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Analysis

Mobile-traded bond boost for infrastructure

by Oliver Thew

Mobile-traded bond boost for infrastructure

 

Mobile phone penetration has reshaped financial services in sub-Saharan Africa. One country synonymous with this transformation is Kenya, widely recognised as the global epicentre for mobile banking thanks to the success of M-Pesa, the country’s mobile phone-based money transfer and financing service.

Since launching in 2007, M-Pesa has amassed 31m users – around 63% of Kenya’s population – and 50% of the country’s GDP is estimated to flow through the network. Earlier this year, Kenya again showed how the rapid adoption of mobile banking can make it a world-leader in financial innovation. In March the Kenyan Treasury issued the first mobile-only government bond, M-Akiba.

M-Akiba was developed by the Treasury and Central Bank of Kenya over a two-year period. The government offered the bond to investors through the M-Pesa mobile platform.

The Treasury traditionally issues large- denomination bonds through the central bank, which are then purchased by institutional investors and private sector entities. These are then divided into smaller amounts and sold onto the secondary market. But M-Akiba, as a mobile-traded bond, is issued by the Treasury and investors can access it directly through M-Pesa.
All activities relating to registration, trading and settlement are carried out on the mobile platform. This means individuals can buy and sell the bonds through the Nairobi Securities Exchange on their phones, with coupon payments paid directly to their mobile accounts.

Lower entry point opens market
For many emerging economies, the lack of developed financial infrastructure necessitates innovative solutions, like M-Akiba, to traditional challenges. M-Akiba differs from conventional government bonds not only because of the use of a mobile platform, but also because it was designed with the goal of improving financial inclusion.

Institutional investors typically dominated Kenya’s market because only they could reasonably afford the minimum of Kes50,000 (around $500) for government bond purchases. M-Akiba tries to address this imbalance by reducing the entry price to Kes3,000, making the programme more accessible for less affluent retail investors. With a lower entry point, the government hopes more Kenyans will transfer cash into savings vehicles.
Central bank statistics show the gross deposits in Kenyan banks amounted to around Kes2.7tn at the end of November 2016, with 95% of all accounts holding less than Kes100,000. In comparison, banks in Spain, which has a similar population to Kenya, hold deposits of around $1.6tn, more than 60 times higher.

One reason for these small volumes is that the Kenyan banking sector has capped interest rates on savings accounts and products, meaning consumers are offered low or even negative rates of return. Traditionally, small savers have put their money in illiquid investment vehicles, such as investment clubs, where they must wait for months before being paid a lump sum, often without interest.

M-Akiba, however, is a three-year infrastructure bond and provides investors with 10% tax-free interest, payable every six months. By pricing the bond at 10% the government is able to compete with the low interest rate products and savings accounts offered by banks, as well as the less formal investment clubs. Moreover, as M-Akiba does not require a formal bank account, it will attract savers from Kenya’s large unbanked population.

Political uncertainty
In addition to boosting financial inclusion, M-Akiba is intended to finance large infrastructure projects. Kenya has borrowed heavily in the last four years to fund an ambitious development programme.

The challenge is balancing this financing while maintaining fiscal responsibility. So far Kenya has relied on the global bond market, foreign direct investment and loans from international financial institutions for funding. However, the country’s debt to GDP ratio is 52.8%, and there is a risk that repaying foreign currency loans could become too expensive. The best way to reduce the country’s fiscal deficit is through stronger domestic revenue, which M-Akiba can help to achieve.

The initial M-Akiba tranche was worth Kes150m and targeted 50,000 mobile money users in a two-week window in March. The pilot was a success; more than 104,000 people registered for the auction and the issue sold out two days ahead of schedule. However, the main listing of Kes1bn in June had a slower uptake, with the bond reaching only 25% of the targeted amount and the Treasury extending the deadline by seven weeks.
One explanation for this is timing, as the launch coincided with the contested presidential election. With so much political uncertainty, many Kenyans opted to hold their cash. The initial bond offering was extended to after the elections, though the Supreme Court ruling annulling the result of the election dealt another heavy blow.

Investor confidence
There is a broader issue which explains why the main listing underperformed and remains undersubscribed. Initially there was a great deal of interest surrounding the launch of the bond. Investors in the pilot were early adopters, whereas the main issue targeted a broader population. These are different groups and demand alternative marketing strategies. A sustainable market must be in place for M-Akiba to become a recognised investment channel.

Many commentators have pointed to inadequate marketing campaigns compared to the pilot tranche, including those in the government. Apart from a banner at the Treasury and occasional adverts, key players – including private banks – were mostly uninvolved.

This issue is far from insurmountable. The challenges of launching a new product include marketing it correctly and educating investors to promote interest. Average Kenyans need to feel confident in M-Akiba before they begin to pay in. As Wohoro Ndohho, director general of public debt management at the Treasury, has said, this process ‘is a marathon, not a sprint’.

Oliver Thew is Programmes Manager at OMFIF.

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