August 5th, 2014 4.55PM/CBN
In a bid to accelerate the pace of development of the Nigeria economy and realization of the key role of some critical sectors in the process, the Federal Government of Nigeria has over the years established development finance institutions (DFIs) to provide financial interventions in the identified sectors, targeting micro-, small- and medium-size enterprises (MSMEs), to complement the efforts of banks and other financial institutions (OFIs) in that regard. However, due to limited access to long-term and low-interest funds, in addition to other factors, the DFIs have recorded limited successes. Consequently, the Federal Government in collaboration with development partners and international financial institutions (IFIs) decided to sponsor the establishment of a Wholesale DFI (WDFI) to bridge the gap and to increase the availability and access to finance, in particular, for MSMEs. The benefits of WDFIs are documented and acknowledged in both developed and emerging markets.
In support of this initiative, the Central Bank of Nigeria (CBN) has decided to develop this Regulatory and Supervisory Guidelines to provide a level playing field for participants in the DFI subsector and to further direct private capital to participating financial institutions (PFIs). These Guidelines will provide framework for licensing, regulation, supervision and operations of both WDFI and Retail DFI (RDFI). Rather than compete directly with RDFI at the retail level, WDFI shall only provide wholesale financial products and facilitate technical assistance to eligible participating financial institutions (PFIs) throughout Nigeria.
As with all financial institutions regulated by the CBN, DFIs shall be subject to regulation and supervision by the CBN under the Banks and Other Financial Institutions Act, CAP B3, Laws of the Federation of Nigeria, 2004 (herein after referred to as “BOFIA”). These guidelines are designed to be consistent with CBN’s existing regulations for all licensed financial institutions and to ensure that DFIs operate in a safe and sound manner.
The guidelines are arranged in twelve sections, beginning with definition and objectives of DFIs, followed by powers and duties of the CBN with respect to the operations of DFIs. The third and fourth sections highlight the permissible and non-permissible activities, and the licensing procedure and requirements, respectively. The fifth section deals with corporate governance requirements, while section six focuses on sources of funds for DFIs. Section seven and eight provide for rendition of statutory returns and prudential requirements, respectively. Other regulatory approvals, examination reporting and off-site surveillance, and administrative sanctions and actions are covered under sections nine, ten and eleven, respectively. Section twelve itemizes the annexures to the guidelines.
1.0 Definition and Objectives
Development Finance Institutions are specialised financial institutions established with specific mandate to develop and promote key sectors of the economy considered to be of strategic importance to the overall socio-economic development objectives of the country.
The objectives of DFIs are:
•Fund MSMEs for economic development.
•Foster growth in sustainable businesses.
•Reduce poverty and improve quality of lives.
2.0 Powers and Duties of The Central Bank Of Nigeria With Respect To Development Finance Institutions
In line with the relevant provisions of BOFIA and CBN Act, 2007, Cap Bx, Laws of the Federation of Nigeria (LFN) (hereinafter referred to as the CBN Act), the CBN shall exercise the following powers with respect to DFIs:
(a) To license the DFIs.
(b) To determine the DFIs minimum capital requirements.
(c) To approve the appointment of Board and top management of DFIs.
(d) To regulate and supervise the DFIs business operations, which include:
i. Determining capital adequacy, minimum liquidity and other prudential requirements
ii. Prescribing minimum criteria upon which credits may be extended.
iii. Prescribing permissible activities.
iv. Prescribing eligible assets or portfolio of eligible assets.
v. Conducting on-site and off-site supervision.
vi. Imposition of sanctions for infractions.
3.0 Permissible and Non Permissible Activities
3.1 Permissible Activities
DFIs may engage in any of the following activities:
a. Provide finance and credit facilities to eligible borrowers
b. Refinance MSMEs loans.
c. Invest in government securities.
d. Invest in any other securities as may be approved by the CBN from time to time
e. Issue guarantee for loans.
f. Issue bonds and notes to fund its operations.
g. Provide technical assistance to borrowers (PFIs and MSMEs) on Credit and Business Development related activities.
h. Other activities as may be prescribed by the CBN from time to time.
3.2 Non-Permissible Activities
DFIs shall NOT engage in the following activities:
a. Granting retail loans or direct lending, if a WDFI.
b. Acceptance of demand, savings and time deposits, or any type of deposits.
c. Taking proprietary positions in real estate construction other than for its own business.
d. Management of pension funds/schemes.
e. Project management.
f. All other activities NOT expressly permitted by the CBN.
4.0 Licensing Procedure and Requirements
The procedure and requirements for grant of licence to promoter(s) of a DFI shall be the same as specified for banks under BOFIA and any other regulations issued by the CBN.
