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?