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Should you leverage SACCO loans for investment? Balancing costs and returns in Kenya

Faith Ndunda by Faith Ndunda
January 3, 2025
in Opinion
Reading Time: 2 mins read

Leveraging Savings and Credit Cooperative Organization (SACCO) loans to invest in financial assets such as Treasury bonds, Treasury bills, stocks and money market funds (MMFs) can be a strategic move, provided the returns on these investments exceed the cost of borrowing.

SACCOs in Kenya offer competitive interest rates at an average of 12.0% per annum. For instance, Nation DT SACCO provides development loans at 1.2% per month on a reducing balance. Similarly, Kimisitu SACCO offers development loans with a limit of Ksh.50,000,000 at 1.0% per month on a reducing balance, repayable in 60 months. These rates are generally lower than those of commercial banks, making SACCO loans an attractive option for borrowers.

 In 2024, the real return on Treasury bonds range between 11.0% and 14.0% while the real return on treasury bills ranged between 6.0% and 9.0%. MMFs in Kenya typically offer returns ranging from 8.0% to 18.0% per annum, depending on the fund’s performance and prevailing market conditions.

Investing in the Nairobi Securities Exchange (NSE) can yield variable returns. Most NSE companies offer dividends yielding between 8.0% to 18.0% annually. However, capital gains can vary based on market dynamics.

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To assess whether taking a loan from a SACCO for investment purposes is wise, evaluate the loan’s interest rate against the anticipated return on investment (ROI). If the ROI exceeds the loan interest rate, the investment could be profitable. For instance, taking a loan with an annual interest rate of 12.0% to invest in a T-bond offering a 17.0% return per annum creates a positive difference of about 5.0%. On the other hand, if the return on investment (ROI) is less than the loan’s interest rate, it could result in a net loss. Investing in a money market fund (MMF) that yields 10.0% annually while the loan costs 12.0% would lead to a negative difference of 2.0%.

When deciding on this, it’s important to evaluate aspects like market volatility, liquidity, and loan repayment. Stock investments are exposed to market fluctuations, which can influence returns. Some investments, such as T-bonds, have longer maturities, which can affect liquidity. Make sure the investment’s cash flow aligns with the loan repayment timelines to prevent financial stress.

Borrowing from a SACCO to invest in financial assets can be beneficial if the returns on investment surpass the borrowing costs. It is crucial to perform comprehensive due diligence, evaluate market conditions, and consider your personal financial situation before making any decisions. Seeking advice from a financial advisor can offer tailored insights based on your individual investment goals and risk tolerance

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Faith Ndunda

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