CBN issues guidelines for Credit Guarantee Schemes

The Central Bank of Nigeria has released a guideline Credit Guarantee Schemes to solve the challenge of limited access to credit by MSMEs.

This was disclosed in a recently released circular to all banks and other financial institutions, titled “GUIDELINES FOR REGULATION AND SUPERVISION OF CREDIT GUARANTEE COMPANIES IN NIGERIA”.

Finance Guarantee Schemes have long been regarded as one method of resolving the problem of MSMEs’ limited access to credit. This thought is based on the benefits of using a guarantee as collateral, which includes safety, liquidity, and the absence of issues that come with tangible collateral, such as obsolescence, depreciation, verification, perfection, and foreclosure.

Key takeaway

• The CBN enabled the formulation of rules for the establishment and operation of credit guarantee businesses in Nigeria as part of its attempts to boost lending to Micro, Small and Medium Enterprises (MSMEs). For potential credit guarantee businesses, the Guidelines provide minimum licensing governance and prudential standards.
• The CBN licenses Credit Guarantee Schemes (CGC) with the primary goal of providing guarantees to banks and other lending financial institutions licensed by the CBN, also known as Participating Financial Institutions (PFIs), against the risk of obligor default.
• 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 an agreed portion of the liability of a borrower in the case of default.
• However, Credit Guarantee Companies (CGCs) are unable to provide guarantees to entities outside of Nigeria, as well as to entities within their holding company structure and related entities.
• Without prior written authorisation from the CBN, Credit Guarantee Companies (CGCs) cannot purchase, sell, dispose of, acquire, or lease any real estate for any reason.
• Promoters seeking the license must pay a non-refundable application fee of N100,000 (One Hundred Thousand Naira) and show proof of deposit into the FPRD CGC Share Capital Account of the specified minimum paid-up capital requirement of N10,000,000,000.00 (Ten Billion Naira only) or any other amount prescribed by the CBN.