The LEI: The Key to Unlocking Financial Inclusion in Developing Economies

Plus: A Spotlight on Africa How LSEG (London Stock Exchange Group), Zimbabwe’s NMB Bank Limited, GLEIF, Cenfri and Cornerstone Advisory Plus are unlocking access to trade finance and boosting economic potential for African businesses. Introduction 65 A 2017 report from the International Finance Corporation (IFC) contends that million firms 65 million firms around the world, including 45 per cent of small to medium sized globally enterprises (SMEs) in developing countries, have an unmet annual total financing need of $5.2 trillion.1 Today’s African economies, for example, suffer from a severe trade finance gap currently estimated to be more than US$81bn.2 including The root of the problem, both for banks seeking to expanding trade finance portfolios and international businesses looking for supply chain partnerships, lies in the need for 45% greater transparency among SMEs. Too many do not possess the business credentials of SMEs in needed to support counterparty due diligence processes and their associated risk developing assessments. countries

This is a major obstacle impeding global economic growth. It is felt most acutely in developing economies where it prevents capital from flowing into SMEs, through both unmet annual trade finance and domestic and international partnerships. total financing need of $5.2 trillion The Legal Entity Identifier (LEI) can solve this problem as it enhances transparency in the marketplace and builds greater trust between market participants.

This e-book explores how financial institutions and SMEs in developing economies across the world

can use the LEI, a globally recognized and standardized form of business ID, to address these problems head-on. By equipping SMEs with LEIs, developing economies everywhere can dramatically increase Trade finance financial inclusion, enable broader participation in both domestic and international markets and, gap in Africa estimated at ultimately, increase the flow of inbound capital needed to fuel their economic development. $81 billion 1The MSME Finance Gap, IFC 2017 2Trade Finance in Africa: Trends Over the Past Decade and Opportunities Ahead - Policy Research Document 3, September 2020

2 The need for globally Reasons for African banks rejecting SME trade finance applications5 recognised business identity Reasons %

SMEs play a crucial role in Client credit worthiness 35 Know your customer (KYC) and anti-money the global economy, fostering Insufficient collateral 30 innovation and financial laundering (AML) requirements, in particular, development and providing have emerged as a new and growing 2013 Single obligor limit 11 two thirds of the world’s jobs.3 challenge for SMEs. Over the 2013-14 period, Limited forex liquidity 10 According to the World Bank, less than one per cent of African banks cited to SMEs represent around 90 per regulatory compliance as the primary reason 2014 Insufficient limits with cent of businesses worldwide.4 for rejecting trade finance applications. corresponding banks 8 Between 2015 and 2019, however, as Yet, despite the critical role Bank balance sheet compliance requirements have increased, this constraint 6 they play, many SMEs in figure has grown to circa 16 per cent. This developing economies lack shows that stringent KYC/AML regulations are robust business credentials having two unintended consequences on the Reasons % and, as a result, face significant trade finance sector. They are: barriers to growth: their access Client credit worthiness 30 to finance, particularly to trade 1 Increasing the cost of processing finance Insufficient collateral 25 finance, is either severely applications and transactions from limited or denied altogether, SMEs. Banks operating in the region are Know your customer and their capacity to establish now reluctant to spend time and effort 2015 requirements 16 contractual domestic performing the required to and international trading Insufficient limits with KYC checks for a new SME client. corresponding banks 7 partnerships is constrained. 2019 Even gaining access to payment 2 Reducing the number of international Single obligor limit 6 services is a challenge. banks participating in trade finance Limited forex liquidity 6 across the region, for the same reason. Others 6 Bank balance sheet 3‘Setting up small and medium-size enterprises for restart and recovery’ McKinsey, June 2020 constraint 4 4Small and Medium Sized Enterprise Finance section, World Bank website 5African Development Bank’s Report Trade Finance in Africa: Trends Over the Past Decade and Opportunities Ahead

