Unlocking County Capital: Why Subnational Bonds Could Reshape Kenya’s Fiscal Future
When Kenya adopted the 2010 Constitution, it not only gave counties administrative freedom, but a fiscal promise as well – the legal authority to borrow and finance their own development. The spirit of devolution was clear: power, planning, and public investment should shift closer to the people. But over a decade later, that potential lies largely dormant. In the financial year (FY) 2023/24, over 72% of county revenues still came from the equitable share, reinforcing a dependency on national allocations.
One county chose a different path and issued Kenya’s first county infrastructure bond, raising KSh 1.16 billion from private investors. It was a test of law, process, and public trust. Imperfect, yes, but proof of concept all the same. It showed that with structure, transparency, and resolve, counties can access capital markets on their own terms. That proof demands a closer look. The case of Laikipia county sits at the centre of a broader conversation about Kenya’s domestic bond market – where counties fit, why they have hesitated, and what it would take to unlock this untapped potential.
Current Landscape
County borrowing remains largely unused. As of June 2024, Treasury bonds accounted for over 84% of Kenya’s domestic debt stock, while county-issued bonds were absent from the market. Laikipia is the only county that has floated a public bond, which happened in 2021 when it raised KSh 1.16 billion through a seven-year infrastructure bond to fund roads, street lighting, and markets across 16 urban centres, including Nanyuki and Karuga. The bond received regulatory approvals from the county assembly, Intergovernmental Budget and Economic Council, National Treasury, and Parliament.
Meanwhile, counties remain heavily reliant on national transfers, as illustrated in FY 2023/24, whereby the equitable share stood at KSh 354.6 billion. This accounted for 72.5 percent of total county revenues, based on figures published by the Controller of Budget. Laikipia’s experience highlights a functional path to the market by demonstrating that county borrowing can move beyond theory when backed by coordination, preparation, and clearly defined projects. Other counties have yet to replicate this approach or test similar instruments at scale.
Case Studies
Laikipia’s infrastructure bond remains the most concrete example of county borrowing in Kenya. For Investors, Infrastructure bonds are tax-exempt. The bond has a minimum required investment of KSh 50,000 and simplified access through Central Depository and Settlement Corporation (CDSC) accounts. Internally, it was anchored to Laikipia’s County Integrated Development Plan and passed through all required approvals.
Elsewhere on the continent, South African cities offer a useful parallel. Municipalities such as Johannesburg have accessed capital markets through domestic bonds supported by their own-source revenues. Johannesburg’s initial bond in 2004 raised R1 billion, followed by multiple issuances linked to transport, energy, and housing projects. Johannesburg’s successful bond issuances illustrate how clear governance structures, reliable revenue management, and direct investor engagement can support subnational borrowing. These elements have improved the city's access to capital markets repeatedly since 2004, offering a transferable model for other local governments in Africa.
Challenges
County bonds remain the exception rather than the norm. Several persistent challenges continue to limit their broader adoption.
A key challenge is the weight of unresolved pending bills. As of June 2024, counties owed a combined KSh 182 billion, with Laikipia’s liabilities at approximately KSh 1.648 billion. This level of indebtedness directly threatens bond issuance by undermining compliance with Section 107 of the Public Finance Management Act, which limits borrowing to sustainable thresholds. Laikipia proceeded only after conducting a legal audit to isolate legitimate claims and initiating a repayment framework – an approach few counties have adopted. Without credible measures to address arrears, counties are unlikely to meet statutory borrowing conditions or reassure potential investors.
Another constraint is the absence of formal credit ratings. Laikipia, which was not rated by any external agency, conducted an internal debt sustainability analysis aligned with the National Treasury’s County Borrowing Framework, as outlined in its 2024 Debt Management Strategy Paper. It also established a debt service reserve account, allocating 20% of its annual equitable share – approximately KSh 530 million in FY 2023/24 – for scheduled repayments. Without a credit rating or a similarly structured alternative, a county may lack the documentation investors require to assess repayment risk, making bond issuance more difficult or costly.
