How to Invest in Bonds in Kenya

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Bonds are becoming increasingly popular with individual investors. And there’s a good reason for that.

Not only are they one of the safest investment assets, but they also work in a predictable and timely fashion, so they offer a good way to provide reliable passive income.

But how, exactly, do bonds in Kenya work? Here’s a complete rundown.

What is a bond?

Put simply, a bond is a loan given to an organization (like a company or a government) by the public.

Huge organizations are usually in need of money to fund large projects. And since they typically require large sums that would be too costly to borrow from traditional banks, they opt to borrow directly from individual investors.

In return, these organizations (i.e. the borrower) agree to pay interest to the public (i.e. the lender) and repay the investors their money (principal) back after an agreed duration.

How do bonds in Kenya work?

Companies get huge loans directly from the public through selling bonds.

So by buying a bond, you’ll be giving your money to the organization and, in return, you’ll receive a periodic interest payment and eventually principal repayment.

The capital repayment happens after the maturity of the bond i.e. when the agreed duration of the loan comes to an end.

Let’s put this into perspective:

If you buy a 5-year bond at 20,000/= paying 10% interest, it means the borrowing organization will pay you 2,000/= (10% of 20,000) each year for a period of 5 years. After those 5 years, the organization will pay back your initial investment of 20,000/=.

The interest is usually paid periodically, depending on the terms of the bond. Some organizations do it quarterly, some bi-annually, and others annually.

Types of bonds in Kenya

Broadly speaking, there are two types of bonds, depending on the borrower: government bonds and corporate bonds.

  • Treasury bonds – these are bonds issued by the government to supplement revenue from taxes. They offer investors a medium- to long-term investment that pays interest every six months. They are also much safer than corporate bonds because they are backed by the national government. However, due to this increased safety, their returns aren't as high as corporate bonds.
  • Treasury bills – like treasury bonds, bills are issued and backed by the government. The difference between them is the duration. While bonds are typically medium- to long-term (with a minimum duration of 1 year), T-bills are short-term with options for 91, 182, and 364 days.
  • Corporate bonds – loans given to public companies to fund operations such as research, expansion, or the development of new products. They offer a higher interest rate than government bonds, but they’re also riskier. That’s because the borrower might default on the loan if their business fails.

How to buy bonds in Kenya

You can buy bonds in Kenya in a few ways, depending on whether it is a treasury bond or a corporate bond. Some of the ways include: directly through the CBK (for government bonds), through a broker (for corporate bonds), a bonds unit trust/mutual fund, or the M-Akiba platform.

  • Directly through the Central Bank of Kenya – you’ll start by opening a CDS account, which is done by visiting the CBK offices. Once this is done, you’ll need to fill out and submit a bond application form indicating how much you want to buy. Next, the bond will be allocated to you at which point you’ll be required to make the payment. With all this done, you’ll start receiving your interest payments semiannually in the bank account you indicated in the bond application form.
  • Through a broker – most corporate bonds are bought directly from the company issuing the bond, through a broker. You just need to get in touch with a CMA-licensed broker, have an operational CDS account and, of course, have the capital required.
  • A bond unit trust/mutual fund – this is by far the easiest and cheapest way to buy bonds if you’re a beginning investor. You simply invest in a bonds fund and immediately own a portfolio of bonds under the mutual fund of your choice. It provides instant diversification and some cost as low as KES 1,000 as a minimum investment. Companies like Britam and Old Mutual offer such funds to investors.
  • Through your phone on the M-Akiba platform – this is a Mobile Traded Bond that operates exclusively via mobile phones. The minimum amount required is KES 3,000.

Recommended Reading: Mutual Funds In Kenya

How much do I need to invest in bonds?

The minimum investment is KES 50,000 for regular bonds (both government and corporate).

It’s typically costly for beginning investors to buy either government or corporate bonds directly because they are sold only in increments of 50,000/=. However, as mentioned, affordable options are available.

These include bond mutual funds (KES 1,000 and above) and the M-Akiba platform (KES 3,500  and above) for infrastructure bonds.

Why invest in bonds?

  • High rate of return - most bonds in Kenya offer an interest rate of over 10% with some going as high as 13%. This makes them a better option compared to the fixed deposit or savings rates offered by banks. In fact, government bonds are better than money market funds, which typically range from 8% - 11%.
  • Regular source of passive income – interest payments on bonds are made every 6 months. So they can be used as an active source of passive income throughout their lifetime. An investor that owns several bonds can expect a regular stream of interest payments every other month.
  • They are safe – bonds are considered to be less risky than other assets (like stocks) because of their predictability. The fact that you know exactly how much you will earn and exactly when you’ll receive it makes them easy to hold.
  • Tax advantages – infrastructure bonds (like M-Akiba) are tax-free. This, therefore, means that you are exempted from the 15% withholding tax that is imposed on all other types of bonds and investments.

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What are the risks of bonds?

  1. They have a lower rate of return compared to other investment options like stocks and real estate. This is because they are a low-risk investment.
  2. Some companies may default on paying the investment back, resulting in a loss. So although bonds are safe, they are not completely risk-free.

Over To You…

Bonds offer a good investment opportunity for investors who are keen on safeguarding their capital. They are also perfect if you’re a beginner and aren’t sure where to start investing.

So if you’re just starting, consider investing in bonds as you figure things out.