Last updated 02 September 2019.
When we invest money in cash products at a bank, the bank loans 8 to 13 times that amount to other people. This is either as home loans, car loans, business loans or short-term debt, like credit cards. They simply produce this money out of thin air. This is called fractional reserve banking, which sounds like a scam, but is perfectly legal.
If we invest R100 with a bank, they lend around R1 000 to other customers. Depending on whether it is home, car or personal loans, banks earn between 10% and 20% interest on the money they loan us. At an average of 15%, the bank is earning R150 a year on your R100 investment. Assuming you earn 10% interest, they pay you R10 of the R150 they got for their effort.
However, with this income comes a lot of risks. People default on loans. Although the banks try their best to recover this money with auctions, they still lose money on some loans. Typical default rates range between 2% and 8% for South African banks, depending on the vetting process and type of loan. Knowing all this, let’s have a look at the best savings interest rates.
|R1 000 000||7.80%||7.80%||7.80%|
Investec offers an average interest rate of 6.53%. They do not allow fixed deposit investments of less than R100 000. Therefore, if you wanted to invest less than this, you would have to keep it in a cash management account that only grows by prime minus 6%. To be fair, if their offer was evaluated solely based on the larger investments, they would have ranked 6th. However, not everyone has R100 000 to invest.
8) Standard bank
Standard bank is offering decent fixed deposit rates that range between 6.74% and 7.66%. You get an extra return of 0.15% if you invest via the online platform (which I’ve included in the figures). They do not quote interest on investments larger than R100 000, which is calculated when you invest. I assume it will be higher than 7.66% if you invested R1 million.
|R1 000 000||7.15%||7.20%||7.80%|
The average yield in a fixed deposit account with FNB is 7.28%. This is still inflation-beating returns and will bring some stability with decent growth. However, this is definitely not retiring in the Maldives money. Neither is the returns from other banks, but they might at least get you a Mauritius retirement.
|R1 000 000||7.60%||7.75%||8.50%|
Absa offers decent interest rates of between 7.1% and 8.5%, averaging 7.79%. There is one thing that makes the Absa offer extra attractive. If you remain invested for the entire 5-year period and opt to take your interest on expiry, the return increases to 10.5% per year. That is a massive improvement from 8.5%. So, if you can afford to go without the invested money for 5 years, it will pay off.
|R1 000 000||7.92%||8.14%||8.89%|
Capitec is probably my favourite cash investment option. They have a low loan default rate and they are only issuing loans to the value of 8 times the invested capital. In other words, they choose to err on the side of safety. The average return on investment in their fixed deposit accounts is 8.12%, which is good compared to other banks.
|R1 000 000||7.87%||8.12%||9.87%|
Nedbank has a good fixed deposit return of between 7.09% and 9.87%, averaging 8.26%. I don’t know why their interest rates on investments of two years are lower than interest rates over one year. It might be worth investing your money for one year and then reinvesting it for another year if your investment horizon is two years.
The return on the 5-year, R1 million investment is extremely good at 9.87%. However, let’s face it, few people have a million rand to invest and the ones that do, will know better than to invest everything in cash.
|R1 000 000||8.25%||8.25%||9.35%|
A new addition to the list is the offering by Finbond. They offer decent returns of up to 9.35%. If you can invest for 67 months, this return is increased further to 9.65%. This is an average return of 8.62%. The only drawback is that you will require at least R100 000 to invest in this account.
2) African Bank
|R1 000 000||8.80%||9.20%||10.75%|
African Bank has the best cash investment returns, by far. The average return is 9.58%. Even their worst interest rate outperforms most of the other banks. You can even invest with as little as R500. Has African Bank gone bust before? Yes. Will they go bust again? Probably not. Am I willing to risk it? Unfortunately not.
An interesting new offering comes from Tymebank. They have an interest rate that scales from 6% to 9% over a three-month period. If you then give 10 days’ notice when you extract the money, the interest jumps to 10%. This means that you can earn a decent interest rate, even if your investment horizon is relatively short. This makes Tymebank a great option for storing your emergency fund. The only drawback, however, is that you can only invest up to R100 000.
Most of the interest rates offered by the banks are slightly down since the interest rate decrease. One other savings account I want to mention is the offer by Fedgroup. I did not include them in the list as their offering is only applicable to an investment horizon of 5 years. They offer an effective rate over the 5 year period of 11.3%, which according to my calculations is an annual rate of 9.37%. So, consider them as well if you are in it for the long haul.
Why would we invest in cash products, knowing that shares return more than 12% and cash only about 10%? Well, the return from cash products is consistent. During bear markets, the returns from cash investments will continue growing, bringing some stability to your portfolio. This is critical during retirement. If your investment horizon is less than 2 years, this might make sense as well. The volatility of shares might work against you in the short term. You can read more about managing this risk here.
I am not investing large amounts in cash products, because I have a home loan where I can save the money at an interest rate of 10%. I use a savings account to earn some interest on my salary, as discussed in the article 8 ways to reduce bank charges.
Fixed deposits cannot be used for your emergency fund. You will need a savings account with a notice period of a month or less for that (or a home loan where you can park the cash). For this, the Tymebank account should be a good option, since the notice period is only 10 days.
Be safe out there,
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