Why DhowCSD is a game changer for the retail investor

As at the end of Q2 2023, mutual funds held almost half (46 percent) of their pooled funds in government treasuries. PHOTO | SHUTTERSTOCK

For all who’ve been asking: Is there anything to be done to improve the fixed income market structure? Well, I think the partial answer arrived a few weeks ago in the form of DhowCSD.

Just this week, the Central Bank of Kenya reported that more than 7,000 new accounts were created via the new platform compared to the total of 44,000 accounts that existed prior.

The numbers made it clear: retail investors are hugely interested if the access platform is right. Potentially, this access could prove to be the most impactful reform coupled with the reduction in the investment amounts.

Here’s why I think the platform is advantageous. First, retail investors are snapping up new Treasury Bills at a record pace, as they broaden their search for higher-yielding alternatives to bank accounts that are currently spotting low interest rates. Average savings rates stand at 3.5 percent while deposit rates stand at 7.82 percent.

The 91-day Treasury Bills, on the other hand, are offering yields of over 14 percent. It looks like the disconnect is drawing out competition for bank deposits from all corners. Some smaller banks have started paying more interest.

Treasury bills, which are short-term papers that mature anywhere from a 91-days to a year after they are issued, are trending high now that the Central Bank has raised interest rates to fight inflation.

Secondly, the intermediation into government securities has long been unreasonably expensive. Most money market funds still take out two percent management fees (plus other hidden charges) just to pool and invest your funds with little input value.

In an ideal scenario, retail direct investments should be the most dominant. In Ireland for instance, 80 percent of the population owns directly at least one government debt instrument.

In Hungary, more than a quarter of the State debt is directly owned by domestic retail investors. Recently, Italy has relied on a new retail debt instrument to finance emergency expenditures related to the coronavirus crisis.

According to the Capital Markets Authority, as at the end of Q2 2023, mutual funds held almost half (46 percent) of their pooled funds in government treasuries.

Lastly, as more people transition towards online platforms to access financial services in general, the new platform is therefore right on time.

I expect it to forge a paradigm shift in the bond market, spiking up demand for government bonds and lowering the cost of State borrowing (which has so far been higher than banks’ deposit rates), going forward.

For the government, the platform provides it with an option for a less costly and inclusive debt programme. It’s also a way to build on the lessons learnt from the M-Akiba bond pioneered a few years ago aimed at promoting access to State securities.

That said, retail investors should be aware that these bonds offering attractive yields and deemed “risk-free” may not keep pace with inflation at all times.

They might also miss out on investment opportunities in stocks, so they should be wary of how much you stash in these government bonds. In short, a balanced approach is well-advised.

Mwanyasi is the managing director at Canaan Capital.