Liquidity management is an important aspect of personal financial planning. Even individuals with good investment portfolios often find it difficult to manage liquidity. A sudden requirement of cash can force you into selling your assets – sometimes at a discount to fair value instead of paying high interest rates on a personal loan.

Most Banks offer personal loans against fixed deposits, whereby one can raise short-term money without breaking a fixed deposit. Another advantage the borrower enjoys is the low interest rate as compared to other personal loans. In most cases you will pay a 3% margin on your fixed deposit rate (Back-to-back).

This makes sense suppose you have an FDR of KES 100,000.00 and you are in need of a quick short term loan of the same amount. There is no need to pre-liquidate the fixed deposit as the bank will levy a penalty on premature closures. Therefore it is better to take a loan against FDRs (Fixed deposits receipts) considering the low interest rate and waive of penalty.

The first step lets calculate how much you will earn on one year fixed deposit of KES 100,000 at a rate of 9% p.a.After deduction of withholding tax you will be entitled to a net interest of KES 7,650.00.

* Subject to deduction of 15% withholding tax.

The second step is to find out how much you would pay back to the bank. So we ask: If you borrowed Sh100, 000 and was charged 12 per cent per annum (9% on FDR plus 3% margin) for one year, what would be the total instalment? The answer is Sh6, 618.55 calculated on a reducing balance.

In Conclusion personal loan against fixed deposit can help you in times of liquidity crunch. From the above computation you will earn a profit of KES1,031.45. However, the bank has Right to lien meaning you stand to lose your  fixed deposit as the bank forecloses the same to settle loan dues in case of a default.

Below are the monthly computation for both the loan and Fixed Deposit.The interest calculations is based on number of days in a month hence the variation(updated on 17/11/2015).