From 01 August 2020, the Central Bank of Nigeria (CBN) gave effect to a new policy that will have major ramification for banking services in Nigeria. The new Global Standard Instruction (GSI) policy provide that at the point of executing loan agreements:
- Borrowers must also execute a GSI mandate in favour of the participating financial institution (PFI).
- Should a borrower default in paying a loan, the lending bank can now activate the GSI, give it right to withdraw from the borrowers account held in any other bank in Nigeria.
- The lending bank can do this without any recourse to the borrower or giving any notice whatsoever.
- The aim of the CBN is to help reduce incidents of Bad Loans in Nigeria.
While I welcome the intention of the central bank to deal with an epidemic of unpaid loans, I do have many concerns about this policy which I will like to highlight. I will try to explain my concerns in a non-technical way that most stakeholders will understand.
1. Wrong focus
The GSI policy is ONLY applicable to Personal accounts and not Business bank accounts. This is curious, given that majority of bad debts in Nigeria according to reports are corporate loans rather than individual loans.
So, why start with Personal Loans when businesses are the bigger culprit for bad-debt? Given that the majority of loan delinquencies are attributable to corporate organizations, it is baffling why the CBN did not make any provision for the application of the GSI to corporate entities.
2. Legal privity
In contract, privity doctrine states that only parties to a contract can enforce its terms. So, it is concerning that third parties who were not involved or parties to a contract can be dragged into it via the GSI. It is arguable that this is unlawful.
The CBN Guidelines is so badly drafted that many lacunas exists. For example, the CBN did not explain what will happen if there is a court proceeding ongoing in relation to a loan facility. Can GSI still be activated by the Lending Bank even if a legal dispute is ongoing? The CBN is silent on this.
What happens if a participating bank releases money in the borrower’s account upon receipt of a GSI trigger from a lending bank and a court subsequently finds in favour of the borrower? Will that participating bank become legally liable?
All these need to be cleared up by the CBN as its current guidelines is grossly inadequate in dealing with these situations.
3. Joint accounts action
The CBN guidelines empowers a lending bank to trigger GSI to withdraw money from another participating bank account, even if it is a joint account of the borrower and someone else. This is worrying.
Such GSI trigger on joint-accounts will infringe on the constitutional rights of a co-joint account holder in my view.
So, if Mr. A borrows N10Million from Bank X; but Mr. A also operates a Joint Bank Account with his wife Mrs. A at Bank Y where they both deposit their salaries. CBN is saying if Mr. A defaults; Bank X can trigger GSI to withdraw the N10Million from the joint account in Bank Y (as Loan settlement) simply because Mr. A’s BVN is linked with the account. How about the Constitutional rights of Mrs. A? Will Mrs. A not have a legal remedy against Bank Y?
The Statute provides that no moveable property of a person shall be taken possession of compulsorily except in the manner and for the purposes prescribed by a law.
It is a well-established equitable principle that you cannot take over the content of a Joint Account to settle debt owed by only ONE of the parties to the Joint account. Both individuals hold joint interest in that account in Bank Y and a GSI cannot purport to attribute a portion of the joint account to one party. It will be irrelevant in law that all the deposits into that linked joint account may have been made by the defaulting borrower.
The CBN guideline is silent on how to protect the interest of parties to joint accounts who are not connected to any defaulting loans. This CBN omission promotes the encroachment by banks on an unconnected third party’s constitutional protection from compulsory acquisition under Section 44 of the Constitution. The CBN needs to address this concern urgently.
4. Retroactive effect
The GSI is not an entirely new principle as some banks had contractual clauses similar in their past loan agreements; although the CBN-backed policy has more teeth. While the CBN states 01 Aug as the starting date for the GSI policy, it seems there is nothing stopping any bank from retroactively applying it, if a similar term was present in previous loans that has now gone bad. It is questionable if it will be lawful for banks to try and do retroactive triggers, but in Nigeria, nothing can be ruled out no matter how crazy it sounds.
I will expect that the CBN will make a clear directive stating that retroactive application will be unlawful. The CBN needs to make this expressly clear to avoid mischief by the banks.
