The Central Bank of Nigeria (CBN) set N10 billion minimum capital base for Credit Guarantee Companies (CGCs) to stay in business.
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.
In the operating guidelines for CGCs issued yesterday, CBN
Director, Financial Policy Regulation Department, I.S Tukur, 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 obligors.
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.
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 stooped 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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