Highlights Of The Guidelines For Regulation And Supervision Of Credit Guarantee Companies In Nigeria

INTRODUCTION

Credit Guarantee Schemes have been widely considered as one of the means of addressing the challenge of limited access to credit by Micro, Small, and Medium Enterprises (MSMEs). In Nigeria, the credit markets for MSMEs are characterized by market imperfections, collateral constraints, information asymmetry, and low-profit margins, among others. These factors have limited MSMEs' access to credit due to their perceived high risk and where credit is granted, it is often on unfavourable terms.¹

In recognition of the role of guarantee schemes in facilitating lending, the Central Bank of Nigeria (CBN) in the exercise of powers conferred on it by Section 2(d) of the CBN Act 2007 and Section 56(2) of the Banks and Other Financial Institutions Act (BOFIA) 2020, on 28th March 2022 issued the Guidelines for Regulation and Supervision of Credit Guarantee Companies (CGCs) in Nigeria.²

The Guidelines provide supervisory and regulatory guidance on Credit Guarantee Companies in Nigeria. The objectives of the scheme are to:³

• Improve access to credit for Micro, Small, and Medium Enterprises (MSMEs);
• Reduce credit risk in lending by providing guarantees to Participating Financial Institutions (PFIs);
• Stimulate lower interest rates on loans;
• Promote flexible collateral requirements by PFIs;
• Encourage new business formation, development, and expansion;
• Accelerate economic growth and decrease unemployment;
• Foster sustainable and inclusive growth; and
• Improve risk management in the financial system

The Guidelines also stipulate the Licensing Procedure and Requirement including Financial Requirement, Corporate Governance Requirement, Prudential Requirement, Capital Adequacy Requirement for the operation of Credit Guarantee Companies in Nigeria amongst others.

Premised on the above, this article highlights the salient provisions of the guidelines.

PARTICIPANTS/STAKEHOLDERS OF THE CREDIT GUARANTEE SCHEME

There are four major participants in the operation Credit Guarantee Scheme in Nigeria namely;

1. The Central Bank of Nigeria (CBN)
2. Micro, Small, and Medium Enterprises (MSMEs)
3. The Participating Financial Institutions (PFIs)
4. Credit Guarantee Company (CGC)

(i) The Central Bank of Nigeria;⁴ The CBN is to exclusively perform the following roles in line with the relevant provisions of BOFIA 2020 and the CBN Act:

1. Grant and revoke licenses;
2. Determine minimum capital requirements;
3. Issue governance guidelines and ensure compliance with the governance requirements;
4. Approve the appointment of board members and senior management staff (Assistant General Manager or it's equivalent and above);
5. Remove board members and senior management staff (Assistant General Manager or its equivalent and above);
6. Exercise regulatory and supervisory functions,
7. Approve the appointment of External Auditors
8. Issue 'No Objection' to annual audited financial statements of CGCs before presentation at the Annual General Meeting (AGM) and subsequent publication;
9. Approve change(s) in the GCC's organizational structure before its implementation; and
10. Exercise any other powers in line with the BOFIA 2020, the CBN Act, or any other applicable law.

(ii) Micro, Small, and Medium Enterprises (MSMEs): MSMEs are required to perform certain roles which include:

• Having basic understanding of a Credit Guarantee Scheme before entering into agreements;
• Applying and obtaining a guarantee directly or through the lending PFI from a CGC licensed by the CBN.
• Ensuring full discharge of their obligations as at when due;
• Having an understanding of all conditions relating to repayment, including monthly, quarterly, or other periodic repayment plans as agreed.
• Having an understanding of their rights in the event of early liquidation of the facility; and
• Having an understanding of all sanctions in the event of default.⁵

(iii) The Participating Financial Institutions (PFIs): Under the scheme, PFIs who are banks and other financial institutions that have been licensed by the Central Bank of Nigeria to grant loans are responsible to:

1. Receive and appraise loan applications submitted by its customers;
2. Apply for and obtain, with the consent of the MSME, a guarantee from only CGCs licensed by the CBN for any eligible loan;
3. Sensitize their customers on the CGC Scheme;
4. Monitor the performance of all exposures to obligors guaranteed during the guarantee period;
5. Register all eligible moveable assets with the National Collateral Registry
6. Take the lead in the recovery of guaranteed sums from defaulting obligors post-claim payment;
7. Post claim payment, realize all collaterals used to secure MSME loans and apply the proceeds as stipulated in the relevant contracts; and
8. Render periodic returns as may be specified by the CBN from time to time.⁶
9. iv) Credit Guarantee Company (CGC): A CGC is an institution licensed by the CBN with the primary objective of providing guarantees to banks and Participating Financial Institutions (PFIs), against the risk of default by obligors. The parties to a guarantee are the lender to whom the guarantee is given; the guarantor that provides the guarantee (i.e., the CGC); and the borrower on whose behalf the guarantee is given.⁷

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.⁸

CGCs are responsible for providing credit guarantees for MSME loans from eligible PFIs; paying claims on default by obligors in line with the contract terms and the general provisions of the Guidelines; collaborating with PFI to recover the guaranteed sum from defaulting borrowers post claims payment; provide advisory support to PFIs on guarantee matters; and ensuring that the PFIs adhere to the terms of disbursement of loans to MSME, especially with regards to loans with fixed business circles.⁹

SOURCES OF FUND

It should be noted that CGCs may source funds through one or more of the following as may be approved by the CBN:¹⁰

1. Paid-up share capital;
2. General reserves;
3. Long-term loans from international organizations and sponsors;
4. Funds from development partners;
5. Loans from governmental bodies;
6. Preference shares;
7. Bonds;
8. Long-term borrowings from individuals and corporates (excluding PFIs);
9. Grants and donations from sources approved by the CBN; and
10. Any other source may be approved by the CBN from time to time.

A CGC is permitted to carry out the following:

• Provide a guarantee for risk assets of Participating Financial Institutions;
• 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; and
• Other activities may be prescribed by the CBN from time to time.¹¹

REQUIREMENTS AND LICENSING PROCEDURE FOR REGISTRATION OF CGCs

The guidelines require eligible promoters seeking to register to operate a CGC to meet certain requirements. The promoters of a CGC shall be required to submit a formal application to the Governor of the CBN for the grant of a CGC licence. The application for a CGC licence shall be processed in two stages, namely: Approval-in-Principle (AIP) and final licence.¹²

Approval-in-Principle (AIP): At this stage, prospective promoters seeking to operate a CGC in Nigeria shall apply in writing to the Governor of the CBN, and submit the following documents with the application: with the required documents such as;

• A non-refundable application fee of N100,000 (One Hundred Thousand Naira) only, or such other amount as the CBN may specify, in bank draft payable to the CBN or CGC Application and Licensing Account;
• Evidence of deposit of the specified minimum paid-up capital requirement of N10,000,000,000.00 (Ten Billion Naira only) or any other amount that may be prescribed by the CBN into the CGC Share Capital Account. Promoters should note that in compliance with the BOFIA 2020, the investment of share capital deposit shall be subject to the availability of investment instruments. Upon the grant of license or otherwise, the CBN shall refund the sum deposited to the promoters, together with the investment income, if any, after deducting administrative expenses and tax on the income;
• Evidence of capital contribution made by each shareholder;
• Evidence of name reservation with the Corporate Affairs Commission (CAC)
• Detailed business plan or feasibility report in line with the guidelines.
• For corporate investors, promoters shall forward the following additional documents:
• 1. Certificate of Incorporation and certified true copies of other incorporation documents;
  2. Board resolution supporting the company's decision to invest in the equity shares of the proposed CGC;
  3. Names and addresses (business and residential) of owners, directors, and their related companies, if any; and
  4. Audited financial statements and reports of the company and Tax Clearance Certificate for the immediate past 3 years.
• A draft copy of the company's Memorandum and Articles of Association (MEMART).
• Shareholders' agreement providing for disposal/transfer of shares as well as authorization, amendments, waivers, reimbursement of expenses;
• Statement of intent to invest in the company by each investor;
• Detailed Manuals and Policies, particularly:
• 1. Manual of Operations
  2. Financial Management Policy that highlights the CGC's policies and procedures, and systems of internal controls.
  3. Anti-Money Laundering and Combating Financing of Terrorism (AML/CFT) Policy;
  4. Enterprise Risk Management (ERM) Framework; and
  5. Code of Ethics and Business Conduct that specifies the acceptable standards of conduct for the CGC's employees, officers, and directors.

