By Research Team, Mar 14, 2021
During the week, T-bills recorded an undersubscription, with the overall subscription rate coming in at 94.3% down from the oversubscription of 141.0% recorded the previous week, attributable to the concurrent bond issue. The highest subscription rate was in the 364-day paper of 121.9%, but it was a decline from 190.2% recorded the previous week. Additionally, the Central Bank of Kenya released the auction results for the recently reopened bonds, FXD1/2019/10 and FXD2/2018/20 whose overall subscription rate came in at 97.4%, with the government receiving bids worth Kshs 48.7 bn compared to the Kshs 50.0 bn offered. Standard & Poor’s, lowered its long-term foreign and local currency sovereign credit ratings on Kenya to 'B' from 'B+’ and affirmed the short-term foreign and local currency rating;
During the week, the equities market recorded mixed performance, with NSE 20 declining by 0.9%, while NASI and NSE 25 gained by 0.3% and 0.9%, respectively, taking their YTD performance to gains of 6.6%, 6.1% and 2.7% for NASI, NSE 25 and NSE 20 respectively. The equities market performance was driven by gains recorded by large-cap stocks such as Equity Group, Diamond Trust Bank (DTB-K) and KCB Group of 5.1%, 4.9%, and 4.6%, respectively. The gains were however weighed down by losses recorded by stocks such as NCBA, Bamburi, and ABSA Bank, which declined by 4.1%, 3.0% and 1.9%, respectively;
During the week, the Kenya Bankers Association (KBA) released the Housing Price Index, March 2021 Report, highlighting that house prices rose by 0.2% in Q4’2020, an improvement from the 0.1% contraction recorded in Q3’2020. In the residential sector, Sycamore Pine Limited, a real estate developer announced plans to construct 1,959 residential apartments under a project dubbed Samara Estate to be located in Migaa Gold Estate in Kiambu County;
Financial planning for education is the practice and habit of managing one’s finances with the intention of saving towards the funding of their children’s’ education in the future. This week, we follow up on our previous focus on Education Investment Plans in Kenya by bringing on the financial planning aspect of it, the available options and the considerations to make when choosing the best investment avenue for education;
Money Markets, T-Bills & T-Bonds Primary Auction:
During the week, T-bills recorded an undersubscription, with the overall subscription rate coming in at 94.3% down from 141.0% recorded the previous week, attributable to the concurrent bond issue coupled with the tightened liquidity in the money markets. The highest subscription rate was in the 364-day paper, which declined to 121.9% from 190.2% recorded the previous week. The subscription rate for the 91-day and 182-day papers also declined to 108.8% and 60.8%, from 176.1% and 77.7% recorded the previous week, respectively. The yield on the 91-day paper remained unchanged at 7.0%, while the yields on 364-day and 182-day papers rose by 7.3 bps and 6.7 bps to 9.1% and 7.8%, respectively. The government accepted 100.0% of bids received, amounting to Kshs 22.6 bn.
On the Primary Bond Market, there was an undersubscription for this month’s bond offers, with the overall subscription rate coming in at 97.4%, attributable to the relatively tight but recovering money market liquidity. The Central Bank of Kenya had re-opened 2 bonds, FXD1/2019/10 and FXD2/2018/20 with effective tenors of 8.0 and 17.4 years, and coupons of 12.4% and 13.2%, respectively, in a bid to raise Kshs 50.0 bn for budgetary support. The government received bids worth Kshs 48.7 bn, and accepted only Kshs 48.3 bn, translating to an acceptance rate of 99.2%. Investors preferred the 20-year bond issue i.e. FXD2/2018/20, which received bids worth Kshs 32.8 bn, representing 65.6% of the total bids received. The weighted average rate of accepted bids for the two bonds came in at 12.4% and 13.4%, for FXD1/2019/10 and FXD2/2018/20, respectively.
In the money markets, 3-month bank placements ended the week at 7.9% (based on what we have been offered by various banks), while the yield on the 91-day T-bill remained unchanged at 7.0%, same as recorded last week. The average yield of the Top 5 Money Market Funds declined marginally by 0.1% points to come in at 9.9%, from 10.0% recorded last week. The yield on the Cytonn Money Market also declined during the week by 0.4% points to come in at 10.5%, from 10.9% recorded the previous week.
