Investing in Kenya

Dated Dec 24, 2019; last modified on Sun, 17 Sep 2023

Areas to Consider

Capital Markets

The Central Depository and Settlement Corporation (CDSC) runs the Central Depository System (CDS) that facilitates holding and trading of shares at the Nairobi Stock Exchange (NSE). A Central Depository Agent (CDA) is a Stockbroker, an Investment Bank, or a Custodian Bank, who has been authorized by the CDSC to open accounts in CDS on behalf of investors.

In 2006, an Automatic Trading System was introduced so that orders are matched automatically and executed by stockbrokers on a first-come first-served basis. Government bonds have also been added to the ATS. Securities lending, short-selling and same day turnaround trades are not yet permitted.

I guess that’s why quant funds are not a thing in Kenya.

The NSE 20 compared to the S&P 500 over 5 years (2015 - 2019). The NSE 20 lost 48%, while the Fortune 500 gained 55%. Credits: https://www.bloomberg.com/quote/KNSMIDX:IND
The NSE 20 compared to the S&P 500 over 5 years (2015 - 2019). The NSE 20 lost 48%, while the Fortune 500 gained 55%. Credits: https://www.bloomberg.com/quote/KNSMIDX:IND

Consequently, why would a rational investor put money into the NSE 20 instead of the S&P 500? I’m biased to look for gems because I’m Kenyan. This performance pokes holes in the ‘Kenya’s economy is rapidly growing’ narrative. Is it the place to be as an investor?

To invest in bonds, open a CDS account with the Central Bank of Kenya. Treasury bills mature in < 1 year, and start at 100k KES. Treasury bonds mature in 1 - 30 years, and start at 50k KES.

It seems like bills and bonds are more reliable for the Kenyan market. Kenya USA Diaspora Sacco and Cytonn Investments do bills and bonds for diaspora .

tracks Africa ETFs listed on US exchanges. They’re not doing so well. The top 4 performers in the last 5 years: EZA at 17.96%, AFK at 15.65%, EGPT at 9.70%, and NGE at -19.82%. Kenya is not on this list.

The unremarkable ETF performance dampens the “Africa is the next big investment scene” campaign. cites the increasingly familiar claim, “Seven of the ten fastest growing economies in the world are in Africa and of the 10 best cities to invest in Africa, two are in Kenya.”

Real Estate

I’m not bullish on real estate in Kenya. Seems like a bad lemons market. There’s the prevailing belief that land will always appreciate. Maybe they’re right, maybe it’s 2008 all over again.

value propositions for partnering with them for real estate are: clean titles, legitimate owners, fairly priced and projected to appreciate, ensure amenities are in place and negotiated financing plans.

Questions to Dig Into

For property in prime areas, e.g., close to Nairobi, investment groups put up projects that individuals can pool together into. For example, is a planned 20-storey project with 216 studios and 234 1BR units in Ngara West, 1km from Nairobi CBD . A studio unit goes for ~2m KES, while a 1BR goes for ~4m KES. How much is the expected annual income from such a unit?

One could Airbnb it. notes a 26% average occupancy rate and an $51 average nightly rate for Nairobi. shows ~134 units currently available, with a median of $35 per night. Assuming a similar drop-off in occupancy, a Stima Heights unit would have ~17% occupancy, giving an expected monthly revenue of \(.17 \times 35 \times 125 \times 30 = 22,312.50 \text{ KES}\). It’d take 7 years to recoup a 2m KES unit.

Getting Airbnb stats isn’t as straightforward as I expected. quotes the 10-K for FY21 , but I can’t glean ’s numbers from the SEC filing. Nothing from investors.airbnb.com stands out to me. www.airdna.co seems like the leader in this space, with data access plans starting at $12/month .

What about renting it out? puts 1BR units at ~28k per month. Couldn’t find rental occupancy rates in Nairobi. reported a 6.7% drop in rental prices in the Parklands area in 2022, so not looking good. To beat an Airbnb’s expected income, a rented unit would need to an occupancy rate of 80% or better.

The Hass Property Index seems like a leader in property valuations in Kenya.

Commodity Trading

Kenya is heavy into commodities. ’s 2021 data shows that a non-trivial portion of the GDP (45.59% in 2020) comes from non-services, and thus especially amenable to commodity trading.

Dev’s curse. My first instinct was to go for a D3 line chart , but embedding a Google Docs chart is way faster, and allows me to focus on the more pertinent objective: evaluating commodity trading in Kenya.

