Brief Insight into the Guidelines for Regulation and Supervision of Credit Guarantee Companies in Nigeria

May 27, 2022adminNo CommentsCategories: Business, Finance

The Central Bank of Nigeria has officially given green light to the establishment of private credit guarantee companies to support access to credit facilities by Micro, Small and Medium Enterprises (MSMEs), amongst other things. This is backed by the Central Bank of Nigeria Guidelines for Regulation and Supervision of Credit Guarantee Companies in Nigeria (“the Guidelines”), which took effect from March 16, 2022. Although credit guarantee schemes are not new in Nigeria, it had been facilitated through public enterprises and through private-public enterprises (as was the case with the joint partnership of the Federal Government and the Central Bank of Nigeria to support Agricultural Credit Guarantee Scheme Fund established by Decree Number 20 of 1977 and the ₦200 billion Small and Medium Enterprises Credit Guarantee Scheme by the Central Bank of Nigeria, as well as the establishment of Infrastructure Credit Guarantee Company through a partnership between the Nigeria Sovereign Investment Authority (NSIA) and GuarantCo respectively).

With these Guidelines, wholly private entities can now offer credit guarantee products to MSMEs.

MSMEs are indispensable to improve economic growth, development, and job creation in Nigeria. The reason is not far-fetched: MSMEs contribute 49.78% to the country’s gross domestic product (GDP), accounts for 7.64% and 90% of export receipt and businesses respectively, and 50% of employment. However, a vast majority of these MSMEs still grapple with issues regarding access to credit for their operations. The Guidelines aims to improve this status quo since the companies permitted to come into existence thereunder, referred to as “Credit Guarantee Companies (CGC)”, 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”.This article looks at the pre-establishment requirements for CGC and the key highlights of the Guidelines.

First, to qualify as Credit Guarantee Companies (CGC), an application must be made to the Governor of the CBN for the grant of a CGC licence. It should be noted that the grant of a licence is a two-stage process, commencing with an application for Approval-in-Principle (AIP) and subsequently an application for Final Licence.The following are required for the former: a non-refundable application fee of ₦100,000 (One Hundred Thousand Naira) or other amount as the CBN may specify; evidence of deposit of ₦10,000,000,000 (Ten Billion Naira) being the minimum paid-up capital requirement; evidence of capital contributed by each shareholder, evidence of reservation of business name with the Corporate Affairs Commission (CAC); a business plan that includes some specified information, a draft of the Memorandum and Articles of Association (MEMART); investors’ statements of intent to invest in the company; shareholders’ agreement regarding the disposal or transfer of share as well as authorization, amendments, waivers and reimbursement of expenses; and a detailed manual of operations and policies (the Financial Management Policy, the Anti-Money Laundering and Combating Financing of Terrorism (AML/CFT) Policy, the Enterprise Risk Management (ERF) Framework, and the Code of Ethics and Business Conduct).

In the event that the CBN is satisfied with the application, the first stage licence is issued. However, this is not an approval to commence operation. Rather, the second stage of the process, that is, an application for Final Licence is to be submitted to the CBN not later than six (6) months. The following is to be submitted alongside the application: non-refundable licensing fee of ₦1,000,000 (One Million Naira); certified true copy of the certificate of incorporation, MEMART, and application for registration of company (Form CAC 1.1); evidence of payment of stamp duties, location of head office, and the ability to meet technical requirements and provide modern infrastructural facilities necessary for operation; an update on any change in the Board and shareholding after the issuance of AIP; copies of letter of offer and acceptance of employment of members of the management team; detailed resumes of top management staff and their BVN, TCC for the last three years and valid means of identification; internal control policy; business continuity plan, comprehensive plan of the timelines to begin operation; and board and staff training program.

Prior to the grant of this Final Licence, it is mandatory that the CBN would have conducted an inspection of the premises and the facilities of the CGC to ascertain the physical structure of the building and infrastructure needed to commence operation, to sight the original copies of those document required for the application of Final Licence, and to meet the members of the Board and Management Team whose resumes were submitted during the application.

Key Takeaways from the Guidelines

  1. CGCs require a minimum share capital of ₦10,000,000,000 (Ten Billion Naira).
  2. The incorporation or registration of name with the Corporate Affairs Commission (CAC) can only be done after the AIP has been issued and same would be presented to the CAC for the registration.
  3. The CGCs can only participate in activities expressly permitted by the CBN, and they are: guarantee risks of Participating Financial Institutions; render advisory services for financial and business development; invest surplus funds in government securities; participate in other investments upon their approval with the CBN; provide technical assistance to lenders and borrowers on credit and business development; maintain and operate accounts with Nigerian banks; and other activities as may be subsequently permitted by the CBN.
  4. Where the CGC provides credit guarantees for a MSME in any Participating Financial Institutions (PFIs), the company is liable to pay for any default. Afterwards, it can collaborate with PFI to recover the amount in question.
  5. Some provisions have been included to ensure that tasks in some roles are performed unfettered and without any interference. They include;
  • The positions of the Board Chairman and the MD/CEO must be separate, and not occupied by the same person at the same time.
  • Where the CGC is a member of a holding company, a maximum of two family members would be allowed to serve both on the board of the CGC and the holding company.
  • Membership of the Remuneration Committee, if any, or the Remuneration and Governance Nominations Committees must be drawn exclusively from non-executive directors.
  • The MD/CEO and other executive directors shall not be members of the Board Audit Committee.
  1. Any agreement that would result in the change of ownership structure of a CGC cannot be entered into without the prior written consent of the CBN.
  2. The CBN is authorized to issue cease and desist orders where the CGC is in violation of the provision of the Guidelines, and is either engaging in or intends to engage in unsafe and unsound practices.
  3. One of the administrative sanctions in the event of any contravention with the Guidelines is revocation of licence.