Liquidity:
During the week, liquidity in the money market tightened, with the average interbank rate increasing marginally by 0.1% points to 5.0%, from the 4.9% recorded the previous week, attributable to the government payments which were partly offset by tax remittances. The average interbank volumes increased by 12.6% to Kshs 13.0 bn, from Kshs 11.6 bn recorded the previous week. According to the Central Bank of Kenya’s weekly bulletin released on 12th March 2021, commercial banks’ excess reserves came in at Kshs 11.7 bn in relation to the 4.25% Cash Reserve Ratio.
Eurobonds performance:
During the week, the yields on Eurobonds were on an upward trajectory. According to the Central Bank bulletin, the yields on the 10-year Eurobond issued in June 2014, the 10-year and 30-year Eurobonds issued in 2018 and the 7-year and 12-year Eurobonds issued in 2019 all increased by 0.1%, 0.6%, 0.3%, 0.2% and 0.3% points to 3.3%, 5.9%, 7.5%, 4.9% and 6.5% respectively, from 3.2%, 5.3%, 7.3%, 4.6% and 6.3%.
Kenya Eurobond Performance | |||||
| 2014 | 2018 | 2019 | ||
Date | 10-year issue | 10-year issue | 30-year issue | 7-year issue | 12-year issue |
31-Dec-2020 | 3.9% | 5.2% | 7.0% | 4.9% | 5.9% |
29-Jan-2021 | 3.6% | 5.3% | 7.2% | 4.8% | 6.1% |
26-Feb-2021 | 3.3% | 5.4% | 7.4% | 4.7% | 6.4% |
5-Mar-21 | 3.2% | 5.4% | 7.3% | 4.8% | 6.4% |
8-Mar-21 | 3.4% | 5.7% | 7.4% | 5.0% | 6.7% |
9-Mar-21 | 3.4% | 5.6% | 7.5% | 5.0% | 6.6% |
10-Mar-21 | 3.4% | 5.7% | 7.6% | 5.0% | 6.7% |
11-Mar-21 | 3.3% | 5.9% | 7.5% | 4.9% | 6.5% |
Weekly Change | 0.1% | 0.6% | 0.3% | 0.2% | 0.3% |
Monthly Change | (0.3%) | 0.2% | 0.2% | 0.0% | 0.3% |
YTD Change | (0.7%) | 0.6% | 0.5% | 0.0% | 0.6% |
Source: CBK Bulletin
Kenya Shilling:
During the week, the Kenyan shilling appreciated marginally by 0.03% against the US dollar to Kshs 109.6, from Kshs 109.7 recorded the previous week. This was mainly attributable to market participants anticipating a positive economic recovery following the arrival of the Covid-19 vaccine in the country. On a YTD basis, the shilling has depreciated by 0.4% against the dollar, in comparison to the 7.7% depreciation recorded in 2020. We expect continued pressure on the Kenyan shilling due to:
However, in the short term, the shilling is expected to be supported by:
Weekly Highlight:
During the week, Standard & Poor’s, a US-based credit rating agency, lowered its long-term foreign and local currency sovereign credit ratings on Kenya to 'B' from 'B+’, on the back of the effects of the ongoing pandemic which resulted in GDP contraction of 5.7% and 1.1% in Q2’ and Q3’2020, respectively, and increasing debt levels, which in turn increase the country’s vulnerability to debt defaults. Below is a summary of the credit rating on Kenya so far:
Rating Agency | Previous Rating | Previous Outlook | Date Released | Current Rating | Current Outlook | Date Released |
S&P Global | B+ | Negative | 14th July 2020 | B | Stable | 5th March 2021 |
Moody’s | B2 | Stable | 13th February 2018 | B2 | Negative | 7th May 2020 |
Fitch Ratings | B+ | Stable | 9th February 2018 | B+ | Negative | 19th June 2020 |
The agency changed its outlook on Kenya to ‘Stable’ from ‘Negative’ in the last release in July 2020, as it expects Kenya’s GDP to grow by 4.4% in 2021, from their projected growth of 0.2% in 2020.
