The Central Bank of Nigeria (CBN) established a N10 billion minimum capital base for Credit Guarantee Companies (CGCs) in order for them to remain in operation.
The CBN established CGCs to protect banks and other lending financial institutions from the risk of loan default by Micro, Small, and Medium Enterprises (MSMEs).
CBN Director, Financial Policy Regulation Department, I.S Tukur, stated in the CGC operating guidelines issued yesterday that CGCs are expected to maintain additional capital as the regulator deems appropriate in respect of other specific risks.
He also stated that the promoters of a CGC must submit a formal application for the grant of a CGC licence to the Governor of the CBN. The CGC licence application will be processed in two stages: approval-in-principle (AIP) and final licence.
Tukur explained that a CGC is a CBN-licensed institution that provides guarantees to banks and other lending financial institutions against the risk of obligor default.
He added that the CBN also allows CGC to provide guarantees for risk assets, provide advisory services for financial and business development, invest surplus funds in government securities, participate in other investments as approved by the CBN, and maintain, operate, and recover the guaranteed sum from defaulting borrowers after claims payment.
According to the CBN, the establishment of credit guarantee companies is intended to increase credit to MSMEs in developing countries that have difficulty accessing loans from the formal sector.
It stated that credit guarantee schemes have been widely regarded as one method of addressing the issue of MSMEs’ limited access to credit. This thought is motivated by the appealing characteristics of a guarantee as collateral, which include safety, liquidity, and freedom from the problems associated with tangible collateral, such as obsolescence, depreciation, verification, perfection, and foreclosure.
“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 CGC guarantee represents a legal commitment to discharge a borrower’s liability in the event of default,” it added.
The guidelines were issued by the central bank in the exercise of powers granted to it by Section 2(d) of the CBN Act 2007 and Section 56(2) of the Banks and Other Financial Institutions Act (BOFIA) 2020.
Credit guarantee companies, on the other hand, are not permitted to guarantee companies located outside of Nigeria, collect demand, savings, and time deposits, or collect third-party cheques and other instruments for clearing through correspondent banks.
The apex bank also prohibited CGCs from purchasing, selling, disposing of, acquiring, or leasing any real estate for any reason without prior written approval from the CBN, as well as leasing, renting, selling, or purchasing assets with related parties and/or significant shareholders of the CGC without prior written approval from the apex bank.