The CBN will verify the capital contributions of the promoters of the CGC and issue an Approval-in-Principle (AIP) to the promoters of the CGC following the receipt of an application with complete and satisfactory documentation.¹³Thereafter, the CBN will communicate its decision to the promoters within ninety (90 days) days of receipt of the application.¹⁴

Worthy of note is the fact that a proposed CGC is estopped from incorporating or registering its name with the Corporate Affairs Commission (CAC) until an AIP has been obtained from the CBN in writing, a copy of which shall be presented to the Corporate Affairs Commission (CAC) for registration. In other words, the grant of AIP is a condition precedent for registration at CAC.¹⁵

Final Approval: The guideline provides that not later than six (6) months after obtaining the AIP, the promoters of a proposed CGC are required to apply for the grant of a final licence to the CBN to be accompanied by the following¹⁶:

• A non-refundable licensing fee of N1,000,000.00 (One Million Naira) only, or such amount as may be prescribed by the CBN, in bank draft payable to the CBN or CGC Application and Licensing Account;
• Certified True Copy (CTC) of Certificate of Incorporation of the CGC;
• CTC of MEMART;
• CTC of Form CAC 1.1(application for registration of company);
• Evidence of payment of Stamp Duties;
• Evidence of the location of Head Office (rented or owned) for the takeoff of the business;
• Schedule of changes, if any, in the Board and Shareholding after the grant of AIP;
• Evidence of ability to meet technical requirements and provision of modern infrastructural facilities such as office equipment, computers, telecommunications, to perform the CGC's operations and meet CBN and other regulatory requirements;
• Copies of letters of offer and acceptance of employment in respect of the management team;
• Detailed resumes of top management staff stating qualification (including photocopies of academic and professional credentials), experience, and records of accomplishments, their BVN, Tax Clearance Certificate for the last three years, and valid means of identification;
• Completed Fitness and Propriety Questionnaire, and sworn declaration of net worth executed by top management staff;
• Internal Control Policy;
• Business Continuity Plan;
• Comprehensive plan on the commencement of the CGC's operations with milestones and timelines; and
• Board and staff training program

As a requirement for the grant of the final licence, the CBN is required to inspect the premises and facilities of the proposed CGC to, amongst others: check the physical structure of the office building and infrastructure provided for the take-off of the CGC; sight the original copies of the documents submitted in support of the licence application; meet with the Board and Management team whose resumes had earlier been submitted to the CBN.¹⁷

Before commencement of operations, the CGC is required to inform the CBN of its readiness to commence operations through a letter and such information shall be accompanied by one copy of each of the following:

1. Shareholders' Register;
2. Copy of share certificate issued to each investor;
3. The opening statement of affairs signed by at least two directors and auditors;
4. Enterprise Risk Management Framework (ERMF);
5. Internal control policy; and
6. Minutes of the pre-commencement board meeting.¹⁸

A CGC shall as a post-commencement requirement:

1. Comply with the requirements incidental to the authorization to perform its operations as stipulated by the CBN from time to time;
2. Comply with all guidelines and regulations issued by the CBN;
3. Maintain an adequate accounting system and keep records that capture information that reflect the financial condition of the CGC;
4. Maintain an unimpaired minimum regulatory capital at all times; and
5. Notify CBN upon commencement of operations.¹⁹

OTHER NECESSARY REGISTRATION CRITERIA

Apart from the aforementioned registration requirements, an eligible promoter must prove to be satisfactory before being registered by CBN. These satisfactory requirements are highlighted below:

1. Financial Requirements

The guidelines stipulate that the financial requirements for an approval to operate as Credit Guarantee Company, which may be amended by the CBN as it deems necessary, are as follows:

1. Minimum share capital: N10,000,000,000 (Ten Billion Naira) ;
2. Non-refundable application fee: N100,000 (One Hundred Thousand Naira);
3. Non-refundable licensing fee: N1,000,000 (One Million Naira); and
4. Change of name fee: N50,000 (Fifty Thousand Naira).²⁰

2. Corporate Governance Requirement

Members of the Board are to be appointed by the shareholders subject to approval by the CBN²¹which are to be accountable and responsible for the performance and affairs of the CGC. Specifically, and in line with the provisions of the Companies and Allied Matters Act (CAMA) 2020, directors owe the CGC a duty of care and loyalty to act in the interest of the CGC's shareholders and other stakeholders and are in this regard²² jointly and severally liable for the activities of the CGC.²³

The Board shall appoint the Managing Director/Chief Executive Officer (MD/CEO) as well as top management staff and establish a framework for the delegation of authority in the CGC, which shall comply with extant regulations issued by the CBN from time to time.²⁴

The minimum and maximum number of directors on the boards of CGCs shall be seven (7) and eleven (11), consisting of executive and non-executive directors. The number of non-executive directors is to be more than that of executive directors with at least one (1) member of the Board, other than the executive directors, who have banking or related financial industry experience and at least one (1) member of the Board, other than the executive directors, who have actuarial or related experience. The Board of a CGC shall consist of a minimum of one (1) independent non-executive director.²⁵ The Board Chairman and the MD/CEO shall be separate in line with the Nigerian Code of Corporate Governance 2018.²⁶

3. Prudential Requirement

Guarantee Coverage: The Guarantee may cover up to a maximum of 75% of the default amount. The status of default shall be determined by extant Prudential Guidelines.

After the crystallized guarantee has been settled, the PFI and the CGC shall be required to take all necessary steps to recover the outstanding sum, and the CGC shall be reimbursed to the extent of the recovered sum. The PFI shall lead this process, in line with the provisions of the extant Consumer Protection Regulations(CPR). The cumulative guarantee liabilities of a CGC shall not exceed ten (10) times of its shareholders' fund unimpaired by losses.²⁷

4. Capital Adequacy Requirement²⁸

The guidelines make provisions that the CGC shall commence operations with, and maintain at all times, a minimum paid-up capital of Ten Billion Naira (N10,000,000,000.00), or such amount as may be prescribed by the CBN from time to time.

The capital adequacy ratio of a CGC shall be measured as the percentage of its shareholders' funds unimpaired by losses to its total risk-weighted assets. The minimum Capital Adequacy Ratio (Qualifying Capital/Total Risk-Weighted Assets) for CGCs shall be 10 percent or as may be prescribed by the CBN from time to time.

Where a CGC fails to meet the minimum Capital Adequacy Ratio, the CGC shall be prohibited from any or all of the following until the required ratio is restored:

• Undertaking further investment;
• Payment of dividends to shareholders;
• Opening additional branch(es); and
• Any other action as may be determined by the CBN

Furthermore, the CGC shall be required to submit, within a specified period, a recapitalization plan acceptable to the CBN. Failure to comply with the above shall constitute grounds for the revocation of the operating licence of the CGC or such other penalties as may be deemed appropriate.

