Mastering personal finance in Kenya's low-interest rate era

In April, the Central Bank of Kenya (CBK) reduced its benchmark lending rate by 75 basis points, bringing it down to 10 per cent. This marked the fifth consecutive cut in its current cycle of monetary easing, a move designed to stimulate economic activity by making credit more accessible and affordable.

While this shift presents attractive opportunities for borrowers, it also introduces challenges for savers, as returns on traditional deposit instruments continue to decline. In such a dynamic financial environment, individuals must adapt their strategies to take full advantage of the emerging benefits while carefully managing the associated risks.

One of the most notable implications of the lower interest rate is the reduced cost of borrowing. As the CBK lowers its policy rate, commercial banks are expected to follow suit by adjusting their lending rates.

This creates a more favourable lending environment for individuals looking to secure mortgages, personal loans, or financing for business ventures.

Household incomes

Lower borrowing costs can encourage both consumer spending and private investment, injecting fresh momentum into the economy.

As economic activity accelerates, job opportunities may increase and household incomes may rise, providing indirect benefits to the wider population.

However, the environment is less promising for savers. As lending rates decline, the interest paid on savings accounts and fixed deposits also falls.

This trend forces individuals to reconsider their traditional saving habits, as the returns from conventional savings instruments are no longer sufficient to meet their financial goals.

Moreover, although inflation remains within the CBK’s target range, any future increase could further diminish the real value of low-yield savings, placing savers at an even greater disadvantage.

Considering these shifts, individuals must consider alternative financial strategies to preserve and grow their wealth. One practical approach is to explore more diversified investment options.

While returns on Money Market Funds reflect the trends in the prevailing interest rate environment, currently a declining interest rate cycle, they continue to offer stable returns and are structured to be very liquid funds to meet investor redemptions on demand.

Investors seeking currency diversification and have moderate risk appetite, would be well served investing in the foreign currency denominated Fixed Income Funds that offer competitive returns and liquidity.

Government securities also remain an attractive option. Short-term instruments like the 91-day Treasury bill have seen overwhelming demand, with subscription rates exceeding 400 per cent.

For those who prefer higher returns with a moderate risk appetite, long-term government bonds can offer steady and predictable returns.

Investing in quoted equities listed on recognised securities exchanges, locally and internationally, offers avenues for competitive risk-adjusted returns for investors with a medium to long-term investment horizon.

In addition, Real Estate Investment Trusts (REITs) present a practical way to invest in the property market without the complications of direct ownership. They provide regular income streams and the potential for capital appreciation, making them suitable for those looking to balance risk and return.

Lower interest rates also open the possibility of using credit more strategically. With borrowing costs reduced, it becomes more feasible for aspiring entrepreneurs to launch or expand businesses. Those with sound business ideas and a clear growth plan may find this an opportune moment to seek financing and lock in attractive interest rates.

Likewise, investing in education or vocational training is another worthwhile use of affordable credit.

Pursuing further qualifications can improve employability and enhance income potential in the long term, making education loans a valuable tool for personal development.

Investment opportunities

As the financial environment continues to evolve, individuals need to reassess their financial goals and risk tolerance. The decline in traditional savings returns may necessitate a shift in strategy, prompting savers to allocate a portion of their funds to higher-yielding, though potentially riskier, investment opportunities.

At the same time, it remains crucial to maintain liquidity through an emergency fund. Keeping a portion of one’s savings readily accessible ensures preparedness for unexpected expenses, helping with financial resiliency amid economic fluctuations.

Kenya’s current low-interest rate environment is a double-edged sword.

It provides more affordable credit, encouraging borrowing, investment, and  economic growth for borrowers, while simultaneously reducing the returns on traditional savings’ product.

To navigate this landscape successfully, individuals must adopt a forward-thinking and flexible approach to financial planning.

By diversifying investments, leveraging low-cost credit wisely, and continually re-evaluating their financial strategies, Kenyans can make the most of the opportunities available even if this low interest economic environment.

The writer is the head of Asset Management at Stanbic Bank Kenya