MCAs have approved City Hall's request to engage lenders to offset a Sh4.2 billion loan from Kenya Commercial Bank.
The county government is grappling with a huge debt of Sh57 billion. The executive said the debt was affecting service delivery.
It asked the assembly to allow it borrow from lenders with favourable terms to offset the KCB loan which was taken in 2014.
In a letter dated April 10, acting Finance executive Charles Kerich cited unfavourable terms as the need to clear the debt.
The money was used to offset another loan that had been taken by the defunct Nairobi City Council on March 31, 2011. The council used the cash to pay workers pensions and income tax.
Majority leader Abdi Guyo told the assembly that City Hall entered an agreement with KCB to offset the Sh2.4 billion loan that the council had acquired from Equity Bank.
City Hall has defaulted the KCB loan payment since February 2016.
"If such big loans are not addressed, the county may fail to meet its targets, especially on projects and development," Guyo said.
The county incurred Sh38 million in transferring the loan whose principal amount stood at Sh3.3 billion. Another Sh978 million was paid for accumulated interest and penalties.
City Hall said Equity Bank charged fluctuating rates of between 18 and 26 per cent during the repayment period.
KCB agreed to charge a flat rate of 13 per cent with a repayment period of eight years besides giving the county a six months grace period.
In November last year, Guyo said City Hall settled a Sh980 million loan from Co-operative Bank.
In March, KCB chief executive Joshua Oigara told the Public Accounts Committee that City Hall had failed to pay the loan despite several reminders.
"This assembly resolves to authorise the county finance executive to engage the National Government and other suitable lenders with favourable terms with a view to refinancing the county's Sh4.2 billion loan facility with the Kenya Commercial Bank Limited," speaker Beatrice Elachi said on Thursday.
The request had been tabled by Finance and Budget Appropriations Committee chairman Robert Mbatia .
Mbatia said the committee had previously held a meeting with the executive and urged them to come up with ways to address the debts.