By Russel Eraga

Introduction

On 13 July 2020, the Central Bank of Nigeria (CBN) introduced the Guidelines on Global Standing Instruction (GSI) applicable to individuals (the “Guidelines”). The Guidelines which comes into operation on 1 August 2020, has the object of promoting a sound financial system in Nigeria by, among other things, reducing the incidence of non-performing loans and improving their recoverability. The Guidelines provide a window for creditor banks to directly set-off past due debt obligations of customers from the deposits/investments held by such customers in their qualifying bank accounts domiciled with other banks and financial institutions.[i]

The Guidelines has been greeted with positive reporting which focused on the ease with which bank could after the commencement date, recover the unpaid debt obligations from defaulting customers.[ii] The Guidelines has also faced criticism from industry analysts[iii] who are of the view [and I agree with them] that the Guidelines does not nearly resolve the issue of non-performing loans in the financial industry particularly as loans to corporate bodies represents more than 65% of the industry’s total average outstanding loans.[iv] Thus, necessitating the call for a GSI framework which would be applicable to corporate bodies

The focus of this piece is on the application of the Guidelines to joint accounts. It is my view that the extension of the Guidelines to joint accounts has the potential of creating fresh problems in the industry and, this is a call for the immediate review of the Guidelines.

Debt Recovery Prior to the Guidelines

Before the introduction of the Guidelines, banks and other financial institutions basically had two means of recovering debts from defaulting customers. This was first by consolidating the accounts of the customers domiciled with the creditor bank with the aim of offsetting the customer’s indebtedness in one account with the credit balances in the other account(s). Although, the creditor bank could resort to consolidation of right, unless it was precluded by some agreement with the customer, the bank could not exercise the power of consolidation against accounts opened by the same customer with a business name or in the name of an incorporated body even if controlled by the customer.[v]

The second option available to the creditor bank was to institute an action in court against the defaulting customer to recover the unpaid debt. A successful court action gave the creditor bank the right to execute the judgment on the customers properties including garnishing the customer’s credit account balances with other banks. However, recovery of debt by court action involved significant loss of time and cost to the banks.

Post Guidelines Debt Recovery

With the operation of the Guidelines, banks are able to recover the past due debt obligations (i.e., only the principal and interest component of the debt[vi]) from defaulting customers through a direct set-off from deposits/investments held by the customer in his/her qualifying bank accounts with Participating Financial Institutions (“PFIs”).[vii] This means that a creditor bank is given the opportunity to extend the powers of ‘consolidation of the accounts’ beyond the customer’s accounts which are domiciled with the creditor bank but to the customer’s accounts which are domiciled with other PFIs without any further recourse to the customer.[viii]

Consequently, where a customer defaults on a loan, the creditor bank could issue an instruction through the Nigerian Inter-Bank Settlement System (“GSI Trigger”) for the debit of the customer’s bank accounts with other PFIs to recover the outstanding principal and accrued interest. Thus, reducing the creditor bank’s reliance on court action (and the process of garnishee) to recover a substantial part the customer’s debt obligation.

For creditor banks to take advantage of this extended power of consolidation, the Guidelines provides that the customer must have executed a GSI Mandate which authorises the creditor bank to recover the outstanding principal and accrued interest from any/all accounts maintained by the customer across all PFIs. The customer is also required to list out qualifying accounts linked to his/her Bank Verification Number (“BVN”)[ix] including:

  1. Individual Savings Accounts;
  2. Individual Current Accounts;
  • Individual Domiciliary Accounts;
  1. Investment/Deposit Accounts (Naira & Foreign Currency); and
  2. Electronic Wallets.
  3. the joint account versions of items (i) to (v) above.[x]

Application of the Guidelines to Joint Accounts

The application of the Guidelines to joint accounts is problematic and this is apparent on the surface; a joint account is operated by two or more persons, and a feature of which includes the requirement of joint mandate to debit such accounts. By opening a joint account, a bank is entering into a joint contract with the joint account holders wherein the bank is liable to all the joint account holders with regards to the account. Thus, the bank cannot operate or deal with the account except at the request or instruction of both or all the joint account holders.[xi]

By the inclusion of joint accounts under the Guidelines, the CBN has created an opening for PFIs to possibly debit joint accounts on the mandate of one of its operators. Thus, effectively extending the operation of the Guidelines to third parties who did not sign the GSI Mandate. Put differently, the Guidelines makes non-defaulting joint account holders liable for the unpaid debt obligations of the other joint account holder who has defaulted on a private debt obligation.

