Losing Nairobi City Hall to KCB: The inside story of Kshs 4.3 Billion Row

The High Court gives KCB bank the go ahead to take hold of Nairobi County assets and auction them to recover Kshs 4.3 billion debt. KCB took over the loan from Equity bank in September 2014.

In summary

  • Nairobi County government risks losing its assets to KCB due to a Kshs 4.3billion loan.
  • High court judge Chacha Mwita acknowledged an earlier arbitration award by Phillip Bliss Aliker, letting it stand.
  • The lender sought the court’s intervention in the ongoing financial battle with the county government.

The High Court has permitted KCB bank to seize Nairobi County’s assets and auction them to recover over Kshs 4.3 billion from loan default.

While giving out the ruling, Justice Chacha Mwita said that through its application, the county government hadn’t proven to the court why the loan amount was awarded by an arbitrator (Phillip Bliss Aliker,) in November 2019.

“In the circumstance, therefore, having considered the application, the response, and submissions as well as the law and the decisions relied on by parties, and upon giving due consideration to all those, the conclusion, I come to is that the application dated 2 October 2020 has merit,” justice Chacha said.

KCB bank in 2020 went to court asking for the amount awarded by the arbitrator to be formally recognized, paving the way in the recovery of the loan.

Phillip Bliss Aliker, the arbitrator, was jointly picked by KCB and Nairobi County.

Despite the direction given by Aliker, where City Hall was mandated to settle the debt, the County Government made no effort to repay the loan hence it remaining in default, thus leading the financial institution to seek direction.

While making his ruling, High Court judge Chacha Mwita acknowledges that the parties to the case amicably agreed to pursue arbitration and chose Mr Phillip Bliss Aliker as the sole arbitrator. It, therefore, was prudent that both parties follow the direction given by the arbitrator. Justice Chacha further stated that Nairobi County, through its lawyers, didn’t convince the court why the earlier arbitration award should be overlooked. Also, the county government didn’t provide a convincing explanation for why it failed to stick to the loan repayment agreement.

According to Equity Bank, the amount outstanding as of 24 March 2014 was Shs. 3,366,696,209 due to the Nairobi City Council’s failure to honour the earlier agreement.

How it All Began

In March 2011, the defunct Nairobi City Council (NCC) got a loan of Kshs 5 billion from Equity bank Kenya. The proceeds were to help settle statutory debts. At the time, the council had a debt of Sh30 billion, affecting its service delivery.

Records show that the loan tenor was 60 months/ 5 years with Sh333, 333,334-installment payable every quarter. The monthly interest rate was 10%, and the transaction fee was Ksh.50 million.

According to Governor Evans Kidero, the former County boss, the loan was to help counter the financial challenges that hindered service delivery and paying for overheads and other administrative costs, including salaries and utilities.

Kidero, at a later date, disclosed that his administration failed to pay back Kshs 978 million in 2013 as agreed with Equity Bank leading to the financial institution threatening legal action against the council, including reporting the institution to the Credit Reference Bureau (CRB)

“An adverse listing could have serious consequences on the county government’s ability to obtain or maintain credit facilities countrywide with any other financial institution,” warned Equity Bank.

According to Equity Bank, the amount outstanding as of 24 March 2014 was Shs. 3,366,696,209 due to the Nairobi City Council’s failure to honour the earlier agreement.

From Nairobi City Council to Nairobi County

Following constitutional changes, the Nairobi City Council became the Nairobi County and took over all the functions, assets, and liabilities. After winning the elections, Dr Evans Kidero was the man in charge of the institution.

The former governor took over a bloated workforce, inefficient and poor management, corruption, and ghost workers. Such issues continued to sink the county government deeper into debt as the expenditure exceeded income.

Court records indicated that the Kshs. 5-billion loan taken in 2011 by the defunct Nairobi City Council from Equity bank was to help the institution access;

  • Local Authority Transfer monies
  • Pay off statutory debts
  • Make remittances to the Kenya Revenue Authority(KRA) and the Local Authorities Provident Fund, among other administrative and overhead costs

However, the financial woes continued despite acquiring the loan leading to payment default. According to Equity bank, City Hall owed the banker a total of Shs 4.75 billion, including Kshs 1.45 billion overdraft as of 2014.

KCB Bank Comes into the Picture

The county government’s failure to service the loan portrayed the true picture of the institution, which already was sinking in debts.

According to Gregory Mwakanongo, then county Finance executive officer, City Hall had 14 days to settle the loan, and the accruing interest was 18%. The interest on the amount in default was 16% per annum compounded monthly.

To salvage the situation and prevent the banker from exposing the county government, Dr Kidero reached out to his assembly members seeking ways to handle the situation amicably and prevent legal action.

“Failure to comply with this demand and pay the bank the said money will result in action being taken against you to recover the said outstanding amount, including the filing of legal proceedings,” stated the letter vide EBL/HO/CC/081 sent to Governor Evans Kidero.

Following successful negotiation, KCB bank agreed to take over the loan and pay Equity bank the outstanding amount.

 The new terms included:

· A 6-month grace period

· 8-year maturity period

· 13% interest rate

The County financial officer stated that KCB repayment terms were much better than Equity, including a fixed interest rate instead of Equity’s, which fluctuated between 18 and 24%. The maturity period was also graceful.

As stated in the standard media, this move prevented the auctioning of the county’s assets to recover the outstanding amount.

The Fight Goes to Court

The Fight Goes to Court

City Hall once again defaulted on the loan, and KCB decided to pursue a legal process to address the issue. The lender and borrower agreed to use an arbitrator, Phillip Bliss Aliker.

According to Mr Bliss, Nairobi County owed KCB Sh4.29 billion. In addition, he directed that the county pay Sh6 million to cater for costs pursuing the debt and Sh3 million in tribunal cost.

While applying in Milimani in May 2021, the banker wanted the High Court to recognize the arbitration ruling and compel the county government to settle the outstanding debt.

In its defence, City Hall stated that it intended to repay the loan and set aside Sh4.4 billion; hence, there was no need to further pursue the matter within the court corridors.

Robert Mbatia, the chair of the Nairobi County Assembly Budget and Appropriations committee, further stated that it had received Kshs 12billion through the second supplementary budget to help in settling pending debts and bills.

The lender accused the county of its unwillingness to pay back the amount.

 “The sums awarded to the applicant are significant. As such, it is necessary for the applicant to recover these amounts,” KCB said.

This financial war led to KCB’s chief executive, Joshua Oigara, seeking the intervention of the National Treasury to resolve the longstanding issue.

The letter dated 28 November 2019 acknowledged that the national government has a controlling stake of 27.49% in the lending institution and has a say in the county governments hence in a position to help resolve the matter.

Following the latest ruling by the High court’s judge Chacha Mwita, the county government risks losing its assets to KCB. The judge acknowledged the arbitration, which gave the banker power to auction the county’s assets.