The table below shows Kenya’s 2021 GDP projections from 6 organizations with the consensus GDP growth expected to come in at 5.2%:
Kenya 2021 Annual GDP Growth Outlook | ||
No. | Organization | 2021 Projections |
1. | International Monetary Fund | 4.7% |
2. | S&P Global | 4.4% |
3. | Cytonn Investments Management PLC | 4.0% |
4. | Central Bank of Kenya | 6.4% |
5. | National Treasury | 7.0% |
6. | World Bank | 4.7% |
Average | 5.2% |
Some of the key challenges identified included: i) Risk of delay in fiscal consolidation as the fiscal deficit remain high due to the poor performance of the economy due to the pandemic, and ii) Risk of getting worse of debt rearrangement terms of the current maturing bonds.
Other key take-outs from the press release include:
The recovery is also likely to be supported by Kenya’s diversified economic base and high liquidity in the domestic market with domestic debt making up 47.9% of the nation’s total fiscal debt as of December 2020. Kenya also benefits from flexible monetary settings, supported by its relatively deep and dynamic domestic capital markets (with local currency debt market capitalization at over 25.0% of GDP), and relatively well developed institutional framework compared to peers. The table below shows the local currency public debt to GDP ratio of select countries for comparison:
Local Currency Public Debt Market Capitalization to GDP Ratio | ||
No. | Country | Local Currency Debt to GDP |
1. | Kenya | 25.0% |
2. | Ghana | 21.7% |
3. | South Africa | 51.0% |
4. | Nigeria | 16.5% |
Emerging Markets Economies Average | 68.4% |
Source: World Bank
Local currency public debt levels have remained low in some African countries and deepened significantly. A higher level of local currency public debt points to deeper capital markets while indicating a well-developed banking sector, which would facilitates trading of the debt instruments Foreign investments in local currency debts can help them to develop the markets by increasing liquidity – helping to lengthen maturities, develop secondary markets and create a more diversified investor base but they can also increase financial vulnerability as markets become more exposed to the risks of international financial contagion and sudden outflows of capital.
According to the release, Kenya enjoys more sophisticated checks and balances than other African peers, but possible ethnic tensions remain a concern amid an expected referendum on constitutional reforms to be held in 2021. The constitutional changes and the upcoming 2022 general elections could hamper the government’s efforts for fiscal consolidation.
Overall, the ratings downgrade will mean Kenya will find it harder to borrow from the international market and may have to pay more on interest to borrow money from the foreign lenders, due to the perceived higher risk.
Rates in the fixed income market have remained relatively stable but we have seen an upward trend in the short end due to increased borrowing by the government. The government is 5.4% behind its prorated borrowing target of Kshs 385.5 bn having borrowed Kshs 364.5 bn. In our view, due to the current subdued economic performance brought about by the effects of the COVID-19 pandemic, the government will record a shortfall in revenue collection with the target having been set at Kshs 1.9 tn for FY’2020/2021, thus leading to a larger budget deficit than the projected 7.5% of GDP, ultimately creating uncertainty in the interest rate environment as additional borrowing from the domestic market may be required to plug the deficit. Owing to this uncertain environment, our view is that investors should be biased towards short-term to medium-term fixed income securities to reduce duration risk.
Market Performance:
During the week, the equities market recorded mixed performance, with NSE 20 declining by 0.9%, while NASI and NSE 25 gained by 0.3% and 0.9%, respectively, taking their YTD performance to gains of 6.6%, 6.1% and 2.7% for NASI, NSE 25 and NSE 20 respectively. The equities market performance was driven by gains recorded by large-cap stocks such as Equity Group, Diamond Trust Bank (DTB-K) and KCB Group of 5.1%, 4.9%, and 4.6%, respectively. The gains were however weighed down by losses recorded by stocks such as NCBA, Bamburi, and ABSA Bank, which declined by 4.1%, 3.0% and 1.9%, respectively.
