How to Build Passive Income Using Fixed Deposits in Kenya

EDITOR’S NOTE: This article is part of our Money254 Partner Series produced in partnership with Umba to celebrate the launch of their fixed deposit savings account.

Passive income is money you earn without having to directly exert your time or energy. An example of this is Sacco dividends. At the end of the year, the Sacco pays its members dividends. This is money that you do not have to actively work for. 

There are many ways of earning passive income. They include real estate, shares, bonds, treasury bills, and fixed deposits.

Investing in fixed deposits is something you should pay close attention to. However, before you make a decision, let's understand the importance of having passive income. 

Understanding Passive Income

We are four years into the new decade and to say the least, this has not been the best decade for many people. To start with, the pandemic grinded the world to a halt in 2020. 

Those who depended on their active income were severely affected. However, those who had some form of passive income were buffered to an extent as they depended on their reserves.

The impact of the virus was exacerbated by the volatile political situation in Kenya. In 2022, the country went to the polls and amid the economic slowdown, the global cost of living crisis kicked in. 

There has never been a more prudent time for you to have passive income. 

In addition, in 2023, the Kenyan shilling has fallen short, nearly hitting Ksh160 against the dollar. Fuel has gone to a historical high that saw the price of petrol rise to Ksh217. The rising inflation necessitates the need for investment options that give you a higher return than the rate of inflation - which stood at 6.8% as of November 2023. 

To put it simply, if you have Ksh100,000 today if left uninvested, say in your current account,  the value of that money will have depreciated by Ksh6,800 by December 2024 - assuming the inflation rate remains the same. 

Creating an avenue for passive income therefore serves beyond protecting your income source when the active income, say your salary, is facing uncertainty. Passive income can help protect the value of the money you have today from losing value through inflation. 

There are many ways to make passive income. Some examples of passive income include dividends, rental income, royalties, or earning interest. In this article, we shall focus on how to build passive income using fixed deposits in Kenya.

Using Fixed Deposits to Earn Passive Income

A fixed deposit account is a good way to earn passive income. Fixed deposits are a type of financial instrument offered by financial institutions where you deposit a lump sum of money and you lock the interest for a pre-agreed duration. 

Here is how a fixed deposit account can be a great investment vehicle when building passive income.

High-interest rates 

A fixed deposit account typically has higher returns than a regular savings which makes them ideal when you want to build a savings habit. 

The fixed deposit account not only outperforms a regular savings account but offers returns that rival other passive income opportunities such as Sacco deposits, shares, real estate, and mutual funds. 

Assured returns

The agreed-upon interest rate is locked with a fixed account. This ensures that you are assured of your returns at the end of the specified period. You are assured of your passive income.

Ideally, the longer you leave your money in the fixed deposit account the more interest you stand to earn. Nonetheless, a fixed deposit investment is more assured than most passive income investment vehicles where the return is determined after you have put in your money. 

For example, a Money Markets Fund (MMF) will offer a daily rate of return that depends on the fund’s performance at the end of the day. Saccos and listed companies will typically announce the returns at the end of a financial year. 

Flexible Tenure

You get a flexible tenure when locking your money in a fixed deposit account. You can lock your money for months or years. It depends on you. The longer you hold it the more you earn.

Fixed deposits offer much better flexibility compared to a real estate investment. You know exactly for how long you are locking your money. 

High liquidity

Moreover, fixed deposit accounts offer relatively higher liquidity than other passive investment vehicles. 

By having flexible tenures you are assured of accessing your money within the timeline you commit. Hence, you can lock the money for as long as you need to earn your passive income and take the money to do what you want after the tenure period. This may be different in other investment options, say in real estate, where you can only access your money after selling property through a process where you have little control over the time taken. 

Umba Microfinance Bank Case Study

Umba Microfinance Bank is a digital bank that is licensed and regulated by the Central Bank of Kenya (CBK). The bank offers different financial products from the convenience of your phone through the Umba app.

Among the financial products they offer is the Umba Fixed Deposit Account which offers customers an opportunity to build passive income streams. Umba helps you build a passive income by leveraging the following key advantages.

Up to 16% Interest Rate

The Umba Fixed Savings Account offers you one of the highest interest rates at 16% per annum. This rate is higher compared to fixed deposit accounts offered by most Kenyan banks Sacco dividends range between 6% and 14% return while most MMFs return between 7% and 13%.

Flexible Tenure

The fixed deposit account offers a flexible timeline that you can choose to invest in. If you do not wish to lock in for a year, you can do it for a month, 3 months, 6, or 9 months at different interest rates as show below: 

• 30 days (1 month) - 12% p.a
• 90 days (3 months) - 13% p.a
• 180 days (6 months) - 14% p.a
• 270 days (9 months) - 15% p.a
• 365 days (1 year) - 16% p.a 

Assured Returns

The rate of return for an Umba fixed deposit account is assured. If you locked your money at a 16% return for one year after one year your money will earn 16% in interest. 

The assurance associated with a fixed deposit account allows for predictable growth of passive income. The reliability of such an investment allows you to plan for significant costs such as holidays, back-to-school expenses, school fees, etc.

Other assets in the market do not enjoy the assurance given by a fixed deposit account. Their return depends on prevailing market conditions. 

Additionally, as a microfinance bank regulated by the CBK, deposits to the Umba Microfinance Bank are protected by the Kenya Deposit Insurance Corporation (KDIC). 

Fully Digital

Umba is a digital bank hence all its products are digital. You can easily access their products through their Umba mobile application.

From the touch of a button, you can deposit in the fixed deposit account and view as your money grows. You can track how your passive income is growing at your convenience.

It is also very easy to withdraw your money once the lock period lapses.

Minimum Deposit

To start building passive income you do not have to have millions you can open a fixed deposit account with as little as Ksh 5,000.

The low entry point allows many people to take advantage of the high return offered. 

Wrapping Up

Passive income has become a lifeline for many Kenyans as they deal with the high cost of living, and slowed down economic activity. 

There are multiple passive income opportunities to pursue in Kenya depending on your preferences as an investor and your financial position.

An example of a passive income investment vehicle available in Kenya is the Umba Fixed Deposit Account which pays up to 16% p.a for deposits locked for a year. 

Beyond the interest rates, the Umba Fixed Deposit Account stands out because: 

• It is accessible to all - you can lock deposits as low as Ksh5,000
• It is fully digital - you can open and operate it on your mobile phone
• It has flexible lock periods of 1, 3,6, 9 and 12 months
• Returns are assured, the rate is pre-determined and deposits are insured by KDIC