This development is unconstitutional as it amounts to the determination of the rights and obligations of the non-defaulting joint account holder without any recourse to him/her.[xii] Also it would amount to breach of contract where a PFI honours a GSI Trigger on a joint account domiciled with it, on the basis of a GSI Mandate which is signed by one of the joint account holders.[xiii] The PFI cannot rely on the Guidelines as a defence for the breach of its contractual obligations.

Further, the extension of the Guidelines to joint accounts has the effect of jettisoning the principle of privity of contract by enforcing a loan agreement against a third party and stranger to the loan agreement. The law is trite that a contract cannot be enforced against a person who is not a party to it.[xiv]

It is clear that the application of the Guidelines to joint account opens up the PFIs to claims in damages from a non-defaulting joint account holder.  Of concern is the fact that PFIs cannot seek to exclude joint accounts domiciled with them from the operation of the Guidelines as the PFIs incur penalties for failing to honour a GSI Trigger on an eligible account.[xv]  Consequently, the Guidelines place the PFIs in the quandary of having to choose between a possible claim in damages and the penalty  for failing to honour a GSI Trigger on a joint account.

The problems that arise from the application of the Guidelines on joint accounts would not bode well for the financial industry and it is imperative that the CBN deletes the inclusion of joint accounts from the Guidelines. There is no sound legal argument to retaining same.

Conclusion

It is without doubt that the provisions of the Guidelines are well intended and may be a first step towards strengthening the financial system in Nigeria. However, having identified the problems associated with applying the Guidelines to joint accounts, it is important that the CBN reviews the Guidelines towards eliminating the problematic inclusion.

[i]         A better approach to the CBN’s “name and shame” strategy to improving recovery of non-performing loans

[ii]      See https://nairametrics.com/2020/07/14/cbn-gives-banks-approval-to-debit-bank-accounts-of-chronic-loan-defaulters-starting-august-1/ See also https://guardian.ng/news/cbn-orders-seizure-of-debtors-funds-across-banks/

[iii]      Proshare Research: https://www.proshareng.com/news/Debtors—Recovery/Key-Takeaways-from-the-CBN-GSI-Guideline/52228

[iv]     See 3 above.

[v]      See British and French Bank Ltd v.Opaleye (1962) 1 All NLR 26; UBA Plc. v. Salman [2019] 2 NWLR (pt. 1656) 304.

[vi]     Penalty charges are not   recoverable by the banks under the Guidelines. See paragraphs 1.1 and 3.2.2 (e) of the Guidelines.

[vii]     All CBN-licensed Financial Institutions that are connected to Nigerian Inter-Bank Settlement System (NIBSS) Instant Payment (NIP) platform and participating in        the framework by executing the GSI Mandate Agreement with NIBSS.

[viii]    It is important to mention that although the CBN in its August 26 2019 circular (BSD/DIR/GEN/LAB/12/054) titled “New Offer Letter Clause for Credit Facilities” required banks to include a clause in credit facility agreements which would create a standing instruction to offset the customer’s  debt to a creditor bank from the financial assets of the customer in other banks, the Guidelines is much more standardised and provides the operational manual for the GSI.

[ix]      Failure to list all qualifying accounts would cause the customer’s BVN to be watch-listed. See paragraph 3.2.1 of the Guidelines.

[x]      See paragraph 2.0 of the Guidelines.

[xi]      See Macdonald v Tacquah Gold Mines Co (1884) 13 Q.B.D 535 @ 539 where Bowen L.J. opined: ‘…where money is due on a covenant made with two persons jointly by which it is to be paid to such two jointly, no one of those two has any right to that money without the other…’

[xii]     See section 36 of the Constitution of the Federal Republic of Nigeria, 1999 (as amended).

[xiii]     See Ndoma-Egba v. A.C.B. Plc.   (2005) 14 NWLR (Pt.944)79 where         the Supreme Court stated that a bank owed each of the joint account holders the duty not to allow either of them to draw funds from the joint account without the concurrence of the other.

[xiv]    Chuba Ikpeazu vs. African Continental Bank (1965) N.M.L.R 374.

[xv]     Paragraph 6.4 of the Guidelines.  See also paragraphs 6.2, and 6.3 of the Guidelines.

Authored by: Russel Eraga, LLB, BL, russeleraga@gmail.com

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