The introduction of M-Akiba bond is a win for both the government and the public. Through this platform, the government will borrow at a lower rate of interest. The public will also get a higher rate of interest on their savings. In the initial offer last month, the government borrowed Sh150 million for three years at a rate of 10 per cent.
If we compare this with other recent bond issues, the two-year bond and five-year bond lastly issued at 12.5 and 13.1 per cent, respectively. This means the government is saving more than 2.5 per cent on interest through the M-Akiba bond issue.
The government plans to issue about Sh4.85 billion in June. This adds up to a saving of Sh125 million in one year. The initial amount issued is small compared to the Sh320 billion that the government plans to borrow from the local market in the 2017-18 financial year.
If the government were to increase this amount to five per cent of the planned borrowing, it would borrow at least Sh15 billion. Assuming a similar interest saving, this would save Sh375 million in one year. This is a significant saving, and makes a good case for a larger amount.
The larger the amount, the higher the impact on interest rates in the market in general. Currently, institutional investors control over 95 per cent of the government borrowing market. Most of the institutions do not trade on the investment, choosing to hold the debt to maturity. The cash needs of retails investors are more dynamic, and this will reflect in more trading of the bond.
The investors’ point of view is equally positive. The lowering of the minimum amount to Sh3,000 from Sh50,000 means more people with lower income can lend to the government. The use of mobile phone also simplifies what is usually a complicated process of opening an account with the Central Bank of Kenya.
The interest rate on offer is also more attractive than what is currently offered by the interest rate law. A tax-free 10 per cent interest rate that was offered by the initial offer is about 14 per cent when you take into account the tax. This is by all means a very attractive return on any investment.
Some key success factors of M-Akiba can be identified. One is a large amount on issue as a proportion of total government borrowing, say over 10 per cent. This will ensure that the programme influences interest rates. Two is a large number of interested investors to encourage trading. Investors should buy and sell as the need arises. Three is an IT infrastructure that will ensure that the administration costs of the program are kept to a minimum.