Following the launch of the GLEIF Digital Business Identity Initiative, which aims to close the trade finance gap in Africa, GLIEF has been talking to their key partners about how the project will improve the financial inclusion of SMEs on the continent and beyond.
All over the world, small and medium-sized enterprises (SMEs) lack the legal documentation with which to identify themselves to banks, service providers and other businesses. As a result, millions of them struggle to obtain trade finance and enter into partnerships, especially in developing countries.
Following the launch of GLEIF’s Digital Business Identity Initiative, which aims to address this gap in trade finance in Africa, they have been talking to their key partners about how the project will improve the financial inclusion of SMEs on the continent and beyond.
Barry Cooper is technical director at the Centre for Financial Regulation and Inclusion (Cenfri), an independent, not-for-profit think tank working on African financial sector development.
Cenfri has a wide reach across Africa and has relationships with both regulators and financial service providers (FSPs). Cenfri’s role in the initiative was multifaceted and included sourcing candidate banks in appropriate countries where the initiative could have the greatest impact on MSMEs and serve as a demonstration example, liaising with regulators on the initiative, leading working sessions with the selected bank to guide them through the LEI process and overcome any challenges, and preparing and validating reports. Cenfri and Cornerstone Advisory Plus’ assessment mechanism has successfully identified suitable regulated markets and FSPs that have a strong interest and investment in their micro, small and medium enterprise (MSME) clients.
Why did you decide to participate in the initiative?
Cenfri has worked extensively on identity, anti-money laundering (AML), counter-terrorist financing (CFT), customer knowledge (KYC) and MSME finance issues, and this opportunity suited our work very well. In addition, we strive to be at the forefront of best and next practices and were very excited by this initiative as it was the first in Africa and provided an important opportunity to shape key practices.
How does your organization benefit from its participation in the LEI initiative?
Participation in this initiative is beneficial to Cenfri as we gain unique insights from the prototyping of the process that will help us address issues in MSME finance, especially in our focus countries in Africa, which includes Zimbabwe.
The LEI initiative has also given us a tool to recommend to institutions and regulators to address AML-CFT, compliance and de-risking challenges. In addition, Cenfri has received its own LEI, which we can use ourselves.
What problems can SMEs in Africa overcome in the medium to long term through the use of LEI?
There are 54 states in Africa, each with their own constituent bodies and registries, each with different procedures and idiosyncrasies. Reliable verification and further incorporation of information for due diligence and risk management processes requires a high level of in-country expertise, can take a long time and is prohibitively expensive, and is therefore more commonly used for larger transactions. MSME transactions and even some corporate transactions in Africa are either not pursued or are subject to the assumption of higher risk.
The use of LEI enables MSMEs to have a much stronger identity that is globally accessible, trustworthy and verified. Local banks have extensive knowledge of their national systems, risks and processes. The LEI makes this knowledge available in a globally accessible format. The LEI is able to overcome information asymmetries in risk management and enables better formal trade flows through more accessible trade finance, more accurate financial risk assessments, lower adverse risk premiums, fewer transaction delays and fewer outright rejections. It also helps to increase the visibility of MSMEs and improve opportunities to trade and connect with partners they might not otherwise be able to connect with. In addition, they can solve AML-CFT compliance challenges by ensuring that they adhere to the highest standards globally.
What would the African SME landscape look like if the $81 billion trade finance gap in Africa could be closed? What would this mean for the regional economy?
Closing the $81 billion trade finance gap could have a significant impact on the African economy and its people, enabling substantial growth and competitiveness in international markets. The question is whether the changes in trade activity will be inclusive and have a positive impact on the lowest income levels or whether the benefits will be limited to basic industries and existing businesses and favour the established social classes. Affirmative action measures such as LEI are designed to help MSMEs participate on an equitable basis and promote sustainable growth and economic diversity. As they account for more than 50% of employment worldwide, according to the World Bank, a small increase in the size and income of MSMEs can have a significant impact on employment levels and enable more efficient service delivery in markets. Reducing trade disparities should be linked to promoting intra-regional trade among African countries to further enable inclusive growth and development.
What opportunities could be created for the people of Africa if all SMEs could be provided with a globally recognized business ID?
Providing all SMEs with a LEI will create a universal, continent-wide, robust and interoperable global identity. We see the unlocking of significant latent business and employment opportunities not only for global trade but especially for trade within the Africa region, which has historically been systemically difficult between 54 states. The LEI will significantly improve the accessibility and competitiveness of MSMEs not only globally but also within their countries and the region. As mentioned earlier, moderate growth of MSMEs can have a significant impact on employment in various sectors of the economy and especially at the lower income levels. Through increased networking effects, LEI’s can also lead to better distribution of goods and services across countries and provide access to additional local, sustainable products and services for Africans.