September 05, 2013   by

By Mary Anne Zita

As you continue to save money for your Chama, I am sure that you have a bank account with a certain bank where you put money for the Chama. Chances are the account is either a savings account or a current account. Whilst your money is secure sitting in the account, ask yourselves, how much are we making? Sometimes this money sits there for close to a year as you plan to accumulate funds to reach your goals to either take a loan or invest in something. Why not put that money in a fixed deposit account instead?

Invest-in-Fixed-DepositA fixed deposit is a lump sum of money deposited in a bank for a fixed amount of time at a fixed interest rate. The deposited money cannot be withdrawn until the maturity of the deposit. It is one of the safer investment products when compared with shares and other investment vehicles.
This type of investment can work very well if you are Chama that is just starting out in your investment career. It makes sense to start off with secure investments such as a fixed deposit account and as you grow you can venture into riskier investment vehicles. Whilst this may not give you very high returns, it is a secure investment and it works well for a Chama that is still young and members are still getting to know each other and building trust.

Also, this prevents members of the Chama from spending the money before it can be used for its purpose. Having money readily available in the bank account sometimes tempts members of the Chama to withdraw it and use it on something else. However, when it is in a fixed account, you cannot touch it thus it can later be used for the right purpose and gives you discipline as a Chama to save.

A Business Advisor at Barclays Bank, Abedi Mohammed says that before you put money aside as a Chama for fixed deposit you much be sure that you are ready to keep it away for so long without causing resentment within the group. Also he says that for chamas this scheme is a wonderful way to save for a future need. For those chamas that don’t have any concrete plans for the money, it sure is a great way to invest. Additionally, for chamas that don’t believe in high-risk investments, it is better to have a fixed deposit. Though the returns on this investment vehicle are fairly modest, Abedi says that fixed deposit works well especially for chamas that constitute of members who are employed on a full-time basis. This is due to the fact that although an investment in shares can give higher returns, it can be difficult for someone in employment to be on a constant lookout for vagaries of the stock markets.

On the local banking scene the interest rates for fixed deposits ranges from 2 – 10 percent depending upon different factors, which include the deposit amount, the term period, and the financial institution. A Chama can invest in a fixed deposit scheme for a period of 1 month
to a maximum of 5 years. The minimum amount you can put away on a fixed deposit is Kshs.50,000/-.

A Chama that wishes to keep aside some money for the future can go in for
a fixed deposit. Your Chama can invest in a fixed deposit scheme at a local branch of any bank
or a financial institution. Abedi explains that what is required of you is you open a Chama bank account which acts as a mother account, then open another account for the fixed deposit. If your Chama already has a bank account; talk to your branch manager who will be able to arrange for you a fixed deposit. Alternatively you can shop around in other banks and find the one with high rates and open your fixed deposit account there. Some of the banks that offer high fixed deposit account interests include NIC Bank, Equity. But keep in mind that interest rates keep changing in banking institutions thus it is your job to do your homework and find out who is offering more.

As mentioned earlier, it is very important that everyone in the Chama is fine with locking up money for the long term. This is because should members demand for money earlier which translates to making a premature withdrawal; this means lower returns. “If your bank is offering a 3% interest on a one-year deposit and 10% for a 5-year term, don’t be tempted to go for the longer term if you may need the money earlier. If you opt for the 5-year fixed deposit and then break it after one year, you will be slapped with a premature withdrawal penalty of between 1 – 3 percent” says Abedi.

Once you start on fixed deposit investment, Abedi advises that another good idea would be to stagger your investments. This is due to the fact that there is risk of experiencing low rates as the local interest rates keep changing all the time. A smart move is to stagger your investments.
For example if you have 400,000 shillings to invest, split the amount in four deposits of 100,000 shillings each for one, two, three and five years. When the 1-year deposit matures, reinvest the maturity proceeds. By doing so, the highs and lows in interest rates will balance out over a period of time.

So, get your Chama friends together and invest in a fixed deposit and relax knowing that your investments are in safe hands.

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