Making GSI available to every lender would be the CBN’s smartest decision

The biggest mistake CBN has made, despite its commendable and spirited efforts to get credit into the hands of every Nigerian, was to lock out non-CBN licensed lenders from accessing the global standing instruction (GSI) to recover loans.

GSI is one of the most powerful and currently impotent tools ever created by CBN to support the credit industry.

Here it is; no country can grow without credit. Credit grew the leading global economies. For instance, when China set out to transform its economy, introducing credit to stimulate the manufacturing and tech industries was one of the most brilliant things they did. Funding their export was probably the smartest thing ever.  

The reality is that Nigeria and other underdeveloped countries are doing poorly because there is no credit, and there is a massive credit gap, even at the consumer and SME levels.

If there’s such a massive credit gap lenders can make money from, why aren’t traditional and digital lenders tripping over themselves to avail credit to the over 100m adults? The simple answer is that Nigerians won’t pay back, and there is nothing any lender can do about it. You can jump, shout, scream, etc., but nothing will happen.

Nobody needed to tell lenders to go super risk averse, which has led to stunted economic growth.

It means a young mother can’t quickly pay school fees, forever conscripting her kids to a cycle of poverty powered by illiteracy. It means the young man with a medical emergency can’t get the treatment he needs, cutting short a life of fulfillment and glory. It also means SMEs that needed short-term finance never reached them; all the value they could have created was never realized.

Then came along the CBN with the GSI to address this problem. But so far, D- in scoring.

How does the GSI work?

The GSI is a CBN-led initiative created to help banks and other financial organizations recover unpaid loans from persistent debtors, but only as a last resort. The core of the GSI proposition is one of the smartest things the CBN and banks have ever pulled off. 

Despite having the means to repay their debt, we can’t ignore the reality that many borrowers refuse to do so and choose to evade their obligations. GSI allows a lender (a bank) to request for a borrower’s accounts in other banks to be debited when the borrower has defaulted, but the lender suspects that the borrower has funds elsewhere. 

It requires that all bank accounts be linked to the borrower’s bank verification number (BVN). The borrower issues a mandate during the loan application process that authorizes the bank to activate the GSI in the case of default. This mandate is valid for as long as the loan remains unpaid, so the banks can keep debiting the defaulting borrower until their loan obligation is fully met. 

Given this tool’s power to protect borrowers and abuse, there are strong penalties for misusing the GSI.

Why hasn’t GSI fixed the problem?

Would introducing the GSI would have been the secret ingredient to make credit blow in Nigeria, finally? Nah. Banks are too shy to use this for reasons I’m not ready to air here. Besides, bankers are not used to consumer loans, so they don’t care.

The small credit Nigeria has is driven by money lenders and other digital initiatives. 99% of them are outside of CBN’s purview. Of course, getting licensed by the CBN is so hard that most people with common sense won’t even attempt it. It’s harder than getting a seat to go to Mars. Hello Elon?

So we’re at an impasse.

But let’s take a step back. CBN should be more interested in the growth of loans and the economy, irrespective of who gives the loan.

Here’s what the CBN can do

The GSI is too impressive a creation to let it go to waste. There are a few things CBN can do to increase its effectiveness exponentially. 

Opening up the GSI to everyone, whether licensed by CBN or not, would be a big step in the right direction. If possible, it could even be opened up to individual lenders. 

Before you scream “abuse by lenders”; the penalties for misusing the GSI offer protection to borrowers who are targeted unjustly.

An immediate benefit is that to use the GSI, loans have to be registered on the Credit Risk Management System (CRMS) when a loan is granted. The CRMS is a central database that contains consolidated credit information on borrowers and their debt obligations across banks and other financial institutions. It’s almost a Credit Bureau. The CBN mandates financial institutions to enter all outstanding debts with a minimum value of ₦1 million and update the status of these debts every month. Before extending credit facilities to any borrower, the financial institution must also conduct a status inquiry on the borrower’s existing debt obligations in other financial institutions via the CRMS to ensure they can repay and have not abandoned their obligations elsewhere.

Additionally, CBN could make a few more adjustments that help everyone. They could allow GSI as a primary payment method; there’s no need to wait until the loan defaults. CBN could also charge a token for lenders to pay when they use the service since it creates value for everyone on the chain.

CBN has all to gain and nothing to lose. They get to see all the loans via the CRMS. That data helps the CBN, regulators, and other stakeholders make better-informed macro decisions and strategies. This way, the CBN  helps enforce consequences. Nigerians who choose not to pay back loans do so because there is little to no enforceable consequence for their harmful behavior. A loss reduction for lenders will follow; this will also crash the interest rate since the risk premium will also reduce. All these will make for a healthier credit market, hopefully stimulating economic growth. This is something I’d like to believe the CBN can get behind. 

