The Central Bank of Nigeria (CBN) has mandated that Credit Guarantee Companies (CGCs) maintain a minimum capital base of N10 billion to continue operations.
The Central Bank of Nigeria (CBN) established CGCs to protect banks and other lending financial institutions against the possibility of loan default by Micro, Small, and Medium-Sized Businesses (MSMEs).
CBN Director, Financial Policy Regulation Department, I. S. Tukur, stated yesterday in the CGC operating guidelines that CGCs are expected to keep extra capital as the regulator believes appropriate with respect to other special risks.
He continued that the promoters of a CGC must formally apply to the Governor of the CBN for permission to operate. Processing of the application for a CGC licence will occur in two phases: an initial “approval in principle” (AIP) and a final “licencing” stage.
Tukur defined a CGC as an organisation approved by the CBN whose principal function is to protect financial institutions that lend money from the risk of default by obligors by offering guarantees on loans.
He added that CGC has permission from the CBN to guarantee risky assets, offer financial and business advisory services, invest its surplus in government securities and other investments subject to CBN approval, keep and manage a variety of accounts at Nigerian banks, and pursue recovery of the guaranteed sum from defaulting borrowers after claims have been paid.
The CBN said that setting up credit guarantee companies is to make it easier for MSMEs in developing countries to get loans from the formal sector.
“Credit markets for MSMEs in Nigeria are characterised by market imperfections, collateral constraints, information asymmetry, low profit margins, among others. These factors have limited access to credit due to the perceived high risk of MSMEs and where credit is granted, it is often on comparatively unfavourable terms,” the bank said.
To combat the issue of micro, small, and medium-sized enterprises (MSMEs) having difficulty gaining access to finance, the report noted that credit guarantee programmes have been extensively discussed as a potential solution. The guarantee’s safety, liquidity, and lack of issues with depreciation, verification, perfection, and foreclosure make it a viable option as collateral.
“Credit Guarantee Companies 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. A guarantee issued by a CGC represents a legal commitment to discharge the liability of a borrower in the case of default,” it added.
The central bank claimed it was issuing the regulations to exercise its authority under Section 2(d) of the CBN Act 2007 and Section 56(2) of the Banks and Other Financial Institutions Act (BOFIA) 2020.
However, credit guarantee organisations are prohibited from guaranteeing businesses outside of Nigeria, accepting demand, savings, or time deposits from third parties, or collecting checks or other instruments drawn on third parties for clearing through correspondent banks.
The CBN also forbade CGCs from entering into any lease, rental, sale, or purchase of assets with related parties and/or significant shareholders of the CGC without the CBN’s prior written approval. This included purchasing, selling, selling, acquiring, and leasing any real estate.