Central Bank issues operational guidelines for development finance institutions


The Central Bank of Nigeria, CBN, on Tuesday issued regulatory and supervisory framework for the operations of the country’s Development Finance Institutions, DFIs.

The framework designed to guide the activities of the DFIs includes the dos and the don’ts for the operators as well as the sanctions against erring institutions.

The DFIs 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 of the country.

Under the guidelines, the DFIs are permitted to engage in activities which would provide finance and credit facilities to eligible borrowers either by way of refinancing of loans to medium and small-scale enterprises, MSMEs, issuance of guarantees for loans and issuance of bonds and notes to fund their operations.

The DFIs would also be expected to invest in government and any other securities approved by the CBN as well as offer technical assistance to borrowers on credit and business development related activities.

However, the wholesale DFIs are barred from granting retail loans or getting involved in direct lending activities; management of pension funds/schemes or involved in project management. They are also not to accept on demand any type of deposits, including savings and time deposits, or taking proprietary positions in real estate construction other than for its own business.

Specifically, the guidelines, which stated that DFIs would only engage in the extension of credit to borrowers, also spelt out the procedures, organisational structure, and the criteria to be applied in evaluating applications for loans, credit lines and guarantees.

It also specified the standards and criteria for, and timing of, periodic assessments of the creditworthiness of primary finance institutions, PFIs, obligors, or other counterparties, and for the establishment of credit limits.

The Asset/Liability Management Policy, ALM policy, that highlights the DFI’s permissible asset 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.

The two categories of the DFIs (wholesale and retail) require a minimum capital of N10 billion and N5 billion respectively to become operational.

On corporate governance requirements, the guidelines vest the ultimate responsibility for the management of the DFIs on their Board of Directors, which is expected to have a minimum of seven and a maximum of 15 members.

The number of the non-executive directors, according to the guidelines, should be at least twice the number of the executive directors, with the appointment of both subject to the approval of the CBN.
The tenure of the executive directors of the DFIs should be a fixed term of not more than 5 years, subject to a renewal only once, while non-executive directors should serve for a fixed term of not more than 4 years, renewable only twice.

“For the avoidance of doubt, the maximum tenure of an executive director shall not exceed a total of 10 years, while a non-executive director shall not serve for periods exceeding 12 years in total,” the guidelines stated.

Any executive director who has served two 5-year terms may equally serve as Managing Director, if so appointed, for the maximum of two 5-year terms, with a combined maximum tenure of 20years, the guidelines said.

On collateral credit policies, DFI’s credit extensions, guarantees or other products must be secured by PFI collateral, while PFI-originated eligible loans are to be collateralized to be eligible for DFI financing or refinancing.

Any DFI found to be operating without a valid license risk outright closure and prosecution of its promoters, while those engaging in activities outside the approved business would be liable to a fine of N100,000 for each day of the default, subject to a maximum of N2,000,000. In addition, the institution would forfeit the estimated profit.

DFIs have always been there 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.

However, limited access to long-term and low-interest funds resulted in DFIs recording limited successes.

The establishment of wholesale and retail DFIs was aimed at bridging the gap and increasing access to finance, particularly for MSMEs.

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