Can one borrow from a SACCO to invest in T-Bills?
The Sunday Nation
Nairobi,
08 November 2015
After reading about the high rates being offered by the Central Bank of Kenya (CBK), Dan Ngimwa wants to know whether it would be wise to take a loan from his Savings and Credit Cooperative Society (SACCO) and invest the money in a Treasury Bills (T-Bill).
Then answer is that it depends on the interest rate charged by the SACCO. Most charge 12 per cent per annum and this is calculated on a “reducing balance” method. So, with the rate of T-Bills at current high levels (above 19 per cent), it is mathematically wise to do that. Let’s see how…
Suppose he wants to invest in a Sh100,000, 91-day T-Bill at 19 per cent per annum. This is equivalent to 4.75 per cent for three month term. The first step is to work out how much he will pay to the Central Bank of Kenya (CBK).
To find out, we ask: to what amount would we add 4.75 per cent in order to get 100,000? The answer is 100,000 divided by 1.0475 = 95,465.39. So, if Dan paid Sh95,465.39 and earned 4.75 per cent, he would get Sh100,000 at the end of the period; that is, he would earn Sh4,534.61. (Don’t take my word for it, test it for yourself!)
However, the interest earned attracts withholding tax at the rate of 15 per cent. That is, 4,534.61 multiplied by 0.15: the answer is 680.19. This Sh680.19 must be deducted from the interest and handed over to the Kenya Revenue Authority.
Therefore, Dan’s net interest will be Sh4,534.61 minus Sh680.19; that is, Sh3,854.42. So, the amount he pays to CBK is Sh100,000 – Sh3,854.42 = Sh96,145.58. This is money Dan will need to borrow from the SACCO.
The second step is to find out how much Dan would pay back to the SACCO. So we ask: If he borrowed Sh96,145.58 and was charged 12 per cent per annum (or, one per cent per month) for three months, what would be the monthly instalment? The answer is Sh32,691.62. So, in three months, he would pay a total of Sh98,074.86.
In summary, at the end of three months, Dan will have paid Sh98,074.86 and received Sh100,000. That is a profit of Sh1,925.14. Is this a worthwhile venture?
Now, as mentioned earlier, this is purely a mathematical result. Unfortunately, however, there are some things that the math cannot capture. First of all is the bureaucracy involved in getting the SACCO loan and in opening the Central Depository System (CDS) account at the CBK.
To get the loan, you might need to get three guarantors to support your application; then wait a few weeks for the loans committee to meet and approve it. Opening the CDS account takes anywhere between two to four weeks – sometimes more. In other words, it will take you about four weeks to do this kind of thing. Chances are that, by the time all the bureaucracy is done with, the T-Bill rates will have dropped to below 12 per cent – and in that case you will make a loss!
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