How borrower behaviors have shifted under the threat of GSI

Since its launch in August 2020, the Global Standing Instruction (GSI) has become a key infrastructure  in the Nigerian lending scene. It is now fully integrated by all commercial banks, and based on our engagement with commercial banks, these things work.

This well–thought–out brainchild is an automated loan recovery feature that grants banks sweeping powers to debit the accounts of loan defaulters regardless of which banks hold them, so as to settle those defaults.

The GSI’s main mission is straightforward: to make lending less risky for banks by reducing the number of loan defaults. But how has it affected the way borrowers approach their financial obligations?

Borrowers now understand the severity of loan defaults

The GSI’s ability to automatically debit a borrower’s account across various banks removes the traditional “out of sight, out of mind” mentality that could sometimes lead to delinquent behaviors.

With the GSI in place, borrowers are acutely aware that neglecting a loan repayment, intentionally or not, can have immediate consequences, regardless of where they hold their bank accounts.

This heightened awareness motivates borrowers to prioritize their loan repayments and avoid triggering the GSI’s automated debit mechanism.

Borrowers are carefully assessing their repayment capacity

People are thinking twice before taking out loans. They are carefully considering their financial situation to make sure they can afford the loan before they apply.

This helps them avoid getting into debt they can’t repay and the risk of the GSI taking action, which is evident in the reported decline of non performing loans from 5.0 per cent in June 2022 to 4.1 per cent in 2023.

Borrowers are paying closer attention to loan terms

People are taking a closer look at the fine print of their loan agreements more than ever before, including the interest rates and repayment schedules. This deeper understanding helps them make informed borrowing decisions.

For example, a borrower might opt for a loan with a slightly higher interest rate but a longer repayment term if it better suits their cash flow. Plus, a thorough understanding of the loan terms helps borrowers avoid hidden charges and unexpected fees, which can affect when and how they repay their loans.

Borrowers are repaying loans on time

The fear and knowledge that GSI can automatically take money from their accounts across different banks if they default has encouraged more timely loan repayments. This leads to fewer late payments and defaults, which were significant problems in the Nigerian lending market before.

Unfortunately, there are advantages and disadvantages to the system mechanisms. GSI’s reach has loopholes and unintended consequences which borrowers are taking advantage of.

While the GSI was designed to empower banks and encourage responsible lending, it hasn’t been a silver bullet. You’d think that with the GSI in place, banks would be eager to responsibly expand lending. Sadly, the reality is more complex.

Banks still seem hesitant to extend credit at scale, despite the GSI’s safety net. Some key institutions, like finance houses and microfinance banks, still operate outside the GSI’s reach.

This creates an uneven playing field and savvy borrowers are exploiting these loopholes.

Borrowers are keeping their money at home

In an interview with Vanguard Newspaper, President, Association of Micro Entrepreneurs of Nigeria (AMEN), Comrade Prince Ichie noted that drawbacks from GSI will motivate borrowers to seek other alternatives to banking like not keeping their money in their banks.

Those drawbacks include:

• hidden terms and charges with interest rates becoming high on a daily basis,
• joint account holders forced to repay loans of the defaulter they are sharing the account with, and
• litigation issues.

Borrowers are using informal financial systems

As prophesied by Uju Ogbunbunka, President Bank Customer Association of Nigeria (BCAN), “bad debtors may operate outside the banking system.”

Borrowers who don’t want to suffer the threat of GSI might turn to lenders outside the traditional banking system. These lenders often operate without following the official rules, making it much harder to track down borrowers and recover the debt.

Featured read: Why GSI fails for borrowers with unpredictable income

Borrowers are shifting funds to “GSI-free” fintechs

We are seeing elevated stories of borrowers who want to avoid repaying their loans taking advantage of this gap by running their accounts with Kuda, OPay, and some other large fintechs. Add that to the long list of why Nigerians don’t pay their loans.

Such calculated evasion not only undermines the entire system but also damages the trust within the lending ecosystem. This could have long-term consequences for borrowers who genuinely need credit.

The fact remains that the GSI was introduced to be the saving grace in the lending community, but this is Nigeria and nothing is ever 100%. The Central Bank has made a great effort but more can definitely be done.

So how can the CBN step in again?

Expand financial inclusion

Bring the mountain to Mohammed, in this case, CBN can bring financial services closer to people who can’t access traditional bank branches. This would look like supporting the growth and partnership with microfinance banks, mobile banking options, and agent banking networks.

Close the loophole by increasing coverage

The CBN needs to find a way to include more fintechs and microfinance banks in the GSI program. This would make the rules the same for everyone in the industry and reduce opportunities for people to evade this policy.

Work with credit bureaus

The CBN could work with credit bureaus and other financial institutions to improve how they share information. This would help them identify borrowers who might be trying to avoid the GSI system altogether.

For example, they could flag suspicious activities like large cash withdrawals or unusual patterns in someone’s bank accounts.

Mandate bank transparency

The CBN can mandate that banks explain fees and interest rates in plain language that’s easy for everyone to understand.

Banks should be required to provide a clear and concise list of all potential fees and charges associated with their financial products before a customer opens an account or signs up for a loan.

Straightforward complaint process

The CBN should establish a clear and easy-to-use system for consumers to report hidden charges or unfair interest rates. The CBN would then be responsible for thoroughly investigating these complaints and working towards a fair resolution.

Featured read: 6 common misconceptions about using GSI for loan recovery.

CBN needs to stay two steps ahead

The GSI is a bold initiative with good intentions, but as with any policy, how it works in practice can be more complex. Its success depends on the ability to close these loopholes and maintain trust between borrowers and lenders. The CBN needs to be clever and proactive to close these gaps so the GSI can truly achieve its goals.