A lawyer, strategist and governance expert, Dr Charles Omole has made critical recommendations for the smooth working of the Global Standing Instruction recently introduced by the Central Bank of Nigeria (CBN).
The 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), which entails that if 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.
In a position paper seen by Nigerian Tribune, Omole recommended 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,” he stated.
Secondly, he advises the CBN to redraft the guidelines, clarifying the vague provisions, such as who is the fine paid to and how many days will any refund for breach take?
According to the expert, 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.
“The fines should be increased to serve as a proper deterrence. Fining banks N100,000 to N500,000 is not an effective deterrence.
“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, Omole said, adding that the CBN should reconsider the exclusion of business accounts at the least.
Finally, he further suggested that 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,” he stated.
According to him, 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, he wondered why the regulator should start with personal loans when businesses are the bigger culprit for bad-debt.
Given that the majority of loan delinquencies are attributable to corporate organisations; it is baffling why the CBN did not make any provision for the application of the GSI to corporate entities.
“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,” Omole questioned.
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 he said.
“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,” the expert stated.
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