The possible upsides of making GSI the go-to loan repayment method

Nigeria has a N74 trillion credit gap. If there’s such an enormous credit gap that traditional and digital lenders can profit from, why aren’t enough lenders lending?

The short answer is that the average Nigerian won’t repay their loan if they think they can get away with it, making many lenders more terse and unwilling to lend to high-risk individuals.

The stark reality in Nigeria and other underdeveloped countries is that the glaring credit gap is heavily responsible for the citizens’ doing poorly. A closer look at history reveals a consistent pattern of how economic giants like China and Europe have trudged a similar path of growing their economies using credit as a viable tool. Therefore, it validates that no economy can grow without credit, and Nigeria isn’t different.

The Federal government, through the Central Bank of Nigeria (CBN), in an effort to broaden access to credit by facilitating an improved credit repayment structure to create a somewhat safer space for lenders to thrive – initiated the Global Standing Instruction (GSI) to nip the issue of non-performing loans and unrepentant loan defaulters in the bud. The Government knew that if lenders continued to run at a loss with no intervention, the economy was heading for doom.

Unfortunately, the implementation of this very powerful tool has been marred with what some would consider “Exclusion”. This is because it’s limited to banks and money lenders, the bulk of those lending to Nigerians, are excluded.

What you need to know about Global Standing Instruction (GSI) 

The GSI is a service of last resort that helps banks and other financial institutions recover unpaid loans from serial defaulters by debiting the accounts of loan holders in other banks to settle defaults. A borrower is charged to issue a mandate that authorizes the bank to activate GSI if they default on their loan during the application stage – simply put, ‘When it’s time for repayment, collect the money I owe you from any of my accounts’.

Suppose Bank A gives out a loan, and there is a default. GSI allows Bank A to activate loan repayment and automatically debit from other bank accounts of the borrower after every other means has been exhausted. It is important to note that the GSI only allows loan principal and interest collection; other penalty charges are not included.

Unfortunately, being licensed by the CBN isn’t what every lender can afford.. So, many small-scale lenders contributing a large chunk to bridging Nigeria’s credit gap are left to chase serial loan defaulters on their own. In contrast, banks with easy access to the GSI are not exactly keen to give out consumer loans to Nigerians.

Therefore, the GSI as a tool is underutilized. Those who need it have no access; Those who have access have no use. The GSI is too impressive a creation to let it go into oblivion, so here are a few things that can be done to sporadically increase its effectiveness. 

Access – Making the GSI available to everyone, including small-scale lenders, regardless of CBN licensing, is a welcome change.

Repayment method – Besides granting access to all financial institutions, the CBN can also allow the GSI to operate as a primary loan repayment method.

Upgrading GSI as a primary repayment method would be transformational

1. Minimized risk for lenders

Lenders want assurance that their money will return to them, and the GSl provides that assurance. Suppose the CBN eventually broadens the access to GSI and adopts it as a means of loan repayment,  there will be a significant decrease in lenders’ risk exposure associated with loan defaults making their business more profitable and secure. 

2. Reduced non-performing loan

With GSl, the chances of loans not being repaid will reduce exponentially. Non-performing loans, often the thorn in lenders’ flesh, are a recurring reason why many micro-lenders never make it past the 1-year mark. By enabling automatic deductions from a borrower’s accounts across the financial ecosystem, the GSI simplifies the loan repayment process, removing the risk of defaults and late payments. For this reason, lenders can ensure timely repayments and minimize instances of non-performing loans.

3. Improved access to credit

Happy lenders make room for more financial inclusion. GSI creates an environment where lenders can confidently extend credit to individuals with limited credit history, as they are assured of their money returning to them, fostering financial inclusion and providing opportunities for underserved communities.

4. Lower interest rates

The convenience and reliability of payments through GSI can prompt lenders to provide loans at reduced interest rates, as there has likely been an overall reduction of risk associated with lending. This reduced risk perception often spurs lenders to extend the benefit to borrowers. With lower interest rates, the borrowing process becomes more affordable for individuals.

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Considering the significant advantages these changes present, it makes a lot of sense for the CBN to follow this path, and it ultimately favors everyone except those who plan to default on their loan. And why should mischief makers influence decisions anyway? 

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