Our local capital markets haven’t been the best place to attract fixed-income instruments for some time now, especially those that are investable and open to the public.
This has been mainly due to the inflationary environment and the uncertainty around the currency issue.
As a result, capital has been chasing the equities and real estate markets, with another portion going into alternative investments.
This to some extent explains the valuations that we have witnessed in those markets. Globally the fixed-income market is significantly bigger than both the equities and real estate markets combined, but in Zimbabwe, there is only one listed fixed-income instrument.
On the other hand, banking in the country hasn’t also been in its best form, to say the least. Bank charges and transaction costs far outweigh the interest on deposits, such that the public is discouraged from saving using formal banking institutions.
Together with increased informalisation, more money has started circulating outside the formal banking channels. As a result, together with other economic fundamentals, the cost of capital in the country has significantly increased with microfinance institutions lending at anything between 10 to 20% per month.
Now with a bit of certainty on the multi-currency regime, there is no better time to explore fixed-income instruments than now, and who better to stir that up than a mobile money transfer company that turned into a microbank?
InnBucks’ roots can be traced back to the Covid era, although it was officially launched in 2022. Its parent company Simbisa Brands which is a fast food chain noticed an opportunity and exploited it. Initially, the idea was to leverage the branch network by allowing individuals to create an account, and deposit money which can be used to buy in Simbisa stores or transfer to someone and withdraw.
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After the regulator raised concerns, the company took over deposit-taking microfinance and gave life to Innbucks Microfinance as we know it today. This changed the character of Innbucks and gave it the ability to not only take deposits but also issue out credit. With over 280 Simbisa outlets dotted across the country, InnBucks has quickly become a household brand and brought fierce competition.
This is where the InnBucks Commercial Paper comes in, and in all fairness, a CP is not a new idea in the market. In simple terms, if you have a minimum of US$10,000 that you don’t want to put to productive use for at least the next 12 months, you can subscribe to the instrument. At the end of the year, you will be able to get back your invested money together with the 12% interest that it would have earned after deducting whatever is due to the taxman.
This instrument is not backed by anything but the market’s confidence in the issuer, which is typical of commercial papers however the tenure of the instrument is indefinite. The paper is being arranged by Inter Horizon Advisory.
This boutique firm has in the past taken care of most of the transactions relating to Innscor and its sister companies. IH will also be the transfer secretary and maintain the investors' register.
There is no doubt that there was innovation in utilising known financing models by the issuer to pick up cheap deposits to finance their operations as opposed to borrowing from the banks for the same purpose. As a borrower, they get the upper hand in setting the interest they are willing to pay on the deposit. Immediately one will be tempted to ask how this instrument compares with other assets on the market.
Typically, when comparing financial products, you want to compare both the risk and return components such that you come up with a meaningful conclusion of which investment is better.
Due to limited information, in this article I will only consider the return components and disclaim that this is not a proper comparison of the instruments, but for appreciation.
Simbisa reported that its discount rate for cashflows, which essentially is the pre-tax cost of capital was 13.5%. On the other hand, FBC a banking institution offering mortgages is quoting a 17% rate whilst NMB is at 15%. Interestingly, the Central Bank reported that as of the end of 2023, the maximum savings rate quoted per annum by commercial banks was 5.68% whilst the maximum lending rate was 13.54% for individual clients and 14.22% for corporates.
The VFEX All Share Index closed the year at 26% in the negative and annual rental yields in the country have been under 10% since the pandemic.
Overall analyst comment
I think this will be a welcome product in the market subject to the risk-return assessment of the instrument, but the principle is very clear and the product is fairly easy to understand.
Considering that InnBucks, as a platform is typically mass-market oriented, I would have thought that the entry point would be lower to at least attract those who already have money in their accounts to be motivated to save it, but it appears the promoters have a different view. A secondary market for trading the instruments will make them more appealing.
Although the tenure of the paper is one year, the facility is an indefinite program and the funding gap that the issuer wants to cover is not stipulated. This makes it difficult for analysts to assess how much the issuer intends to borrow and whether it is supported by the company’s cashflows to allow repayments or its investment book.
Overall it remains a cheerful and interesting instrument that we will eagerly follow!
- Hozheri is an investment analyst with an interest in sharing opinions on capital markets performance, the economy and international trade, among other areas. He holds a B. Com in Finance and is progressing well with the CFA programme. — 0784 707 653 and Rufaro Hozheri is his username for all social media platforms.
