8.

SNAPSHOT

By David L. Ross and Catherine Mandler- Statera Capital

How much is Transacted Using Mobile Money Each Year in East Africa?

This month’ s indicator figure is $ 63,575,367,410

$ 63,575,367,410 What?

$ 63,575,367,410 USD or $ 63.6 billion USD is the total sum of money that was transacted in aggregate in a single year on mobile money platforms in the East African Community( EAC) countries. This corresponds to 46 % of the total GDP of the EAC in the most recent statistics available from 2015( excluding Burundi)..

What do you mean by transacted on mobile money platforms?

Mobile money is defined as the transfer of funds using a mobile phone. Common East African platforms for mobile money include M-Pesa, TigoPesa, MTN Mobile Money, and others. The amount transacted relates to the total amount of money sent from one person to another using the most recent figures available.

Which EAC country has the largest and which has the least amount of money transacted via mobile money?

Kenya, the pioneer of mobile money and the largest economy in East Africa has the largest volume of money transacted over mobile platforms at $ 28.7 billion USD and largest percentage of their GDP transacted over mobile money at 63 %. Tanzania comes in second at $ 24.1 billion USD transacted comprising 45.6 % of GDP followed by Uganda and Rwanda at $ 9.2 billion USD( 21.1 % of GDP) and $ 1.5 billion( 8.1 % of GDP) respectively.

How does the use of mobile money in the EAC compare to other regions of the world?

The largest player in mobile money transaction volume is China where two platforms, WeChat Pay and Alipay with hundreds of millions of users utilize these platforms each month to conduct billions of dollars of transactions. The highest percentage use of mobile money in the world by population is Cambodia at 67 % which is followed by three EAC members, Tanzania, Kenya, and Uganda followed by Zimbabwe, Ghana, and Rwanda.

Is the use of mobile money increasing or decreasing?

Mobile money transaction volume is increasing in size significantly as the economies of the EAC grow as well as mobile money’ s share of GDP. In Tanzania for example, mobile money volume increased 31 % in the first six months of 2016 compared to a similar period the year before.

What is driving the growth of mobile money?

Several factors make mobile money successful in East Africa which include demographic factors and service factors. Demographic factors include the large percentage of the population that is unbanked, the large informal sector of the economy, and the highly disbursed population throughout the region. Service factors include the relatively high cost of transportation to move physical cash, the high cost of remittances, the pervasiveness of mobile phone and service access, and market dominance by Kenya’ s Safaricom or interoperability among mobile money platforms in Tanzania.

In summary, it is cheaper, faster and easier to send money via a mobile money platform than to journey over to someone’ s location to pick up physical cash.

David L. Ross is Managing Director of Statera Capital and US Ambassador to the Open University of Tanzania active in growing companies in Eastern and Southern Africa through primary investment, investment advisory, strategic partnerships, and executive education. Connect on LinkedIn at https:// tz. linkedin. com / in / davidlross1 or at david @ stateracapital. com.

Catherine Mandler is a Senior Analyst at Statera Capital. Connect on LinkedIn at www. linkedin. com / in / CatherineMandler or at catherine @ stateracapital. com.

By Eugene Mwai- The Exchange

IMPACT OF RISING INTEREST RATES

ising or declining interest rates present a lot of uncertainties in any market. It expresses the expectations of the market-players towards weekly auctions by the government in the domestic and capital money markets. Whereas there is no scientifically fixed rate where short-term interest rates should be stabilized, most markets the world over have an internal optimal stable rate which is acceptable by all market players. Kenya uses the 91, 182 and 364 days Treasury bill rate.

Effects on the cost of money Interest rates measure the cost of funds lent to any issuer be it a corporate entity or the government. This translates into the current rate of 91 or 182 days becoming the benchmark upon which other derivatives can result from. Most commercial banks fix their base lending rates to the Treasury bill rate. When interest rates move either way the resultant effect on the banks is to adjust their lending rates. When interest rates are low, the owners of capital have to also lower their lending rates. With the cost of money being cheap, more activities are likely to emanate which include funds borrowed to finance more productive activities in the economy. This is why every government strives to keep the level of shortterm interest rates low. The Central Bank of Kenya has of late been rejecting high bids during the primary auction of both treasury bills and bonds leading to stability of short-term interest rates at desirable levels. However to reap the maximum benefits of a low interest rate regime, inflation has also to be held in check in tandem with exchange rates to ensure that savers do not get negative yields.

Conversely, when interest rates are high, the market witnesses the money-lazing concept-- where owners of capital look for the easiest, cheapest and risk-free way to invest those funds. This leads to diversion of resources from being lent to the productive sectors to high- yielding short-term products. High interest rates also indicate a riskier market and as such investors price and load that opportunity cost on the issuer. With the advent of rising interest rates, we are likely to go back to the era of defaulting borrowers, eventually leading us to the cases of bad debtors. For instance, in the Kenyan market, there was an aggressive retailing of unsecured loan products from the commercial banks a few years back. The evaluation criteria have always been based on monthly salaries. Once the underlying borrowing rates change due to rising short-term interest rates most borrowers will not be able to cope because salaries are not adjusted upwards with rising interest rates.

Effects on government borrowing There is empirical evidence the world over that high interest rates lead to more investor appetite. What drives higher demand for government papers is the stability in the interest rates. This therefore means with a proper management of the levels of interest rates in any market, the supply and demand can be also managed. Rising interest rates tend to send signals to investors that more and better return is yet to come. As such, most investors postpone their investments leading to low demand for weekly Treasury bills.

Effects on the equity market Capital and money markets are both complementing and supplementing at the sometime. However, to investors, what matters most is the return achievable in any of those markets. If the return on capital market

TREASURY BONDS LISTED AT THE NAIROBI SECURITIES EXCHANGE

Data Source: NSE Trading reports and CBK bond prospectus and Auction results.

MAY 2017

products like equities seems relatively very high than the money market, most institutional investors shift base. Therefore there is no doubt that as the interest rates keep creeping up, trading in equities remain subdued for some time.

Effects on bonds market Bonds’ trading is entirely dependent on stable and predictable interest rates, to the extent that any disturbance in the stability can heavily discourage trading in the secondary market. The basic principal behind bonds’ trading is the yield to maturity( YTM) concept which states that fixed income securities should be traded when priced to maturity. The remaining life of the bond has to be priced to the resultant yield in the market. By doing this, all the fixed income securities have to be marked or valued to current / existing market. This helps the bonds holder determine the worth of that investment at the existing prices. The prices of bonds are inversely related to the yield to maturity. This relationship commands all the primary and secondary market of the treasury securities. In a rising interest rates market, therefore, the value of the fixed income securities, particularly treasury bills and bonds tend to decline. This makes the holders to book losses on those investment which can easily be realized when those bonds are literally sold to third parties. In a scenario where interest rates are rising, bondholders would be booking huge losses. However, since no trader of bonds would wish to make loses when selling, trading at the secondary market comes almost to a halt.

The table below shows government fixed rate bonds that are listed at the Nairobi Securities Exchange and the indicative market yields and current market value. NB: not all bonds trade on a regular basis and therefore their respective yield to maturity is obtained through interpolation by using the benchmark bonds.

Issue No.

Date of Issue

Maturity Date

Coupon Rate

DISCLAIMER: Whilst every care has been taken in compiling the data the writer does not accept any responsibility for the accuracy or completeness of the information contained herein.