Introduction

The digital lending industry in Nigeria has grown rapidly in recent years, providing an alternative source of credit for many individuals and small businesses. However, non-payment of loans, also known as non-performing loans (NPL), has been a significant challenge, with Digital Banks like Kuda reporting NPL rates of 69% compared to traditional banks' rates of 4.4%.

Recently, regulatory bodies like the Federal Competition and Consumer Protection Commission (FCCPC) have started cracking down on harmful debt collection practices such as “naming and shaming”, threatening customers and unlawful data collection employed by a majority of digital lenders in Nigeria. This underscores the need for lenders to adopt compliant recovery alternatives.

Thankfully, in 2020, the CBN implemented a framework called Global Standing Instructions (GSI) that allows creditors to directly recover loan amounts from a borrower's bank accounts across participating financial institutions in Nigeria. The GSI system is facilitated through the Nigeria Interbank Settlement System (NIBSS).

How Does The GSI Work?

The GSI framework allows eligible creditors to directly debit loan repayments from a borrower's qualifying bank accounts linked to the borrower’s Bank Verification Number (BVN) in participating financial institutions. Essentially, the lender can recover the sums owed by the borrower from all accounts linked to the borrower's BVN.

When a borrower takes out a loan, he/she must sign a GSI mandate authorizing the lender to directly debit repayments from all eligible accounts linked to the borrower’s Bank Verification Number (BVN). If repayment is defaulted on, the lender can activate a GSI trigger through NIBSS to identify and debit the repayment amount from qualifying linked accounts across participating financial institutions. In the event that a borrower’s qualifying account that is not linked to his/her BVN is identified, such BVN shall be Watch-Listed.

Who can Utilize the GIS?

The GSI system can be leveraged by both traditional brick-and-mortar lenders as well as digital money lenders. Particularly, to utilize the GSI system, lenders must meet the following requirements:

1. It must be a financial institution licensed by the CBN

2. It must have adequate IT infrastructure for connectivity to NIBSS and CBN systems; and

3. It must have the ability to capture borrowers' account details including NUBAN.

Eligible Account Types for GSI-enabled Recovery.

The GIS cannot be used to recover every kind of debt and also cannot be utilised on every type of customer account. The eligible account types for GIS-enabled recovery include:

1. Individual Savings Accounts;

2. Individual Current Accounts;

3. Individual Domiciliary Accounts;

4. Investment/Deposit Accounts (Naira & Foreign Currency); and

5. Electronic Wallets.

Benefits of the GSI

By adopting the GSI system, digital lenders can significantly reduce the costs and effort of traditional debt collection. They can also avoid incurring losses from unrecoverable loans that become non-performing. They can also avoid the criminal and civil liability associated with their current name-calling and shaming approach.

For borrowers, the system ensures loans are repaid according to contract terms to preserve their creditworthiness.

The GSI promotes greater financial access through improved repayment rates for all stakeholders.

Alternative Recovery Options

If ineligible, lenders should explore options like litigation, mediation, payment restructuring etc, and it is important to consult a lawyer on the best method to employ in the event of default of loan repayment obligations by a borrower. Ongoing compliance consultation is also advisable when implementing major process changes.

Conclusion

In conclusion, the GSI framework provides a viable solution for digital lenders in Nigeria to significantly improve loan repayment rates in a risk-averse manner. By directly debiting loan amounts from multiple bank accounts linked to a borrower's identity, lenders can recover funds that would otherwise go uncollected through conventional means.

Adopting GSI allows lenders to avoid the legal and regulatory issues associated with harmful collection tactics like name-and-shame. It also protects borrowers from coercive actions by prioritizing respectful, rules-based recovery aligned with the borrower's original loan authorization. With proper implementation, GSI can transform online lending into a more sustainable industry where both lenders and borrowers maintain profitable, affordable relationships over the long term.

Moving forward, continued consultation with legal experts can help lenders seamlessly adapt their GSI integration process.