In July 2020, the Central Bank of Nigeria issued new Guidelines on Global Standing Instruction. These guidelines relate to individuals and their loan repayment obligations. The goal in creating these guidelines was to promote greater financial system stability and improve loan recovery across the banking sector in Nigeria. This policy change was introduced to enhance the culture of credit repayment, lower Non-Performing Loans held by banks, and help identify consistent loan defaulters.

For the Global Standing Instruction to be applied, all of a borrower's bank accounts must be linked to their Bank Verification Number (BVN) and National Identification Number (NIN). Borrowers must also authorize during the loan application process that this instruction can be activated if they default on the loan. The Global Standing Instruction is intended as a last resort for creditor banks to recover past due obligations, such as principal and accrued interest but not penalty charges, from a defaulting borrower through a direct payment from deposits or investments held across participating financial institutions.

The Global Standing Instruction appears to have had a promising start thus far. According to 2022 data, Non-Performing Loans (NPL) within the sector were noted to have declined from 4.9 percent in December 2021 to 4.2 percent by December 2022, falling below the maximum prudent threshold of 5.0 percent set. This reduction in non-performing loans has been credited to write-offs of poor performing debts, restructuring of banking facilities, strong credit risk management practices by financial institutions, and adoption of the Global Standing Instruction for Institutions as reported in 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.

The Guidelines for the GSI scheme define Participating Financial Institutions (PFIs) as only those digital lenders licensed by the Central Bank of Nigeria (CBN) that are connected to the Nigerian Inter-Bank Settlement System's (NIBSS) Instant Payment (NIP) platform.

NIP is a clearing and settlement system used by banks that streamlines payments and reconciles balances between financial institutions. It acts as a neutral third party, facilitating fund transfers and ensuring all parties involved are appropriately credited or debited. By targeting exclusively CBN-licensed lenders on NIP, the GSI scheme leaves out other players in the digital lending industry not regulated by the CBN.

Digital lenders that operate under the Central Bank of Nigeria's (CBN) finance company license are not connected to the National Instant Payment (NIP) system. This is because as finance companies, they are specifically prohibited from taking deposits from the public. The CBN's Revised Guidelines for Finance Companies in Nigeria from 2014 does not state that companies with this license must participate directly in payment and settlement systems.

This generally makes these types of financial institutions ineligible to be involved in the Global Standing Instruction (GSI) initiative. The obvious result is that these companies do not have access to the mirror that shows customers' accounts and debts across one or multiple institutions. As a consequence, they are excluded from the ability to seamlessly recover loans owed to them.

Digital lending companies operating under the finance company license from the Central Bank of Nigeria (CBN) are not connected to the Nigerian Interbank Payment System (NIPS). This is because they are expressly prohibited from taking deposits from the public under the CBN's regulations. The revised 2014 guidelines for finance companies in Nigeria do not state that companies with this license must participate directly in any payment and settlement systems.

This generally makes these types of financial institutions ineligible to be involved in the Global Standing Instruction (GSI) initiative run by NIPS. The practical implication is that these companies do not have access to the NIPS interface that allows customers' liabilities to be viewed by one or multiple participating institutions. As a result, these digital lenders are prevented from the benefit of being able to seamlessly recover loans through this system.

GSI and Buy Now, Pay Later (BNPL)

Credit defaults do not solely result from failed loan deployment but also from a rapidly expanding phenomenon that allows consumers to purchase goods mainly online but also enables delayed payment, often without incurring interest. This indirect access to consumer loans is commonly referred to as Buy Now Pay Later. It is also referred to as "point of sale installment loans". Typically in BNPL transactions, the financial technology company acting as the lender pays the merchant at the time of the transaction and recovers its payments from the customer within the agreed upon period.

The Buy Now Pay Later (BNPL) market in Nigeria is experiencing increased demand as major players in the space see growth, players like Carbon Zero, CredPal, Zilla, CD Care. According to PR Newswire, the BNPL sector in Nigeria is projected to expand considerably over the next several years, with analysts forecasting a 67.4% rise from 2021 to 2028 resulting in a market size of $341.9 million.

Currently, BNPL companies are able to utilize direct debit services by automatically debiting payments from customers' bank accounts linked to their loan accounts. This enables lenders to directly withdraw repayments owed from borrowers' funds. Customers can consent to instructions permitting a biller or merchant to be paid fixed or variable amounts from their account over a set time period through their bank. However, this option does not fully protect merchants if clients fail to maintain sufficient balances, particularly when automatic debits are relied upon for repayment.

If a bank processes a standing order even when a customer's account lacks sufficient funds, the account will automatically be considered overdrawn without authorization. If the account is held at a deposit bank, the customer's standing with other banks essentially becomes visible as well. In this situation, the overdraft may be immediately resolved.

As mentioned earlier, this swift response is only possible if the bank is integrated within the NIBSS platform. Therefore, if the debit is related to a non-deposit bank, the advantage of having visibility into the customer's debt obligations at other institutions does not apply. However, a substantial portion of non-performing loans are now held by digital banks and other non-deposit banks. Since these institutions are not on the NIBSS network and the GSI cannot be used to determine if a non-performing loan exists, resolving overdrafts may be more difficult in these cases.

Closing the Gap

In order to reduce non-performing loans held by other financial institutions, it is recommended that the Central Bank of Nigeria issues a new guideline or reviews its existing Guidelines to allow digital lenders licensed under its finance companies license to participate in the Global Standing Instruction (GSI) Scheme. Alternatively, the Central Bank could create a similar program that is more appropriate. For digital lenders licensed by the Central Bank, extending the GSI scheme to cover them just requires political will. Money lenders present a slightly more complicated situation.

They are typically registered at the state level and each state usually has its own unique rules and regulations. The Central Bank may consider promoting a standard, uniform regulation or platform that provides visibility and transparency across states. Since money lenders are governed by state laws and generally outside the oversight of the central bank, incentives could then be provided to encourage their participation.

Conclusion

In conclusion, establishing a program that allows most, if not all, lenders to access borrower information through a centralized system would significantly increase the stability of the financial sector. By giving lenders of all types relevant details about prospective borrowers, such a system could help guide responsible lending decisions.

This undoubtedly would boost investor confidence and generally support increased gross domestic product growth. Any initiative that can lower credit default rates while facilitating a better business environment deserves support. The Central Bank now faces the important task of implementing such a system under the new administration.