The City Council of Nairobi left a cheaper loan offer from Co-operative Bank in favour of a more expensive one that left Equity Bank as the major beneficiary of the Sh5 billion loan advanced to City Hall early last year.
A parliamentary committee investigating the multi-billion- shilling debt that left the Kenyan capital in financial doldrums heard that Co-operative Bank had offered to advance City Hall the money at an interest rate of 8.5 per cent or two per cent less than the base rate in case of any changes in central bank rate.
This means that City Hall would be servicing the loan at the rate of 16 per cent following the steep rise in the base rate to a high of 18 per cent in December last year.
Investigations by the auditor-general revealed that Equity Bank had initially agreed to advance the loan at the rate of 10 per cent but immediately charged 12 per cent interest with the first instalment before increasing it to 24 per cent, leaving the council with a huge debt obligation.
Elizabeth Nguringa, the assistant director in the office of the auditor-general told Parliament that the loan agreement could also see City Hall transfer some of its key bank accounts to Equity Bank.
“Some of the details in the letter of offer, which was supposed to lead into a contractual agreement, were not filled, and therefore in my understanding the parties never entered into an agreement,” Ms Nguringa said.
She told the Parliamentary Committee on Local Authorities Fund Account that the loan agreement between City Hall and Equity Bank could also not be traced at City Hall.
The original letter of offer could not be found at City Hall, forcing the auditors to ask Equity Bank for the agreement that was signed in March 2011.
Former Town Clerk Philip Kisia told the committee that all the documents involving the loan transaction had been photocopied and the copies filed and stored.
The loan document was to show the conditions and clauses under which City Hall was to pay back the money and at what cost.
Ms Nguringa said correspondence between the bank and City Hall provided that the council transfers its existing bank accounts to Equity Bank.
The auditor-general’s office further found that Equity Bank once revised the interest rate upwards without informing City Hall.
It was revealed for the first time that City Hall officials created a key loophole in the contract by allowing junior officers to execute the mandates of their bosses, opening up the council to major leakages by committing it to contracts signed by junior officers.
Mr Kisia said that the council had passed a resolution allowing the junior officials to perform the role of their bosses but he could not object because other officials and the legal team had agreed.
That resolution saw the deputy treasurer, Margaret Osili, and deputy director legal services, Wilberforce Wambulwa, take over the role of their bosses.
Ms Osili and Mr Wambulwa admitted before the parliamentary committee that it was not the best practice to have been given the mandates of their bosses.
Mr Kisia further disclosed that the council had sought more funds from Equity Bank to pay its employees but that request was rejected.
“They went back to Equity Bank last week for more money but Mr Mwangi told them to go and resolve their issues first,” said Mr Kisia, indicating that City Hall’s employees may not get paid August salaries on time.
Mr Kisia, PS Karega Mutahi, Ms Osili and Mr Wambulwa spoke Tuesday when they appeared before the parliamentary committee.
Mr Kisia insisted that no money was lost in the loan arrangement and therefore there is no cause for concern.
Ms Osili has since been transferred to Kisumu in the same position while Mr Wambulwa is under interdiction over alleged irregularities in the procurement of a grader when he was the Town Clerk in Kwale.
Mr Kisia also said that the arrangement with Equity Bank was a loan and not an overdraft facility, which attracts higher charges – contradicting his successor Roba Duba.
Prof Mutahi had told the committee that the ministry had approved borrowing of Sh5.2 billion but that the terms were varied to execute the overdraft which attracts higher interest rates.
The council’s director of legal services, Aduma Owuor, said one of his deputies, Mr Wambulwa, worked on the contract on instructions from Mr Kisia and on the basis of a letter of offer from the bank instead of a legal contract.
“It is surprising that they signed a letter of offer rather than the contract. Why would one sign letters of offers on a matter of such magnitude,” posed Prof Karega.
The treasurer, Jimmy Kiamba, said he had earlier indicated that he was not involved in paying the proceeds to creditors, some of who were not in the list approved by the Ministry of Local Government.
“I was not involved in making the payments although the law requires that I authorise the same. My deputy, Margaret Osili, made the payments,” he said.
The claims by the heads of department mean that Mr Kisia, who is aspiring to become the first governor of Nairobi County, acted illegally.
Prof Mutahi was also shocked why there were no legal documents that are supposed to be kept in a fireproof Cabinet.