CBN mandates N10b minimum capital base for Credit Guarantee Companies

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The Central Bank of Nigeria (CBN) has set a N10 billion minimum capital base for Credit Guarantee Companies (CGCs) to be operational.

The CBN created CGCs to provide guarantees to banks and other lending financial institutions against the risk of default by Micro, Small and Medium Enterprises (MSMEs’) taking loans from the lenders.

The CBN Director, Financial Policy Regulation Department, I.S Tukur, in the operating guidelines for CGCs issued yesterday, said CGCs are expected to maintain additional capital as the regulator considers appropriate in respect of other specific risks.

He added that the promoters of a CGC shall be required to submit a formal application for the grant of a CGC licence addressed to the Governor of the CBN. The application for CGC licence shall be processed in two stages, namely: Approval-in- Principle (AIP) and final licence.

Tukur explained that a CGC is an institution licensed by the CBN with the primary objective of providing guarantees to banks and other lending financial institutions against the risk of default by debtors.

He said the CBN also allows CGC to 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 and maintain, operate various types of accounts with banks in Nigeria and engage in recovery of the guaranteed sum from defaulting borrowers post claims payment.

The CBN said the establishment of the credit guarantee companies is to enhance credit to MSMEs which face difficulties accessing loans from the formal sector in developing countries.

“Credit markets for MSMEs in Nigeria are characterized 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 unfavorable terms,” the bank said.

It said credit guarantee schemes have been widely considered as one of the means of addressing the challenge of limited access to credit by MSMEs. 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.

“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 apex bank said the guidelines are in exercise of powers conferred on it by Section 2(d) of the CBN Act 2007 and Section 56(2) of the Banks and Other Financial Institutions Act (BOFIA) 2020.

The credit guarantee companies are however, not allowed to guarantee companies outside Nigeria, demand, savings and time deposits, collect third-party cheques and other instruments for clearing through correspondent banks.

The apex bank also stopped CGCs from the purchase, sale, dispose, acquire or lease any real estate for whatever purpose without prior written approval of the CBN as well as lease, rental, sale or purchase of assets with related parties and/or significant shareholders of the CGC without the prior written approval of the apex bank.

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