On the IPOs: Invest but avoid loans to buy IPO shares

The Rwanda capital markets and the investing public are upbeat about the upcoming Initial Public Offering of Bank of Kigali (BK), the country’s largest lender by assets and profitability. Based on the optimism from the public, BK’s IPO is expected to be successful.

The Rwanda capital markets and the investing public are upbeat about the upcoming Initial Public Offering of Bank of Kigali (BK), the country’s largest lender by assets and profitability.

Based on the optimism from the public, BK’s IPO is expected to be successful.

With plans to sell 45 percent of its shares to the public, BK’s IPO will be the second in the history of Rwanda after government successfully sold its 25 percent shares in Bralirwa, the country’s largest brewery, through an IPO.
More local listings are also expected in the near future with mobile operator MTN Rwanda expected to follow once BK’s IPO is complete.

Rwanda’s stock market, like our neighbours’ Uganda and Tanzania, is still at a nascent stage.  It still lacks depth due to the few listings.

It is a widely held view that during these IPOs, the prime target group are institutional investors and high net individuals even though “small” retail investors are a key ingredient of any successful stock market. They (retail investors) increase liquidity and frequent multiple trading, which creates fees for the brokers.

They help to create a buzz directed towards new converts. Small retail investors can play a catalyst role in getting the cooperative movement galvanised and investing in the local bourse.  The Capital Market Advisory Council (CMAC) and the Rwanda Stock Exchange (RSE) should, therefore, increase their public awareness campaign.

To participate in the IPO is commendable and rewarding. Most developed economies’ wealth is generated and reinvested into the stock exchange.  CMAC and RSE should expound and sensitise more, on realistic returns and time frame. 

The world over, small retail investors are notorious for ‘speculative investments’. It is what makes them tick as they look for a quick profit (or disliked by high net investors for hyper ventilating the market).

While local banks are willing to offer loans for the BK IPO, encouraging this group of investors to borrow from a commercial bank at market rates is misguiding and counterproductive.

The stock market is essentially a long term investment, you at times get a fast appreciating stock, but that mainly happens in developed markets (Tech stocks like LinkedIn come to mind). The message should be very clear, that you will make money, but it may not be immediate.

Many people are getting excited about what seems to be generous loan offers to invest in shares. And they will take up the loan offer on the premise that the stock is going to gain greater value fast in a short period, leaving an investor with enough to clear the loan deficit and the interest accrued plus a good profit.

Problems can arise if the prophetic sign from the stockbroker is not appearing fast enough to highlight the small retail investor’s loan repayments! The investor will start panicking and it creates a negative vibe for the financial markets.

It can lead to new small retail investors being more sceptical about promised quick profits and shunning future IPOs.  It can get even worse because you cannot sell your stock till you repay your bank loan. I bet the Bank will be keeping your share certificate as security.

BK has very positive fundamentals to continue on its growth path. The stock has immense potential to reward early investors with good returns of paid dividends and stock appreciation. BK is a trusted and well known brand to Rwanda’s largely unbanked masses.

Being a native listed giant is enough leverage with public institutions to secure large deposits. As the financial market becomes more competitive and sophisticated, BK has to introduce more products to complement its traditional earnings from account fees and the percentage difference between cheap deposits and high interest loans.
Gearing by retail investors should be discouraged, you never have room for a profit, and you usually make a loss. Invest using your savings, however small, you will be rewarded.

If and if, you have to borrow, use a low interest body like your Sacco, which can take over your Sacco benefits in case you default. It is important to inform our new local investors. Poor decision making or miscommunication can doom an otherwise noble idea to empower our people.

The author is a business development consultant

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