Commodity trading firms (CTFs) identify and optimize transformations (in space - using logistics; in time - through storage; in form - with processing) in commodities that reconcile mismatches between supply and demand. CTFs do not speculate on outright commodity price risk, but aim to profit on the differential between the untransformed and transformed commodity.

A lot of the materials businesses that I can think of seem like a subset of what a CTF would be interested in. For example, shops mostly specialize in transformations in space – they bet that by bringing goods closer to the consumer, they can profit from the delta in the items' prices. Sometimes it feels as if the CTF is an unnecessary middle entity that inflates the final price, e.g., in the supermarket scenario, why can’t the supermarket directly buy from the manufacturer? Or does the manufacturer tend to sell in very large quantities, and therefore individual supermarkets (or small chains) need an intermediary?

CTFs specialize in the production and analysis of information that identifies optimal transformations. What price data sources are available for the Kenyan market? Having good data seems like a barrier to entry, as without data, it’s hard to pick optimal transformations and manage risk around the transformations.

is a hilarious intro into commodity trading as Dollar Bill takes a $300m position to corner the chicken market based on a tip about the “Chicken Man” who runs the Arkansas Chicken Index, which dictates the nationwide price of chicken.

A similar real-life drama unfolded with the Georgia Dock index, which was published by an employee of the Georgia Dept of Agriculture after calling chicken producers weekly and asking them for the price of chicken. Georgia Dock was heavily used in setting contracts for chicken prices. However, when other [relatively unused] chicken indexes were falling, Georgia Dock remained high, triggering investigations into its validity, and eventual discontinuation.

Kenya National Bureau of Statistics publishes Consumer Price Indices (e.g., food, alcohol, housing, health, transport, etc.; selected commodities, e.g., cabbages, maize flour, LPG, petrol, etc.), Producer Price Indices (e.g., mining, manufacturing, electricity, and water), and Construction Input Price Indices (e.g., cement, mixers, transport, mason, etc.).

Still not sure how I’d go about this. features an online grain trading game, featuring real-time cash, futures and options quotes for corn, soybeans and wheat. It also has learning material, e.g., “Selling futures to hedge the value of grain before harvest.” sounds like a good place to learn more skills about commodity trading.

Processes for Investing

Investment Vehicles

Investment groups (chamas) are popular for pooling investor resources. is an umbrella non-profit organization. The list of chamas is not publicly available though, which makes picking a good chama trickier.

Kenya USA Diaspora Sacco claim to address stringent financial requirements from banks, unreliable relatives and friends, and limited control and accountability of investments in Kenya. They offer term deposits (best rate is 10% for 5m+ KES), bringing together group investments, facilitating real estate deals .

offers a high yield fund, which is mostly (up to 80%) invested in real estate. Promise target returns of ~14%, and charge a 2% management fee.

In 2020, ’s minimum for the fund was 1m KES, but in 2022, the minimum is 100k KES.

Starting a Business

has components like: mega-investment projects; guides on labor, taxes, investor rights; primers for getting started in various sectors. Many steps need to be completed in Kenya (can appoint an agent).

Capital Movement

US to Kenya Money Transfers

The foreign exchange markup is calculated as \((r_{mkt} - r_{bank}) / r_{mkt} \cdot 100\).

In May 2023, offered a USD/KES rate of 110.65, while the market rate was 113.65, and so the FX markup was \((113.65 - 110.65) / 113.65 \cdot 100 = 2.64\%\). Sendwave is convenient though as the funds arrive in the recipient’s M-PESA account in minutes.

US banks charge an average flat fee of USD 42 for outgoing international wire transfers . There may be incoming wire fees, e.g. NCBA - KES 850 , Standard Chartered - 15 USD , KCB - 2,000 KES , Co-op Bank - 500 KES , Diamond Trust - 500 KES , and Absa - 12 USD . So USD 55 is a good upper bound.

If wire transfers incur total flat fees \(f_{wire}\), and a “no-fee” money transfer tool has an FX markup of \(m\), then using a wire transfer makes sense for \(x \ge f_{wire}/m \). In Sendwave’s case, \(x \ge 1{,}590.91 \text{ USD}\).

Any form of electronically moving money from one bank account to another is an electronic fund transfer (EFT). A wire transfer is an EFT between individuals/entities across a network of financial institutions. The institutions communicate through a secure messaging system, e.g. the SWIFT network.

If wiring USD, where is the best place to exchange it? In Sept 2023, Xe’s informational rate for USD/KES was 146.89. Chase offered 140.30 for 15 USD and 141.75 for 250k USD. Equity Bank offered 143.70.

