The Central Bank of Nigeria (CBN) in an effort to boost Micro, Small and Medium Enterprises (MSMEs) access to credit, has developed guidelines for regulation and supervision of credit guarantee companies in Nigeria.
This is according to a circular titled “EXPOSURE DRAFT of GUIDELINES FOR REGULATION AND SUPERVISION OF CREDIT GUARANTEE COMPANIES IN NIGERIA,” signed by I.S. Tukur, Director, Financial Policy and Regulation Department.
“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, hereby issues the following Guidelines to provide for the regulation and supervision of Credit Guarantee Companies (CGCs) in Nigeria.” – CBN
The guideline would serve as a regulatory foundation for credit guarantee firms seeking to minimize credit risk, promote lower interest rates on loans, and complement other regulatory measures targeted at promoting MSMEs.
What is CGC?
A credit guarantee company (CGC) is a financial entity licensed by the CBN with the primary goal of protecting banks and other lending financial institutions from obligor default.
Finance guarantee programs have long been seen as one method of resolving the problem of MSMEs’ limited access to credit. This is based on the benefits of using a guarantee as collateral, which includes safety, liquidity, and the absence of issues that come with actual collateral, such as obsolescence, depreciation, verification, and foreclosure.
Credit Guarantee Companies (CGCs) are anticipated to offer lenders with third-party credit risk mitigation by absorbing a percentage of the lender’s losses on loans issued to Nigerian MSMEs in the event of default. A CGC guarantee provides a legal pledge to discharge a borrower’s debt in the event of failure.
Why this matters
In developing nations, Micro, Small, and Medium Enterprises (MSMEs) have trouble getting financing from the official sector. Market flaws, collateral limitations, information asymmetry, and poor profit margins, among other things, define MSMEs’ credit markets in Nigeria. Due to the perceived high risk of MSMEs, they have limited access to financing, and when credit is given, it is frequently on comparably unfavorable terms.
As a result, the CBN’s action is laudable, as MSMEs are a big contributor to the growth of the Nigerian economy and a major employer of labour. This initiative is anticipated to enhance informal sector access to financing and help the Nigerian economy thrive.