Any promoter(s) seeking a licence to operate a DFI in Nigeria shall apply in writing to the Governor of the Central Bank of Nigeria. The application shall indicate the class of DFI (RDFI or WDFI) and be accompanied by the following documents:
A. A non-refundable application fee of N100,000 [one hundred thousand Naira only] or any other amount as may be determined from time to time and payable to the CBN.
B. Evidence of proposed name reservation with CAC
C. A detailed feasibility report containing information that shall include:
i. The objectives and aims of the proposed DFI (including the vision & mission statement);
ii. The strategy for achieving the objectives and aims;
iii. The branch expansion program [if any] within the first 5 years;
iv. The proposed training programs for staff and management, as well as succession plan;
v. A five-year financial projection for the operation of the DFI, indicating expected growth and profitability;
vi. Details of the assumptions which form the basis of the financial projection;
vii. Enterprise-Wide Risk Management Framework;
viii. The organizational structure of the DFI indicating the functions and responsibilities of the top management;
ix. The composition of the Board of Directors and interests represented;
x. The conclusions based on the assumptions made in the feasibility report.
D. A copy of the draft Memorandum and Articles of Association (MEMART);
E. A list (in tabular form) showing the names of the promoters, amounts subscribed, their businesses and residential addresses and the names and addresses of their bankers, with evidence of payment and bank statement of account attached.
F. Curriculum vitae of each promoter or their nominees, in the case of corporate investor(s);
G. The business profile of corporate investor(s), if any;
H. Evidence of payment of N5 billion for RDFI and N10 billion for WDFI to the CBN via NIBSS or any other acceptable payment channel, being minimum capital deposit which will be refunded with interest after the proposed institution obtains its final licence; and
I. Draft detailed manual of operations namely:
a) Credit Policy that describes the eligibility requirements for its borrowers, the products to be offered by the DFI, including the policies, procedures, terms and conditions for issuing loans and guarantees, and sets forth the standards to be used by the DFI to manage its credit risk. The Credit Policy should, at a minimum:
i. Specify that the DFI shall only engage in the extension of credit to borrowers.
ii. Specify procedures, organizational structure, and the criteria to be applied in evaluating applications for loans, credit lines and guarantees.
iii. Specify the levels of collateralization, valuation of collateral, and the discounts that are to be applied to any collateral values securing credit extensions.
iv. Specify the standards and criteria for, and timing of, periodic assessments of the creditworthiness of PFIs, obligors, or other counterparties, and for the establishment of credit limits.
v. Specify the fees to be charged for obtaining or pre-paying term loans, including any schedules or formulas pertaining to such fees.
vi. Discuss the standards and criteria for pricing DFI products, including any differential pricing of loans and guarantees.
b). Asset/Liability Management Policy (ALM Policy) that highlights the DFI’s permissible assets and liabilities, sets the standards for managing its interest rate risk and liquidity risk, and delineates the composition, duties, and operational procedures for the DFI’s Asset/Liability Management Committee.
c). Financial Management Policy that highlights the DFI’s financial management policies and procedures, and system of internal controls. The Policy should include, at a minimum:
i. Accounting policies and principles.
ii. Roles and responsibilities of the senior management officials responsible for financial management.
iii. Treasury operations, including cash management, vouchers, payroll and procurement.
iv. Financial record keeping and reporting.
v. Auditing and periodic testing of internal controls as it relates to financial management.
d). Anti-Money Laundering and Combating Financing of Terrorism (AML/CFT) policy.
e) Code of Ethics and Business Conduct that specifies high standards for honesty, integrity, and impartiality for the DFI’s employees and directors and provides guidance on avoiding conflicts of interest, self-dealing, and other types of impropriety as specified by the CBN and other appropriate authorities. Every director and officer of the DFI shall be required to sign the Code of Ethics and Business Conduct. Among its provisions, the Code shall establish, for DFI officers, the maximum amounts of allowable borrowings from, and share-holding in all licensed financial institutions. The Code shall also require that:
i. any contact related to the business of the DFI between an officer of the DFI and a member of a political body or an official of a Government institution should be reported to its Ethics Committee
ii. DFI directors and officers shall disclose to the DFI’s Ethics Committee, at least annually, any outstanding loans from, and share-holding in all licensed financial institutions, and
iii. DFI officers inform the Ethics Committee, and receive its consent, before acquiring any shares in, or loans from licensed financial institutions.
Following the receipt of an application with complete and satisfactory documentation, the CBN shall appraise the application and communicate its decision to the applicant within 90 days. Where the CBN is satisfied with the application, it shall issue an approval-in-principle (AIP) to the applicant.
No proposed DFI shall incorporate/register 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 CAC for registration