The Central Bank of Kenya has admitted it lacks the legal authority to take action against county governments operating unauthorised bank accounts in commercial banks, exposing a major regulatory loophole in the management of public funds at the devolved level.

Appearing before the Senate Standing Committee on Devolution and Intergovernmental Relations, CBK Governor Kamau Thugge told lawmakers that the bank cannot compel counties to shut down illegal accounts due to the absence of clear legal provisions granting it such powers.

“Just to identify some of the challenges that we face, one is the enforcement limitation that there is a lack of a direct mandate by CBK to compel county governments to close unauthorised accounts,” Thugge told the committee on Thursday.

He was responding to questions from committee vice chair Catherine Mumma, who had sought to understand CBK’s role in monitoring the opening and operation of county accounts. The governor explained that although regulations require county funds to be held at the CBK, the law does not clearly define enforcement mechanisms, leaving room for abuse.

According to the 2015 County Government Public Finance Management (PFM) regulations, all county exchequer and government accounts should be maintained at the CBK, except for petty cash (imprest) accounts.

However, Thugge noted that counties have been taking advantage of vague wording in the overarching PFM Act to justify opening thousands of accounts in commercial banks.

A recent report by Controller of Budget Margaret Nyakango revealed that county governments more than doubled their commercial bank accounts within a year, reaching 3,431 accounts by March 2025 after opening 1,763 new ones.

Thugge said that the PFM Act gives county treasuries discretion to open accounts without specifying the banks, which they are now exploiting.

“They are using that legal gap to open accounts wherever they wish. The regulations say one thing, but the law is not explicit on enforcement or limitations,” he said.

He added that this ambiguity has led to conflicting interpretations between the PFM Act and the regulations, enabling counties to bypass the requirement that most public funds be held at the CBK.

The governor also pointed to operational challenges that make enforcement even harder. He cited CBK’s limited branch network as a major constraint, especially for counties located in remote areas that struggle to access its services.

In addition, Thugge said weak coordination among key oversight institutions, including the Office of the Auditor General and the Controller of Budget, has worsened the situation, further limiting the CBK’s ability to ensure compliance with financial regulations.