Central bank unveils guidelines for credit guarantee companies

The Central Bank of Nigeria (CBN) has unveiled fresh minimum standards for the operation of credit guarantee companies (CGCs).

The document requires participating financial institutions (PFIs) to apply and obtain a guarantee from only CGCs licensed by it for any loan granted to medium and small scale enterprises (MSMEs).

The regulator also said where it is satisfied that a 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 the guidelines, there will be sanctions.

The CBN reiterated that it reserves the right to revoke a CGC licence where there is evidence of insolvency, misuse of the license, unauthorised cessation of business for a continuous period of six months.

In the new guidelines, board and board committee meetings of CGCs shall be deemed to be duly constituted where two-thirds of members are present, provided that a majority of directors at the meeting are non-executive directors.

The board shall disclose, in the corporate governance section of the annual report, the total number of board and board committee meetings held in any financial year and attendance by each of the directors.

On remuneration, the guidelines stipulate that CGCs shall align executive and Board remuneration with the long-term interests of their institutions and their shareholders.

It adds: “Levels of remuneration should not be excessive but sufficient to attract, retain and motivate executive officers, management and members of staff of the CGC. Where remuneration is linked to performance, it shall be designed in such a way as to prevent excessive risk-taking. A CGC shall have a remuneration policy put in place by the board of directors, which shall be disclosed to the shareholders in the annual report.”

The new guidelines also prohibit the MD/CEO and other executive directors from receiving sitting allowances and directors’ fees.

It added that non-executive directors’ remuneration shall be limited to directors’ fees, sitting allowances for board and board committee meetings and reimbursable travel and hotel expenses, saying non-executive directors shall not receive salaries and benefits, whether in cash or in-kind, other than these.

Where share options are adopted as part of executive remuneration or compensation, the Board shall ensure that the stock options are not priced at a discount except with the prior authorization of the relevant regulatory agencies,” the CBN stated.

The guidelines also stress that share options shall be tied to performance and subject to the approval of shareholders at AGMs.

According to the guidelines signed by Muhammad Hamisu Musa on behalf of the Director, Financial Policy and Regulation Department of the CBN, share options shall not be exercisable until one year after the expiration of the tenure of the director.

It requires the CGCS to disclose in their annual reports, details of the shares held by directors and their related parties.

Under the new rules, Medium and Small Scale Enterprises (MSMEs) must have a basic understanding of a Credit Guarantee Scheme before entering into agreements; apply and obtain a guarantee directly or through the lending PFI from a CGC licensed by the CBN; ensure full discharge of their obligations as at when due; have an understanding of all conditions relating to repayment, including monthly, quarterly or other periodic repayment plans as agreed.

They must also have an understanding of their rights in the event of early liquidation of the facility and have an understanding of all sanctions in the event of default.

The roles and responsibilities of the participating financial institutions are expected to receive and appraise loan applications submitted by their customers; apply for and obtain, with the consent of the MSME, a guarantee from only CGCs licensed by the CBN for any eligible loan; sensitize their customers on the CGC Scheme; monitor the performance of all exposures to obligors guaranteed during the guarantee period; register all eligible moveable assets with the National Collateral Registry and take the lead in the recovery of guaranteed sums from defaulting obligors post-claim payment; post-claim payment, realise all collaterals used to secure MSME loans and apply the proceeds as stipulated in the relevant contracts; and render periodic returns as may be specified by the CBN from time to time.

The rules propose CGC shall not incorporate or register its name with the Corporate Affairs Commission (CAC) until an AIP has been obtained from the CBN, a copy of which shall be presented to the CAC for registration.

Requirements for Granting of Final License are not later than six months after obtaining the AIP, the promoters of a proposed CGC shall apply for the grant of a final licence to the CBN.

The application shall be accompanied by the following – a non-refundable licensing fee of N1 million 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; approve the appointment of External Auditors; Issue ‘No Objection’ to annual audited financial statements of CGCs before presentation at the Annual General Meeting (AGM) and subsequent publication; Approve change(s) in the CGC’s organizational structure before its implementation; and Exercise any other powers in line with the BOFIA 2020, the CBN Act or any other applicable law.

Under permissible activities ACGs may carry out the following: provide guarantee for risk assets of Participating Financial Institutions; render advisory services for financia] 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 as may be prescribed by the CBN from time to time.

Non-Permissible activities
ACGC shall not carry out 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.