An international flagship project designed to expand financial inclusion among small to medium-sized enterprises (SMEs) especially on the African continent has launched. The project has been realised with the support of the German Federal Government through the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH.
The collaborative initiative is equipping SMEs across Africa with globally recognised business identities, in the form of Legal Entity Identifiers (LEIs). The LEI is comparable to an international company ID card; it contains good quality business card and ownership structure information about a legal entity which can be verified quickly and efficiently by anyone, anywhere, enabling organisations to know precisely with whom they are doing business. The verifiable company data results in transparency in the marketplace and builds greater trust between market participants.
Supplying LEIs to African SMEs aims to strengthen financial inclusion in the region by enabling them to apply for trade finance and establish contractual, regulated agreements with banks, payment networks and trading partners, leading to broader access to financial services and greater participation in both domestic and international markets. Ultimately, the intention of the initiative is to strengthen Africa’s SME base and increase the flow of inbound capital needed to fuel the continent’s economic development.
Stephan Wolf, CEO, GLEIF, said: “The LEI has the potential to create a more transparent, efficient cross-border exchange of goods and data under the African Continental Free Trade Area. This is the first step toward greater financial inclusion and overcoming the challenges associated with access to trade finance in Africa. Considering the high pace of digitisation and regulatory development across the African continent, the LEI is a great natural fit. It is a compelling, ready-to-go cross-border solution for entity identification that is open, reliable and easily integrated into regulatory frameworks.”
Today, Africa’s heterogeneous economies suffer from a severe trade finance gap, which is currently estimated to be more than $81billion. The limited availability of transparent key reference information for African businesses, together with the perceived risk of trading with them, is a major challenge both to banks seeking to expanding trade finance portfolios on the continent and to international business partners seeking to engage this underutilised, but nascent sector.
By working with African banks to enable them to issue LEIs, the initiative not only addresses this challenge but also aims to dramatically reduce the compliance burden associated with stringent anti-money laundering (AML) and know your customer (KYC) regulations. Today, this overhead routinely prevents banks from lending to new African SMEs due, in large part, to ID validation and verification difficulties. Over the 2013-14 period, less than one per cent of African banks cited regulatory compliance as the primary reason for rejecting trade finance applications. Between 2015 and 2019, however, as compliance requirements have increased, this figure has grown to circa 16 per cent.
Sarah Weiss, Financial Sector Development Advisor, Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH, and Hugues Kamewe Tsafack, Financial Sector Advisor, Making Finance Work for Africa: “Having more African-based LEI issuers would contribute to promoting the LEI concept and facilitate LEI applications for Africa-based entities. Forging strategic partnerships could also bolster awareness raising efforts among African FIs, real sector companies, national supervisory and regulatory authorities about the LEI, its potential benefits and the application process. Finally, it is worthwhile to explore the potential synergies between African initiatives that facilitate client due diligence and promote market transparency.”
Using the LEI for identifying legal entities in cross-border trade could also enable banks to significantly reduce both cost and effort in data reconciliation.
Barry Cooper, Technical Director, Cenfri: “The LEI is one of the few initiatives with real potential to meaningfully address the challenges of de-risking in developing markets. The high costs of institutional due diligence and information asymmetries is a core element of the exclusion of small and medium enterprises, and even some corporates, from regional and international markets. A robust global enterprise identity opens up an under-represented large base of SMEs and women-owned businesses to trade across Africa as well as across the global markets. Cenfri looks forward to the deepening of LEI usage across Africa and the inclusion of SME and women-owned enterprises in the global economy.”
Who is involved?
The LEI initiative is a collaborative effort between:
- The Global Legal Entity Identifier Foundation (GLEIF), a not-for-profit founded by the G20 and Financial Stability Board which manages the global network of LEI issuing organisations and supports the availability of the Global LEI System
- LSEG (London Stock Exchange Group), which is the initiative’s LEI issuing organisation
- Zimbabwe’s NMB Bank Limited, which is equipping local SME customers with LEIs
- The Centre for Financial Regulation and Inclusion (Cenfri), an independent, not-for-profit think tank which works on African financial sector development
- Cornerstone Advisory, which specialises in financial sector advisory and training services.
Scope of opportunity
To gain insights into the accessibility and potential benefits of introducing LEIs in African markets, the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) conducted a survey between April and June 2020. The survey showed that LEIs are attractive for companies of all sizes and types in the region and led to the development of the initiative. “By acting as a reliable‚ proof of existence to business partners in their value chain, the LEI can support companies in engaging in trading activities for cross-border commerce. Given the global nature of the LEI, the greatest benefit may appear in cross-border transactions. […] LEIs may improve companies’ access to financial services by enabling previously un(der)served clients such as SMEs to make their ownership structure and credible identity accessible to banks,” the authors concluded.