RISK MANAGEMENT²⁹

All CGCs shall be required to develop and document an Enterprise Risk Management Policy (ERMP) which shall be approved by the board of directors. The ERMP shall be reviewed at least every three years.

The ERMP shall cover all the risks to which a CGC may be exposed, including:

1. Guarantee Risk;
2. Concentration Risk;
3. Liquidity Risk;
4. Operational Risk;
5. Legal/ Regulatory Risk; and
6. Market Risk.

REGULATORY COMPLIANCE

CGCs are required to comply with relevant provisions of circulars issued by the CBN on disclosure requirements for financial institutions and other disclosure requirements contained in CAMA 2020 and BOFIA 2020 (as amended), and disclosure requirements issued by other relevant regulatory authorities in Nigeria.³⁰

CGCs are also to comply with relevant provisions of the Money Laundering (Prohibition) Act, 2011 (as amended), Terrorism Prevention Act, 2011 (as amended), CBN AML/CFT Regulations for Banks and Other Financial Institutions 2013, AML/CFT Administrative Sanctions Regulation 2018, other extant regulations on "Know-Your-Customer" issued by the CBN³¹, the principles outlined in the CPR, other relevant guidelines issued by the CBN, and any other applicable laws shall apply to CGCs.³²

STATUTORY RESTRICTIVE ACTIVITIES/ NON-PERMISSIBLE ACTIVITIES

By virtue of Paragraph 1.6 of the Guidelines for Regulation and Supervision of Credit Guarantee Companies (CGCs) in Nigeria, a CGC is prohibited from the following:

• Provision of guarantee to entities outside Nigeria;
• Provision of guarantee to entities within its holding company structure and connected entities ;
• Guarantee loans of any institution it is indebted to;
• 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;
• All forms of trading in derivatives and swaps;
• Collection of third-party cheques and other instruments for clearing through correspondent banks;
• Purchase, sale, dispose of, acquire, or lease any real estate for whatever purpose without the prior written approval of the CBN;
• Lease, rental, sale, or purchase of assets with related parties and/or significant shareholders of the CGC without the prior written approval of the CBN; and
• Any other activity NOT expressly permitted by the CBN

ADMINISTRATIVE SANCTIONS³³

Where any of the provisions of this Guidelines is contravened, the CBN in exercising the powers vested on it can impose one or more of the following sanctions:

• Monetary penalties on the CGC, its directors, officers, or employees;
• A prohibition from declaring or paying dividends;
• Suspension of guarantee operations, capital expenditure, and/or debt issuance;
• Suspension or removal from office of any director, officer, or employee;
• Disqualification of any director, officer, or employee from holding any position or office in a CGC; and
• Revocation of licence.

It should be noted that where the CBN is satisfied that the CGC is engaging in, has engaged in, or intends to engage in an unsafe and unsound practice in conducting its business, or in any conduct that violates any provision of these guidelines or any other applicable laws and CBN directives, the CBN may also issue cease and desist orders on a CGC.³⁴

REVOCATION OF LICENSE

The CBN has the power to revoke a CGC license for failure to comply with its provisions.

These instances include:

1. Where there is evidence of insolvency;
2. Where there is a misuse of the license
3. Where there is unauthorized cessation of business for any continuous period of six (6) months or any period aggregating six (6) months during a continuous period of twelve (12) months or
4. Where there is a breach of the CGC Guidelines.³⁵

CONCLUSION

It is silhouetted against the foregoing that any entity seeking to operate as a Credit Guarantee Company under the Credit Guarantee Scheme must meet the requirements provided by the provisions of the guidelines. Failure to meet these requirements will lead to disapproval from the Central Bank of Nigeria. Therefore, all eligible entities seeking to register as (CGCs) must register in compliance with the provisions of the Guidelines.

