The Central Bank of Nigeria issued the Guidelines on Global Standing Instruction (GSI) (Individuals) (the “Guidelines”) in July 2020 pursuant to Section 2 (d) of the Central Bank of Nigeria Act, 2007. These guidelines were issued in a bid to promote sound financial system stability in Nigeria and to enhance loan recovery across the banking sector. The policy was introduced to improve credit repayment culture, reduce Non-Performing Loans (NPLs) in the banking industry; and identify and create a watchlist of consistent loan defaulters. For the GSI to work, all bank accounts belonging to the borrower have to be linked to their Bank Verification Number (BVN) and National Identification Number (NIN). The borrower also has to issue a mandate during the loan application process that authorizes the bank to activate the GSI in the event of a default. The GSI is designed to serve only as a last resort by a creditor bank, without recourse to the Borrower, to recover past due obligations (Principal and Accrued Interest only, excluding any Penal Charges) from a defaulting Borrower through a direct set-off from deposits/investments held in the Borrower’s qualifying bank accounts with participating financial institutions.
The introduction of the GSI seems to have been successful so far. As of 2022, NPLs in the industry were reported to have decreased from 4.9 per cent in December 2021 to 4.2 per cent in December 2022, which was below the maximum prudential requirement of 5.0 per cent. The decline in NPLs was attributed to write-offs, restructuring of facilities, sound credit risk management by banks and the adoption of the GSI as reported by This Day Newspaper.
Despite this achievement, GSI’s potential, in promoting a sound financial system in the digital lending space, seems not to have been fully utilized. In this article, we shall examine the scope of the GSI scheme and make a case for its expansion to accommodate other digital lenders (currently excluded from its application) and Buy Now Pay Later (BNPL) entities not otherwise envisaged by the Guidelines.
Participating Financial Institutions (PSI) under GSI
In Nigeria, digital lenders seeking to lend money must obtain one of several licenses: a money lenders license issued by a state government; a banking license issued by the Central Bank of Nigeria (“CBN”); or a finance company license also issued by the CBN, allowing finance companies to provide consumer and asset loans. However, it appears that the GSI scheme is only targeted towards a category of digital lenders, leaving out other players in the industry who are not licensed by the CBN. The definition of PFIs under the Guidelines seems to target only the CBN-licensed Financial Institutions that are connected to the NIBSS Instant Payment (NIP) platform. The NIP is a simple clearing and settlement platform which streamlines payments and reconciles one financial institution’s financial position with others, making it easier for banks to conduct business with one another. It acts as an umpire between banks by facilitating the transfer of funds and ensuring that all parties involved are properly credited and debited.
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Digital lenders operating under the CBN’s finance company license, are not connected to the NIP, since they are expressly precluded from taking deposits from the public. As a result, there is nothing in the CBN Revised Guidelines for Finance Companies in Nigeria 2014 (“Revised Guidelines”) that prescribes that such a licensed company participates (directly) in payment and settlement systems. This typically makes such financial institutions ineligible to participate in the GSI initiative. The obvious consequence is that such institutions have no access to the mirror that exposes customers’ liabilities to one or multiple institutions and are thus excluded from an opportunity for seamless loan recovery.
In the same vein, there is the other category of money lenders who operate under state-issued money lenders licences and by virtue of which they are totally removed from the purview of the GSI platform. A compelling justification for this exclusion is that these institutions are not under CBN regulation. By extension, the NIP established exclusively for deposit banks is invariably not available to such money lenders. The problem with such exclusion is that there is no distinction between NPL connected with a deposit bank as against NPL flowing from a Money lender. Both NPLs have an equally damaging impact on the financial system’s stability.
Left with no further option for loan recovery, some of these digital loan companies that are ineligible for the GSI Scheme, have resorted to unethical and unprofessional loan recovery means bordering on breach of their borrowers’ data privacy rights, just to recover their NPLs. Reacting to this, the Federal Competition and Consumer Protection Commission (“FCCPC”) in collaboration with other key regulators, introduced the Limited Interim Regulatory/ Registration Framework and Guidelines for Digital Lending, 2022, aimed at curbing the violation of consumer rights and ensuring the regulation of the lending space. However, this only serves to ensure the protection of consumer rights but does not provide for ways to curb privacy infringement or the high rate of loan defaults, which sometimes are deliberate acts on the part of the borrowers.
GSI and Buy Now, Pay Later (BNPL)
Credit defaults do not only result from failed loan deployment but also from a rapidly growing phenomenon allowing customers to purchase goods (mainly online) but at the same time enabling a later payment, often without incurring interest. This indirect access to consumer loans is colloquially referred to as Buy Now Pay later. It is also referred to as “point of sale instalment loans”. Typically, in BNPL transactions, the fintech company acting as the lender pays the merchant at the time of the transaction and recovers its payments from the customer within the agreed period.
The Nigerian market is experiencing an increased demand for BNPL services with major players such as Carbon Zero, PayQuart, Afterpay, etcetera. BNPL services are poised to further disrupt the traditional banking landscape and will likely see increased adoption in the future. PR Newswire reports that in Nigeria, the BNPL market is expected to grow by 67.4% to reach $341.9m between 2021-2028.
Currently, BNPL companies can make use of direct debit services against the customer’s account, which enables lenders to trigger automatic debits from borrowers’ bank accounts tied to their loan profiles. Thus, the customer can give an instruction to their bank, authorizing that a biller (merchant) is paid an amount of money over a specified period. The amount can be fixed or varied. However, this option does not protect the merchant, particularly in instances where customers decide not to fund that account with the automatic trigger option. The customer’s account will automatically be thrown into unauthorized overdraft should the bank honour the standing order in the absence of sufficient funds in the account. If these accounts are held by deposit banks the customers standing with other banks becomes automatically visible and the overdraft may be immediately redeemed.
As stated earlier, this swift action will only be possible, if the bank is within the NIP platform. Accordingly, where the debit is in connection with a non-deposit bank, the advantage of having sight of the customer’s debt obligations with other institutions is unavailable. Yet a substantial part of NPLs are now held by digital banks and other non-deposit banks. These institutions are not on the NIBSS platform, neither is the GSI available to establish the existence of an NPL.
Closing the Gap
In order to close this gap (reduce NPLs of other financial institutions), it is recommended that CBN issues a new or reviews its existing Guidelines to cater to onboarding digital lenders operating with CBN’s finance companies license into the GSI Scheme; or creates a more befitting yet similar product. With Digital lenders licensed by the CBN, all that is required is the political will to extend the GSI scheme to such lenders. With money lenders, it is slightly more complicated. They are typically registered at the state level and each state will customarily prescribe its own rules and regulation. The central bank may consider promoting a standard uniform regulation/platform that enables visibility and transparency. Since money lenders are governed by state laws and ordinarily outside the purview of the central bank, incentives may then be provided to encourage participation.
There is no doubt that creating a scheme that will enable most, if not all lenders, access the GSI will, to a large extent, strengthen the Financial System Stability. This will provide all categories of lenders with relevant information about the prospective borrower and will give an indication of whether and to whom to lend. This will undoubtedly boost investor confidence and generally assist the growth of the Gross Domestic Product. Any scheme that will reduce the credit default rate and create an enabling environment that will ease business must be encouraged. The central bank under this new administration has its work cut out for it.
Osaro Eghobamien, SAN is the managing partner at Perchstone & Graeys, Adesola Baruwa is an intermediate associate, and Anthony Obidike is an associate at the firm