Counties face risks on unsecured loans

Many counties issued unsecured mortgage and car loans to employees, exposing themselves to massive financial liability in the event of defaulted repayments.

The Treasury said audits on the county governments’ accounts revealed that in most of the devolved units mortgage and car loan funds were directly transferred to beneficiaries who did not deposit securities with the fund managers.

“Loan and mortgage repayment was pegged on beneficiaries’ allowances rather than their salaries. A number of funds are uninsured, exposing them to contingent liabilities in the event of defaults or upon expiry of beneficiaries’ employment contracts,” the Treasury said in its Budget Outlook statement for 2017.

The Public Finance Management Act stipulates that mortgages and car loans are each handled by a fund administrator who keeps custody of all collateral against such facilities and ensure all loans are recovered from beneficiaries.

The fund managers are also required to file quarterly financial statement updates to the county Treasury and the Controller of Budget office to safeguard the funds.

County government provide for car loan and mortgage funds in their budgets.

The Salaries and Remuneration Commission (SRC) in 2015 set the maximum duration of mortgage schemes at 20 years and five years for car loans for both state and public officers in national and county governments.

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The rate of interest on both the car loan and mortgage scheme was set at three per cent yearly on reducing balance for the duration of the loan.

According to a circular by the SRC, a county governor is entitled to a car loan of up to Sh10 million and a mortgage of up to Sh40 million while a deputy governor can access a car loan of up to Sh 5 million and a Sh25 million mortgage.

Issuance of mortgage and car loans to county staff is tricky because many of them serve for five-year terms.