On 4 August 2021, the Central Bank of Nigeria (CBN) issued the Exposure Guidelines to regulate the activities of Credit Guarantee Companies (CGCs) in Nigeria. The Guidelines are expected to create a conducive atmosphere for Micro, Small and Medium Enterprises (MSMEs) to access credit at low interest rates from banks and financial institutions in a bid to solve the problem of their inability to obtain loans. The Guidelines also stipulate the activities that CGCs are permitted to undertake while outlining the non-permissible activities, application processes for obtaining Approval-in-Principle and licence as well as the corporate governance structure of CGCs.
Definition of Credit Guarantee Companies
According to the Guidelines, 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.
An example of a Credit Guarantee Company in Nigeria providing guarantees for MSMEs to access credit is Impact Credit Guarantee Limited.
Objectives of the Credit Guarantee Scheme
The objectives of the scheme include the following:
- Improve access to credit for MSMEs
- Reduce credit risk in lending by providing guarantees to PFIs
- Stimulate lower interest rates on loans
- Promote flexible collateral requirements
- Encourage new business formation, development and expansion
- Foster sustainable and inclusive growth
- Improve risk management in the financial sector.
Powers and Duties of the Central Bank of Nigeria
The Central bank of Nigeria shall have regulatory and supervisory powers and duties over CGCs in addition to the following:
- Grant and revoke licence.
- Determine minimum capital requirements.
- Approve the appointment of board members and senior management staff.
- Remove board members and senior management staff.
- Approve the appointment of external auditors.
Permissible Activities
The activities which CGCs may legally engage in include:
- Provide guarantee for risk assets.
- Render advisory services for financial and business development.
- Invest surplus funds in government securities.
- Maintain and operate various types of accounts with banks in Nigeria.
- Engage in the recovery of guaranteed sum from defaulting borrowers post claims payment.
- Other activities as may be prescribed by CBN from time to time.
Non-permissible Activities
The non-permissible activities for CGCs include the following:
- Provision of guarantee to entities outside Nigeria.
- Provision of credit to customers.
- Acceptance of demand, savings and time deposits or any other deposits.
- Management of pension funds or schemes.
- Foreign exchange, commodity and equity trading.
- All forms of trading in derivatives and swaps, etc.
Licensing Procedure and Requirements
The application for licence is made by the promoters of the CGC and addressed to the Governor of CBN. The application for licence shall be processed in two stages namely: Approval-in Principle and final licence.
Requirements for Approval-in-Principle
The requirements for obtaining Approval-in-Principle for CGC include:
- Apply to the Governor of the CBN in writing together with the following:
- A non-refundable application fee of N100,000.
- Evidence of the deposit of the specified minimum capital requirement of N10,000,000,000 into a CBN designated account.
- Evidence of capital contribution made by each shareholder.
- Evidence of name reservation with Corporate Affairs Commission.
- Detailed business plan or feasibility report.
- Draft copy of the Memorandum and Articles of Association of the company.
- Shareholders agreement.
- Detailed manuals and policies.
- Upon receipt of the application and satisfactory documentation, the CBN shall verify the capital contributions of the promoters of the CGC.
- Where CBN is satisfied with capital contribution of the promoters, it shall issue Approval-in-Principle to the promoters of the CGC.
- The CBN shall communicate its decision to the promoters within 90 days of the receipt of the application.
- The proposed CGC shall not register or incorporate its name with Corporate Affairs Commission until an Approval-in-Principle has been obtained from the CBN.
Requirements for Final Licence
Not later than six months after obtaining the Approval-in-Principle from CBN, the promoters of a proposed CGC shall submit an application for the grant of final licence. The application shall be accompanied with the following:
- Non-refundable licensing fee of N1,000,000 (One Million Naira)
- Certified True Copy (CTC) of certificate of incorporation of the CGC.
- CTC of the Memorandum and Articles of Association.
- CTC of CAC form 1.1.
- Evidence of payment of stamp duties.
- Internal control policy.
- Business continuity plan, etc.
However, before the final licence is granted, CBN shall inspect the premises and facilities of the proposed CGC.
Corporate Governance Structure for CGCs
The board is to be responsible for the affairs of the CGC and its performance. The board shall be made up of both executive and non-executive directors whose number is to be more than executive directors’. The board is to be composed of 5 members minimum and 7 members at the maximum. It should be noted that the appointment of the members of the board is subject to CBN’s approval.
There shall be the positions of a Managing Director and Chief Executive Officer. The two positions are not to be merged but to be occupied by different individuals.
The board is to be appraised annually by an independent consultant on aspects of board’s structure, composition, responsibilities and performance.
Sources of Funds of CGCs
CGCs can access funds from any source approved by CBN. These sources include:
- Paid-up share capital.
- General reserves.
- Long-term loans from international organisations and sponsors.
- Funds from development partners.
- Loans from governmental bodies.
- Preference shares.
- Bonds.
- Grants and donations from sources approved by the CBN, etc.
Compliance, Sanctions, and Revocation of Licence
CGCs are required to comply with all laws, rules and regulations. One of the directives is for CGCs to be prudent and not to guarantee more than 75% of the credit provided to any MSME. Where the CGC fails to comply, it shall be met with administrative sanctions. The sanction could be suspension of its operation, monetary penalties, prohibition from declaring dividends, or revocation of licence, etc.
The licence of a CGC may also be revoked where it is insolvent, misuses the licence or ceases operation for a continuous or aggregated period of six months within 12 months.
Conclusion
The issuance of the Guidelines is aimed at facilitating MSMEs access to credit at low interest rate. This is a step in the right direction by CBN. It will ensure that credit loans are guaranteed by minimizing credit risks that banks and other financial institutions are reluctant to take up. It would potentially also lead to business and economic growth for Nigeria especially in the MSME sector.
In applying for approval in principle and license, CGCs are to be prudent by ensuring that all CBN’s requirement for CGC’s licensing are met.
Please note that the contents of this Article are for general guidance on the Subject Matter. It is NOT legal advice.
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