Equities turnover increased by 51.5% during the week to USD 29.6 mn, from USD 19.5 mn recorded the previous week, taking the YTD turnover to USD 227.8 mn. Foreign investors remained net sellers, with a net selling position of USD 2.9 mn, from a net selling position of USD 2.5 mn recorded the previous week, taking the YTD net selling position to USD 5.4 mn.
The market is currently trading at a price to earnings ratio (P/E) of 11.9x, 7.7% below the 11-year historical average of 12.9x. The average dividend yield is currently at 4.4%, unchanged from what was recorded the previous week, and 0.3% points above the historical average of 4.1%.
With the market trading at valuations below the historical average, we believe that there are pockets of value in the market for investors with a higher risk tolerance. The current P/E valuation of 11.9x, is 54.8% above the most recent valuation trough of 7.7x experienced in the first week of August 2020. The charts below indicate the market’s historical P/E and dividend yield.
Universe of Coverage:
Company | Price at 5/3/2021 | Price at 12/3/2021 | w/w change | YTD Change | Year Open 2021 | Target Price* | Dividend Yield | Upside/ Downside** | Recommendation |
I&M Holdings*** | 44.1 | 43.0 | (2.4%) | (4.1%) | 44.9 | 60.1 | 6.3% | 46.0% | Buy |
Diamond Trust Bank*** | 71.8 | 75.3 | 4.9% | (2.0%) | 76.8 | 105.1 | 3.4% | 43.1% | Buy |
Kenya Reinsurance | 2.6 | 2.6 | (0.8%) | 12.6% | 2.3 | 3.3 | 4.2% | 31.2% | Buy |
Equity Group*** | 38.1 | 40.0 | 5.1% | 10.3% | 36.3 | 43.0 | 22.5% | 30.0% | Buy |
KCB Group*** | 38.2 | 40.0 | 4.6% | 4.0% | 38.4 | 46.0 | 8.8% | 23.9% | Buy |
Standard Chartered*** | 134.5 | 134.5 | 0.0% | (6.9%) | 144.5 | 153.2 | 9.3% | 23.2% | Buy |
Sanlam | 11.2 | 12.5 | 11.7% | (4.2%) | 13.0 | 14.0 | 8.0% | 20.5% | Buy |
Co-op Bank*** | 13.0 | 13.0 | (0.4%) | 3.2% | 12.6 | 14.5 | 8.5% | 20.5% | Buy |
Jubilee Holdings | 270.0 | 261.8 | (3.1%) | (5.1%) | 275.8 | 313.8 | 0.0% | 19.9% | Accumulate |
Britam | 7.1 | 7.2 | 0.8% | 2.6% | 7.0 | 8.6 | 0.0% | 19.8% | Accumulate |
NCBA*** | 25.9 | 24.9 | (4.1%) | (6.6%) | 26.6 | 25.4 | 15.3% | 17.5% | Accumulate |
ABSA Bank*** | 9.6 | 9.4 | (1.9%) | (1.1%) | 9.5 | 10.5 | 2.7% | 14.1% | Accumulate |
Stanbic Holdings | 84.5 | 83.0 | (1.8%) | (2.4%) | 85.0 | 84.9 | 4.6% | 6.9% | Hold |
CIC Group | 2.2 | 2.3 | 3.2% | 8.5% | 2.1 | 2.1 | 10.9% | 2.6% | Lighten |
Liberty Holdings | 8.1 | 9.6 | 19.1% | 24.9% | 7.7 | 9.8 | 0.0% | 1.9% | Lighten |
HF Group | 3.5 | 3.4 | (1.2%) | 8.6% | 3.1 | 3.0 | 0.0% | (12.0%) | Sell |
*Target Price as per Cytonn Analyst estimates **Upside/ (Downside) is adjusted for Dividend Yield ***For Disclosure, these are banks in which Cytonn and/ or its affiliates are invested in |
We are “Neutral” on the Equities markets in the short term. We expect the recent discovery of a new strain of COVID-19 coupled with the introduction of strict lockdown measures in major economies to continue dampening the economic outlook. However, we maintain our bias towards a “Bullish” equities markets in the medium to long term. We believe there exist pockets of value in the market, with a bias on financial services stocks given the resilience exhibited in the sector. The sector is currently trading at historically cheaper valuations and as such, presents attractive opportunities for investors.