However, this may also backfire: if too much cash is suddenly available, it could lead to severe inflation.

Considering how much there is to gain from these adjustments, it makes sense for CBN to pursue this line of action, and it’s ultimately beneficial to everyone except those who don’t want to repay their loans. And why should we decide based on what’s good for the bad guys anyway?

Is proof of funds a fraud?

The proof of funds loan is the most important financial product to have impacted almost 100,000 middle-class Nigerians over the last two years. It has been the foundation to enable most Nigerians that have achieved the “Nigerian dream” to japa

But could this be the biggest fraud of all time? 

What is proof of funds?

This is a signed official statement of a bank account that a student or an immigrant has the funds to settle or take care of themselves in a foreign country. Embassies have been demanding this for centuries, especially the UK, Canadian and Australian embassies. 

What’s the genesis?

Let’s understand that to say our economy is battered and the country itself is messed up is an understatement. It’s expected for anyone with a shred of sense to run for their lives. Maybe if I didn’t think staying in cold weather too long would kill me, I would be running too.

The hitch is with a bad economy; people don’t have the money to provide proof of funds. Let’s think about it; If they had thousands of pounds stashed away somewhere, they might not be so desperate to run off to a foreign land in search of milk and honey. 

This is where the smart lenders entered the game. 

How does it work?

Lenders saw an opportunity to provide those with migration plans with a profitable loan product. Tons of lenders do this. They give individuals the large loan needed to show proof of funds to the embassies.

You’re probably wondering what’s stopping Nigerians from simply taking this loan and using the money to japa, never to be seen again, the same way they treat other loans. Well, the bank account containing the loan is controlled by an internal bank friend collaborating with the lender. The account is locked, so the borrower has no access to the funds. The money only belongs to you on paper.

If you take out a loan like this, you pay monthly interest in the region of 3%. So proof of funds of £20,000 means ₦20 million (yeah, a pound is about ₦1,000) and ₦600 thousand per month for six months. Good luck to all who set out on this journey.

Is proof of fund fraud?

Now let’s do a quick English language class. What exactly is fraud? The answer: a false representation of facts. The embassy has requested confirmation that you have funds to support yourself when you make the big move to their country. But you borrowed money that you definitely don’t have to prove, deceiving the authorities. 

It’s a fraud. No two names.

Take it easy; I’m not here to judge. I, too, did this when a family member was going for a post-graduate program. I used my boss’ account as a guarantee of funds. Don’t quote me; I will deny you. 

What would probably happen? 

As everything is abused by Nigerians, this would probably unravel soon. The outcry has already begun. Nigerians have started arriving in these countries with only little to their name and may soon become destitute. Many have already found themselves in less-than-ideal conditions; some have been asked to withdraw from universities because they couldn’t pay the balance of their fees. Others are homeless and forced just to lay their heads anywhere they find. 

These countries will soon find out that these guys never had the money in the first place. 

Would they ban us as the UAE did? Maybe not. But they could start doing what CBN did to those who asked for licenses (that’s a story for another day) by forcing them to either open an account in a foreign country or pay school fees and accommodation costs 100% ahead of visa application.
Although things are undeniably tough in Nigeria and many of us understand and maybe even sympathize with the japa craze, the sad reality about cutting corners like this is that those coming behind you will probably have to pay for your sins too.

Hiring is as hard as investing in startups. Maybe harder

Finding the next Facebook, Paystack, or TeamApt as an angel investor is pretty hard. I’m not the first, nor will I be the last to reiterate what you probably already know; most startup investments fail! In fact, 90% are duds and maybe only 2 out of 100 investments would be rockstars. 

Sadly, hiring, especially for startups, is no different.

Tech investment, especially angel investment, is almost like glorified gambling and the line separating both can be quite blurry. Only the obsessed stand a chance against the odds. 

It’s the same when it comes to finding talent. It’ll probably be redundant for me to qualify talent further with any fancy adjectives. Talent is just that. Talent. You’ve either got it or you don’t. That’s not to say I don’t believe people can improve themselves or that 

employers can’t invest in developing employees. They absolutely can. And they should.

I’ve read tons of how to find good talent; worked with a bajillion different recruiters. My best outcomes have been more of luck than science or any definite process. Maybe I’m the one with a problem. But when I share my pain with other founders, we always arrive at the same conclusions.

Where I found some of the best people 

I have looked at my own track record of how I found some of the best people I ever worked with in the last 5 years and I can confidently say I’m at best, gambling. There’s simply no common sense formula to how I got these people. 

