Rethinking Remittances: Redirecting Diaspora Remittances to Sound Investment Choices

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Avikele Legal Services

Remittances have been one of the most important contribution by the diaspora to their respective countries. Globally, this could be ranked as an individual industry as it affects millions and probably billions of people worldwide. According to a World Bank report, remittances to low- and middle-income countries reached a record high in 2018.

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The Bank estimates that officially recorded annual remittance flows to low- and middle-income countries reached $529 billion in 2018, an increase of 9.6 percent over the previous record high of $483 billion in 2017. Global remittances, which include flows to high-income countries, reached $689 billion in 2018, up from $633 billion in 2017. The World Bank forecasts that Sub-Saharan Africa will receive roughly $47 billion in remittance inflow in 2019.

Regionally, Kenya tops the countries receiving remittances from the diaspora.  In December 2018, for example, Kenyans in the diaspora sent home $244 million (Sh24.82 billion) data by the Central Bank has shown. This was 10.75 per cent more that remittance reported in November at Sh22.41 billion.

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The use of remittances varies greatly from individual to individual, however, there are quite a number who attempt to invest, while others send money to their respective families for upkeep and general maintenance. Some of the very common uses of these remittances are land purchases, fees, medical and general use. The diaspora largely invest by purchasing plots of land through their families and friends and leave the plots undeveloped. In my engagement with others, it has emerged that their attempt to even invest in the country has stopped due to misuse of the funds and a lack of knowledge of better investment opportunities other than “plot maguta maguta” as they are advertised.

This is the feeling that many in the diaspora express. Alienation and disenfranchisement from economic participation in the country which currently features as one of the fastest growing in the world by 6.3% with low inflations of 3-5%. Kenya also leads in Africa in terms of Foreign Direct investment as it recently overtook Nigeria and South Africa in attracting private equity funding to SMEs, large enterprises and start-ups. Decentralization has seen agriculture, real estate, manufacturing start in areas previously not exposed to investment. South Coast for example, still relatively low in land prices is now seen as an alternative to Mombasa in terms real estate development allied to the tourism industry. Truly, and without further analysis, this is a sign of investor confidence.

But why should foreigners invest while the diaspora lament? What are the diaspora’s options?

Here is a brief explanation on the diaspora’s options.

1.      Real Estate

Real estate remains one of the best investment options in Kenya as the upward trajectory of land prices is firmly fixed on growth of income and investment distribution within the larger economy. The diaspora’s involvement in the real estate industry is aligned to the common notion of “plot maguta maguta”. In itself, this approach focuses on land purchase and holding without developing hoping that at some point, the prices double or triple, and upon resale a realization of profits is automatic. This has not always been the case of late as land prices around major cities have skyrocketed thus a purchase and resale of the same becomes almost impossible thus no return on investment is found. Simply put, this is speculation, and, speculation is not investment but gambling.

Such purchases of land fail to observe the two most important principles of investment which are:

  1. Return on Investment
  2. Income on Investment

To illustrate this, let me delve into the story of an uncle of mine. Having come from Canada, he sought to undertake investments into the real estate industry. He purchased land along the busy Nairobi – Nakuru highway. On purchasing, he started construction of a gas station, with a restaurant, a few shops and a parking bay. On completion, he entered into a 15 year management contract with a leading petroleum retailer who would manage and market his gas station for him. In exchange, he was going to earn a percentage of total sales without even engaging in the daily hustles of running and managing the gas station.

This is income from the investment. If he decided to sell, the strategic positioning of the land, its amenities after developing plus the income from operations among others would causes a reward known as Return on Investment.

You might be wondering how to replicate the same. The idea lies in the formula above. To break it down, remember to buy, develop then sell or lease. This earns you the return on investment which would sit well in your account or income from investment which you would enjoy.

Some of the most attractive investment options lie in holiday homes constructed near holiday spots such as the coast of Kenya. Such a trend has picked up all over Kenya and Zanzibar.

2.      Bonds (Treasury Bonds)

Most simply, bonds represent debt obligations – and therefore are a form of borrowing. If a company issues a bond, the money they receive in return is a loan, and must be repaid over time. Just like the mortgage on a home or a credit card payment, the repayment of the loan also entails periodic interest to be paid to the lenders. The buyers of bonds, then, are essentially lenders.

