Small, retail investors to gain access to the bond market under new rules

Bank of Uganda (left) and the Central Bank of Kenya. Kenya and Uganda have announced sweeping measures to open up the bond market to small and retail investors, in a move expected to reduce the dominance of commercial banks, encourage competition and drive down interest rates. PHOTOS | FILE 

By JAMES ANYANZWA, The EastAfrican

Posted  Saturday, June 20  2015 at  17:40

In Summary

• Kenya’s National Treasury has lowered the minimum threshold for investment in Treasury bills and bonds from Ksh50,000 ($515.6) to as low as Ksh3,000 ($30.92), with investors allowed to trade through their mobile phones with effect from July 1.
• The Bank of Uganda (BoU) said it would allow all retail investors access to its Central Depository System (CDS) through the Internet in the next six months.
• According to Christine Alupo, the director in-charge of communication at BoU, major reforms are also underway to boost activities in Uganda’s government securities market.

Kenya and Uganda have announced sweeping measures to open up the bond market to small and retail investors, in a move expected to reduce the dominance of commercial banks, encourage competition and drive down interest rates.

Kenya’s National Treasury has lowered the minimum threshold for investment in Treasury bills and bonds from Ksh50,000 ($515.6) to as low as Ksh3,000 ($30.92), with investors allowed to trade through their mobile phones with effect from July 1.

“Mobile Direct will give Kenyans wider access to Treasury bills. Currently, you must have at least Ksh50,000 to invest in Treasury bills and the process of buying the security is complicated,” said Treasury Cabinet Secretary Henry Rotich.

The Bank of Uganda (BoU) also said it would allow all retail investors access to its Central Depository System (CDS) through the Internet in the next six months.

Brokers and dealers will also be allowed to participate in the bank’s electronic book entry system on behalf of retail clients. The CDS system holds bonds and company shares in an electronic format that enhances transfer, payment and settlement for traded securities on a real time basis.

Uganda has set the minimum threshold of buying a Treasury bill or Treasury bond at Ush100,000 ($30.63), though the bond market is still controlled by commercial banks followed by the national pension fund and offshore investors.

According to Christine Alupo, the director in-charge of communication at BoU, major reforms are also underway to boost activities in Uganda’s government securities market.

They include training and sensitising the public on bond trading through literacy clinics, restructuring the primary dealer system to enhance secondary market trading of government securities and introducing a trading platform for government securities to allow price discovery.

READ: Bank of Uganda draws investors to bond market through reforms

In Tanzania, primary dealers and direct investors with bids of Tsh5 million ($2,201.57) and above are eligible to participate directly in the Treasury bonds auction while investors with bids below Tsh5 million ($2,201.57) will channel them through primary dealers.

In Rwanda, an investor is expected to have a minimum of Rwf100,000 ($136.64) to buy a Treasury bill.

A cross-section of market analysts polled by The EastAfrican consider the move by Kenya to open up bond trading to the mass market as critical in lowering the cost at which the government borrows from the domestic market and thus help manage lending rates in the country, currently averaging 15 per cent.

Treasury bills and Treasury bonds constitute about 96 per cent of the Kenyan government debt with overdrafts from the CBK and other domestic debts taking up only four per cent.

Data from Central Bank of Kenya shows that commercial banks control 56 per cent of the government debt market, followed by pension funds (24.5 per cent), insurance companies (9 per cent), parastatals (3.1 per cent) and other investors (7.4 per cent).

ALSO READ: Banks to lose if Kenya govt cuts local borrowing

“We are going to see many more investors coming into the bond market and institutional investors will have less control over the pricing of Treasury bills and Treasury bonds,” said Daniel Kuyoh, an investment analysts at Kingdom Securities Ltd.

Mr Kuyoh said that activity in the bond market is expected to increase by between 10 and 20 per cent as investors seek safe havens away from the equity market.

Amish Gupta, director-in-charge of investment banking at Standard Investment Bank, said increased competition for government paper will boost liquidity in the bond market and lower interest rates.

“The government is trying to elevate retail investors by giving them the opportunity to take up a high proportion of government paper in an attempt to enhance competition between different types of investors,” he said.

According to Mr Gupta, increased competition for Treasury bills would help the government to reject some applications from commercial banks and institutional investors and inherently force these institutions to seek alternative investment vehicles through lending to the provide sector. This will bring down interest rates and spur development.

Mr Gupta said retail investors will not operate in the competitive bid market and could be offered lower rates compared with banks and other institutional investors.

“If this model is successful, well marketed and properly implemented, it can bring down interest rates,” he said.

The Kenya Bankers Association expects the overall impact of retail investors on T-bill rates to  depend largely on the price and volume at which the small investors bid and the volume of the issue — the amount the government is seeking to borrow.

“The retail end of the market will be more active as small players come in. If they come in cheaper, the rates will slump but we will have to wait and see how the market will evolve,” said KBA chief executive, Habil Olaka.

Kenya plans to borrow a total of Ksh229.7 billion ($2.36 billion)  through Treasury bills and bonds to plug a large budget deficit of Ksh426.3 billion ($4.39 billion) in the next financial year (2015/2016). The average interest rate on the 91-day Treasury bill for the week ending June 19 stood at 8.31 per cent.

“We don’t know what the impact will be on rates because it largely depends on volumes. If volumes are huge it will obviously reduce the participation and bargaining power of some of the big players in the market,” said Johnson Nderi, corporate finance manager at ABC Capital.