3 The LEI and financial inclusion

A crucial step to increasing In this way, any SME holding financial inclusion in an LEI can demonstrate the developing economies is level of transparency needed What is the LEI? to encourage broad SME for it to establish a trusted The Legal Entity Identifier (LEI) is Adoption of this proven system is adoption of a trusted, relationship with any third- an alpha-numeric code that links now expanding to overcome a range globally recognized system party organization at home or to a system in which the identity of new identity-related challenges for business identity. across borders. of a legally registered organization, facing organizations across different This is what is offered by the Put simply, it is the key that or ‘legal entity’, can be verified market sectors as they engage in Global LEI System. It gives enables any business to unlock quickly and efficiently by anyone, global digital commerce. banks, financial institutions, anywhere. It can be thought of access to both finance and The Global LEI System is the perfect potential business partners as a kind of digital international trade. solution to help bridge trade finance and other regulated institutions company ID card; each LEI ‘record’ gaps and promote financial inclusion easy access to an SME’s key For financial institutions and contains high quality business card across the globe. It is the only legal reference data. Once regulators, the LEI improves information. system in existence that is open, registered, an SME can be risk management by enhancing There are currently 1.87 million LEIs commercially neutral, standardized recognized universally, since assessments of micro and in circulation, each one containing and carries the endorsement of its data is openly available macro prudential risk. In this information about an entity’s financial regulators. electronically, free of charge, way, it also promotes market ownership structure, enabling to anyone, anywhere. integrity while containing This makes it the only system questions of identity (‘who is who’) market abuse and combating capable of establishing digitized and ownership (‘who owns whom’) financial fraud. trust between all legal entities, to be answered unambiguously. everywhere. The LEI is already widely mandated by regulators for use in capital markets and has been embraced in over 200 jurisdictions around the world.

4 The positive impact of the LEI: Benefits for SMEs

1 2 3

Business ID: More trade Fast-track support Credible digital finance, for national business identity leads to less red tape digital ID schemes trustworthy business As countries look to advance their own SMEs can both prove who they are and The LEI can improve an SME’s business digital identity schemes, the LEI can know precisely who they are doing risk profile in the eyes of lenders and ease the implementation and integration business with, globally, saving time and investors, increasing its chances of accessing burden on SMEs. In a globalized digital money, enabling new opportunities for finance and securing more attractive rates. economy, verifying the identity of legal domestic and cross-border trade, and By creating the foundational step of identity, entities such as customers, partners and combatting financial fraud and market the LEI also has the potential to dramatically suppliers is becoming an increasingly complex abuse. The Global LEI System is fast, reduce the compliance burden and costs and costly challenge. Only by establishing efficient and the data is free to use. All LEI associated with stringent AML and KYC trust between legal counterparties can the data is verified and validated by LEI issuing regulations. true benefits of a digitally enabled world be organizations and accredited by GLEIF. realized. The LEI is uniquely powerful in its ability to enable digital transformation in a way that is truly interoperable for everyone.

5 The positive impact of the LEI: Benefits for SMEscontinued... 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 4 5 a core element of the exclusion of small and medium enterprises, and even some Trust and Enhanced corporates, from regional and international markets. A robust global enterprise identity transparency cross-border opens an under-represented large base in supply chain trade of SMEs and women-owned businesses to partnerships trade across Africa as well as across the global markets. Cenfri looks forward to the The SME digitalization journey has The LEI creates more transparent deepening of LEI usage across Africa and accelerated dramatically during the and efficient cross-border exchanges the inclusion of SME and women-owned COVID-19 crisis. Their successful of goods and data. Particularly in enterprises in the global economy. transition to e-commerce and free trade areas, such as the African online business is now crucial. Continental Free Trade Area (AfCTA) This is the area where the LEI or the Association of Southeast Asian shines by enabling accurate and Nations Free Trade Area (AFTA), fast digital identification in supply the LEI can help to simplify customs chains, building both transparency procedures, accelerating and trust into commercial the flow of goods. partnerships.