Just to give you an idea where I found some of the best people I have worked with: a friend found one at a saloon, I met another on a staircase and I was introduced to another by someone I didn’t even know. They’re all so random that I’ve given up finding a pattern.

And where did I find some of my biggest disappointments?

Hold on to your hats for this one. You’d think the random strangers I met “off the streets” would have been the ideal candidates for disappointment. That was not the case. Many of those who fell short of my expectations (or just common decency in some cases) were those who graduated with a first class, had high CGPAs and came highly recommended. This category of people are exposed and present themselves properly. I fell for it. But learnt very quickly there was a whole lot of fluff in the mix. 

Ironically, a significant proportion of those who scale through the recruitment process are those described above. As we’ve established, recruiting is nowhere near a science but employers can keep tweaking the process to get better results. Assessment tests, where applicable, to establish competency levels from the jump is a step in the right direction.

Disclaimer: I’m not a hater. I have nothing against this class of smart people. Many of them go on to do great things. The ones I’ve met have just shown me “shege”. 

Despite the gambling, some things stick out

Despite the fact that my best efforts have come from random encounters, some things do stand out more and make all the difference. Good people are smart, relentless and determined. They are also loyal and can keep their word. Perhaps my favorite thing about them is how responsible they are. They own their sh*t with their chests and don’t deflect blame to others.

Some things are also perplexing

Some of the best people aren’t especially smarter than others. Oftentimes, they don’t even have the right answers. But what they do have, is the right attitude. One can’t give up because talent is now the most important thing. Let’s not even get into how globalization and the wave of newly funded startups are rapidly changing the hiring game. 

As a tech leader, seeking and grooming talent, one must have an infinite capacity to take the pains and disappointment. You must know when/who to nurture or simply let go. Not everyone can be groomed; and definitely not everyone can grow fast enough. And not everyone wants to have that growth pain with you. 

It’s even pretty bold of you to assume that everyone wants to grind and hustle for success. Some people were born to just seek the “soft life” and that’s okay too. But not with me.

Investors take a risk on startups and hope the company takes off. Recruiters take a risk on people and hope they don’t run the company into the ground and take off. To each his own pain. 

To the leaders and recruiters seeking rockstar employees or discovering diamonds in the rough, good luck! 

Being poor doesn’t make you a bad borrower

There is a general belief among top bankers and armchair experts that the poor don’t pay back their loans, and therefore there isn’t any basis to even let them have access to credit.

The arguments are many, and having fought with unmatched vim in many of these arguments, and I wonder how I have escaped without a black eye most times.

In a country where over 90 million people are below the poverty line, and many just want a chance to move up the ladder (those who wait for the Government to move them shall wait forever), then it is elitist and dangerous to jump into these conclusions without an adequate assessment of the realities.

The poor don’t have money to pay back

Well, yes, this is true. One of the 4 Cs of credit is capacity, which is a core tenet of credit; it’s only sensible to never lend to anyone beyond what they can pay back and to structure it in a way that doesn’t keep them in a financial chokehold (na money dem dey find, no be say they kill  person).

It is equally as important to note that loans should also be tied to productive activities that are sure to yield enough return to pay them back. Being poor does not disqualify one from being productive. Someone who hawks Gala on the streets of Lagos with N0 to his name, taking a N10,000 loan in the morning to sell in traffic, has a higher chance of paying it back than a fat banker who took a loan to buy business class tickets for himself and his side chick to Dubai (we know your stories).

The poor have a history of not paying back

Nigeria is replete with tons of stories of government interventions where nobody paid back their loans. It makes you wonder when loans and cash gifts became synonymous. One might think this to be true until you discover that most of these loans were run by syndicates who arranged for most loans to be disbursed within their networks. These people saw an opportunity to share the national moi moi and divide the national cake.

While this narrative seems to have taken over, on the flip side, I can point you to thousands of lenders who extend daily credit to market women around Nigeria. These market women pay back consistently and reliably. Chimamanda couldn’t have said it better; beware of the dangers of a single story.

The poor have no credibility

Everyone assumes the poor would lie to get a loan. Yes, Nigerians lie to get loans, but this isn’t a problem of poverty; it is a character problem. Poverty does not directly translate to a lack of credibility, and neither does the Nigerian elite starter pack come equipped with credibility (selective amnesia for AMCON defaults still?) The quantum of the bad loans in the Nigerian banking system, powered by borrowers with zero character, was for the rich and mighty.

The lack of character is a personal problem, and this is due to the torn national value fabric, which is on its knees begging for mend.

You can’t catch the poor if they don’t pay back

But are the rich not still running?

Someone owes you N20,000 in unpaid loan; you spend N10,000 in locating their place; what would you do when you get them? Nothing! In all honesty, I concur that pursuing a poor person who hasn’t paid is a waste of effort and resources.

