State Guarantee Scheme for Bank Loans to Businesses in Cameroon

State Guarantee Scheme for Bank Loans to Businesses in Cameroon

By Ferdinand Doh Galabe. Partner

I - Introduction

Traditionally, risk in credit markets is often assumed at loan origination by third parties in return for a fee. Insurance, various guarantees, and external credit enhancements protect the owner of the loan against borrower default. Governments have a role to play in mitigating credit risk and improving bank lending standards by guaranteeing loans.

Public loan guarantee schemes (PGSs) are a tool that many governments use to improve access to credit for sectors of the economy that would otherwise have difficulties in borrowing money. The ultimate goal is often to accelerate economic growth, and support output and employment. The concept is simple: in case of a business' default on the loan, the government covers all (or some) of the bank losses, thereby making the loan more attractive for lenders, especially during times of uncertainty or crisis.

On July 17, 2023, Cameroon’s Minister of Finance issued Order no 638/MINFI fixing the conditions for granting and the procedures for implementing the state guarantee to public establishments and public and private companies, for domestic loans for the financial year 2023.

Under this Order, the state portfolio guarantee is a legal commitment by which the State of Cameroon grants its guarantee to a person whose borrowing operations it wishes to facilitate, thereby guaranteeing to the lender the repayment of the guaranteed debt in the event of default by their debtors.

This Order was followed up by the long and much-talked about portfolio guarantee or guarantee line agreement entered between the State of Cameroon and 15 banks and 37 microfinance institutions which was recently signed on 16 August 2023. The list of banks and microfinance entities partnering with the state of Cameroon within the framework of the agreement is accessible on the website of Cameroon's Ministry of Finance here. For a full list of licensed Cameroonian banks click here.

This agreement enshrines the effective implementation of the State Guarantee Facility for businesses and some public entities, as provided for in the 2023 Public Finance Law, which empowers the Government to grant the State's guarantee to public establishments and public and private businesses, in respect of domestic loans totaling FCFA 200 billion (€ 305 million).

According to Cameroon’s Minister of Finance, through this state guarantee facility, the State intends to improve the quality and increase the volume of credit granted to private companies, especially SMEs.

This mechanism makes it possible to partially cover the credit risk of businesses, which is more pronounced among SMEs. The reduction in credit risk should therefore lead to a fall in the risk premium on guaranteed loans.

The State will therefore provide its guarantee to these 15 banks and 37 microfinance institutions to facilitate borrowing transactions, by guaranteeing to these lenders the repayment of the guaranteed portion of the debt in the event of default by their debtor.

II - The nuts and bolts of the State Guarantee

This state guarantee is capped at 30% of the sums due on the due date for large enterprises and up to 70% for SMEs.

The July 17th Order affirms the object of the facility to be to ease the grant of loans to businesses at more favorable interest rates and maturity dates, to enable the optimal development of their activities.

III – Criteria for Eligibility

Businesses eligible to the guarantee are those operating in one or more of the priority sectors earmarked by the National Development Strategy Paper 2020-2030 (SND30) in support of the import substitution policy and the reinforcement of local exportation capacities.

Moreover, beneficiaries must be solvent businesses registered under Cameroon law majority held by Cameroonians. Operations relating to the refinancing, restructuring, refund and buyback of existing debts are not covered by the facility.

Per the Order, the priority sectors earmarked by the National Development Strategy Paper 2020-2030 (SND30) in support of the import substitution policy and the reinforcement of local exportation capacities, include: agro-pastoral and fisheries, agro-industry, energy, forestry, textile, handicrafts, metallurgy and steel, pharmaceutical chemistry, building and construction, real estate development, water recycling and sewerage, digital, hotel business, tourism and entertainment, and restaurant business.

IV - Formalities for applying for the state-guaranteed loans

To benefit from state-guaranteed loans, eligible businesses must file an application with one of the 15 banks and 37 microfinance institutions accredited by the state.

These banks then examine the application according to banking practices and usages and give their prior approval to the loan application and transmit same to the Minister of Finance, for his approval.

The Minister of Finance then transmits the file to the National Committee on Public Debt which has seven business days to provide a reasoned opinion to the Minister on whether or not the Minister of Finance should grant the loan to the applicant.

If the Minister of Finance approves the request, he issues a guarantee certificate which is served on the lending institution.

