For some time now, as the economy reels from the sweltering heat of high interest rates, financial institutions have been awash with savings products that claim to attract lucrative interest rates on deposits.
Consequently, many customers still walking on a bumpy road to financial freedom, have little alternative but to throng the banking halls with the hope of savouring a good income without cutting too much sweat — a feat that has been hard to achieve.
It, therefore, behoves someone to wonder whether, as a small-time investor, one stands a chance of benefiting from these savings programmes?
Money set out to investigate. Ms Veronica Munyao, like many other people, has been a member of a women micro-finance institution for the past eight years. From her meagre earnings, she saves at least Sh400 every month.
Although she has a weak grasp of financial management, she acknowledges the importance of saving with the micro-finance, saying she at times gets “bonuses,” depending on how much she has saved at the end of the year.
“If you have savings of about Sh10,000, you are supposed to get a “bonus” of about Sh500. But, I have not been given the details of how I can benefit from better interest rates on the savings I make,” Ms Munyao told Money in an interview.
However, given the line of savings she has been pursuing, it might be tantamount to a wild-goose chase, according to Zimele Asset Management investment manager Isaac Njuguna.
While blaming it on low financial literacy in the country, he says, “until there is awareness, banks and other financial institutions will continue to give small retailers a raw deal for their deposits or savings.”
He adds: “Many small retailers take their money to the bank, and earn about 2 per cent interest, or nothing at all.”
Mr Njuguna says it’s not a wise investment option for retail investors to deposit money in financial institutions with the aim of earning interest.
This is because there is still a wide gap between what the banks or micro-finance institutions charge on loan interest rates and what they offer for deposits.
For instance, banks may be lending at about 20 per cent interest rate but awarding only 8 per cent for deposits, which may apply only to amounts over Sh100,000.
“Right now, saving won’t make a lot of sense to retail customers. But, for big depositors, a higher rate can be given, since they have a bigger bargaining power,” he says.
But, a quick market survey shows that banks are aggressively targeting the low-end saver, a plan that Mr Njuguna says is aimed at minimising their costs on deposits.
“Banks are moving to retail savers, who don’t have much negotiating power, unlike the high-net worth individuals or the institutional depositors,” Mr Njuguna said.
Mr John Mwara, the managing director of Faulu Kenya — a micro-finance — says that savings through regulated institutions such as banks and micro-finance firms would be considered appropriate because they match the savers’ goals while at the same time offering better returns and safety for the money.
“With a stable financial partner, savers are accorded an avenue to accumulate resources to match their investment goals. Financial discipline is instilled through a savings culture. In most cases, clients receive financial and investment advice,” Mr Mwara told Money.
He says Faulu Kenya offers savings accounts with no opening balance and a minimum operating balance of Sh200. Such accounts, at the same time, offer returns from Sh1,000 deposit at four per cent interest, Sh15,000 at 10 per cent interest and Sh100,000 at 13 per cent interest per year.
Given that different financial institutions offer varying savings products, it is important for a saver to engage several firms and consider the products on offer before committing one’s money.
Similar sentiments were expressed by Kenya Women Finance Trust operations director Anthony Chege, who says the interest rate on deposits at KWFT used to be nine per cent but increased to 16 per cent when the rates went up in the market in the last quarter of last year.
“Our focus starts from the micro-insurance level, which allows people to save as little as Sh50 a month.
The depositors can earn interest rates of between 1.5 per cent and 16 per cent, depending on how much they have with us and also on the length of time they have been saving with us,” Mr Chege said.
He further notes that for savings of over Sh1 million — a feat that, going by her earnings, Ms Munyao can only dream of — clients earn a 16 per cent interest rate.
But there is a rider to this as well, the customer should have been saving with the institution for at least six months.
However, a challenge at times arises when a client wishes to withdraw part of the money — an experience that Ms Munyao has gone through.
“When someone seeks to withdraw, we are at times told there’s no money. I have been a member for eight years, but whenever I try to get my savings back, it takes a long time,” she says.
Further, she says, on many occasions, there are discrepancies in the records as one may be told they have not been remitting their money at certain points.
She adds: “At times, you may be told you didn’t remit money for, say, four months, even when you’ve been consistent every month.”
As a solution, “you have to keep your receipts to make sure that you update them at such times,” she says. Such discrepancies in record keeping negatively affects both customers’ savings and the benefits at the end of the year.
It could also be prudent for savers to form or join savings and credit cooperative societies, according to Faulu Kenya’s boss.
As members, they can not only earn bonuses annually, but also borrow as much as three times their savings. Sacco loans, for instance, require about three other members to guarantee one to borrow money.
The interest rates charged are also attractive, at 12 per cent per year on a reducing balance, compared with rates charged by commercial banks.
“The Bottom of the Pyramids also have access to both formal and informal saving options such as banking institutions, SACCOs, Co-operatives, piggybanks, Rotating Savings and Credit Association and Accumulating Savings and Credit Associations among others,” Mr Mwara said.
With increasing financial literacy, Mr Njuguna says people can put their money in government securities like Treasury bills and bonds.
A retail investor may, for instance, invest Sh50,000 in Treasury bills and earn double-digit yields after a short time. They may also consider putting their money in unit trusts — money-market funds where money is invested in different investments, he adds.
But, the above is a dilemma given the fact that not many people are financially literate. The other undoing is that retail investors can hardly afford to use the services of investment banks or financial advisor like the high-networth individuals in making investments.