Introduction
Money market funds (MMFs) are a low-risk high-liquidity option for temporarily parking your money.
However, no investment is completely risk-free.
In this article, we will explore the risks associated with money market funds in Kenya. We shall delve into how safe money market funds really are, and take a look at some case studies on how investors and regulators responded when failures occurred.
For the basics, see earlier parts of this series:
Risks Associated with Money Market Funds
MMFs offer short-term funding to issuers, and serve as cash management tools for investors.
The risks they face can broadly be attributed to the mismatch between the liquidity of the assets they hold and redemption terms offered to investors. They are vulnerable to large, simultaneous redemptions, often referred to as bank runs.
They are prone to operational failures which involve dishonest, or ineffective fund managers, and credit risk which occurs when issuers are unable to repay their debts.
In brief:
| Risks Associated with Money Market Funds | |
|---|---|
| Risk Type | Description |
| Operational Risk | Inherent risk of mismanagement in financial institutions. |
| Credit risk | Issuers may default, leaving investors exposed. |
| Structural risks | There are few investment options, concentrating risk in few issuers. |
| Liquidity risks | Large redemption requests leave MMFs unable to invest, or service many customers at once. |
| Source: Kiihela | |
Case Studies: Historical Perspective on Failures and Collapses
There are many moving parts in money funds , and should any one of them fail, the entire fund may come tumbling down.
1. Amana Money Market Fund
A Regional Juggernaut
Founded Nakuru Mattresses Supermarket in 1987, Nakumatt grew to the largest and most prominent supermarket chains in Kenya over the next two decades, with a Ksh 34B ($400 million) valuation . In 2016, the company had over 62 stores in East Africa - 45 in Kenya, 9 in Uganda, 5 in Tanzania, and 3 in Rwanda.
The Fall of House Nakumatt
In late 2017, the company began a “cost-saving” program, shutting down stores in Uganda due to rent arrears totalling close to Ksh. 300 million. By 2018, the business wasn’t just a white elephant, it was also exposed as trojan horse—a conduit for international money laundering , tax evasion and fraud. And that’s just the tip of the iceberg .
In October 2020, Nakumatt defaulted on their commercial paper
. Amana Capital had staked an eye-watering Ksh. 275 million - 20%
of their total assets - in Nakumatt’s commercial paper
, through its flagship product, Amana Money Market Fund.
A bank run ensued , and despite liquidation of the company’s assets, the vast majority were left in the cold . Many of Amana Money Market Fund’s investors were never compensated for their losses.
2. Cytonn Money Market Fund
A Waking Giant
Cytonn practically pioneered the rise in money market fund adoption that grabbed Kenya, starting their glitzy ads offering a whopping 21% interest to investors. Founded in 2014, they had raised over Ksh. 15 billion in capital by 2017.
However, Cytonn was a bit of a mystery. The vast majority of their investments were in the real estate sector, which is known for tying up capital for long periods of time, and yet, here was Cytonn offering the moon in terms of returns.
Trouble in Paradise
The first investors to sound the alarm reported Cytonn to the CMA in 2020 for a 122m default.
A year later, a series of tweets went viral . Cytonn was not honoring a 1-year memorandum extension. More investors came forward, and a series of court cases against Cytonn followed.
It would later turn out that none of their products fell under the CMA’s regulations . Behind the curtains, Cytonn was an old-fashioned Ponzi scheme.
The High Court ordered the liquidation of the company’s assets and pay back investors Ksh. 14-billion worth of securities in 2023.
6. Conclusion
Understanding the risks associated with money market funds in Kenya is crucial for investors to make informed decisions.
So, how risky are money market funds in Kenya?
The good news is that the regulations around money market funds have so far proven very robust. The bad news is the money market funds industry is still in its infancy. At this stage, it’s hard to be certain how well funds will endure market volatility.