Treasury warns banks against lending to counties

Commercial banks and other financial institutions have been instructed to start recovering loans they advanced to counties without being guaranteed by the national government.

The National Treasury, in its Budget Policy Statement for the Financial Year 2016/17, says it is alarmed that counties, in total disregard to the law, are borrowing money domestically without the national government’s guarantee and approval by Parliament.

In the 2014/15 Financial Year, the Treasury said, four counties borrowed a total of Sh1.9 billion, with Nairobi being the biggest borrower at Sh300 million.

“This raises several concerns, most critically that the debt is not guaranteed by the national government as required by the law. Neither has the debt been approved by Parliament,” it said.

The Treasury said it will audit  loans whose purposes of borrowing it said are unclear and asked banks and financial institutions to stop giving loans to counties and start recovering those already given.

It wants banks to ensure they understand the law regarding borrowing by counties before advancing loans to them.

“All bank and non-bank financial institutions are being alerted to cease plans for extension of credit to counties, start recovery of un-guaranteed loans and familiarize themselves with regulatory provisions on county borrowing,” the statement added.

The statement also sought to clarify that counties are only allowed to borrow from the domestic market to fund capital projects with high economic growth potential.

The Treasury also wants county treasuries to comply with the Public Finance Management Act.

NEXT BUDGET

The Treasury proposes a budget of Sh1.79 trillion for the 2016/2017 Financial Year where Sh290.2 billion will be set aside for counties.

However, counties will only share is Sh285.4 billion while the balance will be distributed as a conditional grant.

The Treasury says it has experienced several challenges financing counties including the fact that counties have been leaving billions of shillings idle in their reserve fund  accounts at the Central Bank of Kenya.

The budget policy statement  states that the figures have been rising for the last two years, hitting Sh39.2 billion in the 2014/15 Financial Year. In the year 2015/16, the figure reduced marginally to Sh34.2 billion.

“A big proportion of this balance was held in counties’ accounts, with the rest either in the form of accounts receivables (essentially imprests and advances to officials which were not surrendered or accounted for) or cash,” it says.

The Treasury said the increase of idle cash in the county reserve accounts indicates that counties are not implementing their budgets pointing failure to deliver services to the public.

“The Treasury will prioritize disbursement to counties with least  balances at the CBK. This is supported by the Constitution  which requires that public money be managed prudently and responsibly,” says the statement.

As at July 1, 2014, Turkana  was leading with Sh3 billion in its reserve account, Kilifi and Nakuru had Sh2 billion each while Garissa  had Sh1.8 billion). 

Others were Kakamega (Sh1.65 billion), Kitui (Sh1.6 billion), Uasin Gishu (Sh1.55 billion), Makueni (Sh1.5 billion) and Siaya (Sh1.4 billion), Homa Bay (Sh150 million), Nyeri (Sh200 million) and Machakos (Sh300 million). The Treasury, is also concerned over mounting liabilities facing counties.