I. Industry Reports
During the week, the Kenya Bankers Association (KBA) released the Housing Price Index, March 2021 Report, highlighting that house prices rose by 0.2% in Q4’2020, an improvement from the 0.1% contraction recorded in Q3’2020. The marginal improvements in the housing prices are attributed to, preference by homeowners to newer buildings over the older ones, and, reduced private-sector lending, especially for the construction sector and this has significantly affected the incoming supply of new units consequently contributing to the rise in house prices. Other key take-outs from the report include;
The above findings are in line with the Cytonn Annual Markets Review-2020, which highlighted that buyers continued to show a preference for apartments as opposed to detached units. In terms of annual uptake, detached units recorded an average of 16.9% compared to apartments at 21.7% indicating continued demand for apartments supported by affordability amid reduced disposable income. Investment opportunity for apartments lies in the lower mid-end market such as Ruaraka, Kasarani, and Kitengela which continues to show increased demand and continue to post above-average market returns due to the higher annual uptake. For detached units, the opportunity lies in the upper mid-end market in submarkets such as Thindigua, and, South B due to high occupancies and attractive rental yields
II. Residential
During the week, Sycamore Pine Limited, a real estate developer announced plans to construct 1,959 residential apartments under a project dubbed Samara Estate to be located in Migaa Gold Estate in Kiambu County. The Kshs 11.0 bn affordable housing development will sit on a 17.2-acre piece of land is expected to be completed in 2024. It will comprise two and three-bedroom units of 59 SQM and 76 SQM priced at Kshs 3.0mn and 4.0mn, respectively. The unit prices translate at an average of Kshs 44,408 per SQM, 40.9% lower than the satellite towns’ residential market average for apartment’s value of Kshs 75,187 according to the Cytonn Annual Markets Review-2020. In our view, the investors’ decision to focus on the affordable housing project in Kiambu is supported by i) availability of development land, ii) infrastructural development which continues to open up the area for development, iii) availability of social amenities such as the Migaa Golf Club, iv)incentives by the government on affordable housing projects, and, v) positive demographics with Kiambu town hosting a population of 147,870 as of 2019,36.0% higher than 108,698 recorded in 2009 according to KNBS. Additionally, in terms of performance, apartments in satellite towns recorded an annual uptake, rental yield, and, total returns of 22.5%, 5.0%, and, 5.5% compared to the market averages of 21.5%, 5.7%, and, 5.2%, respectively.
The table below shows the apartments performance summary FY’2020
All Values in Kshs Unless Stated Otherwise
Apartments Performance Summary FY’2020 | |||||||
Segment | Average Price per SQM (Kshs) | Average Rent per SQM (Kshs) | Average Occupancy | Average Annual Uptake | Average Rental Yield | Average Price Appreciation | Annual Total Returns |
Upper Mid-End | 123,608 | 697 | 83.7% | 20.3% | 5.2% | 0.0% | 5.2% |
Lower Mid-End | 95,310 | 530 | 88.1% | 22.3% | 5.8% | (0.9%) | 4.9% |
Satellite Towns | 75,187 | 408 | 85.8% | 22.5% | 6.0% | (0.6%) | 5.5% |
Average | 98,035 | 545 | 85.9% | 21.7% | 5.7% | (0.5%) | 5.2% |
Source: Cytonn Research
The real estate sector is expected to continue recording activities particularly in the residential sector supported by the continued launch of projects by investors especially in the satellite towns of the Nairobi Metropolitan Area.
The year 2020 was marked by the occurrence of a global pandemic whose effects were felt globally. The tough operating environment during the year saw most firms scale down their operations leading to massive job losses and reduced income. With the disruptions occasioned by the pandemic, the World Bank estimates that close to 2.0 mn Kenyans were pushed into poverty in 2020 as people prioritized consumption and provision of basic needs with the little money they had. As such, most financial goals such as joining investments and savings schemes were also disrupted. These then meant that people have to go back to the drawing board and relook at their financial objectives and rework their financial plans by readjusting at the goals themselves and how the same shall be attained. For most parents Education forms an integral part of their key financial goals and In our focus on Education Investment Plans in Kenya, we analyzed various education plans, why one should invest and the factors at play when selecting a suitable plan. In order to continue sensitizing the market on the importance of personal financial planning, we found it timely to reiterate the topic on Education Investment Plans focusing on the financial planning aspect of it.
