The introduction of the offshore fixed income proposition, a bond investment instrument by Standard Chartered Bank Botswana (SCBB) is consistent with the narrative that where a challenge exists an opportunity lurks behind it.
Post the economic downturn in 2008/09 banks fell prey to stringent regulatory scrutiny coupled with rising loan impairments, which caused them to incur high costs due to the requirement by regulation to establish strict risk management tools. Increased cost of capital also piled pressure on the banks’ profitability and dampened their previously vigorous trading. The reduced trading activity also resulted in levels of liquidity in the market plummeting. However, the predicament presented a new opportunity in the market, as medium to long term instruments such as bonds became increasingly attractive as alternative investment vehicles.
This analysis was elucidated by Biswaroop Barua, Group Head for Credit Products at Standard Chartered, who is responsible for all aspects of the fixed income business in the bank’s wealth management division. The fixed income proposition was launched by SCBB last week Friday. SCBB is the first in the market to avail such an investment instrument to retail customers through a local distribution channel. Such instruments are usually only made available through private banking or offshore banking channels.
Barua emphasized that investment instruments meet a wide spectrum of needs across different investors, such that bonds are attractive to a particular group of investors who seek a medium to long term investment duration (5 year expected duration mark).
“Such investors desire a lower instrument volatility (4%) with a yield based preference. They are usually looking to diversify their investment portfolio and searching for a potentially higher return than normal term deposits, but are willing to take the additional risk,” said Barua.
He further explained that trading in these instruments will be done by SCBB on behalf of its clients. The instrument will only be traded with three global currencies being US Dollar, Euro and Pound sterling over the geographical sphere across Latin America, Europe, East Asia and the Middle East. He warned prospective investors that the instrument is not without risk and explained the different types of risk involved, which include the risk of non payment, currency exchange risk and risk that the instrument will not trade quickly enough should the investor want to sell.
For his part, Peter Van Riet Lowe, who also shared insights on wealth protection and growth, said bonds are instruments that derive a predicted amount of capital at a predicted date in the future. He added that bonds can be used to raise capital for governments to fund projects and activities.