Credit card companies offer low FX rates, but may have foreign transaction fees (see for sample transaction fees, and cards that lack such fees). Some debit cards charge a flat rate, or a percentage, or both for ATM withdrawals. Some banks have relationships with other banks that results in lower fees. Prepaid cards lock in the FX rate at load/reload time; read the fine print though on fees, validity, and guarantees if card is stolen. Airport and hotel exchange desks have hefty FX markups. Using your home currency on the credit card invites more fees because the local bank needs to convert, and the home bank needs to re-convert; good for the banks, but not so for you.

Exchange Rate Risk

One of the challenges is the KES being relatively volatile against the USD. For instance, buying USD-denominated goods is expensive when the KES is depreciating against the USD.

The rule of thumb is to leave the exchange rate risk unhedged when the local currency is depreciating against the foreign-investment currency, but to hedge this risk if the local currency is appreciating against the foreign-investment currency.

lists ways of hedging currency risk by locking in an exchange rate:

  • Currency futures: buy/sell a fix amount of currency at a set rate for a defined period of time; traded at an exchange, with a margin payable; binding obligation; can be sold before maturity.
  • Currency forwards: often large sums; customizable amount and maturity; traded over-the-counter so more counter-party risk and less liquidity.
  • Currency options: pay premium to have the right (but not obligation) to buy the currency at a pre-determined rate before the option expires.

For small amounts, recommends currency ETFs as discussed by . A currency ETF tracks the currency, and typically has low management fees.

What counts as a small amount?

Kenyan Bank Account

Ideally, I should be able to open the account from the US, manage the account online, have support in the US, enjoy good interest rates for a savings account, and easy transfer via mobile money (mainly M-PESA). The major tradeoff is the relative movement between the USD and the KES. Since Dec 2003, the USD has appreciated 43.64% relative to the KES ( Google Finance ). For a similar time period, what appreciation rate would have been needed to stash KES without losing value?

$$ (1 + R)^{20} = 1.4364 \implies 20\ log(1 + R) = log(1.4364) \implies log(1+R) \approx .01811 \implies R \approx 1.827 \% $$

Huh, so over long time periods, depreciation isn’t a concern. The non-resident tax rate for interest income seems to be 25% (not sure if a savings account is a bearer instrument, but that’s the seemingly closest match) . So as long as \(.75R \ge 1.827 \implies R \ge 2.436 \% \), we’re good. 2.5% is easy to beat for a savings account.

Any partnerships with Chase? Other than JP Morgan is opening a regional office in Nairobi soon , nothing much going in this regard.

Coincidentally, there was a Chase Bank Kenya which was liquidated in 2018.

Can I avoid having as the intermediary when I’m sending money home? Is there a local bank that allows me to send money directly to people’s mobile money accounts without having a mobile money account myself? Or can I open a mobile money account from the US? As there’s no clear path on the Safaricom/M-PESA website, contacting @Safaricom_Care instead.

When choosing Chase, I was mostly guided by US Consumer Satisfaction Indices of National Banks, where Chase ranked pretty high. Did not find a similar report for Kenya. The largest banks in Kenya are: Equity Bank, Kenya Commercial Bank (KCB), Co-operative Bank, NCBA, Diamond Trust Bank, I&M, and Absa (formerly Barclays). NCBA , Diamond Trust Bank , I&M , and Absa doesn’t have branches near home, so they’re out of contention.

Equity Bank. Transactional account that has no maintenance and ledger fees. There are 3 savings accounts: EazzySave, Jijenge, and Call/Fixed Deposit. EazzySave has no monthly charges, has one free monthly withdrawal, and “competitive interest rates” for KES +20K. Jijenge has monthly contributions of KES 300, no monthly fees, and a 6 months lock-in. Call/Fixed Deposit has a KES 20K minimum, 1 month lock-in, and negotiable interest rates. Additionally, there are accounts for buying securities . Equity Online promises convenient transfers to M-Pesa and Airtel Money.

Kenya Commercial Bank (KCB). For transactional accounts, Current has a 1K opening balance and various ledger fees, Transactional has USD options, and no monthly fees for a USD 1K balance. For savings accounts, Goal a lock-in of 6 months with a max of 5 years at 8.5% p.a.; Simba Savings has no expiration, but limits to one monthly withdrawal, and offers variable rates p.a. (6% for KES 100K - KES 1M, 7.5% for up to KES 10M, 8.5% for KES +20M, etc.). KCB offers an M-PESA account with up to 12 month lock-in at 6.3% p.a.

Co-operative Bank. Transactional account has a KES 5K minimum and a KES 30 transactional fee. The Fixed & Call Deposits account has up to a year lock-in for at least KES 50K for competitive interest rates. There are also accounts for buying securities .

References

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