Previously, we have covered the following topicals on financial planning:
This week, we will cover the following sections:
Section I: Introduction to financial planning
Personal financial planning refers to a systematic approach towards managing one’s finances in an effort to maximize the finances in a manner that will aid in the achievement of one’s financial goals and objectives. Therefore, personal financial planning involves a process that consists of the following steps:
To achieve ones’ financial goals there are some key habits that one needs to practice:
Section II: Financial Planning for Education
Education is a key aspect in any economy, with the Kenyan government making significant allocations towards education expenditure in every fiscal year. However, over the last 10-years, the budgetary allocation towards education expenditure as a percentage of GDP has been declining to stand at 17.2% in FY’2020/21 from 20.6% in FY’2009/10. Despite the actual allocation as per the recently approved 2021 Budget policy Statement, increasing by 2.1% to Kshs 508.6 bn from Kshs 497.8 bn allocated in FY’2020/21. The allocation as a percentage of GDP is expected to decline further to 16.9% for FY’2021/22, mainly attributed to a faster increase in the total budget as compared to the increase in the actual allocation to Education.
Education plays a central part in households consumption budget with the average spend ranging from about 10% to 30% of the total income. When looking at coming up with the right plan for education there are a couple of things that one needs to look at. We shall mention a few but discuss them in details in a later section:
Section III: Education Investments Plans in Kenya
Education Investment Plans are medium to long-term mutual funds promoted by a financial institution, usually an Insurance company or an Asset Management firm. These plans are easily distinguishable in that they often have a lock-in period of investment whereby the guardian is required to make periodic contributions, usually monthly. The beneficiary of the funds could be a dependent or one may save for their own education. Education Investment Plans in Kenya typically have a minimum monthly contributions with the amount ranging from Kshs 1,500 to Kshs 7,000. However, the payments are flexible in that one may pay monthly, quarterly, semiannually or annually, depending on individual preferences.
Below is a list of some of the existing education plans in Kenya:
Education Investment Plans offered by Fund Managers | |||||
Education Plan | Minimum Investment Period | Minimum Investment Amount | Interest Rate per annum | Minimum Sum Assured | Life Cover Benefits |
Cytonn Education Investment Plan (CEIP) | 3 Years | Kshs 1,000 | 10.0% | No life cover | N/A |
Cytonn Sharp Education Investment Plan (SEIP) | 3 – 10 Years | Kshs 100,000** | 15.0% | No life cover | N/A |
Wanafunzi Investment Trust | 4 Years | No minimum Initial investment | 8.0% | No life cover | N/A |
Average |
|
| 11.0% |
|
|
Education Investment Plans offered by Insurance Companies | |||||
Education Plan | Minimum Investment Period | Minimum Investment Amount | Interest Rate per annum | Minimum Sum Assured | Life Cover Benefits |
Liberty Educator Plan | 10 – 20 Years | Kshs 1,000 | No interest rate Bonuses payable | Kshs 200,000 | · Sum Assured · Waiver of premiums · Student Accident Cover · Disability Benefit |
Britam Elimu Bora Education Policy | 7 – 18 Years | Kshs 1,500 | 10.0% | Varies according to contributions | · Sum Assured · Disability Benefit · Hospitalization Benefit · Family Income benefit · Last Expense |
Madison Uniplan | 5 – 15 Years | Kshs 5,000* | 5.0% (Guaranteed) | Kshs 394,000 | · Sum Assured · Waiver of premiums |
Corporate Insurance Educator Plus | 6 Years | Kshs 1,000 | 1.0% (Guaranteed) | Not Specified | · Sum Assured · Waiver of premiums · Policy Loans |
Jubilee Career Life Plan | 5 Years | Kshs 5,000 | 5.6% | Kshs 350,000 | · Accidental death · Waiver of premium · Accidental hospitalization · Sum Assured · Last Expense |
Average |
|
| 5.5% |
|
|
*Kshs 5,000 minimum investment comes with a term condition of minimum of 6-years (Madison Uniplan) ** This is a privately offered and distributed product, hence the higher minimum amount to comply with Regulation 21 of the CMA Act on Private offers |
Source: Online Research
Below are the key take-outs from the above table:
Key Things to Consider Before Joining an Education Investment Plan
