Say you make a contribution of Kshs 10,000 per month to a SACCO or to another investment. The SACCO or investment company will invest the money somewhere else.
At this point let me give you a secret, if you have invested your money in the short term in instruments like money market and the interest rate is less than 9%, those guys are just conning you. Further, if you have invested in the long term and the interest rate is less than 12.5% then you are getting the short end of the stick.
Why do I say so? Its because those interest rates I have quoted are the treasury bills and bonds rates. They are risk free!!! So you are better taking your money to CBK and get 9% interest than take to a money market that gives you 8%. I hope that makes sense.
Now back to our discussion. The SACCO, investment company and pension fund will invest the contributions in assets such as bank deposits, NSE shares, treasury bonds, real estate and loan to other members. Note that not all these assets can be converted to cash immediately.
So an unforeseen event i.e. Chinese virus is here and many people e.g. SACCO members in the aviation, horticulture or tourism industry want back their contributions immediately. What does the SACCO do? Do they sell shares at a loss? Do they forcefully tell the borrowers to repay so that they can return members funds? Who do they sell the land to at this time?
The way out for these investment firms, SACCOs and pension firms is to use a liquidity management tool called Gate Provision . The tool is widely used in Europe and USA. What is a gate provision?
Gate provisions restrict redemptions and help to prevent runs on the fund. When a fund, particularly a hedge fund, is holding complex investment products, unwinding positions can take time. The gate provision is built into the fund offering to prevent a situation where redemption requests cost the fund further by forcing liquidation in an adverse market situation.
In Luxembourg, which is Europe's largest investment hub, a number of funds have suspended trading as a result of the volatility caused by the Chinese virus. In United Kingdom Aviva Investors has suspended its UK property fund joining the likes of Janus Henderson property fund and Kames' Property income.
If Kenya does not employ gate redemptions especially on SACCOs, the financial catastrophe can be unimaginable. Zitaanguka one by one. That's the reality.
At this point let me give you a secret, if you have invested your money in the short term in instruments like money market and the interest rate is less than 9%, those guys are just conning you. Further, if you have invested in the long term and the interest rate is less than 12.5% then you are getting the short end of the stick.
Why do I say so? Its because those interest rates I have quoted are the treasury bills and bonds rates. They are risk free!!! So you are better taking your money to CBK and get 9% interest than take to a money market that gives you 8%. I hope that makes sense.
Now back to our discussion. The SACCO, investment company and pension fund will invest the contributions in assets such as bank deposits, NSE shares, treasury bonds, real estate and loan to other members. Note that not all these assets can be converted to cash immediately.
So an unforeseen event i.e. Chinese virus is here and many people e.g. SACCO members in the aviation, horticulture or tourism industry want back their contributions immediately. What does the SACCO do? Do they sell shares at a loss? Do they forcefully tell the borrowers to repay so that they can return members funds? Who do they sell the land to at this time?
The way out for these investment firms, SACCOs and pension firms is to use a liquidity management tool called Gate Provision . The tool is widely used in Europe and USA. What is a gate provision?
Gate provisions restrict redemptions and help to prevent runs on the fund. When a fund, particularly a hedge fund, is holding complex investment products, unwinding positions can take time. The gate provision is built into the fund offering to prevent a situation where redemption requests cost the fund further by forcing liquidation in an adverse market situation.
In Luxembourg, which is Europe's largest investment hub, a number of funds have suspended trading as a result of the volatility caused by the Chinese virus. In United Kingdom Aviva Investors has suspended its UK property fund joining the likes of Janus Henderson property fund and Kames' Property income.
If Kenya does not employ gate redemptions especially on SACCOs, the financial catastrophe can be unimaginable. Zitaanguka one by one. That's the reality.
. Now tell me which one I should get?