How to Invest in Treasury Bills and Bonds in Kenya
How to Invest in Treasury Bills and Bonds (T-Bills and T-Bonds) in Kenya
Treasury bills and bonds (T-bills and T-bonds) are government securities that individuals and entities can invest in for income. Kenya T-bills and bonds are mainly fixed-income securities that the Government of Kenya issues to finance its activities. When you buy the securities, you are effectively a lender to the Government in exchange for percentage interest payments and the return of the principal later after the maturity date. The full force of the Government of Kenya backs the securities, and since a government does not fail, the risk of default is almost nonexistent.
T-Bills
T-bill issues are primarily for 91, 182 or 364 days (4, 13, 26 or 52 weeks). T-bill sales are typically weekly auctions throughout the year conducted by the Central Bank of Kenya (CBK) on behalf of the Government of Kenya. Each investor pays for the investment at a discount on the par value or a price less than Kes100 per Kes1,000. The investor decides on a maturity length, the interest rate and the amount they want to invest, considering the recent interest rate trends in the market, which gives them an idea of what to expect in upcoming auctions. The minimum face value of T-bills you can buy is Kes100,000 (or US$715 at current rates) for noncompetitive bids and Kes2,000,000.00 for competitive bids, in multiples of Kes50,000.00. A competitive bid is where an investor bids at the interest rate they want for their investment, and in a noncompetitive bid, the investor does not indicate a preferred interest rate. The bid is given the average interest for the specific auction.
To solicit T-bill bids from investors, the CBK advertises in the daily newspapers weekly and on their webpages throughout the year, and the bids close at 2 pm every Wednesday. The advert discloses the auction date, offer amount, issue and maturity dates, terms and conditions, eligible participants, and competitive and noncompetitive bid deadlines. Each bidder (buyer) submits their application and quotes an amount they want to buy with a discount they would like to have because this will be their return. Submitting a bid is automated; you must go online to submit your bid (see the buying process below). The Government chooses the bids to accept from the offers, starting with the bids with the lowest prices and going up until the total accepted submissions reach the desired amount of Kes5,000,000,000 (US$35,714,286), for example. For instance, a bidder for 91-day T-bill security worth Kes100,000 with a discount of 8% has to pay US$0.98 per Kes1,000 or Kes98,044. The CBK will pay back the principal of Kes100,000 at maturity. The results of each auction are available soon after the auction closes.
T-bills do not pay interest because their sale is at a discount on the face value. The gain for the investor is the difference between the purchase price and the amount paid at maturity (face value). This gain constitutes the earnings in the investment. In the example above, the investor's profit would be Kes1,956, a return of 8% p.a. without tax. Earnings from T-bills attract a withholding Tax (WT) of 15%. When you include withholding tax on the profit, you must pay Kes98,044 with an upfront withholding tax of Kes293.4 or a total of Kes98,337.4, including the tax which CBK will remit to Kenya Revenue Authority (KRA). Therefore, your net profit from this investment would shrink from Kes1,956 to Kes1,662.6. An automated process also makes payment for successful bids, and the money must be available in your bank account by 2 pm on Monday following the closure and announcement of the bid results on Wednesday the previous week. You can only pay for the securities using your bank account. Failure to pay may incur penalties, including barring from buying future securities.
The discount rates accepted by the Government vary from auction to auction, depending on the needs of the Government and prevailing market liquidity conditions. If the Government needs more money when the liquidity in the market is tight, the accepted discount rate is likely to be higher, and the investment gain would be higher, too. The prevailing interest rates in May 2024 were about 15% for T-bills. The CBK provides an online Calculator at https://www.centralbank.go.ke/bills-bonds/treasury-bills/ that can help you determine expected tax, earnings and total payment to the CBK when you select an interest, amount and maturity period. You visit the same webpage and select T-bills to see the T-bills on offer for the week and know the current interest trend to assist you in determining where to place your bid price.
T-bills are not quoted (listed) at the Nairobi Securities Exchange. So, they have no secondary market, and you may have to hold them until they mature before you can get your money back. Therefore, T-bills are relatively illiquid and cannot easily be converted into cash except at the CBK, albeit with punitive terms. However, CBK has created an Over-The-Counter (OTC) market (see a description below) that investors can use to discount T-bills.
T-Bonds
Treasury bonds are also government securities like T-bills with extended maturity periods of two years or more. The bonds sold by the CBK are fixed coupon T-bonds, meaning that the interest rate related to the instrument does not change over the bond's term. The CBK also sells Infrastructure bonds used by the Government to finance specified infrastructure projects. The minimum you can invest in T-bonds is Kes50,000 for noncompetitive bids, and Kes2,000,000 for competitive bids is Kes2,000,000. You buy the investment in multiples of Kes50,000. Because a T-bond maturity date is more extended, interest rates for T-bonds are higher than those offered on T-bills, with T-bonds having the highest interest rates. T-bond rates were about 16% in May 2024.
Investors who purchase T-bonds receive an interest payment every six months per the instrument's terms and a bullet payment of the principal at maturity. The interest amount is paid based on the par value of the bond and the interest rate. For example, if the par value (amount invested) is Kes100,000 and the interest rate is 8% (coupon rate), interest payable every six months would be Kes4,000 (100,000 X 8%/2). Income from T-bonds attracts a Withholding tax (WT) of 15%. However, income from T-bonds of a maturity of 10 years and above attracts WT of 10%, while interest from infra-structure bonds attracts zero tax. Therefore, when you include WT at 15%, the return reduces to Kes3,400 or a yield of 6.8% (Kes3,400 x 2 ÷ 100,000 x 100).
