The Central Bank of Nigeria (CBN), continuing its efforts to improve access to lending for micro, small and medium scale businesses, has developed the draft guidelines that will see to the licensing and regulation of Credit Guaranty Companies (CGCs) in Nigeria.
The apex bank in a circular to all banks, other financial institutions and stakeholders in the financial services industry, signed by I.S. Tukur, the director of the department of financial policy and regulation, stated that the guideline aims to bring to a minimum credit risk associated with lending to MSMEs, stimulate a lower interest rate on loans and complement other initiatives focused on stimulating credit lending to MSMEs in Nigeria.
According to the CBN, the 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. It also noted that a guarantee issued by a CGC represents a legal commitment to discharge the liability of a borrower in the case of default.
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 (debtors).
The financial sector regulator further stated that any promoter seeking a CGC operating license in Nigeria shall file an application while noting the following as prerequisites to obtaining a final license from the central bank.
A specified minimum paid-up capital requirement of N10 billion or any other amount that may be prescribed by the CBN into a designated account with the CBN;
A non-refundable application fee of N100,000 or such other amount as the CBN may specify, in bank draft payable to the CBN;
Non-refundable licensing fee of N1 million only or such amounts as may be prescribed by the CBN, in bank draft payable to the CBN; and
N50,000 for the change of name by any CGC, among other stipulated requirements as outlined in the guideline.
Also, the CBN has stated that any CGC which fails to comply with any of the requirements of this section, in respect of each such failure, is guilty of an infraction and liable to a penalty not exceeding N5,000 for each day during which the infraction continues, while the persistent refusal to submit returns in the prescribed form shall be a ground for revocation of licence in line with the provisions of BOFIA 2020.
The CGCs shall follow the guidelines prescribed by the apex bank for fees, charges and commissions by banks and other financial institutions while emphasizing on the need to ensure that the guaranty cover up to a maximum of 75 percent of the default amount as a prudential requirement; and after the crystallized guarantee has been settled, the PFI and the CGC shall be required to take all necessary steps to recover the outstanding sum, and the CGC shall be reimbursed to the extent of the recovered sum.
The CBN further stated that a CGC shall not declare or pay dividends until all its preliminary and pre-operational expenses have been written off, adequate provisions made for all losses and it has met the minimum prudential requirements as specified by the CBN from time to time.
The apex bank said it reserves the right to revoke a CGC license where there is evidence of insolvency, misuse of the license, unauthorized cessation of business for any continuous period of six (6) months or any period aggregating six (6) months during a continuous period of twelve (12) months, or breach of the CGC Guidelines.