Kenyans investing in Money Market Funds (MMFs) have been dealt a blow after the Central Bank of Kenya (CBK) lowered the base lending rate for the sixth successive time since August last year.
CBK, in its latest Monetary Policy Committee (MPC) report published on Tuesday, June 10, announced that it had reduced the base lending rate by 25 basis points to 9.75 per cent from 10.00 per cent.
A move to ease the monetary policy stance triggers a chain reaction in the financial system. While this move is typically celebrated for encouraging borrowing and investment, it also leads to a slight dip in returns for low-risk, fixed-income instruments, precisely where MMFs invest.
With MMFs primarily investing in short-term fixed income securities such as treasury bills, bank deposits, and commercial paper, a reduction in lending rates therefore has an impact of a slight decline in the yields.
These instruments are highly sensitive to the prevailing interest rate environment. When rates drop, the yields on T-bills and other instruments fall accordingly, meaning MMFs earn less income to distribute to investors.
The average effective annual yield on MMFs in Kenya has, over the past few months, hovered between 9 and 11 per cent. However, with falling interest rates, these numbers could edge lower, shrinking monthly payouts and annualised returns.
For retail and institutionalised investors relying on MMFs for consistent passive income or short-term capital preservation, this would be an important trend to watch.
Fund managers are often forced to rebalance their portfolios in response, either by holding longer-duration paper within legal limits or seeking better rates from institutions. But the room to manoeuvre is narrow, as regulatory frameworks are designed to keep MMFs liquid and low-risk.
Still, the allure of MMFs remains intact for many Kenyans. They offer daily compounding, relative stability, and quick access to cash. But in a declining rate environment, savers must lower their expectations and consider diversifying their portfolios if chasing higher yields is a priority.
On the flip side, some analysts argue that a reduction in lending rates could lead to an increased demand for MMFs, thereby making bank deposits less attractive. This will likely lead to an increase in inflows to MMFs.
Lending rates are often reviewed downwards due to market stability, which, among other factors, is influenced by declining inflation. This signals stability, so there will be confidence in MMF.
With declining lending rates, fund managers will be forced to look towards longer tenor instruments where they can invest their cash, this could be a win for MMFs.
In short, lower lending rates might be good for borrowers, but for MMF investors, they signal a season of slimmer returns. As always, staying informed and periodically reviewing your investment strategy can help you navigate the changing financial landscape, according to experts.
Meanwhile, according to CBK Governor Kamau Thugge, the decision to lower interest rates was to stimulate lending by banks to the private sector and support economic activity while ensuring exchange rate stability.
Thugge also revealed that the banking sector remains stable and resilient, with strong liquidity and capital adequacy ratios. The ratio of gross non-performing loans (NPLs) to gross loans stood at 17.6 per cent in April 2025 compared to 17.2 per cent in February.
According to the Capital Markets Authority (CMA), the top five schemes, Sanlam, CIC, Standard Investment Trust, NCBA, and Britam, collectively manage 64 per cent of the country’s CIS market, amounting to Kshs. 318.9 billion, with each managing AUM of more than Kshs. 30 billion.
The steepest climb came from the Ziidi Money Market Fund, which grew by an astonishing 331 per cent, from Ksh1.7 billion in Q4 2024 to Ksh7.4 billion by the end of March. Other strong performers included Faida Unit Trust (193 per cent growth), Arvocap Funds (170 per cent), and Mayfair Unit Trust (160 per cent).
