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11 Practicable Ways MSMEs Will Benefit From New CBN Guidelines for CGCs

Last Updated on August 15, 2021 by Ope Quadri

Micro, Small, and Medium Enterprises (MSMEs) can never forget the economic effect of the covid-19 pandemic on their businesses. But the business policies of Nigeria’s apex bank are most likely to put smiles on the faces of such business owners going by the latest 27-page guidelines handed down by the Central Bank of Nigeria (CBN) for the registration and supervision of Credit Guarantee Companies (CGCs) in Nigeria.

We’ve seen how the CBN stepped out from its regulatory roles to get involved in more micro-financing of SMEs as we earlier noted at: https://infomediang.com/cbn-sme-loans-in-nigeria as one of the strategic measures of the post-pandemic economic recovery of the Buhari-led government.

What is CGC?

Credit Guarantee Companies, CGC for short, is an institution certified by the CBN with the primary objective of making provision for guarantees to financial institutions, money lenders, and others in the Financial Services Industry (FSI) against the risk of default by obligors.

The latest guidelines are aimed at improving lending to MSMEs, Director of Financial Policy and Regulation Department at CBN Mr. Ibrahim Tukur said in a statement on August 10, 2021.

Is it something to rejoice about?

Issuing guidelines isn’t the problem, but the implementation of such rules by the concerned agencies is germane to the success of the government.

If the CBN followed up on the guideline to ensure its full implementation, it’d be something for the small business owners to rejoice about, as such, below are the key roles the CGCs will be playing:

CGCs will be providing 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.

“In recognition of the role of guarantee schemes in facilitating lending, the Central Bank of Nigeria (CBN) in 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,” the guideline titled, “Exposure Draft of Guidelines for Regulation and Supervision of Credit Guarantee Companies in Nigeria” and signed by Tukur says.

How new CBN regulations on CGC will help MSMEs grow

1) Improve access to credit for MSMEs

2) To reduce credit risk in lending by providing guarantees to  Participating Financial Institutions

3) To stimulate lower interest rates on loans, this is important because the interest rates on credit facility at the moment isn’t sustainable for MSMEs

4) To promote flexible collateral requirements by PFIs

5) Encourage the new business formation

6) To encourage the development and expansion of existing small businesses.

7) To accelerate economic growth across Nigeria.

8) To reduce the rate of unemployment among young Nigeria graduates who want to start  business but are hampered by the credit bottleneck in accessing loan

9) To foster sustainable and inclusive growth

10) To improve risk management in the financial system, thereby making it a win-win situation for the lending institutions, the borrowers who are small business owners, and the Nigeria economy as this would resort to a stronger Gross Domestic Product (GDP)

11) To reduce credit risk, stimulate lower interest rates on loans and complement other initiatives of regulatory authorities to expand lending to MSMEs.

Our thoughts:

Micro, Small, and Medium Enterprises (MSMEs) face difficulties in accessing credit facilities from the formal sector in Nigeria, most especially when it comes to collateral as it’s highlighted in one of our guides at: https://infomediang.com/loan-collateral

But hopefully, the new guidelines for the operation of CGCs will fill that gap and give more room for SMEs to grow faster through access to soft-loan.

The new guideline is also designed to reduce the market imperfections for MSMEs in accessing credit facilities in Nigeria

The unbearable interest rate on SME loans leads to low-profit margins. How exactly would a startup make a profit from a loan that has a 23% interest rate per month?

We hope the new rule aims to solve that and create an enabling environment for them to access funding with a low interest rate, that’s the way to grow.

While the interest of the small business is the centre of the new guideline, it’s also paramount to note that Credit Guarantee Companies will set Nigeria MSMEs on a new economic footing.

Source:

  • cbn.gov.ng/Out/2021/FPRD/MERGED%20CIRCULAR%20ON%20CGC.pdf

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