SADC countries should copy Nigeria’s BVN to reduce bad debts

You wouldn’t guess it but SADC countries are great when it comes to having their citizens pay back what they owe banks. There are two outliers in Angola and Mozambique who had non-performing loan (NPL) ratios of 23% (2021) and 13%(2023) respectively. These ratios are 3-6 times above the world average (5.5%) when it comes…


You wouldn’t guess it but SADC countries are great when it comes to having their citizens pay back what they owe banks. There are two outliers in Angola and Mozambique who had non-performing loan (NPL) ratios of 23% (2021) and 13%(2023) respectively. These ratios are 3-6 times above the world average (5.5%) when it comes to non-performing loans.

Interestingly, Nigeria wasn’t too different from these two countries with a NPL ratio of 14.8% in 2017. Fast forward 6 years and the most populous African country managed to drive it down to 4.85%. All of this got me wondering how countries with poor NPL ratios can take a book out of Nigeria’s page given that technology played a big part in rectifying their bad-debt situation.

The launch of BVN

In 2014, Central Bank of Nigeria launched the Bank Verification Number (BVN) – an 11 digit number that acts as a unique identifier across all Nigerian banks. The number is tied to bank customers biometrics as they register fingerprints when getting the BVN issued. Each person is also limited to one BVN. This means customers with multiple bank accounts have to link all of them to that BVN they got assigned.

Upon it’s launch in 2014, the Central Bank of Nigeria (CBN) would say the following regarding the technology:

The Bank, in collaboration with the Nigerian Interbank Settlement System (NIBSS) and the National Association of Microfinance Banks (NAMBs), extended BVN to other financial institutions (OFI) customers, principally the MFBs. The BVN would strengthen risk management and know-your-customer (KYC) processes in the banking sector. The implementation would further integrate the customers of Microfinance Banks (MFBs) into the financial system, strengthen financial inclusion and the payments system.

CBN annual report – 2014

CBN promoted the BVN as having the following benefits:

  • a unique identity that can be verified across the Nigerian Banking Industry;
  • bank accounts are protected from unauthorised access;
  • address issues of identity theft, thus reduce exposure to fraud;
  • enhance the Banking Industry chances of being able to fish out blacklisted customers;

The last point is particularly important for the scope of our conversation. In that same year of launch – the BVN became a prerequisite for all borrowing in Nigeria with existing debtors obligated to have registered for the system by end of 2014.

Building upon early efforts

In the following year (2015), BVNs were integrated as part of Nigeria’s Credit Risk Management System (CRMS). The CBNs motivation was to make it easier to identify borrowers:

“Work commenced on the redesign of the current version of the CRMS to permanently address the challenges surrounding ability to uniquely identify borrowers. The new version would incorporate the BVN and the Taxpayer Identification Number (TIN) as the unique identifiers for individual and corporate borrowers, respectively.”

CBN annual report 2015

By then there were 23 million registered BVNs. Unfortunately, 2015 is when Nigeria’s non-performing loan ratio would start to spiral out of control going up to 4.9% from 2.9% the previous year. The impact of BVNs was yet to be felt. In fact this would be the start of a vicious cycle as the NPL ratio would spike to 12.8% in 2016, before peaking at 14.8% in 2017.

CBN vs NPLs

The central bank had to act more decisively and they did. A redesigned Credit Risk Management System was deployed in 2017. The new system sought to ensure that Nigerian banks could uniquely identify borrowers. Banks would also now be required to submit complete credit information of customers before credit could be issued out.

Banks could also have a view of the customers credit history on the CRMS before giving out loans. Repayments that went unhonoured would now be available to identify on this system meaning bad debtors would be easier to identify before loan issuance. The BVN would essentially be used to blacklist loan defaulters making it harder for bad debtors to obscure their bad credit habits from different banking institutions.

Nigerian banks Non-performing loan ratio between 2014-2018

By 2018 the effects of this revised CRMS and along with increasing adoption of BVN which now 36.1 million registered numbers at this point was being felt. The NPL ratio fell to 11.4%. The following year the Central Bank of Nigeria would mandate commercial banks to stop lending to firms without Tax Identification Number (TIN) and individuals not having Bank Verification Number (BVN) and the NPL ratio would fall to a more respectable 6.1%. Getting much closer to that 5.5% magic number.

Checkmate

In 2020 – CBN would essentially introduce a checkmate for bad debtors – the Global Standing Instruction guidelines. These guidelines had three simple objectives:

  1. facilitating an improved loan repayment culture;
  2. reducing non-performing loans in the Nigerian banking system and;
  3. watch-listing consistent loan defaulters.

How would they do that? The GSI would give banks the power to debit loan and accrued interest due from bank accounts of loan defaulters across Nigeria’s banking system. Once a borrower defaulted on an outstanding principal and interest, the bank instructs NIBSS to debit the bank account of the defaulter. By the end of 2020 the effects of this were felt marginally with a .1% drop in NPL ratio. The following year (2021) the bank reported an NPL ratio of 4.85% – the lowest it had been since 2014.

The Guidelines on Global Standing Instruction (GSI) has enhanced credit recovery in the banking industry, as well as entrenched discipline in borrowing.

CBN annual report 2021

That is essentially how 3 systems – the BVN, CRMS and GSI guidelines are effectively making it harder to default on loans in Nigeria and perhaps SADC countries (even ones with low NPL ratios) ought to learn a thing or two from how Africa’s largest country by population has tackled non-performing loans. The BVN system now stands at 57 million registered numbers – making it an unavoidable part of Nigerian banking.

Featured image credit: Towfiq Barbhuiya/Pexels

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