Governments (at all levels) and institutions commonly use bonds in order to borrow money. Governments need to fund roads, schools, dams or other infrastructure. Government bonds are by far the most secure as governments hardly ever default on their obligations to debtors. There are rare instances globally of governments defaulting and the consequences have been devastating to those countries. An example would be Greece. No country wants to go that way.

So, how do bonds work? Here is an example. You have a friend, called Otieno who needs a loan for his butchery. You don’t have time yourself to run that kind business but you believe there is opportunity in the meat industry and figure you might as well benefit in some way from the returns of this business. So you lend Otieno Kes 100,000 (USD 1,000) payable in three years which he will use to refurbish his butchery. However you can’t lend Otieno Kes 100,000 (USD 1,000) wait three years and only get back Kes 100,000. That would be unfair to you because you could have done something else with the money i.e. there is an opportunity cost to lending Otieno the money. So Otieno agrees to pay you interest of 10% p.a. to compensate you for this opportunity cost. Because of the nature of how money goes in and out of his business he can’t pay you every month. At the same time it is not fair on you to have to wait till the end of the year or end of three years to get your return. Otieno therefore agrees to pay you interest every six months or semi- annually. In a year you would be earning Kes 10,000, USD 100, (10% of Kes 100,000). If he is paying interest every six months that will translate to you earning Kes 5,000 (USD 50) every half year for three years. The last payment at the end of three years will be the final interest of Kes 5,000 plus you will get back the initial capital invested of Kes 100,000; which is a total of Kes 105,000 (USD 1050)

The scenario above with Otieno is exactly how most bonds work. The government borrows from us to finance certain expenditures like infrastructure etc. The loan that we give the government is referred to as a Bond. Depending on the intended use of the funds, bonds can be issued from 1 year to 30 years. The interest rate a bond will earn is referred to as the coupon.

If you invested in a three year bond with a coupon rate of 10%, the payments to you will be paid semi – annually in the exact same way as when you invested in Otieno’s business. Now Otieno can decide to raise Kes 1,000,000 (USD 10,000) from his business from various investors. Some will give 100,000; others 50,000 (USD 500); and others 200,000 (USD 2000) depending on their ability at the time. All Otieno is interested in is getting to a total amount of Kes 1 million.

Whether you put in Kes 50,000 or Kes 200,000 you will all earn an interest rate of 10% p.a. on your money. In the same way the government can opt to raise even Kes 15 billion ( 150 million) from various investors. Bonds, contrary to popular belief are not only for the wealthy or for institutions. If you put in Kes 50,000 and someone else Kes 50 million you will earn pretty much the same coupon (or interest rate) on your money.

To invest in a Bond you firstly need to open an account with the Central Bank of Kenya (referred to as CDS account). The government advertises any bond it is issuing. Bonds are safe investments so your rationale around bonds would not be to double your money overnight. However if it was money you were going to keep in cash or looking for a secure place to invest, this is definitely worth considering. Bonds are also a good way of securing a source of income and can come in handy when planning for Retirement.

Many people who want to keep a portion of their retirement portfolio safe while earning an income to help meet with everyday expenses have opted to invest in Bonds. If you had built up a retirement portfolio of Kes 10 million (USD 100,000), this same bond would earn you Kes 1.28 million per year (USD 12800) which is translates to Kes 100,000 per month. That could be a large portion of what you actually need to live off. The Kes 10,000,000 would remain intact while you just live off the income being generated.

3.      Mutual/Unit Trusts

A mutual fund is at its core a managed portfolio of stocks and/or bonds. You can think of a mutual fund as a company that brings together a large group of people and invests their money on their behalf in this portfolio. Each investor owns shares of the mutual fund, which represent a portion of its holdings.

Investing in a share of a mutual fund is different from investing in shares of stock. Unlike stock, mutual fund shares do not give its holders any voting rights. A share of a mutual fund represents investments in many different stocks (or other securities) instead of just one holding.

