Credit Guarantee Companies (CGCs) must maintain a minimum capital base of N10 billion in order to continue operating, according to a directive from the Central Bank of Nigeria (CBN).
CGCs were created by the Central Bank of Nigeria (CBN) to shield banks and other lending institutions against the danger of loan default by small and medium-sized businesses (MSMEs).
I. S. Tukur, Director of the Financial Policy Regulation Department at the CBN, indicated in yesterday's CGC operating guidelines that CGCs should hold as much additional capital as the regulator deems necessary in light of other unique risks.
The promoters of a CGC must legally request licence to operate from the Governor of the CBN, he stated. The processing of the CGC licence application will take place in two stages: the initial "approval in principle" (AIP) stage and the ultimate "licencing" step.
According to Tukur, a CGC is an organisation authorised by the CBN whose main duty is to safeguard lending institutions from the danger of default by obligors by providing loan guarantees.
He continued by saying that the CBN has granted CGC permission to guarantee risky assets, provide financial and business advisory services, invest its surplus in government securities and other investments with CBN approval, maintain and manage a number of accounts at Nigerian banks, and pursue recovery of the guaranteed sum from defaulting borrowers after claims have been paid.
According to the CBN, creating credit guarantee businesses will make it simpler for MSMEs in developing nations to get formal sector loans.
“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.