A guardian or parent has to choose an education plan that can provide safety, preservation and growth, as well as fit into their investment objectives. The following are key factors to consider:
Alternatives to Education Investment Plans
In addition to the Education Investment Plans discussed above, there lies various investments avenues whereby individuals can take advantage of when financially planning for education. They include:
To illustrate the different returns one would get under the various alternatives, we have assumed a person who starts with an initial investment of Kshs 10,000 and makes monthly top-ups of Kshs 5,000 saves in a money market fund, with an insurance company and in a bank savings account. Below are the amounts at maturity they would get:
Analysis of Alternative Ways to Save for Education | |||
| Money Market Fund | Insurance Company | Bank Savings |
Initial Amount (Kshs) | 10,000.0 | 10,000.0 | 10,000.0 |
Monthly Top-ups (Kshs) | 5,000.0 | 5,000.0 | 5,000.0 |
Tenor (Years) | 7.0 | 7.0 | 7.0 |
Rate of Return | 9.9% | 5.5% | 4.0% |
Amount after Maturity (Kshs)* | 627,352.0 | 527,921.8 | 498,608.5 |
Sources: i. Money Market Fund Interest Rates – Effective annual interest rates (as at 11th March 2021) of the top 5 money market funds ii. Insurance Company Interest Rates – Average rates of Jubilee, CIC, Madison, Corporate and Britam education investment plans as provided in the table in Section 3 iii. Bank Savings Rate – Average of the Central Bank of Kenya published savings rates for the year 2020 *The figures at maturity are gross, that is, no taxes have been applied, and the interest rates compounded monthly |
Evidently, the returns from saving in a money market fund are the highest but to note is that here you have no insurance and so one needs to look at both the risk and the return proposition. At the end of 7 years, saving in a money market fund will give returns of Kshs 627,352.0 compared to Kshs 527,921.8 and Kshs 498,608.5 when saving in an insurance education policy and in a bank savings account, respectively. It is essential that before making any investment decision to consult a reputable financial advisor in order to better understand what you are getting into, before signing any binding agreement.
Section IV: Recommendation on the improvement of Education Investment Plans in Kenya
The Education Investment Plans have faced challenges in terms of slow uptake. The muted growth can be attributed to the fact that most plans are provided by insurance companies, where their growth and acceptance is a factor of insurance sector penetration which was reported at 2.4% as per the 2019 insurance industry report. In order to accelerate the growth of Education plans, we propose the following measures to improve EIPs in Kenya;
Section V: Conclusion
We often face various financial obligations in different stages of life ranging from medical expenses, education expenses, or retirement plans and sometimes these expenses arise at unexpected times. However, with proper planning and preparation, financial peace of mind is guaranteed no matter the stage of life one is in. For parents, the key priority is to secure a good future for their children through quality education. However, education has cost implications. We believe that investing in an Education Investment Plan will ensure that even in tough economic times that may affect your business or job security, individuals can be rest assured that they have the ability to provide for their dependent’s education. Saving for education from an early stage helps to minimize the need to take on debt in the future to offset education-related expenses as well. Through the variety of Education investment plans available in the market, we believe that a parent can take advantage of the available options in the market, from the higher earning fund manager backed plans to the more traditional insurance companies backed plans.
Additionally, a parent may opt to invest directly in various asset classes dependent on their goal and the age of the child. For instance, assuming the financial goal of a parent is to save for their child’s university education expenses, they may choose to save as follows;
Disclaimer: The views expressed in this publication are those of the writers where particulars are not warranted. This publication, which is in compliance with Section 2 of the Capital Markets Authority Act Cap 485A, is meant for general information only and is not a warranty, representation, advice or solicitation of any nature. Readers are advised in all circumstances to seek the advice of a registered investment advisor.