Home Banking CBN releases guidelines for operating credit guarantee entities

CBN releases guidelines for operating credit guarantee entities

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As part of measures to increase access to finance for micro, small and medium enterprises (MSMEs) in the country, the Central Bank of Nigeria (CBN) has released an exposures draft on the guidelines for the regulation and supervision of credit guarantee companies in Nigeria.

A circular signed by the CBN director, financial policy and regulation department I.S. Tukur, noted that the guidelines were in furtherance to efforts of the apex bank to improve access to lending for MSMEs.

The guidelines provide the bases for the operation of CGCs which are meant to reduce credit risk, stimulate lower interest rates on loans and complement other initiatives of regulatory authorities aimed at stimulating lending to MSMEs.

The guidelines note that MSMEs in Nigeria face difficulties accessing credit from the formal sector with credit market characterised by imperfections, collateral constraints, information asymmetry, low profit margin, among others.

“These factors have limited access to credit due to the perceived high risk of MSMEs and where credit is granted, it is often on comparatively unfavorable terms. Credit guarantee schemes have been widely considered as one of the means of addressing the challenge of limited access to credit by MSMEs.

“This consideration stems from the attractive features of a guarantee as collateral, which include safety, liquidity and freedom from the problems associated with tangible collateral, such as obsolescence, depreciation, verification, perfection and foreclosure.

“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 the liability of a borrower in the case of default.

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