V - State Guarantee Fees

The State charges guarantee fees representing 1% and 1.5% of the amount of the loan for public businesses and private businesses, respectively. The disbursement of the loan is subject to the payment of this fee into the account of the National Sinking Fund (CAA).

VI - The Process of Calling on the State Guarantee to answer for the default of the debtor

This has to do with the lending bank or microfinance institution, who must ensure that certain conditions are satisfied before they can call on the guarantor to answer for the default of the borrower.

The cumulative prior conditions which a call must satisfy include:

• Proof that the debt has become due for repayment evidenced by the statement of the closure of the account following the borrower’s default
• Proof that the lender has sent formal notices to pay to the debtor who has not answered them
• Proof that the unpaid loan was classified from good debt to bad (overdue) debt according to the prudential regulations in force in the banking profession in Cameroon
• Proof that the lender is not responsible for the default in the debt repayment

Whenever the lender is unable to demonstrate the existence of any one of the above conditions, the call on the state guarantee shall be unfruitful, that is turned down by the state.

VII - Call deadline

The lender may not make the call before ninety (90) days have passed since the classification of the debt, in the records of the bank, from good debt to bad debt and the date of the drawing of the statement of closure of the borrower’s bank account.

VIII - The Application for Compensation

Upon the default of the borrower, the lender must transmit to the Minister of Finance an application for compensation following the borrower’s default. This application is made on a form provided by the Ministry of Finance.

Upon receipt of this application, the Minister of Finance has up to thirty (30) clear days to request for further documents or information from the bank or microfinance and proceed to issue a decision on the acceptance or rejection of the call.

Where the Minister of Finance issues an acceptance of the call, the State has up to sixty (60) days to settle the lender.

IX - Deadline to invoke the state guarantee

The guarantee must be invoked within one hundred and eighty (180) days following the due date of the credit or lending agreement between the lender and the borrower and 180 days after the due date of the guarantee agreement between the state and the lending entity.

All claims by the lender relating to the default of borrowers which are made after the above deadlines are deemed inadmissible.

X – The State financial liability under the guarantee facility

Under the provisions of Section 11 of the Order, the State’s liability is limited to refunding its share of the debt at the time of the closure of the account. This debt includes the residual or remainder of the principal plus a maximum of three months of unpaid installments.

This means that under this guarantee facility, the state is not liable for the payment of any interests, penalties or other charges resulting from late payment.

Otherwise, the final provisions of the Order requires that the state should make annual budgetary provision at least equivalent to its current guaranteed loans, to cover eventual calls, except in cases of force majeure.

XI – Droit de suite

The answer by the state of the call of the lender does not exempt the lender from the responsibility of judicially pursuing the recovery of the debt from the borrower, under pain of reimbursing to the state the amount paid to the lender by the state.

The Order of the Minister of Finance goes so far as to requiring from lenders who are judicially pursuing the reimbursement of unpaid debts from the hands of the debtor, to provide the state with court hearing reports.

In case of recovery by the lender, the latter is obliged to repay the state, on first call, on a pro rata basis, after deducting recovery costs. Such repayment s must be done at the latest ninety (90) days following effective recovery.

The state may equally request from the lender the assignment of part of the debt, in which case the state may, itself, pursue the recovery of the debt.

Another way that the state can ensure the recovery of guaranteed debts is by recoursing to the public body responsible for recovering state debts. This is done in agreement with the lender and for a fee.

XII – Closure of the guarantee process

After the state has settled the lender, the latter must issue to the state, within ninety (90) days, a clearance certificate confirming that the state has no outstanding liabilities with the bank.

Also, when the debtor settles his debts towards the lender, the latter must restitute the guarantee certificate to the state.

XIII – Force majeure

The lender cannot invoke the guarantee of the state where the debtor defaulted in his repayment of the loan as a result of a circumstance of force majeure.

Under Section 1218 of the Cameroon Civil Code, force majeure is defined as an event beyond the debtor's control, which prevents the debtor from performing his obligation, and which could not reasonably have been foreseen when the contract was concluded and the effects of which cannot be avoided by appropriate measures. The Minister’s Order cites events such as natural disasters, climatic events, and civil war.

Click here to access Order no 638/MINFI fixing the conditions for granting and the procedures for implementing the state guarantee to public establishments and public and private companies, for domestic loans for the financial year 2023.

For more on banking and financial law click here and here.

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