Highlights of the Credit Guarantee Companies Guidelines
Until March 2022 when the Guidelines was issued, there was no central regulatory framework for private sector players in the credit guarantee sector and Credit Guarantee Companies were not CBN-regulated entities.
The credit market for Micro, Small and Medium Enterprises (MSMEs) in Nigeria is characterized by market imperfections, collateral constraints, information asymmetry, and low-profit margins, among others, according to the Central Bank of Nigeria (CBN). These factors have limited MSMEs’ access to credit and where credit is granted, it is often on unfavourable terms.
As part of its efforts to stimulate lending to MSMEs in the country, the CBN recently issued the Guidelines for the Regulation and Supervision of Credit Guarantee Companies (the Guidelines). With the issuance of the Guidelines, the CBN aims to improve access to credit for the market segment; reduce credit risk in lending by providing guarantees to Participating Financial Institutions (PFIs); stimulate lower interest rates on loans; and promote flexible collateral requirements by PFIs, among others. The Guidelines stipulates the minimum licensing, governance and prudential requirements for the operations of Credit Guarantee Companies (CGCs) in Nigeria.
It should be noted that until March 2022 when the Guidelines was issued, there was no central regulatory framework for private sector players in the credit guarantee sector and CGCs were not CBN-regulated entities. However, from the effective date of the Guidelines, which is March 16, 2022, CGCs have become CBN regulated entities, held to similar regulatory standards as other CBN-regulated financial institutions.
This article seeks to highlight the key provisions of the Guidelines and their potential impact on MSME financing, as well as the Nigerian economy.
The Guidelines adopts a two-stage approach to obtaining a CGC licence from CBN. The promoters of the company are required to file a formal application for an Approval-In-Principle (AIP) alongside the necessary documentation before the incorporation of the company as the first stage. For the second stage, the newly incorporated company shall within six months of obtaining the AIP, apply for the grant of a final licence. It is, however, unclear how the first stage of licensing procedure will apply to credit guarantee companies already in operation before the issuance of the Guidelines. It should be noted that CBN 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 months or any period aggregating six months during a continuous period of twelve months, or breach of the Guidelines.
As with other financial institutions regulated by the CBN, CGCs are required to maintain a minimum paid-up capital that is substantially higher than the minimum capital requirement stipulated for private or public companies in the Companies and Allied Matters Act (CAMA) 2020. Section 27(2) of the CAMA 2020 pegged the minimum issued share capital of private companies at N100,000, while public companies must have at least N2,000,000 as their minimum issued share capital.
The Guidelines provides that licensed CGCs shall commence operations with, and maintain at all times, a minimum paid-up capital of N10 billion or such amount as may be prescribed by the CBN from time to time. Where CGCs already in operation before the issuance of the Guidelines do not meet the CGC capital requirement, the options available to them may include an increase of share capital, corporate amalgamations like mergers and acquisitions, or shareholder contributions.
In addition, CGCs are required to maintain a minimum Capital Adequacy Ratio (qualifying capital/total risk-weighted assets) of 10% (or as may be prescribed by the CBN) at all times, and where a CGC fails to meet this 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.
CORPORATE GOVERNANCE REQUIREMENTS
The Guidelines also provides corporate governance provisions that CGCs are required to comply with. These corporate governance provisions largely mirror the provisions of the Codes of Corporate Governance for Other Financial Institutions 2018 with the following differences:
i. at least one member of the Board, other than the executive directors, shall have banking or related financial industry experience and actuarial or related experience;
ii. the Board shall consist of executive and non-executive directors, the number of non-executive directors shall be more than that of executive directors and the board shall consist of a minimum of one independent non-executive director;
iii. members of the Board shall be appointed by the shareholders and approved by the CBN; and
iv. the Board must also establish a Credit Guarantee Committee to assist in the discharge of its responsibilities.
PERMISSIBLE AND NON-PERMISSIBLE ACTIVITIES
Another noteworthy provision of the Guidelines is the list of permissible and non-permissible activities. The permissible activities that CGCs may carry out include: provision of guarantee for risk assets of PFIs; rendering of advisory services for financial and business development; investing surplus funds in government securities; partaking in other investments as may be approved by the CBN; providing technical assistance to lenders and borrowers on credit and business development; maintaining and operating various types of accounts with banks in Nigeria; and other activities as may be prescribed by the CBN.
CGCs are prohibited from carrying out any activities not expressly permitted by the CBN. Promoters of CGCs need to take cognizance of these restrictions in drafting their business objects in the memorandum of association of new CGCs. Where operational CGCs are already engaged in these activities, they will be required to discontinue them to the extent that they are prohibited by the guidelines.
The Guidelines introduces a maximum percentage for guarantee coverage that CGCs can provide against loans which is a maximum of 75% of the default amount. We note that before the Guidelines, operational credit guarantee companies offered different percentages of guarantee coverage, some as low as 60% and others as high as 100% of the default amount. This created a competitive edge for CGCs with higher guarantee coverage.
The introduction of a maximum credit guarantee coverage brings uniformity into the sector but restricts the extent to which CGCs can leverage their guarantee coverage as a competitive edge. Similarly, the Guidelines restricts the cumulative guarantee liabilities of a CGC, which shall not exceed 10 times its shareholders’ fund unimpaired by losses.
SOURCES OF FUNDS
The Guidelines restricts the sources of funds of licensed CGCs to one or more of the following as may be approved by the CBN: paid-up share capital, general reserves, long-term loans from international organizations and sponsors, funds from development partners, loans from governmental bodies, preference shares, bonds, long-term borrowings from individuals and corporates (excluding PFIs), grants and donations from sources approved by the CBN, and any other source as may be approved by the CBN. As a result of these funding restrictions, CGCs are prohibited from sourcing funds through short-term mediums like private notes and commercial papers.
OTHER REGULATORY REQUIREMENTS
The Guidelines also mirrors certain regulatory requirements and obligations that other financial institutions are required to comply with pursuant to the Banks and Other Financial Institutions Act 2020 or their respective enabling laws/regulations. These requirements include:
i. obtaining CBN prior written approval before entering into any arrangement that will result in a change of control of the CGC, transfer of the whole or part of the business of the CGC, result in a merger or amalgamation of the CGC or reconstruction of the CGC or opening, relocating or closing a branch of the CGC;
ii. obtaining approval of the CBN for any shareholding of 5% and above in a CGC. In addition, no CGC shall open, relocate or close a branch without the prior written approval of the CBN;
iii. complying with the relevant AML/CFT laws; and
iv. developing and maintaining requisite risk management policies; etc.
In conclusion, the Guidelines is a step in the right direction as it brings CGCs under the regulatory purview of the CBN and extend similar standards for regulating other financial institutions to CGCs. The introduction of corporate governance requirements, minimum capital requirement as well as a minimum capital adequacy ratio among other standards in the Guidelines will help to foster trust in, and the growth of, healthy players in the credit guarantee sector.
The standards introduced by the Guidelines will create uniformity and certainty for institutions in the credit guarantee sector as well as other persons seeking to leverage the services these institutions provide.
However, the Guidelines is silent on companies operating in the credit guarantee sector before the issuance of the Guidelines by CBN, leaving the validity of their current operations uncertain; as such, we recommend that such companies may need to approach the CBN for clarity on the validity of their operations.
Detail Commercial Solicitors is distinct as Nigeria’s first commercial solicitor firm to specialize exclusively in non-courtroom practice. Based in Lagos, Nigeria’s business capital, DETAIL is totally committed to its clients’ business objectives and reputed for dealing with the minutiae. Email: email@example.com.
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