M-Akiba success lies not as a retail bond but Social Impact Bond

Kenya like many others African is developing fast with the World Bank projecting that by 2030 50% of the African population will be in urban areas.  Kenya has been struggling to finance its infrastructure projects which have not grown in tandem with the rapidly growing population.

Most recently Kenya has developed a huge appetite for debt financing especially from China with total outstanding external debt in excess of Ksh 3 trillion.

A retail bond is an investment opportunity given by the government in which an investor will earn a return on their investment in terms of interest. The aim of M-Akiba is to open up the opportunity to invest to the common person (Mama Wanjiku) who previously couldn’t access the bond market due to systemic barrier such as minimum investment value of Ksh 50,000.

Whist the idea is indeed noble; it will fail flat on its face in terms of including most individual Kenyans majority whom earn less than Ksh 100,000 p.m.

The M-Akiba Bond is a special Retail Bond that has been issued by the Government of Kenya to raise money to fund its’ infrastructural projects. Expected interest rate for this bond is 10% per year and it is fixed.

The return of 10% p.a makes sense to institutional investors who view such government security to be safe both in terms of return on investment and safety of principal amount. On the other hand the interest to individual investors who normally invest in small amounts may not make sense. Say for example mama Wanjiku saves Ksh 10,000 annually; this will earn an interest of Ksh 1,000. Reason dictates that they would rather invest the sum in other ventures which can be turned several times and earn three times the principal value.

Based on this the M-Akiba bond will be fully subscribed but dominated with traditional institutional investors despite the deployment of mobile technology.

On the other hand; if the M-Akiba bond is floated as a social impact bond which are bonds meant to tackle social problems that can be objectively measured; more of individual Kenyans may want to invest knowing such funds would be used to fund specific social problems that affect them. Investors in social impact bonds gravitate towards them because they want a social need or challenge addressed off course with a return on investment albeit lower than market interest rate.

The change of approach would ensure a win win approach; Government receiving funds for infrastructure at very favorable terms while encouraging savings by Kenyans who will get quality infrastructure and modest return on investment.