Investors typically earn a return from a mutual fund in three ways:

  • Income is earned from dividends on stocks and interest on bonds held in the fund’s investments. A fund pays out nearly all of the income it receives over the year to fund owners in the form of a distribution. Funds often give investors a choice either to receive a check for distributions or to reinvest the earnings and get more shares
  • If the fund sells securities that have increased in price, the fund has a capital gain. Most funds also pass on these gains to investors in a distribution.
  • If fund holdings increase in price but are not sold by the fund manager, the fund’s shares increase in price. You can then sell your mutual fund shares for a profit in the market.

Mutual funds have some clear advantages for investors. This includes the fact that your money is left to professionals who invest them in various options that guarantee returns.

There are a number of very successful mutual funds in Kenya which have invested in various options guaranteeing good returns for their clients.

  1. Private Equity

Private equity is a general term used to describe all kinds of funds that pool money from a bunch of investors in order to amass resources that are then used to acquire stakes in companies.

To simplify this, imagine your group of friends or that WhatsApp group that you belong to. Consider that you are fifty friends. Each contributes fifty thousand U.S dollars. This amounts to two million five hundred thousand dollars. Translated to Kenyan currency, this is two hundred and fifty million shillings.

Diaspora Remittances

So, what do you do with that money?

To explain, let me delve into what private equity does.

The options are limitless. The private equity appoints a management team or fiduciary (a company chosen to manage it on its behalf) who identifies investment opportunities. This could be in existing companies. A great example is listed companies as this allows for easy divestment on the stock exchange.

Sometimes a private equity firm will buy into company outright which is largely small companies with high potential. In Kenya, this are generally agriculture companies, real estate and tech companies. Such organized finances are great as they are structured, enjoy the diversity of investment and a great number of investors.

Private equity in Kenya is well developed with a great number of them as well as asset management companies that invest in a variety of industries. Kenya leads the rest of East Africa and Africa in attracting private equity funding. So far, the growth of alternative financing for startups in Kenya can be attributed to the growth and funding from private equity.

To invest in private equity, there are two general options. One is to start one from ground up or choose an existing to join then earn returns. To enjoy a better security over control, it is important to have a greater say which is achieved by investing in volumes. I’d advice that one pools resources from friends then join a private equity as one entity then enjoy greater returns.

The Upshot

There are key fundamental points to note while investing:

  1. Organize your income. This gives you the opportunity to identify your disposable income and options for your disposable income.
  2. Network, find like-minded people and pool funds. No one thrives in isolation. In pooling funds, you are able to invest in greater options and limit risks. If you have always wanted to construct holiday homes or apartments in Ruaka for example, your best bet would be to do it as a group and own shares in it. That way, you don’t expose all your income to one project and the risks that accompany it. Your WhatsApp group, drink buddies, bible study group could be your answer in investment. Pool funds, lower your exposure to risk and enjoy your investments.
  3. The wise, even in the Word of God, have noted that one should not put all their eggs in one basket. If you put all your eggs in one basket, you concentrate risk and loss means that all your gains are wiped out in one investment.
  4. Seek professional advice. Don’t seek advice from a friend, family friend, family or relatives if they are not professionals. Remember, quite a number have lost money from poor decisions that have also involved Ponzi schemes in Kenya. Kenya is rife with them due to low financial regulations on Ponzi schemes, multilayered marketing schemes and land fraud investment schemes.

 

About The Author and the Company

Edwin N. Kimani is an Advocate of the High Court in Kenya. He is holds a master’s degree International Economic Law at the University of Nairobi. He is passionate about helping enterprises grow and seek new markets.

He is the managing partner of Avikele Legal Services, a professional service and consulting firm that has had engagements in East and Central Africa. The firm focuses on areas of legal, tax, accounting, projects, investments advisory, transactions as offshore services.

By Edwin. N. Kimani

About The Author and the Company

Edwin N. Kimani is an Advocate of the High Court in Kenya. He is holds a master’s degree International Economic Law at the University of Nairobi. He is passionate about helping enterprises grow and seek new markets.

He is the managing partner of Avikele Legal Services, a professional service and consulting firm that has had engagements in East and Central Africa. The firm focuses on areas of legal, tax, accounting, projects, investments advisory, transactions as offshore services.

For more about the firm please see avikeleservices.com .

Call +254727363338 or email us on [email protected] for consultancy, advisory or more.

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