Exploring investment avenues in the Tanzanian economy – Part 4: Corporate bonds-fueling growth with fixed income

WE have explored several investment options in the Tanzanian economy in the past four weeks. Shares, treasury securities (bonds and bills), and mutual or collective investments are the avenues we have explored so far. This week we focus on corporate bonds as an investment avenue available in Tanzania, and next week we will focus on certificates of deposits.

In the realm of investment options, corporate bonds have long been regarded as viable choices for individuals seeking stable returns. Corporate bonds are debt instruments issued by companies to secure capital for various purposes, including expansion, research and development, and debt refinancing. When investors purchase corporate bonds, they essentially lend money to the issuing company in exchange for regular interest payments and the return of the principal amount at maturity.

In Tanzania, we have four companies with corporate bonds trading in the market. National Microfinance Bank (NMB) issued a Jasiri bond of 3 years maturity in 2022 with a coupon rate of 8.5 per cent per annum. KCB Bank also issued a Fursa Sukuk bond in the same year with a maturity of 3 years and coupon rate of 8.75 percent p.a. National Bank of Commerce (NBC) issued 5 years bond in 2022 with a coupon rate of 10 percent p.a. Earlier last month, Tanzania Mortgage Refinancing Company (TMRC) issued a 5-year bond in its series 4, paying a coupon of 10.2 percent p.a. TMRC bond will start trading in the secondary market on Friday 19th May 2023. Generally, corporate bonds pay higher returns than treasury bonds of the same maturity due to higher assumed risk by investors.

Corporate bonds carry a certain level of risk, which varies depending on the creditworthiness of the issuing company. Understanding the issuer’s creditworthiness before investing in corporate bonds is important. In developed countries, rating agencies (such as Moody’s, Standard and Poor’s) rate corporate bonds to provide guidance on the risk associated with investing in specific corporate bonds.

Corporate bonds offer fixed or floating interest rates. Fixed-rate bonds provide a predetermined interest rate for the bond’s duration, while floating-rate bonds have interest rates that fluctuate based on a benchmark, such as the prevailing interest rate. Investors should carefully consider the bond’s yield (interest rate) in relation to its risk profile. The corporate bonds in Tanzania are all fixed-rate bonds, with coupons being paid semi-annually.

Corporate bonds have specific maturity dates, ranging from a year to several years. Shorter-term bonds generally offer lower yields but greater liquidity, allowing investors to sell them before maturity. Longer-term bonds may provide higher yields but tie up capital for an extended period. We can see the NMB and KCB bonds of 3 years have a lower yield to maturity compared to 5 years bonds issued by TMRC and NBC.

Corporate bonds are traded in the secondary market, enabling investors to buy or sell bonds before maturity. The prices of bonds in the secondary market fluctuate based on changes in interest rates, credit risk perception, and market conditions. It is important to monitor market dynamics and stay informed about the performance of the bonds.

Most of these corporate bonds are oversubscribed on their issuance as they offer better returns than treasury bonds. An investor needs to seek professional advice before venturing into corporate bonds as they carry extra risk. Further, as individuals seek to meet their investment objectives, these bonds must be evaluated critically in terms of their current income, maturity, liquidity, and risks. Also, it is important to understand the operations behind the collected proceeds to understand the risks of these bonds.

Investing in corporate bonds requires a minimum of TZS 1,000,000. The coupon payments are after every six months, and for some bonds, the coupon payments are exempted from withholding tax.

For example, an investor holding TZS 10 million bonds of TMRC will be entitled to receive 5.25 per cent on 9th November and 9th May, making it a total of 10.5 per annum. So a total of 10,000,000X10.5 per cent

x5years will make a total of TZS 5,250,000 in five years as coupon payments (without considering the time value of money), and an investor will receive back their investment amount of TZS 10 million when the bond matures. In simple language, an investor who invests TZS 10 million in TMRC bonds will have a total of TZS 15.25 million after 5 years. Isn’t it attractive?

It will help if you diversify your investment. Do not keep all your eggs in one basket. When combined to form a portfolio, we have several financial instruments that can give you good returns and less risk. For more investment advice, an author can provide basic investment advisory services and link you with professional dealers and security trading firms to help you navigate investment in Tanzania. Next week, we will dive into the certificate of deposits as an avenue for investment.

Author: Mr Godsaviour Christopher is A PhD. Candidate at the University of Agder, Norway, and a researcher at the Center for Banking and Financial Services Research (CBFSR) at UDBS. (godsaviourchristopher@gmail.com and +255753218577)


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