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| THE DILEMMA OF KENYAN SAVERS The Kenyan economy is going through an interesting period. For the first time in independent Kenya you lose money by trying to save it. Risk free financial instruments (Government bills and bonds) and saving accounts are having negative returns. The interest rate on Treasury Bills (T-Bills) is *4.518%, the average savings deposit rate is at *2.63%, and average annual inflation is at *10.34%. At the current rates Savers and purchasers of Government securities in Kenya are getting a negative return on their savings.i.e. Given that inflation is 10.34%%, if you earn 3% per annum on your savings account your money has lost value by 7.34% (inflation rate-Savings Account rate). Conventional economic rules assume that Risk free instruments in an economy will earn a rate of return at or near the level of inflation. Hence, purchasing them will not expose the buyer to loss of his principal through inflation. This is the situation in most countries for instance. South Africa has 91 day T-Bill rates at **7.27%, while the inflation rate is at **3.70%. Tanzania on the other hand has an annual inflation of ***4% and a 91 day T-Bill rate of ***10%. The low interest rates have put institutions and individuals with high liquidity in a dilemma. Do they keep investing in the low yielding Government securities and Deposit accounts or do they take a risk on the stock market? Banks have countered the situation by increasing their lending to the public because they get a higher return than using the funds to purchase Government securities. The average lending rate as at September 2004 was *12.27% versus the average rate of 4.518%, on a 91 day T-Bill. In the 1990s when the return on Government securities was high it was more profitable to invest in Government securities rather than lend to customers. That is why Banks are now busy hawking all sorts of loans to the public. Because, even after factoring in the costs of lending (all those personal bankers and the TV spots) they still make a positive return on their funds. Unfortunately, for 'Wanjiku' her lack of financial savvy is costing her a lot. She still has most of her money in a Savings or Fixed deposit Account where it earns a negative return. Other players like Pension funds and insurance companies have their investment activities regulated by statutory rules that limit how much they can invest in a particular asset class. Therefore, to the extent of the statutory rules their investment decisions are limited to certain areas. Some of the excess liquidity has found a home on the NSE. At the start of 2003 some stocks had dividend yields higher than T-Bills. The Nairobi Stock Exchange (NSE) has done very well over the last two years. However, it is also very volatile and risky. For instance, in spite of the more than the 100% rise of the NSE 20 share index from its low level of 1043.38 in August 2002, the index is still very far from its all time high in July 1997. The problem The current rates and financial system make it difficult for savers to get a positive return on their funds. As such, we find it difficult to grow our Savings as a nation. At the same time the low rates are putting a strain on other economic factors such as; inflation -which is rising and the exchange rate, which is dropping against major Currencies. Outlook The current problems the Government is experiencing with its Debt programme will persist until the interest rate issue is settled. The NSE will probably maintain its current levels as long as interest rates remain below the inflation rate and high inflation persists. Since, stocks tend to keep pace with inflation and investors have limited local investment options. There is also a danger that some Kenyan investors may shift their investments abroad in search of higher returns. *source: Central Bank of Kenya **Source: Reserve Bank of South Africa ***Source: Standard Bank Economic Report-Tanzania,October 2004 EA Standard Reprint of the above article |
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