Footnotes

1. Para 1.0 of Guidelines for Regulation and Supervision of Credit Guarantee Companies in Nigeria

2. https://www.cbn.gov.ng/Out/2021/FPRD/MERGED%20CIRCULAR%20ON%20CGC.pdf

3. Para 1.3 of Guidelines for Regulation and Supervision of Credit Guarantee Companies in Nigeria

4. Para 1.4 of Guidelines for Regulation and Supervision of Credit Guarantee Companies in Nigeria

5. Para 3.1.1 of Guidelines for Regulation and Supervision of Credit Guarantee Companies in Nigeria

6. Para 3.2.1 of Guidelines for Regulation and Supervision of Credit Guarantee Companies in Nigeria

7. Para 1.1 of Guidelines for Regulation and Supervision of Credit Guarantee Companies in Nigeria

8. Para 1.0 of Guidelines for Regulation and Supervision of Credit Guarantee Companies in Nigeria

9. Para 3.3.1 of Guidelines for Regulation and Supervision of Credit Guarantee Companies in Nigeria

10.Para 5.0 of Guidelines for Regulation and Supervision of Credit Guarantee Companies in Nigeria

11. Para 1.5 of Guidelines for Regulation and Supervision of Credit Guarantee Companies in Nigeria

12. Para 2.0 of Guidelines for Regulation and Supervision of Credit Guarantee Companies in Nigeria

13. Para 2.1.2 & 2.1.3 of Guidelines for Regulation and Supervision of Credit Guarantee Companies in Nigeria

14. Para 2.1.4 of Guidelines for Regulation and Supervision of Credit Guarantee Companies in Nigeria

15. Para 2.1.5 of Guidelines for Regulation and Supervision of Credit Guarantee Companies in Nigeria

16. Para 2.2 of Guidelines for Regulation and Supervision of Credit Guarantee Companies in Nigeria

17.Para 2.3 of Guidelines for Regulation and Supervision of Credit Guarantee Companies in Nigeria

18.Para 2.4 of Guidelines for Regulation and Supervision of Credit Guarantee Companies in Nigeria

19. Para 2.5 of Guidelines for Regulation and Supervision of Credit Guarantee Companies in Nigeria

20. Para 2.6 of Guidelines for Regulation and Supervision of Credit Guarantee Companies in Nigeria

21. Para 4.4 of Guidelines for Regulation and Supervision of Credit Guarantee Companies in Nigeria

22. Para 4.1.1 of Guidelines for Regulation and Supervision of Credit Guarantee Companies in Nigeria

23. Para 4.1.2 of Guidelines for Regulation and Supervision of Credit Guarantee Companies in Nigeria

24. Para 4.1.5 of Guidelines for Regulation and Supervision of Credit Guarantee Companies in Nigeria

25. Para 4.2 of Guidelines for Regulation and Supervision of Credit Guarantee Companies in Nigeria

26. Para 4.3 of Guidelines for Regulation and Supervision of Credit Guarantee Companies in Nigeria

27. Para 9.0 of Guidelines for Regulation and Supervision of Credit Guarantee Companies in Nigeria

28. Para 10.1 of Guidelines for Regulation and Supervision of Credit Guarantee Companies in Nigeria

29.Para 8.0 of Guidelines for Regulation and Supervision of Credit Guarantee Companies in Nigeria

30. Para 12.1 of Guidelines for Regulation and Supervision of Credit Guarantee Companies in Nigeria

31.Para 12.2 of Guidelines for Regulation and Supervision of Credit Guarantee Companies in Nigeria

32. Para 11.4 of Guidelines for Regulation and Supervision of Credit Guarantee Companies in Nigeria

33. Para 13.1 of Guidelines for Regulation and Supervision of Credit Guarantee Companies in Nigeria

34. Para 13.2 of Guidelines for Regulation and Supervision of Credit Guarantee Companies in Nigeria

35. Para 14.0 of Guidelines for Regulation and Supervision of Credit Guarantee Companies in Nigeria

Originally published May 3, 2022

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.