Introduction

In this article, we detail how safe money market funds in Kenya are, and how investors are protected.

For earlier entries, see:

Regulated vs Unregulated Markets

A market is a place where those with insufficient capital link up with those with surplus capital. In regulated markets, participants mut follow a set of rules, while unregulated markets have no such rules.

Public Markets

In public markets, anyone can buy shares of a company listed on the market. However, in order to sell, participants must first satisfy a range of criteria set forth by a regulator. They must then publicly disclose certain financial information every four months to remain listed.

Public markets are regulated.

Examples of Public Markets
Name Description
Stock markets Platforms where companies list their shares for sale.
Bond markets Where governments and large corporations issue debt securities. Also referred to as fixed income markets.
Money markets Professionally managed investment pools, divided into smaller units.
Insurance markets Premiums collected by insurance companies; invested to generate returns. e.g. NHIF
Foreign exchange markets Where foreign currencies are traded. e.g.
Source: Kiihela

The Capital Markets Authority (CMA) regulates these markets.

Other regulators include:

  • The Insurance Regulatory Authority (IRA) regulates insurance funds (e.g. NHIF).
  • The Retirement Benefits Authority (RBA) regulates pension funds.

Private Markets

In private markets, companies do not have to adhere to any rigid guidance on interacting with lenders. They are unregulated, thus require increased investor caution.

Examples of Unregulated Markets
Name Description
Private equity Direct investment in private companies. e.g. venture capital.
Private debt Lending to companies on private terms. i.e. direct lending.
Real estate Investment in properties not listed on public exchanges. i.e. direct property investments.
Source: Kiihela

Regulatory Environment for Money Market Funds in Kenya

The requirements for money market funds are set out in the Capital Markets Act, (Cap 485A) and the Capital Markets Collective Investment Schemes Regulation, 2001 .

The Capital Markets Authority (CMA) is the primary regulator of capital markets in Kenya, including money markets. It is responsible for licensing and supervising fund managers, setting regulatory standards, and ensuring compliance with these standards.

The Capital Markets Tribunal (CMT) is responsible for adjudicating disputes between investors and fund managers. It also has jurisdiction over disputes related to the registration and operation of MMFs.

Guidance for Collective Investment Schemes

The CMA’s guidance for collective investment schemes provides a framework for funds such as money markets to operate in Kenya. It details how a fund manager should operate, and report on their performance.

Factors Affecting the Regulatory Environment

Weak deterrent laws

The mutual funds industry is larger in countries with stronger regulations, laws, rules, and particularly where mutual fund investor rights are better protected.

Weak Whistleblower Protection

Kenya’s whistle-blower and witness protection mechanisms are weak.

In addition, the Kenya Police Service has been rated as the most corrupt institution in Kenya. There is low confidence in the police and judiciary, which contributes to a general sense of apathy when it comes to reporting economic crimes such as corruption and bribery.

Poor Conviction Rate

The conviction rate for economic crimes in Kenya is low. Contrast this with the United States, where Sam Bankman-Fried was sentenced to 25 years in prison for his role in the FTX saga. In Kenya, there has barely been a conviction for economic crimes in the last 10 years.

Low Transparency

A practice of transparency and disclosure has not permeated Kenyan society. Unlike the United States, where mutual funds publish their financial statements to the smallest detail, Kenyan funds are comparatively behind the times.

The following table shows the transparency and disclosure practices of Kenyan mutual funds, as of 2014.

MUTUAL FUND COMPANY Shows Objectives and Risk Profile Shows Unit Management Costs Historic Fund Figures Available Since inception Benchmark Index Shown Performance Against Benchmark Index Shown Information Current on website
British American ✔ ✔ ✖ ✖ ✔ Updated to 31.12.2013
Old Mutual ✔ ✔ ✔ ✔ ✔ Updated to 30.09.2013
Stanbic ✖ ✖ ✖ ✖ ✔
African Alliance Kenya ✔ ✔ ✔ ✔ ✔ Updated to 31.12.2012
CIC asset ✔ ✔ ✖ ✔ ✔
ICEA Lion ✖ ✖ ✔ ✖ ✔
Commercial Bank of Africa Website inaccessible
Zimele Asset ✔ ✔ ✖ ✖ ✔ Financial statements for Y/E 31.12.2013 available
Amana Capital ✔ ✔ ✖ ✖ ✔ Updated to May 2013
Genghis Capital ✔ ✔ ✖ ✖ ✔
Madison Asset ✔ ✔ ✖ ✔ ✔
Dyer & Blair ✔ ✖ ✖ ✖ ✖
Standard Investment Bank ✔ ✔ ✖ ✔ ✔
Source: Maina Mihari, 2014

Lack of Information

There is a general lack of understanding of how mutual funds (including money market funds) work in Kenya.

They generally perform well in rich, well-educated countries, where transparency and ethical behaviour is held highly.

How Safe Are Money Market Funds in Kenya?

It depends.

First, it depends on how much you trust the judicial system to protect you in case the worst happens.

It also depends on how much trust you can place in the fund managers. How transparent are they? Are their fact sheets full of auditable, verifiable information? Do they follow the CMA’s guidelines on reporting?

Money Market Funds in Kenya So Far

The track record of money market funds in Kenya so far is not good.

Recall that the popularity of money market funds was spearheaded a company who got themselves caught up in very dubious investments. There have been cases in the past where investors completely lost their money.

Here’s some food for thought, before you put your money in a money market fund: how can the same company offer 18% returns on a Kenyan investment, but only 8% for dollar investors? Is the Kenya Shilling more profitable than the dollar?

Conclusion

Whether money market funds are safe or not depends on how much you trust the fund manager. In my opinion, one of the factors to consider when picking an MMF is the liquidity of the fund. If they require you to wait two or three days to process your money, count that as a red flag.

If it seems too good to be true, then it probably is.