CBN announces new guideline to regulate credit guarantee companies

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In a bid to enhance credit to Micro, Small and Medium Enterprises (MSMEs), the Central Bank of Nigeria (CBN), has announced new guideline for regulation and supervision of credit guarantee companies in Nigeria.

The apex bank also announced a minimum share capital of N10 billion, a non-refundable application fee of N100,000 and a non-refundable licensing fee of N1 million among other requirements for registration of an institution to function as a Credit Guarantee Company.

CBN disclosed this in a circular published on its official website yesterday.

The CBN in the circular signed by its Director, Financial Policy and Regulatory Department, CBN, Muhammad Hamisu Musa, stated: “Micro, Small and Medium Enterprises (MSMEs) face difficulties accessing credit from the formal sector in developing countries. In Nigeria, the credit markets for MSMEs is characterized by market imperfections, collateral constraints, information asymmetry, low profit margins, among others. These factors have limited MSMEs’ access to credit due to their perceived high risk and where credit is granted, it is often on unfavorable terms.

“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.”

It added that 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 an agreed portion of the liability of a borrower in the case of default.

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On capital adequacy ratio, it added that CGC shall be measured as the percentage of its shareholders’ funds unimpaired by losses to its total risk weighted assets.

“The minimum Capital Adequacy Ratio (Qualifying Capital/Total Risk Weighted Assets) for CGCs shall be 10 per cent or as may be prescribed by the CBN from time to time.

“Capital measurement approach for CGCs shall be as prescribed by the CBN from time to time. A CGC shall, at all times, maintain the minimum capital adequacy ratio, ”the CBN said.

It added, “The CBN may require a CGC to maintain additional capital as the CBN considers appropriate in respect of other specific risks. Where a CGC fails to meet the minimum Capital Adequacy Ratio, the CGC shall be prohibited from any or all of the following until the required ratio is restored: undertaking further investment; payment of dividend to shareholders; opening additional branch(es); and any other action as may be determined by the CBN.

“In addition, the CGC shall be required to submit, within a specified period, a recapitalization plan acceptable to the CBN. Failure to comply with the above shall constitute grounds for the revocation of the operating licence of the CGC or such other penalties as may be deemed appropriate.”

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