The Central Bank of Nigeria (CBN) set the minimum paid-up capital for the proposed Credit Guarantee Companies (CGCs) in the country at N10 billion yesterday. This was stated in a CBN circular addressed to banks, other financial institutions, and stakeholders titled “Exposure Draft of Guidelines for Regulation and Supervision of Credit Guarantee Companies in Nigeria,” dated August 4, 2021.
The framework for CGCs, according to the apex bank, would also provide regulation and a foundation for the operation of credit guarantee businesses. Mr. Ibrahim Tukur, Director of the CBN’s Financial Policy and Regulations Department, signed the circular, which also specified the CGCs’ legal and non-permissible activities.
A CGC is a CBN-licensed institution whose principal goal is to provide guarantees to banks and other lending financial institutions against the risk of obligor default.
A CGC must additionally pay a non-refundable application charge of N100,000, a non-refundable licencing fee of N1 million, and a change of name fee of N50, 000 in addition to the necessary capital base.
The bank argued that the introduction of CGCs was unavoidable as it attempted to expand access to credit for the country’s micro, small, and medium-sized firms (MSMEs).
The blueprint also aims to reduce credit risk, encourage lower loan interest rates, and complement existing programs aimed at increasing lending to small businesses.
The proposed credit risk guarantee organizations, according to the apex bank, are anticipated to provide third-party credit risk mitigation to lenders by absorption of a percentage of the lender’s losses on loans made to Nigeria-based MSMEs in the event of default.
The CBN went on to say that any guarantee granted by a CGC is a legal promise to discharge a borrower’s liability in the event of failure.
The rules essentially lay out the basic requirements for CGCs that issue credit guarantees to Participating Financial Institutions (PFIs).
While the guidelines’ restrictions apply to CGCs licensed by the CBN, the PFIs must follow the same rules when it comes to their activities, according to the CBN.
Nonetheless, the CGC’s credit guarantee might pay up to 75% of the defaulted amount, according to the central bank.
The PFI and the CGC would be expected to take all necessary means to recover the outstanding sum after the crystallized guarantee was settled, and the CGC would be compensated to the extent of the recovered sum.
The CBN further declared that a CGC’s cumulative guarantee liabilities cannot exceed 10 times its unaffected shareholders’ fund. The CGCs must begin operations with a minimum paid-up capital of N10 billion, or such amount as the CBN may prescribe from time to time, and must retain that capital at all times.
“A CGC’s capital adequacy ratio shall be measured as the percentage of its shareholders’ funds unaffected by losses to its total risk weighted assets,” according to the circular.
“The CBN may require a CGC to maintain additional capital in respect of other specific risks as the CBN deems appropriate.”
The CBN, on the other hand, has prohibited CGCs from providing guarantees to MSMEs based outside of Nigeria, among other things. They were also prohibited from accepting demand, savings, or time deposits, as well as providing credit to consumers, by the bank.
The guarantee firms were also exempted from managing pension funds or schemes, as well as foreign exchange, commodity, and equity trading, as well as any derivatives and swaps trading.
Collection of third-party cheques and other instruments for clearing through correspondent banks was prohibited. They are not allowed to buy, sell, dispose, acquire, or lease any real estate for any reason without the CBN’s prior written approval.
They were required to give risk asset guarantees, provide financial and business development advice services, invest surplus funds in government securities, and participate in other investments allowed by the CBN.