Governance-related concerns further complicate the picture. Auditor-General reports for FY 2022/23 flagged procurement irregularities and poor financial controls in counties. Baringo County, for example, was flagged for over KSh 6 billion in unaccounted payments. Irregular procurement, weak financial controls, or leadership changes can introduce uncertainty around the use and repayment of borrowed funds. Given the multi-year nature of most bonds, continuity in oversight and project execution becomes a key concern for investors. Laikipia responded to this by embedding its bond within the County Integrated Development Plan (CIDP) and obtaining approvals from both the executive and legislative arms of county government. This structure provided clarity around project alignment and institutional backing – factors that help reduce perceived repayment risk.
Lastly, market structure presents a limitation. Kenya’s domestic bond market is dominated by national government securities, which accounted for over 84% of outstanding domestic debt in mid-2024. Laikipia's bond was successfully issued following investor outreach and simplified terms, including a KSh 50,000 entry point and access through CDSC accounts. In the absence of such structuring, a county may face muted demand or illiquidity, making pricing less favourable or the issuance unviable.
The Way Forward
To improve their borrowing readiness, counties do not need to start from scratch. They can leverage the institutional lessons and existing legal frameworks laid out in Laikipia’s 2024 County Debt Management Strategy to refine their processes for planning, approving, structuring, and sustaining debt.
Laikipia's debt management strategy outlines a plan for treating public debt as a permanent financial function. This includes maintaining a database of all loans and ensuring that debt levels remain sustainable. It states that public debt shall not exceed 20% of the county's total revenue, and the annual debt service cost will not exceed 15% of the most recently audited revenue. To replicate this, other counties can begin by reconciling their arrears and improving debt registers to clarify their balance sheets. They should also link repayment plans to actual cash flow and ensure all financial planning aligns with the national debt threshold.
The strategy also emphasises that regulatory approvals for borrowing are secured by aligning the plan with budget and development priorities. The process for loan proposals includes obtaining approval from the County Executive Committee and the County Assembly, which then leads to seeking a guarantee from the National Treasury. This guarantee requires the recommendation of the Intergovernmental Budget and Economic Council and the Attorney General, and ultimately, approval from Parliament before the loan is issued. This consistent approach across all planning and legal documents is designed to reduce review delays and build credibility. To follow this path, other counties can ensure all their planning and legal documents speak the same financial language to reduce review delays and build credibility with regulators and investors.
Additionally, Laikipia's strategy for public debt management highlights the importance of earning investor trust in order to secure financing at the lowest possible cost with high returns. The county’s approach is to engage with potential lenders and disclose debt-related information publicly. This ensures that borrowing is done in a transparent and open manner, allowing the county to meet its financing needs and payment obligations. Other counties can leverage these institutional lessons by embedding similar borrowing plans within existing structures to improve their own borrowing readiness.
To manage costs and speed up execution, Laikipia's framework focuses on internal coordination with public agencies and technical teams. Other counties can replicate this by establishing their own structured internal processes. The Laikipia strategy includes creating a County Debt Management Unit and a Debt Management Advisory Committee. By adopting similar institutional and operational frameworks, other counties can minimise fiscal costs and risks and reduce reliance on expensive external advisors.
Conclusion
Counties do not lack ambition; they only lack the tools to match it. The Laikipia example, while imperfect, was never about flawlessness. The goal was to demonstrate that local governments can effectively engage with capital markets. As Kenya’s fiscal demands grow and national transfers strain under competing priorities, county bonds offer a compelling alternative. They are not a silver bullet, but a vital addition to the financial toolkit, anchored in discipline, transparency, and long-term thinking.
A successful county bond ecosystem in Kenya would feature sound fiscal management, streamlined legal pathways, and a vibrant investment community. What seems aspirational today could, with sustained reforms, become routine tomorrow. That’s the promise – and challenge – of fiscal independence.
