On March 23, 2022, the Central Bank of Nigeria ("CBN") issued Guidelines for the Regulation and Supervision of Credit Guarantee Companies ("CGC") in Nigeria (the "Guidelines"). It is expected that the introduction of CGCs will encourage more financial institutions to lend money to micro, small and medium enterprises ("MSME") in Nigeria. We have set out below useful information on CGCs and the Guidelines.
1. What are Credit Guarantee Companies?
A CGC is a company licensed by the CBN to guarantee loans issued to MSMEs by banks and other financial institutions ("Financial Institutions") against a default.
2. Who is to engage a CGC?
Under the Guidelines, either the borrower or the lender (the Financial Institutions) of a loan transaction may apply to licensed CGCs for their credit guarantee services. It is, however, expected that the services of CGCs will be more often required by Financial Institutions as a form of security for loans granted to MSMEs.
3. What are the conditions to access the services of a CGC?
The services of a CGC are limited to loans issued to MSMEs by financial institutions licensed by the CBN. MSMEs are companies with less than 200 employees and less than 500 million naira in assets, excluding landed properties.
4. What are the permissible activities of a CGC?
In addition to providing the guarantee services, CGCs may also provide advisory and technical services for financial and business development to their clients.
5. Are there limitations to the guarantee services of CGCs?
A CGC cannot provide guarantee services in the following instances: (i) to related entities or entities within its holding company structure; (ii) to entities outside Nigeria; and (iii) where it is indebted to the entity.
6. What is the Consideration for the Guarantee Services?
Remuneration payable to the CGC for its guarantee services will be as negotiated between the Financial Institutions and the CGC.
7. How to apply for a CGC license?
A CGC license can be obtained by applying to the CBN with the following supporting documents:
- evidence of minimum paid-up capital of 10 billion naira and capital contribution of the proposed shareholders;
- detailed business plan;
- details of the proposed directors and shareholders;
- draft of the memorandum and articles of association;
- detailed manuals and policies;
- payment of the application fee; and
- other required documents.
Upon a successful assessment of the application, the CBN will issue an approval in principle. Within 6 months of the issuance of the approval in principle, an application is to be made to the CBN for the issuance of the final license, subject to a satisfactory physical inspection.
A challenge Financial Institutions have faced with lending to MSMEs in Nigeria over the years, is the lack of suitable security for loans. With an undeveloped credit rating system in Nigeria, Financial Institutions struggle to have sufficient comfort that loans will be repaid. The growth of CGCs in Nigeria is expected to help provide a level of comfort to concerned Financial Institutions and encourage lending to MSMEs. A major factor, however, that will determine how useful CGCs will be in encouraging lending to MSMEs is the fee charged for their services.
Notwithstanding the foregoing, it is imperative that the credit rating system is improved in Nigeria as this will provide more comfort for Financial Institutions and in turn, achieve the goal of stimulating lending to MSMEs.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.