Short Term finance is typically defined as debt provided for periods of one year or less. It is usually easier to obtain and less expensive than longer term finance.

Short term finance can be provided by banks. Banks are prepared to make short term lending arrangements with clients since it roughly corresponds to the maturities of deposits in their banks.

Alternatively, large well established companies have the option of going directly to the market place to raise short term funds. This borrowing may be in the form of Commercial Paper. Commercial Paper is a specialty of Dry Associates.


CP is a short term unsecured promissory note issued by major corporations to fund working capital requirements. That is all it is – an IOU from a large, well-known company to an investor to pay back the principal amount borrowed plus accrued interest. CP is a negotiable instrument although an organized secondary market for this paper has not yet developed in Kenya. In Kenya, CP is regulated by the Capital Markets Authority (CMA) whose published draft "Guidelines for Issuance of Corporate Bonds and Commercial Paper" offers directives, procedures and qualifications for issuance.


As a short-term money market instrument, it is used for financing short term needs – paying quarterly tax assessments, funding inventory, etc. Longer term borrowing should be met through other means, for example, bonds or "debentures". As a short term instrument, CP can be issued for periods from 1-365 days, although its most popular maturities in Kenya are 30 and 91 days.


Since CP is an unsecured promissory note, any company issuing the paper must represent a good credit risk. CP issuers are typically household names and have a substantial net worth. CP is not for small companies. Investors must be willing to buy unsecured CP based on the company's reputation and review of the company's financial position. Without a very strong reputation, the dealers of CP ("placement agents") would not be able to successfully sell this product.

CP can represent substantial savings versus bank borrowing. Apart from interest savings, there are significant "up front" savings. For example, in setting up a bank overdraft (O/D), banks typically charge a 1% annual commitment fee. On a Kshs 500 million O/D, the commitment fee represents Ksh 5 million – even if you do not draw down the funds!

In addition, the bank will want to place a legal charge on company assets for the amount of the overdraft. This legal process attracts a 0.5% stamp duty representing another Kshs 2.5 million for a Ksh 500 million O/D. Bank lawyers will also pass along their fee which will probably run another Ksh 2.5 million. So before there is any money in the company's account, the company has a bill for Ksh 10,000,000.

CP does not cost anything to set up except some printing costs (perhaps Ksh 50,000) and possibly a legal bill to review the agreement with the placement agent (probably Ksh 150,000 at most). So the start up costs of CP are about Kshs 200,000 versus Ksh 10 million for bank O/D. The big savings, however, come in the interest expense savings. CP is typically sold to institutional clients at an interest that is slightly above the prevailing Treasury Bill but is also below prevailing overdraft rates. In other words, the interest rate paid on CP must be above the Treasury Bill rate of the same maturity because Treasury Bills are inherently safer than private sector debt. The government, after all, can always pay its debts by printing up more money! Consequently, the prevailing Treasury Bill interest rate is the floor below which it does not make economic sense for an investor to purchase CP.

There is also potentially additional interest expense savings for issuers of CP in the form of less compounded interest. Banks charge interest monthly on overdraft balances which means that if one does not pay off the balance entirely, you pay interest on interest 12 times per year. This means the real ("effective") cost of funds of a 15% overdraft is actually 16.0755% On the other hand, if you only paid interest every 91 days, as with 91-day CP, there are only four compounding periods per year. A 15% interest rate with only four compounding periods results in an effective cost of 15.8650% - a saving of 0.2105%.


While Treasury Bill rates set the floor for the pricing, the prevailing overdraft rates are the ceiling. In other words, the issuer of CP wants to sell the CP at an interest which is less – hopefully significantly less – than the rate his bank would charge him for O/D funds.

For example, in today's market in Kenya, the 91-day Treasury Bill as at 21/3/05 is 8.612% which represents the floor for 91-day funds. The ceiling for most companies would be approximately 13.5% which represents the "all in" cost of overdraft funds for most firms. Therefore, CP can be issued anywhere between 8.612% and approximately 13.5% for 91-day money which results in the investor receiving a better yield on his investment than T-bills and the issuing company's interest expense less than bank O/D. (For current CP Rates click here)

There are, of course, drawbacks to any particular financial instrument. Being tied to T-bills in a fluctuating market can be one such drawback. For example, in September 1997, when the International Monetary Fund (IMF) suspended its programme in Kenya, the 91-day Treasury Bill shot up from 18% to 23% in one week. In order to be competitive, a CP issuer, if he wanted to issue CP at the time, would have had to pay 23% plus a premium which probably would have been higher than his O/D rate. In other words, the T-bill jumped so rapidly that the banks had not had time to revise their O/D rates. Of course, over time, banks' lending rates will always exceed T-bills (otherwise you could borrow from banks and buy T-bills and earn a spread off the bank). In Kenya, O/D rates are now substantially above T-bills.


Placement agents sell CP to investors. CP is more the realm of merchant banking than commercial banking and there is no special role for commercial banks in CP issuance (except for clearing cheques). Frankly, it is not in the banks' collective interest to do so. Nevertheless, most banks have come to realize that major international corporations have earned themselves a reputation that permits them to raise funds directly from investors in the form of CP