By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

10 May 2015 

A few months ago, economist David Ndii, argued in the Saturday Nation that the lending rates charged by banks are just right for our economy but the savings rates are too low. Therefore, the way to reduce the rate gap is not to by reducing the lending charges but to increase the deposit rates.

In a free market economy, the only way to raise the deposit rates is by starving banks of this cheap cash. In other words, people need to move their money out of savings accounts! But where do you take your money once you take out: under the mattress?

Of course not! For most people, the first thought outside a savings account is a fixed deposit. Unfortunately, the minimum requirement in most banks (about sh50,000) is discouraging. In addition many customers are not comfortable with the idea of locking money for three months: what if there is an emergency?

Thus for many, the interest rate offered (between 5 and 8 per cent per year) is not enough motivation to lock-in the money. For example; how much would you earn from Sh50,000 put in a three month fixed account that pays 6.5 per cent per year?

6.5 per cent of Sh50,000 is Sh3,250; but that is for a year. Since you are keeping it for only three months, your interest is a quarter of this; that is Sh812.50. Then you must deduct 15 per cent withholding tax. This brings your net earning to Sh690.60. For most people, any earning less than Sh1,000 is deemed to little to bother with the paperwork!

Contrary to popular belief, the Government of Kenya Treasury Bills sold by the Central Bank are also not so profitable either. In addition, the bureaucratic process of opening an account is so rigorous that it discourages a lot of people.

The 91-day Treasury Bill is currently paying about 8.4 per cent per annum. The minimum investment is Sh100,000. But the Bills are sold on a discount method. That is, the Central Bank works out how much you need to put in now so that you will get back Sh100,000 at the end of three months.

In the case of 8.4 per cent interest, you would give them Sh98256.65 and after 91 days, they pay you Sh100,000. Your interest is Sh1,743.35 (after tax). While this is better than what you are likely to get from a commercial bank, there is still the problem of locking your money for three months.

The big question then is: there an alternative? Is there a place where one can keep money, earn high interest and still have ready access to it? The answer is yes! And I will tell you about it next week.