5. Fairness principle
When GSI is triggered by the lending bank; that bank effectively becomes the accuser, prosecutor and judge in its own matter. This breaches the principle of natural justice in my view. What if I am having a disagreement with my bank concerning the loan? What if there is a dispute about the total amount outstanding between the borrower and the lender?
The bank can just ignore borrower’s concerns and trigger GSI to claim the loan amount it chooses back at will, without any recourse to the borrower (or a reconciliation of account statement). How fair is that?
Abuse by banks in Nigeria is not uncommon; so I feel GSI will be abused by banks who are not known for excellent customer services. There is little protection for lenders as the fine imposed by CBN for breaches look inadequate to serve as effective deterrence.
There is also the question of whether the whole GSI policy passes the test of constitutionality.
It can be argued that the Guidelines breach Section 44 of the 1999 Constitution which provides that no law shall allow for the compulsory acquisition of any property without allowing the property owner the right to access a court or tribunal for the determination of his rights.
But as long as there is no retroactive application, I can see that the principle of Volenti can be applied here. Volenti non fit iniuria is a legal doctrine which states that if someone willingly places themselves in a position where harm might result, knowing that some degree of harm might result, they are not able to bring a claim against the other party. This means – if a borrower voluntarily signs a GSI mandate as part of a loan process, knowing fully well its implication; he has volunteered himself for the repercussions if it is triggered.
So, in my view, the banks and CBN are well covered on this specific issue. But this is a position that will be tested in court in the years to come.
7. Opaque redress mechanism
My final concern is that the CBN guidelines does not provide adequately for borrowers or third parties who will be wrongly subjected to GSI by the banks. There is no clear redress mechanism in the guideline. Although some small number of fines are contained in the guideline (payable by banks who breach); it is not explicit who the fine is paid in favour of – the CBN or the wronged parties?
Also, the guideline has no time limit on when wrongly deducted funds must be back in the original account. These vague provisions and lacunas are either basic errors from the CBN or deliberate decision to make litigation difficult. Only time will tell.
8. Loss of confidentiality
Under the Nigerian Data Protection Regulation (NDPR), data may only be collected and processed with the consent of the data subject (in this case, the bank borrower). While it may be argued that execution of GSI constitutes consenting to data, but what about sharing between stakeholders? It is vital to say that the use of a borrower’s data given pursuant to execution of GSI for unintended purposes amounts to violation of the borrower’s privacy rights and may breach of the NDPR. This puts the data controller under the danger of regulatory sanctions and liability if action is taken.
I agree with the intention of the CBN to address the issue of bad loans in our banking sector. But I do not believe the GSI initiative is proportionate as it is riddled with vague provisions as highlighted and I am uncertain about the lawfulness of some of the provisions.
I will advise the CBN to fix the effects in the GSI policy rather than scrapping it. See my recommendations below.
My main recommendation to CBN is that the lending bank should be made to seek a court order to enforce the GSI. With possible disputes on the amount owed, it is wrong for the bank to have its way without any check and balance. This will give a fair third party an opportunity to validate the fairness of the action thus avoiding arbitrary use and abuse by the banks which is all too common in Nigeria.
Secondly, I will advise the CBN to redraft the guidelines and clarifying the vague provisions. Who is the fine paid to? How many days will any refund for breach take?
Thirdly, the inclusion of joint accounts should be removed from the guidelines. This is the weakest legal leg of this policy. Penalising an innocent third party is not equitable. He that wants equity must do equity.
Fourtly, the fines should be increased to serve as a proper deterrence. Fining banks N100,000:0o to N500,000:00 is not an effective deterrence.
Fifthly, ideally the GSI policy should actually be trialed with corporate accounts (as they are the biggest defaulters), before moving to individual accounts at a later stage. I will want the CBN to reconsider the exclusion of business accounts at the least.
Finally, the CBN should consider the possible drag effective the GSI will have on Individuals, who may now seek less loans from the banks.
I suspect, the fear that borrowers may become less likely to borrow may have informed the CBN’s exclusion of corporate accounts in the first place. Giving the state of the economy as a result of COVID-19; I will advise the CBN to delay this policy for a better economic climate.
I will advise a two-year delay of this policy.