Barry Cooper, Technical Director at Cenfri

6 Spotlight on Africa: How the LEI is boosting financial inclusion for SMEs

Impetus An international flagship project is now underway in SMEs across Africa contribute significantly to job creation and economic growth, We face trade financing Africa, designed to help SMEs yet their financial inclusion rates remain low. challenges not only because use the LEI to unlock access to According to the Reserve Bank of Zimbabwe, Zimbabwean SMEs contribute we are a small company, but trade finance and create new more than 60 per cent of the country’s GDP, yet only 3.8 per cent of the banking because we are unknown from domestic and international sector’s and advances are extended to these businesses.8 Zimbabwe. While we are not directly excluded from trade trading opportunities. The same is true of international finance; global banks are also hesitant to provide finance, we often receive credit. These conditions revealed a strong opportunity for the LEI to make a unfavourable repayment terms significant impact, in Zimbabwe specifically and across the broader region. which result in indirect exclusion. The collaborative, multi- The LEI, as a globally recognized stakeholder initiative has What is happening? form of business ID, will give been realized with the us greater credibility when we support of the German NMB Bank Limited, Zimbabwe, is undertaking a flagship initiative to equip its SME client base with LEIs. apply for finance, engage in Federal Government through international trade and establish the Deutsche Gesellschaft NMB was selected on grounds of its well aligned principles to the project: new supplier relationships for our für Internationale • A focus on enabling and deepening its SME client base. manufacturing process. Zusammenarbeit (GIZ) GmbH. • Capacity to conduct this initiative within the given timeframe. • An interest in innovating on SME identification. Between April and June 2020, Second Muguyo, GIZ conducted a survey6 • A financial inclusion mandate. Finance and Admin Manager revealing that LEIs are Participating SMEs are already beginning to realize the benefits of LEI adoption. at Copperwares attractive for companies of all Businesses in possession of an LEI can access greater international trade, escrow sizes and types in the region, and guarantee facilities which bolster their ability to negotiate and trade in larger which led to the development volumes, more frequently, and with less cost. NMB has also noted that the LEI 7 of the initiative. holds the potential to reduce compliance bottlenecks SMEs experience when Zimbabwean copper executing international transactions. and silver giftware manufacturer, 6More Transparency for Better Business – The Potential of Legal Entity Identifiers for African Economies, GIZ, 2020 participating in the 7 Promoting the Legal Entity Identifier to foster transparency and trade in African markets, January, 2021 LEI initiative. 8Re-igniting SME Development in Zimbabwe – Learning from Global Experiences, Governor, Reserve Bank of Zimbabwe, 2017 7 Spotlight on Africa: continued...

Who is involved? The flagship initiative is a collaborative effort between: • The Global Legal Entity Identifier Foundation (GLEIF),the not-for-profit founded by the G20 and the Financial Stability Board to manage the global network of LEI LSEG joined this initiative to issuing organizations and support the availability of the Global LEI System. facilitate wider LEI adoption across Africa. By demonstrating • LSEG (The London Stock Exchange Group), the uses and benefits of Legal which is the initiative’s LEI issuing organization. Entity Identifiers, our aim is that • The Centre for Financial Regulation and Inclusion (Cenfri),an independent, this project will encourage more not for profit think tank which works on African financial sector development. entities across Africa to obtain • Cornerstone Advisory Plus, which specializes in financial sector advisory and LEIs. We started the project with a training services partnership approach, which we intend to continue beyond •  NMB Bank Limited, Zimbabwe’s which is equipping local SME customers with LEIs. the pilot.

Harare, Zimbabwe

Alberta Abbey, LEI Analyst, Data & Analytics, LSEG

8 Spotlight on Africa: continued...

The increasingly stringent customer due diligence requirements of the evolving international regulatory environment has, over the past years, contributed Having more African-based LEI issuers to an increase in SME trade finance would contribute to promoting the LEI rejections by banks. This is an important concept and facilitate LEI applications for limitation to the growth potential and Africa-based entities. Forging strategic global outreach of African SMEs. The LEI partnerships could also bolster awareness can significantly contribute to reversing raising efforts among African FIs, real this trend by decreasing the cost of sector companies, national supervisory compliance and reshaping international and regulatory authorities about the LEI, trade and growth for African SMEs. 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.

Sarah Weiss, Hugues Kamewe Tsafack, Yann Desclercs, Financial Sector Development Advisor, Financial Sector Advisor, Managing Director at Deutsche Gesellschaft für Internationale Making Finance Work Cornerstone Advisory Plus Zusammenarbeit (GIZ) GmbH for Africa

9 NMB Bank Limited: The first Validation Agent in Africa

The LEI initiative has been made possible • Streamline client Within just three months, NMB Bank thanks to the introduction of a new onboarding. Limited has been onboarded and trained LEI operating model for banks, called as the first Validation Agent in Africa • Improve its customer the Validation Agent. After working and has begun to issue LEIs to its SME experience. closely with GLEIF and project partners clients. NMB Bank also has obtained to complete the required qualification • Facilitate digital an LEI for itself which will allow it process, NMB Bank Limited is now serving transformation. to establish its identity with other as the first Validation Agent in Africa. correspondent banks quickly • Reduce client lifecycle In view of the emergence of a digital and seamlessly. By leveraging its KYC, AML and other management costs. era and the rapid increase in demand regulated ‘business-as-usual’ onboarding Although the full benefits of the LEI are for greater transparency by all • Open the door to the processes, NMB Bank Limited can now fully realized in the long-term, NMB organizations, including regulators development of new obtain LEIs for its customers when verifying Bank Limited has already begun to note across the world, securing an LEI identity-based services. their identity during initial onboarding. initial benefits for its day-to-day business has become a powerful tool that This new capability creates a significant • Contribute to the operations, establishing itself as the organizations can rely on in fulfilment range of strategic and operational benefits fulfilment of broader ‘first mover’ in the region, and taking of know your customer/business for the bank itself, as well as for its SME financial inclusion goals advantage of its ability to fully onboard principles. clients. It enables the bank to: of the country. clients to the LEI platform.

