Access to credit in Nigeria has been low for a while, with the Central Bank of Nigeria affirming that only 5.3% of the adult population have access to finance.
There are many reasons for this including high interest rates deterring borrowers and high rates of default on loans deterring creditors.
In a bid to reduce the high rate of defaults by borrowers, enhance loan recovery by financial institutions and generally improve creditor confidence in Nigeria, on July 13, 2020, the Central Bank of Nigeria (CBN) released the Guidelines[i] on Global Standing Instruction (the “Guidelines”). Below are key points from the Guidelines.
What is a Global Standing Instruction? Global Standing Instruction (GSI) is a mandate or an instruction to be executed by a borrower authorizing financial institutions to recover a borrower’s debt from any or all accounts maintained by that borrower across various participating financial institutions through a direct set-off from deposits/investments held in those financial institutions.
What Financial Institutions can offer a GSI to a Borrower? All financial institutions in Nigeria licensed by the CBN including commercial banks, Microfinance banks, finance companies, mortgage banks, and investment banks (“Financial Institutions”).
Does it apply to Individuals or Companies? The current guidelines apply to borrowers who are individuals and not companies. We expect that guidelines for company debtors would be issued by the CBN in due course.
How does the GSI work? Borrowers are to execute a GSI mandate/authorization in hard copy or digital when taking a loan from a Financial Institution. Where the Borrower defaults on the loan, the Financial Institution would be entitled to deduct the money owed plus interest due from any other personal account, joint account or child account in any other Financial Institution, linked to the borrower’s BVN (Bank Verification number)[ii].
When can a GSI be triggered? Where a Financial Institution is unable to recover debt through other means, the institution may trigger the GSI and the Nigerian Inter-Bank Settlement System will proceed to debit the Borrower’s accounts across various Financial Institutions. A GSI is to serve as a last resort by a Financial Institution and can only be used to recover the principal loan amount and accrued interest only (not penalty interests).
Can a GSI be triggered over a joint account? Yes. However, the CBN may need to clarify how GSIs are to work in relation to joint accounts. Where a GSI is triggered over a borrower’s joint account with a third party, how would the rights of the third party to the funds in the account be protected?
What happens if a GSI is triggered in error? The Guidelines provide for penalties where it is established that a Financial institution breached the provisions of the Guidelines. For example, where a Financial Institution activates a GSI in error, the bank will pay a flat fine of ₦500,000.00 and bear all liability from such erroneous GSI activation.
When will the GSI take effect? The Guidelines are to take effect from August 1, 2020 and will be applicable on all loans granted from August 28, 2019.
The GSI is a good initiative which should help improve creditor confidence in the Nigerian credit system. It would also be beneficial to Fintechs in Nigeria who utilize microfinance bank licences[iii] to offer credit facilities such as payday or small business loans. Fintechs/Creditors who offer loans with the use of a moneylender’s license[iv] are, however not permitted to use GSIs. Since such money lenders play a major role in improving access to credit in Nigeria, particularly to individuals, it would be useful for similar regulations to be put in place for their benefit.