Nigeria’s apex bank, Central Bank of Nigeria (CBN) has stipulated N10 billion as minimum capital base for Credit Guarantee Companies (CGC). The CGC firms constitute a new subsector within the financial sector, with the task of guaranteeing loans to Micro Small and Medium Enterprises (MSMEs).
The CBN on Tuesday announced the introduction of the new subsector and the draft guidelines for operators in a circular signed by the Director, Financial Policy and Regulations Department, CBN, Ibrahim Tukur.
On the rationale for the new subsector, the apex bank said, “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.”
Explaining the expected roles of CGC, the CBN stated: “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.”
Among other things, the apex bank stipulated a minimum capital base of N10 billion, non-refundable application fee of N100,000; non-refundable licensing fee: N1 million; and Change of name fee: N50,000, as part of requirements to obtain operating license as a CGC.
On permissible activities of CGC, the draft guidelines stated: “A CGC may provide guarantee for risk assets; Render advisory services for financial and business development; Invest surplus funds in government securities; Partake in other investments as may be approved by the CBN;
“Provide technical assistance to lenders and borrowers on credit and business development; Maintain and operate various types of accounts with banks in Nigeria; Engage in recovery of the guaranteed sum from defaulting borrowers post claims payment; and other activities as may be prescribed by the CBN from time to time.”
The exposure guidelines however excluded CGC from some activities including provision of guarantee to entities outside Nigeria; Acceptance of demand, savings and time deposits or any other deposits; Provision of credit to customers; Management of pension funds or schemes; Foreign exchange, commodity and equity trading and all forms of trading in derivatives and swaps.
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