Why financial inclusion in emerging markets is the backbone of a strong global supply chain
As part of the Financial Inclusion interview series, GLEIF spoke to key partners about the launch of GLEIF’s Digital Corporate Identity initiative in Africa and how it is improving the financial inclusion of African SMEs. Stephan Wolf, CEO of GLEIF, concludes the series by highlighting the immeasurable opportunities and transparency this initiative will bring to the global supply chain as initial success in Africa spreads to SMEs and banks in other emerging markets.
As GLIEF heard from their partners in this interview series, the launch of the GLEIF digital corporate identity initiative in Africa has been a success for all involved. However, it is only the beginning. It has been a showcase of how small and medium-sized enterprises (SMEs) around the world can achieve “financial inclusion” through Legal Entity Identifiers (LEIs). As defined by the World Bank, financial inclusion for businesses means “having access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit and insurance – and that are provided in a responsible and sustainable manner”.
While the financial inclusion of SMEs around the world is a desirable goal in itself, it is also important to recognize that the impact of this initiative – if rolled out more broadly across many emerging economies – will extend far beyond the SMEs and financial institutions involved. It has the potential to positively impact the wider economy by significantly strengthening the global supply chain. Let me explain how these two concepts are linked.
The lack of a universal identity prevents SME growth and overseas trade
SMEs account for 90% of businesses worldwide. However, without legal credibility or a way to officially prove their identity across borders, many of these businesses struggle to obtain funding, enter into partnerships or trade abroad – especially those in developing countries where a higher risk factor is suspected. Banks may not offer them trade finance without subjecting them to arduous and costly customer identity and anti-money laundering checks – processes that are made more difficult without a verified identifier. As a result, the gap between supply and demand for global trade finance is widening, having increased by 15% since 2018 to $1.7 trillion.
The launch of the Business Identity Initiative has illustrated this problem with a focus on Africa. However, it is important to remember that this is a global challenge facing SMEs and banks around the world. As a result, countless SMEs are prevented from engaging in the global supply chain – whether because they cannot invest, scale or form the necessary partnerships – for one simple reason. They are unable to prove who they are.
The LEI supports the expansion of global supply chains and supplier traceability
As we have seen in Africa, a wealth of benefits accrue when financial institutions facilitate the issuance of LEIs to SMEs by becoming validation agents. Therefore, financial institutions should now be motivated and encouraged to use this model to provide their SME clients with a globally recognized identity. Not only will this give SMEs wider access to financial services – a clear advantage for banks – but it will also have a wider impact by enabling SMEs to apply for trade finance and enter into contractual, regulated arrangements with banks, payment networks and trading partners. The result is greater participation in national and international markets and an increased inflow of capital, which can then be used to further economic development in the market.
Imagine a world where millions of SMEs were able to scale internationally and trade with confidence. How many more products and services – both in terms of volume and variety – would be available to us all through the global supply chain, and how would increased competition affect service and prices? This is a desirable thought that is within reach. By opening up cross-border trade opportunities to more SMEs, the LEI can be seen as a crucial – and immediately available – tool in the drive to create a much broader and more competitive supply chain for businesses worldwide. In addition, the use of a global, open identifier would help to make supply chain relationships more transparent – a critical component of sustainable supply chain monitoring and reporting.
What has to happen next?
Every change has to start somewhere – and the success of the first iteration of the GLEIF digital corporate identity initiative in Africa shows the huge potential for the global supply chain, and therefore the global economy, if financial institutions in more countries take the reins and drive the initiative.
Greater financial inclusion of SMEs will lead to a strong, more diverse, transparent and competitive global supply chain ecosystem. As a result, we could expect to see the positive impact – financial growth and prosperity – across all types of businesses in all regions of the world.
Now that the initiative is up and running, GLEIF invites more financial institutions to explore the benefits of a validation body to support broader financial inclusion of SMEs – and reap the benefits. GLEIF continues to seek dialogue with governments, NGOs, banks and other stakeholders interested in expanding the LEI initiative across Africa or replicating the model in other developing countries.