The Central Bank of Nigeria (CBN) has set N10 billion as the paid-up capital for those interested in setting up Credit Guarantee Companies (CGCs) in the draft guidelines that are currently under consideration.
A CGC is an institution with the primary objective of providing guarantees to banks and other lending financial institutions against the risk of default by obligors. The parties to a guarantee include the lender to whom the guarantee is given; the guarantor that provides the guarantee (i.e. the CGC); and the borrower on whose behalf the guarantee is given.
The draft guidelines, for which the CBN is currently seeking the inputs of operators in the financial services sector is contained in a circular referenced PPR/DIR/PUB/CIR/01/012 dated 4th August, and signed by Ibrahim Tukur on behalf of the Director, Financial Policy and Regulation Department.
Tukur, in the circular, addressed to Commercial Banks, Other Financial Institutions and Stakeholders in the Financial Services industry requested the inputs of the stakeholders to reach the Director, Financial Policy and Regulation Department within three weeks from the 4th August that the circular was issued.
The guidelines were in furtherance of the apex bank’s effort to improve lending to Micro, Small and Medium Enterprises (MSMEs).
The guidelines that will supervise the CGCs on completion will ultimately seek to reduce credit risk, stimulate lower interest rates on loans and complement other initiatives of regulatory authorities to stimulate lending to MSMEs.
Tukur hinted that a draft of the guidelines is available on the CBN website for comments and observations that are expected to come in within three weeks from the date on the circular.
The guidelines which comprise conditions for the take-off of a CGC request a prospector to apply to the CBN Governor with evidence of payment of N100,000 application fee and the evidence of the payment of the paid-up capital of N10 billion or any other amount that may be prescribed by the apex bank into a designated account.
The guidelines state that in compliance with the BOFIA 2020, the investment of share capital deposit shall be subject to the availability of investment instruments while upon the grant of license or otherwise, the CBN shall refund the sum deposited to the promoters, together with the investment income, if any, after deducting administrative expenses and tax on the income.
Other documents required from a promoter to obtain an Approval In Principle (AiP) from the CBN include evidence of capital contribution made by each shareholder; evidence of name reservation with the Corporate Affairs Commission (CAC); detailed business plan or feasibility report which shall, at a minimum, include the objectives of the CGC, services to be rendered by the CGC, justification for the application, proposed ownership structure in a tabular form, indicating the names of proposed shareholders, their professions/businesses and percentage shareholdings; and the detailed biodata/resumes of the proposed shareholders and directors.
The promoters are also expected to submit to the apex bank, source(s) of funding of the proposed equity contribution for each shareholder which includes where the source of funding of the equity contribution is a loan, such shall be a long-term facility of at least 7-year tenor and shall not be taken from the Nigerian banking system.
The board and board committee charters stating the roles and responsibilities of the board and sub-committees; criteria for selecting board members; board composition and detailed resumes of proposed directors which shall be between five and seven including at least one independent director, completed Fitness and Propriety Questionnaire executed by the proposed shareholders, directors and top management in line with the provisions of Section 4.0 of the CBN’s Revised Assessment Criteria for Approved Person’s for Financial Institutions, and sworn declaration of net worth executed by the proposed directors and significant shareholders; amongst others are to be submitted for AiP.
The apex bank came up with the idea owing to the difficulties faced by Micro, Small and Medium Enterprises (MSMEs) in accessing credit from the formal sector in developing countries. Credit markets for MSMEs in Nigeria are characterised by market imperfections, collateral constraints, information asymmetry, low profit margins, among other factors that 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.
Credit guarantee schemes that are considered as one of the means of addressing the challenge of limited access to credit by MSMEs 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 (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.
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