Microfinance banks, fintechs and digital lenders say gaps in Nigeria’s loan recovery framework are worsening defaults, six years after the Central Bank of Nigeria introduced the Global Standing Instruction.
While commercial banks can recover overdue loans by debiting funds across a borrower’s bank accounts, other lenders remain excluded, a situation industry operators say has allowed serial defaulters to game the system.
The GSI, launched in 2020, was designed to strengthen credit discipline by enabling creditor banks to recover unpaid loans without requiring fresh consent from defaulting customers.
However, its implementation has largely been limited to commercial banks, despite initial plans for a phased rollout across the broader financial ecosystem.
What they are saying
According to the founder of Lendsqr, Adedeji Olowe, the exclusion of fintechs and MFBs from the GSI has created a clear escape route for borrowers who have no intention of repaying their loans.
- “Because GSI is currently limited to commercial banks, finance houses, microfinance banks and fintechs are either not connected or not using it,” he said.
He said some borrowers are now exploiting this by taking loans from banks and moving them to MFBs and fintechs, where the claws of GSI cannot reach.
Olowe said this behaviour has become increasingly common as borrowers exploit the fragmentation of Nigeria’s financial system, weakening recovery efforts for lenders outside the commercial banking space.
Speaking with Nairametrics, the Managing Director of FairMoney, Henry Obiekea, said that the gap created by not connecting other financial institutions to the GSI is creating a challenge in loan recovery for Microfinance Banks and digital lenders.
- “The deployment of the GSI was going to be done in phases. Unfortunately, the phasing has taken quite a long time,” he lamented
Obiekea said extending GSI access to MFBs would significantly improve repayment behaviour.
- “If customers know that this is what can happen, it will incentivize them to behave the right way and to pay their loan,” he added.
Meanwhile, fintech operators, who participated in a recent CBN survey, the report of which was published by the CBN earlier this month, clamored for the extension of GSI beyond traditional banks to include regulated fintech lenders and microfinance institutions. This, they argue, would strengthen credit discipline and reduce defaults across digital lending markets.
NPLs rising despite BVN and credit checks
President of the Money Lenders Association, Gbemi Adelekan, said most digital lenders already rely heavily on existing infrastructure, such as Bank Verification Numbers and credit bureaus, to assess borrowers before disbursing loans.
- “Most of us use BVN for bio data and credit registries to check credit history. Yet, we still have a lot of people that do not repay. In many cases, they have the ability but not the willingness to pay,” he said.
Adelekan said the inability to access borrowers’ funds across all banks makes recovery difficult, especially with the rise of neobanks and multiple digital wallets.
- “As soon as you give them money, some borrowers will destroy their card and move on to other banks,” he said. “At that point, you cannot reach them. It’s a major problem.”
Call for urgent regulatory intervention
Digital lenders say the lack of access to GSI is now a systemic risk, particularly as they serve customers at the lower end of the income pyramid who often have a limited understanding of credit obligations.
- “We need GSI like yesterday. Non-performing loans are a major issue, and our contribution to the economy is massive, yet we are excluded from critical financial tools,” Adelekan said.
He called on regulators such as the Federal Competition and Consumer Protection Commission and other oversight bodies to engage the CBN on behalf of digital lenders and MFBs.
According to him, the core challenge is that many digital lenders are not directly regulated by the apex bank, making them an afterthought in policies like GSI.
Backstory
The Global Standing Instruction was introduced by the Central Bank of Nigeria (CBN) in 2020 as part of its push to curb rising non-performing loans (NPLs) in the banking sector.
According to the bank, objectives of the GSI include facilitating an improved credit repayment culture; reducing Non-Performing Loans in the Nigerian Banking System; and watch-listing consistent loan defaulters.
- “The GSI shall serve as a last resort by a Creditor bank, without recourse to the Borrower, to recover past due obligations (Principal and Accrued Interest only, excluding any Penal Charges) from a defaulting Borrower through a direct set-off from deposits/investments held in the Borrower’s qualifying bank accounts with participating financial institutions,” CBN stated in the GSI guideline.
Under GSI, when a customer takes a loan, he or she signs a consent form giving the bank the right to recover any unpaid amount directly from the customer’s other bank accounts.
Speaking during the 2024 Bankers’ Night in Lagos, the CBN Governor, Olayemi Cardoso, plans to integrate Microfinance Banks (MFBs) and Primary Mortgage Banks (PMBs) into the GSI platform to tackle the growing challenge of non-performing loans in the financial sector.
While this has not been done as of the time of filing this report, the apex bank, in its first Fintech Report released last week, assured stakeholders again that other financial institutions would be integrated this year.
- “Expansion of the GSI framework to fintech lenders and Microfinance Institutions (MFIs) is underway, with phased completion expected by 2026,” the bank stated in the report.
What you should know
While other MFBs are still clamouring to be connected to the GSI platform, NIRSAL Microfinance Bank, a government-backed institution, has been deploying the GSI to recover the COVID-19 loans granted to many Nigerians during the COVID pandemic era.
The recovery, which has seen many beneficiaries of the loan complain about illegal withdrawals from their accounts, came as a shock to many who took the government loan as a grant.
However, NIRSAL MFB asserted that the deductions are legitimate, citing the loan agreements signed by beneficiaries.
