Yann Desclercs of Cornerstone Advisory Plus talks about how the LEI can be used to counter the de-risking trend in African economies.
Following the launch of the GLEIF Digital Business Identity Initiative, which aims to close the trade finance gap in Africa, GLEIF 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 the GLEIF Digital Business Identity Initiative, which aims to address this gap in trade finance in Africa, GLEIF have been talking to their key partners about how the project will improve the financial inclusion of SMEs on the continent and beyond.
GLEIF spoke to Yann Desclercs, Managing Director of Cornerstone Advisory Plus, about how widespread adoption of LEI in the African financial system could help narrow the trade finance gap on the continent. Cornerstone Advisory Plus is a consulting firm based in Côte d’Ivoire, West Africa. It specializes in compliance consulting and training for private and public sector institutions, including financial sector regulators and supervisors.
As part of the multi-stakeholder initiative, Cornerstone Advisory Plus supported the coordination of the project in collaboration with the other project partners. In addition, the Cornerstone team provided technical content and insights, facilitated stakeholder engagement and conducted data analysis with a particular focus on compliance and KYC data. Cornerstone Advisory Plus also brought a francophone West African and international perspective to the project.
Having worked on the ground with financial institutions in Africa, what impact could the widespread use of LEI have on the financial system as a whole?
African financial institutions face difficulties in gaining access to international correspondent banking networks either because they do not have the required critical size in terms of business volume or, more importantly, because they do not always fully comply with international AML and KYC standards and sanctions regimes. As a result, the African financial system is widely considered risky by the international financial community. International banks therefore assume that establishing links with these institutions would lead to costly due diligence processes that would outweigh the potential additional revenue from transaction fees. The result of this balancing of risk and reward usually discourages these banks from establishing links with African financial institutions and may lead them to sever existing relationships, a phenomenon known as “de-risking”.
Widespread use of LEIs can provide more transparency in the African financial system. This would help to improve risk assessments for individual companies as well as the perception of the system itself and open it up to a global network of international financial institutions. This would certainly help to support the effective inclusion of African financial institutions in the global economy.
Do you think that the widespread use of LEI could also have an impact on SMEs in the region?
Yes, of course. As we know, de-risking has a huge impact on African economies and especially SMEs, which make up the bulk of the economy. A recent report by AfDB and Afreximbank shows that the continent’s trade finance gap is estimated at US$81 billion, largely due to compliance and KYC issues and de-risking. SMEs are the most affected by this problem. Reversing the trend towards de-risking by promoting transparency in the African financial system through the widespread adoption of LEI could help reduce the trade finance gap for SMEs and African economies as a whole.
How can the LEI initiative help banks with their internal processes? How can it make them more efficient?
Banks participating in this LEI initiative and assuming the role of validation agent can leverage their existing KYC processes to obtain LEIs for their clients with minimal to no additional steps, depending on each bank’s KYC framework. As a result, participating banks can obtain strong global business IDs for their customers and help them address globally recognized verification processes while streamlining their internal processes for regular KYC renewals and ongoing updates to customer information.
Another important benefit of providing clients with an LEI is the ease of identifying parental links between entities using the GLEIF database, which may prove particularly useful in identifying beneficial ownership links as required by the FATF Recommendations and the laws of most countries. All of these efficiencies in the KYC process could ultimately lead to greater cost efficiency by proportionately reallocating compliance resources and using an effective risk-based approach in line with the FATF’s first recommendation, which is implemented in most international and national laws.
What strategic advantages can banks gain by participating in the LEI initiative? How does it help them increase their revenues, opportunities or market share?
Participating banks can benefit from improved risk perception within the international financial community, ultimately leading to increased trading capacity and market share. They can also gain a competitive advantage by offering globally recognized business identifiers to their clients, which brings additional benefits to their SME and corporate clients.
This competitive advantage, combined with the enhanced trading capacity, could lead to significant growth in market share and revenue, subject of course to a coordinated and appropriate business, marketing and communication strategy.
What kind of ID services could an African bank develop once it has provided its SME clients with LEIs?
The sky’s the limit. However, for the purposes of this interview, we want to focus on existing platforms such as the MANSA repository, which is created and managed by a partnership led by Afreximbank. The MANSA Repository is a single source for the primary data required to conduct due diligence on African businesses, including financial institutions, companies and SMEs. Subject to agreement between the MANSA initiative and GLEIF, the LEI could be offered as an option/choice for the identification verification part of the repository. As the LEI is an internationally recognized global corporate ID, it could reinforce the already established reputation of the MANSA data repository and accelerate the uptake of all companies that already hold an LEI.
This accelerated onboarding process could also apply to any other national or regional ID platform on the continent. To achieve this in practice, discussions need to be held between GLEIF and platform managers across the continent to find ways of working together to achieve an LEI-based onboarding process in existing ID platforms.
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