CBN Unveils Guidelines for Credit Guarantee Companies, Sets N10 Billion as Capital Base

The Central Bank of Nigeria (CBN) on Tuesday released guidelines for registration and supervision of Credit Guarantee Companies (CGCs) in Nigeria.

The guidelines are contained in a circular by Ibrahim Tukur, CBN’s Director, Financial Policy and Regulation Department, addressed to Commercial Banks, Other Financial Institutions and Stakeholders in the Financial Services Industry.

Tukur said that the guidelines were in furtherance of effort to improve lending for Micro, Small and Medium Enterprises (MSMEs).

He said that the guidelines seek to ultimately reduce credit risk, stimulate lower interest rates on loans and complement other initiatives of regulatory authorities aimed at stimulating lending to MSMEs.

“An exposure draft of the guidelines is hereby issued for comments and observations. The document may be obtained from the CBN’s website, www.cbn.gov.ng,’’ the director said.

He urged stakeholders to send their comments and observations on the guidelines within three weeks.

The apex bank has also stipulated N10 billion  as minimum capital base  for Credit Guarantee Companies (CGC).

The CGC firms constitute a new subsector within the financial sector, with the task of guaranteeing loans to Micro Small and Medium Enterprises (MSMEs).

The CBN yesterday announced the introduction of the new subsector and the draft guidelines for operators in a circular

On the rationale for the new subsector, the apex bank said, “Credit guarantee schemes have been widely considered as one of the means of addressing the challenge of limited access to credit by MSMEs.

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“This consideration stems from the attractive features 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.”

Explaining the expected roles of CGC, the CBN stated: “Credit Guarantee Companies (CGCs) 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.”

Among other things, the apex bank stipulated a minimum capital base of N10 billion, non-refundable application fee of   N100,000; non-refundable licensing fee: N1 million; and Change of name fee: N50,000, as part of requirements to obtain operating license as a CGC.

On permissible activities of CGC, the draft guidelines stated: “A CGC may provide guarantee for risk assets;   Render advisory services for financial and business development; Invest surplus funds in government securities; Partake in other investments as may be approved by the CBN;

“Provide technical assistance to lenders and borrowers on credit and business development; Maintain and operate various types of accounts with banks in Nigeria; Engage in recovery of the guaranteed sum from defaulting borrowers post claims payment; and other activities as may be prescribed by the CBN from time to time.”

The exposure guidelines however excluded CGC from some activities including   provision of guarantee to entities outside Nigeria; Acceptance of demand, savings and time deposits or any other deposits; Provision of credit to customers; Management of pension funds or schemes; Foreign exchange, commodity and equity trading and all forms of trading in derivatives and swaps.