•Seeks to de-risk, boost lending to MSMEs
James Emejo
The Central Bank of Nigeria (CBN) yesterday pegged at N10 billion the minimum paid-up capital for the establishment of the proposed Credit Guarantee Companies (CGCs) in the country. This was contained in a circular by the CBN titled, “Exposure Draft of Guidelines for Regulation and Supervision of Credit Guarantee Companies in Nigeria,” dated August 4, 2021, and addressed to banks, other financial institutions and stakeholders.
The apex bank stated that the framework for the CGCs would further provide regulation and basis for the operation of credit guarantee companies. The circular, which was signed by the CBN Director, Financial Policy and Regulations Department, Mr. Ibrahim Tukur, also detailed the permissible and non-permissible activities of the CGCs.
A CGC is an institution licenced by the CBN with the primary objective of providing guarantees to banks and other lending financial institutions against the risk of default by obligors.
In addition to the minimum capital base, a CGC is also required to pay a non-refundable application fee of N100, 000, non-refundable licencing fee of N1 million, and change of name fee of N50, 000.
The bank stated that the introduction of CGCs became inevitable as it sought to improve access to lending for micro, small and medium scale enterprises (MSMEs) operating in the country.
The blueprint also seeks to ultimately reduce credit risk, stimulate lower interest rates on loans, as well as complement other initiatives targeted at stimulating lending to MSMEs.
According to the apex bank, the proposed credit risks guarantee firms are expected to provide third-party credit risk mitigation to lenders through the absorption of a portion of the lender’s losses on the loans made to Nigeria-based MSMEs in case of default.
The CBN further explained that any guarantee issued by a CGC represents a legal commitment to discharge the liability of a borrower in the case of default.
Essentially, the guidelines stipulate the minimum standards for the operations of CGCs that provide credit guarantees to Participating Financial Institutions (PFIs).
While the provisions of the guidelines shall apply to CGCs licenced by the CBN, the PFIs shall comply with same provisions as it relates to their activities, the CBN added.
Nonetheless, a credit guarantee by the CGC may cover up to a maximum of 75 per cent of the default amount, the central bank pointed out.
It added that after the crystallised guarantee had been settled, the PFI and the CGC would be required to take all necessary steps to recover the outstanding sum, adding that the CGC shall be reimbursed to the extent of the recovered sum.
The CBN also stated that the cumulative guarantee liabilities of a CGC shall not exceed 10 times of its shareholders’ fund unimpaired by losses. It stressed that the CGCs shall commence operations with, and maintain at all times, a minimum paid-up capital of N10 billion or such amount as may be prescribed by the CBN from time to time.
The circular stated, among other things, “The capital adequacy ratio of a CGC shall be measured as the percentage of its shareholders’ funds unimpaired by losses to its total risk weighted assets.
“The CBN may require a CGC to maintain additional capital as the CBN considers appropriate in respect of other specific risks.”
However, CBN, among other things, barred the CGCs from provision of guarantee to MSMEs based outside Nigeria. The bank also forbade them from accepting demand, savings and time deposits or any other deposits, including provision of credit to customers.
The guarantee companies were also exempted from the management of pension funds or schemes, foreign exchange, commodity, and equity trading, as well as all forms of trading in derivatives and swaps.
The companies were prevented from collection of third-party cheques and other instruments for clearing through correspondent banks. They are not to purchase, sale, dispose, acquire or lease any real estate for whatever purpose without prior written approval of the CBN.
They were required to provide guarantee for risk assets; render advisory services for financial and business development; Invest surplus funds in government securities; and partake in other investments as may be approved by the CBN.
