Counties to start borrowing money backed by assets

The Capital Markets Authority (CMA) has come up with a scheme that will enable counties to borrow money and repay it easily without depending on their annual budgets.

The scheme, called asset backed security (ABS), allows counties to set aside part of their recurrent income, for instance, from housing collections, for a particular period so as to enable them to pay their bond or loan.

Cash flows from the collections are used to pay investors who buy the ABS or loan that is in turn used by the county governments to fund their projects.

Luke Ombara, CMA’s head of regulations, policy and strategy Tuesday said the bonds were not beneficial to counties in the past because they were restricted by their balance sheet and had no surety for its debtors.

Now the counties can set aside those cash flows that are assured and use them to borrow through the ABS, which is floated through a securities exchange.

“The ABS is a special security for counties and investors will no longer fear lending them. Counties will also gain capital for investment without interfering with constant revenue flow,” Mr Ombara told a Press briefing at Kisumu Hotel.

Mr Ombara said counties needed to create a special purpose vehicle (SPV) to enable them to set aside some of their income as security to their bonds.

Before the issuance of such debt security, however, the county government would need approval of the county assembly and the National Treasury.

“A county, for instance, can decide to set aside Sh5 billion of its income collections every financial year to the SPV and use it as a surety to issue a bond of Sh70 billion to the willing lenders,” he said.

“But the county must convince its creditors; tell them the kind of investment they intend to undertake and how they plan to pay them back. The parties have to sign an agreement,” Mr Ombara added.

READ: Treasury seeks to seal loopholes in county borrowing

The idea is part of CMA’s efforts to involve counties to participate in capital markets.

Mr Ombara represented the CMA acting chief executive Paul Muthaura at the meeting geared at educating youth and women from the region about finance, saving and investment.

The five-day meeting will also include engagement sessions and two open days and exhibitions from Thursday. Kisumu Chamber of Commerce chairman Israel Agina said that more people in Kisumu are venturing into business.

“The youth and women, for instance, are turning to be a key segment of Kenya’s population who are most involved in mobilising savings and investments through the capital markets,” he said.