Unfortunately, almost the same applies to everyone except the middle class. The rich guys owe banks trillions, but they are the ones suing their creditors. A tale of the tail wagging the dog.

The poor have no credit history

The poor indeed have no credit history. And they won’t have a credit history because of two critical reasons:

One, most Nigerians have never gotten a chance to get a loan before, and if you never had a loan, you can’t have a credit history … but you need history to qualify for most loans (which came first? The chicken or the egg?)

Two, the cost of access to a credit bureau for the small lenders that only do microloans and serve a small portion of the market is unbearable. Imagine racking up credit bureau costs for 1,000 loan requests when only about 100 would qualify for loans and even less will pay back (when next you see the owner of a small lending business, hug them and then squeeze 50k in their hand, those guys are trying).

Why do we need to kill these narratives?

It is dangerous to use intellectual laziness to block over 1 billion people in Africa and 90 million people in Nigeria from credit simply because we can.

Our inability to find a working model isn’t the fault of the poor but the fault of those who may not be putting enough effort into solving these problems. The truth is, if we don’t solve these credit problems, Africa won’t grow, and the poor will one day rise against the rich (#eattherich).

Previous narratives based on elitism have been proven to be false. They once said phones aren’t for the poor, but today, the same poor are the source of life for MTN and others. They once argued that the internet wouldn’t be affordable, and today, Africans are addicted to the internet. I wouldn’t even call it a lack of wisdom. They know the truth. But the gods forbid poor people to have access to the same things as them (gatekeeping 101).

Some banks and fintechs are already changing these narratives

Don’t be alarmed yet; all hope isn’t lost. We’re already seeing the rise of lending-as-a-service tech companies such as Lendsqr, Indicina, Evolve credit, etc., creating cheaper and scalable lending stacks for small-time lenders, which allows them to reach the mass market more cost-effectively.

Some banks, such as Sterling, Access, and FCMB, are at the forefront of mass-scale consumer lending. These banks are giving loans to Nigerians who are not their customers as they understand that consumer credit is the future.

Disclosures: I’m the founder of Lendsqr, and I work there.

It’s destructive for lenders to punish good borrowers

Loans in Nigerians are quite expensive and it’s due in one part to the high-default rate but also  because of what I would describe as  lenders destroying their chances of developing a good business. You’re probably wondering why I would say this, so if you would be so kind as to allow me do you a favor and relieve you of your rose-tinted lenses .. 

This is how lending in Nigeria typically goes…

Lenders know how profitable solving the credit problem can be but they also know a significant portion of their borrowers won’t pay back. Oh please there’s no surprise here anymore, Nigerians have taken it upon themselves to always treat loans like an inheritance from their grandparents. At this point, you might be tempted to play the devil’s advocate and argue that the poverty level and weak economic conditions pose a significant hurdle to repaying loans for the average Nigerian, I won’t argue with you but I will say this; beyond the financial factors that may affect loan repayment, at the core of default is generally Nigerians questionable demeanor towards loans – zero character! The causal relationship between hardship and defaulting on loans is not as airtight as one might like *chuckling in AMCON seizures*.

So what happens? Lenders increase the interest rate on the loans to cover these losses they envisage because of these bad actors and the income to cover these defaults would be paid by those who are “foolish” enough to pay back. Ohooo!

Here’s the fallout 

Lenders might believe this manner of conducting business is foolproof in that as long as it takes care of the bottom line, nothing else matters but instead of solving the problem, it makes it so much worse.You see, those who are good for the money and actually intend to do business in good faith, see the crazy interest rate, say “your fada!” and just forgo the loan. Guess who’s left to do business with? 

The desperate and the wicked. 

Those who are desperate have no option but to take the loan but we all know where desperation takes anyone and then you have the wicked who have no intention of paying anyway and so don’t even mind the interest rate and proceed to take the loans (Lagbaja, nothing for youuu).

Where does this leave lenders?

So after all is said and done, the reality for lenders is that:

High interest rates push away those most likely to repay their loans (because they care the most about what to pay back). 

And 

High interest rates mean nothing to those who won’t pay back anyway (talk about a double-edged sword). 

It’s pretty obvious the tactics have to change, if not these lenders have no way of succeeding. The only way that a lender would do well is with an appropriately priced interest rate

What happens to the risk of default? 

Wouldn’t the lender be wiped out?

The best way to build a sustainable lending business is in the Risk Acceptance Criteria (RAC), the technology, and the loads of data to go with it; that’s how to really address the pain points associated with lending.

Anything else, such as raising interest rates, is completely destructive and there is no way out of it; it’s like a cobra eating its tail.

In what world does one put a band-aid over a headache and wait for relief?