Viola Pamela Ndlovu, Head of Compliance, Interested to find out more Interested in obtaining an LEI for your business? NMB Bank Limited about the Validation Agent Validation Agents are just one source. LEI Issuing Organizations framework and its benefits also support this process for businesses around the world. for financial institutions? On the African continent, there are three LEI issuers in Download GLEIF’s e-book here. operation, with a list of global providers availablehere.

10 The LEI and financial inclusion: Looking to the future

While the LEI cannot claim ‘silver bullet’ status, it remains a uniquely powerful proposition for enabling financial inclusion in developing economies. The advent of the The LEI has the potential to create a more Validation Agent role for financial transparent, efficient cross-border exchange of institutions is building significant goods and data under the African Continental momentum toward the realization Free Trade Area. This is the first step toward of this goal and, at the same time, greater financial inclusion and overcoming the delivering myriad benefits to both challenges associated with access to trade finance participating banks and their business in Africa. Considering the high pace of digitization clients. and regulatory development across the African continent, the LEI is a great natural fit. It is a As LEI issuance increases in developing compelling, ready-to-go cross-border solution for regions, so does the world’s confidence entity identification that is open, reliable and to trade with the businesses that easily integrated into regulatory frameworks. collectively drive their economies. Success here will, in turn, increase the flows of international, inbound Stephan Wolf, capital that enable faster economic CEO, GLEIF. development.

GLEIF continues to seek dialogue with governments, NGOs, banks, and other stakeholders interested in either expanding the LEI initiative in Africa or in Please email [email protected] for more information. replicating the model in other developing economies.

11 Established by the Financial Cenfri is an independent not for Cornerstone Advisory Plus is NMB Bank Limited is a registered Stability Board in June 2014, profit economic impact agency an advisory firm based in Cote in Zimbabwe the Global Legal Entity Identifier based in Cape Town, South Africa. d´Ivoire- West Africa with an office (formerly National Merchant Bank Foundation (GLEIF) is a not-for- Cenfri works on financial integrity In Dakar Senegal as well. The of Zimbabwe Limited) which was profit organization created to and has extensive experience in firm is specialized in advisory and established in October 1992. The support the implementation and conducting research; training and training services towards the private Bank’s vision is to be the leading use of the Legal Entity Identifier capacity building; development of institutions as well as the public group in its (LEI) worldwide. guidelines and modules, targeted sector including regulators and chosen market and its mission is to engagement and advice on financial sector supervisors. The provide financial services to high GLEIF enables smarter, less costly Corresponding banking relations, areas of expertise of the net worth individuals, businesses and more reliable decisions about AML-CFT implementation, Risk firm are Compliance AML (Anti and uniquely branded technology who to do business with. Its Based Approach, Risk Based Money Laundering), terrorist enabled products to SMEs and services ensure the operational Supervision and Financial Inclusion, financing, enterprise wide AML/TF the broader market. The Bank’s integrity of the Global LEI among others. Cenfri mostly (Anti money laundering/Terrorist strategy is firmly focused on the System, providing free access assists government ministries, financing risk assessments, (Know enhancement of its digital offerings to the full global LEI repository. regulators, financial service your customer), Correspondent to ensure seamless service GLEIF is overseen by the LEI providers (banks, insurance, among banking issues including the delivery to the Bank’s existing and Regulatory Oversight Committee, others), designated non-financial global problematic of De-risking. future clients via its exciting and a group of public authorities businesses and professions Cornerstone Advisory Plus was refreshing digital touch points. and observers from more than (DNFBPs) and other stakeholders founded by a specialist in the NMB Bank Limited also continues 50 countries around the world. at national and regional and global financial sector with 20 years with its financial inclusion drive It is headquartered in Basel, levels (including ESAAMLG, GIABA, experience in the financial sector and has intensified the adoption of Switzerland. Alliance for Financial Inclusion in West Africa and in the context of different technologies to improve For more information visit: countries). multinational institutions. on-boarding experience to the www.gleif.org Bank’s future customers. For more information visit: For more information visit: www.cenfri.org www.cornerstoneadvisoryplus.com For more information visit: www.nmbz.co.zw

12 GLEIF Blog

Source: Global Legal Entity Identifier Foundation, St. Alban-Vorstadt 5, 4052 Basel, Switzerland Chairman of the Board: Steven Joachim, CEO: Stephan Wolf Commercial-Register-No.: CHE-200.595.965, VAT-No.: CHE-200.595.965MWST LEI: 506700GE1G29325QX363

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