Like the T-bills, the CBK advertises offers for T-bonds and the bids close at 2 pm on Thursdays. You can find the prospectuses here: https://www.centralbank.go.ke/bills-bonds/treasury-bonds/. The prospectus contains information about the different bonds on offer, including the bonds' durations until maturity or tenor and coupon rates. The investor decides on a maturity length, the interest rate and the amount they want to invest, considering the recent market interest rate trends, which gives them an idea of what to expect in upcoming auctions. Submitting a bond's bid is the same as submitting a bid for T-bills, which involves an online process described below. The results of each auction are available soon after the auction closes. Payment for successful bids must be available in your bank account by 2 pm on Monday following the closure and announcement of the bid results on Wednesday the previous week. You can only pay for the securities using your bank account. Failure to pay may incur penalties, including barring from buying future securities.
Unlike T-bills, T-bonds are listed securities with a secondary market, actively trading on the Nairobi Securities Exchange. Therefore, they are relatively liquid, and investors can easily convert into cash by selling to willing buyers at the securities exchange. The last resort option to discount at the CBK is also open to T-bonds, albeit with punitive terms.
Who qualifies to buy Kenya T-Bills and T-Bonds?
All citizen and non-citizen individuals and organizations qualify to buy Kenya T-Bills and Bonds. You can invest directly or through a local bank as a nominee. Residents and non-resident Kenyan citizens with local bank accounts can invest directly in their names. Foreigners with local bank accounts can also invest directly in their names. Kenya citizens and foreigners without local bank accounts can only invest through a local bank as a nominee. The local bank makes necessary arrangements with the CBK to invest on behalf of its nominees and its behalf. When you invest as a nominee, your bank may use its economies of scale to secure a higher bid rate but will deduct some fees from your income.
How to invest in Kenya Government Securities (T-Bills and T-Bonds)
To invest in T-bills and bonds, you or your agent must register at the Central Bank of Kenya (CBK) by creating an account at the CBK. You can use this account to submit bids online and manage your investment. The buying process is automated and requires investors to use the Dhow CSD portal or mobile application. Individuals and entities wishing to buy government securities without going through an intermediary like a bank must visit https://dhowcsd.centralbank.go.ke/ to create a CSD account. Investment via local commercial banks as a nominee is also an option, and this does not require you to create a CSD account as you use your bank's CSD account. You can access the CBK DhowCSD platform via the web page portal at https://dhowcsd.centralbank.go.ke/ or download the DhowCSD app on the Google Play store or Apple App Store and use it to create an investment account.
You require a CSD account to be able to submit and amend bids, see the results of your submission, make payments using your bank account or rollovers of previous maturing security investments and generally manage your government security investments. Detailed guidelines on what is required and how to create and use a CSD account are available at https://www.centralbank.go.ke/dhowcsd/ and also at https://www.centralbank.go.ke/securities/treasury-bills/
You can also use Treasury Mobile Direct (#866* USSD), accessible at https://www.centralbank.go.ke/wp-content/uploads/2023/07/CSD-USSD-Primary-Issues-User-Guide.pdf
Briefly, you require the following details, information and documents to be able to successfully create and use the CSD account to invest and manage your investment:
- A computer or a mobile device/phone is needed to access the app.
- A valid email address.
- User type (Physical person for an individual and Signatory for Corporates).
- Name, address, and other data.
- Mobile number.
- Kenya Revenue Authority (KRA) PIN, Identity Card, Passport, or Alien Card.
- Bank name, account title and number.
- Coloured Passport size photo.
- KRA exemption certificate where applicable.
- Board resolution to invest and registration documents for Corporations.
To start trading, go to https://dhowcsd.centralbank.go.ke/ or download the DhowCSD app on the Google Play store or Apple App Store and use it to create an investment account. You must then proceed to the portal at https://www.centralbank.go.ke/dhowcsd/ to read the guidelines and provide the above information to be able to submit your bids, get bid results, pay for the bids and receive information and payments relating to your investments. You can access your T-bills and bond bid results through the DhowCSD to determine if your submissions were successful and how much you must pay. The results are also available on the CBK website https://www.centralbank.go.ke/bills-bonds/treasury-bonds/ and CBK social media channels (Twitter, WhatsApp, Facebook and Instagram). Other channels you can use to get information include Telephone-254709081272, Toll-Free (USA) +1(833)2010220, Toll-Free (Kenya) 0800720222, comms@centralbank.go.ke and dhowcsd@centralbank.go.ke.
The Central Bank of Kenya (CBK) reserves the right to accept or reject bids fully or partially without giving any reasons.
Over-the-counter (OTC) Market
T-bills of all tenures are not listed on the securities exchange and, therefore, have no secondary market. However, you can sell the securities through an OTC market created by the CBK to offer investors a chance to buy and sell their securities soon after buying up to 5 days before maturity. The process of selling and buying involves the exchange of SWIFT messages and is commercial bank-assisted. You, therefore, must have a commercial bank account to participate. Settlement is T+0 and on delivery versus payment (DVP) basis. Read the guidelines on how to use OTC in the pdf on this webpage: https://www.centralbank.go.ke/wp-content/uploads/2016/09/OTC-Operational-Guidelines.pdf. You can also get information by emailing NDO@centralbank.go.ke or calling 2860000.
These are excerpts from the book entitled Personal Financial and Retirement Planning, available at Nuria Bookstore and https://www.amazon.com/author/aggrey.jonathan.bett.