GLEIF Launches Global Business Identity Initiative To Boost Financial Inclusion For African SMEs

LSEG (London Stock Exchange Group), Zimbabwe’s NMB Bank Limited, GLEIF, Cenfri and Cornerstone unlock access to trade finance and boost economic potential for SMEs

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 realized with the support of the German Federal Government through the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH.

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The collaborative initiative is equipping SMEs across Africa with globally recognized business identities, in the form of Legal Entity Identifiers¹ (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 organizations 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.

Today, Africa’s heterogeneous economies suffer from a severe trade finance gap, which is currently estimated to be more than US$81bn.² 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 underutilized, 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 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.³

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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.

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 organizations and supports the availability of the Global LEI System;
• LSEG (London Stock Exchange Group), which is the initiative’s LEI issuing organization;
• 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 specializes 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) GmbH conducted a survey between April and June 2020.⁴ 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,” ⁵ the authors concluded.

The Validation Agent (VA): A new operating model for LEI issuance / NMB Bank Limited first VA in Africa

This global digital business identity initiative has been made possible thanks to the introduction of a new LEI operating model for banks known as the Validation Agent.⁶ NMB Bank Limited serves as the first Validation Agent in Africa.

By leveraging their KYC, AML and other regulated ‘business-as-usual’ onboarding processes, NMB bank can now obtain LEIs for its customers when verifying their identity during initial onboarding. This enables the bank to improve its customer experience, facilitate digital transformation and reduce client lifecycle management costs, while opening the door to the development of new identity-based services.

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