Promoting the Legal Entity Identifier to foster transparency and trade in African markets
In Africa, the limited availability of trade finance is a major constraint to the development of Africa’s trade sector and more acutely to intra-African trade. African financial institutions (FIs) face several obstacles to increasing trade finance. Among these, transparency in business relations is a critical factor. The limited transparency of African businesses, especially small and medium sized enterprises (SMEs) and local businesses and the perceived risk is often considered a major challenge to expanding trade finance portfolios and is among the main constraints that restrict the availability of trade finance solutions to African enterprises.
Why the Legal Entity Identifier?
Increasing transparency in business relationships became a global concern in the wake of the 2008 financial crisis as “authorities worldwide were unable to clearly identify parties to transactions across markets, products and regions, making it difficult to identify trends, evaluate emerging risks, including systemic risk, and take appropriate corrective action.” Subsequently, the importance and advantages of an unambiguous Legal Entity Identifier (LEI) became indisputable.
In 2012, the G20 Leaders called for a “global adoption of the LEI to support authorities and market participants in identifying and managing financial risks” and mandated the Financial Stability Board (FSB) to champion this global initiative. The LEI is the outcome of a collaborative effort between public authorities and the private sector to develop a framework that allows for the identification of entities through the issuance of unique LEIs, which could also serve for reporting and other regulatory purposes. The private sector is expected to leverage the accruing benefits of the Global LEI System to support improved risk management and increased operational efficiency, among other uses.
Global Legal Entity Identifier Foundation (GLEIF) was established in 2014 as the operational arm of the system issuing LEI to standardize the identification of legal entities at the global level, and to support the management and analysis of large datasets. The GLEIF is backed and overseen by the LEI Regulatory Oversight Committee (LEI-ROC) and supported by the Local Operating Units (LOUs) which act as primary interface for legal entities willing to obtain an LEI, issue LEIs and provide registration and renewals. The LEI is a 20-character, alpha-numeric code based on the ISO 17442 standard. It connects to key reference information that enables clear and unique identification of legal entities participating in financial transactions (financial institutions and companies). Each LEI contains information about an entity’s ownership structure and thus answers the questions of 'who is who’ and ‘who owns whom’.
It is very important to stress that the LEI is meant for “the identification of legal entities (and legal arrangements such as trusts), but is not applicable to natural persons, except for individuals acting in a business capacity”. As of June 2020, the adoption of the LEI continues to increase, with nearly 1.6 million LEIs subscribed worldwide. Despite this global uptake, African markets lag significantly behind global trend in adopting the LEIs. With just over 7,000 registered entities, the concept of LEIs seems to be far less known in Africa than in other regions.
The LEI Survey of African markets
Against this background, a survey was conducted by the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) between April and June 2020 with the support of the LOUs in African jurisdictions that have at least 15 registered LEIs to gain insights into the accessibility and potential benefits of LEIs for African markets. As stated by Stephan Wolf, CEO of the GLEIF: “The importance of trusted identity is just as critical in relation to trade finance. With Africa’s trade finance gap […], anything that can be done to minimise the obstacles to finance provision – such as the lack of a verified identity – should be pursued with enthusiasm.”
Feedback was received from respondents in 10 African countries (i.e., Angola, Egypt, Liberia, Mauritius, Morocco, Mozambique, Nigeria, Seychelles, South Africa and Tunisia). Although all types of corporates subscribe to the LEI, the survey revealed that the majority of respondents were from the financial sector (73%), which includes insurance, banks and real estate companies. Another 15% of the respondents are trading companies and the remaining 12% come from various other sectors such as manufacturing, retail and technology. The overrepresentation of FIs might reflect the fact that the LEI originated from the financial sector with an initial aim to enhance transparency in capital market transactions.
The survey respondents revealed two main drivers for acquiring LEIs, which are regulatory requirements followed by business considerations, as trading partners are increasingly insisting on the LEI to process transactions. 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. In fact, the more companies are involved in international or regional trade, the more important the LEI becomes. At the continent level, the implementation of the African Continental Free Trade Area (AfCFTA) is expected to boost regional and cross-border trade.
Additional benefits accrue from obtaining a LEI. 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. “In times when transparency and availability of data are at a premium, greater efforts have to be made to ensure that national stakeholders in African countries have the necessary information to signal SME reliability and attractiveness to potential international investors.” The publicly available LEI data pool could become the cornerstone for establishing the foundation of trust for African SMEs.
Likewise, most FIs reported an improvement in their relationship with regulatory authorities despite the LEI not yet being mandatory in any African jurisdiction. Other advantages of the LEI for FIs include more efficient Know Your Customer (KYC), client due diligence and on-boarding processes (35%), while some FIs (18%) claimed more inter-bank lending due to better inter-bank relationships. Additionally, LEIs can mitigate the de-risking trend in correspondent banking relationships and support the fight against financial misconduct.
The survey also questioned the efficiency of the system in place to administer the LEI. 60% of the respondents stated that their application was completed within one week and more than 75% found the cost reasonable although subscription fees vary between LOUs. As applicants are sensitive to costs and there is no obligation to subscribe from the LOU nearest to the entity’s jurisdiction, applicants are encouraged to compare prices before procuring the LEI. While the subscription fee was below USD 100 for roughly 40% of the respondents, most of them claimed a lower amount for the annual renewal fee, leading to the conclusion that the subscription fee is on average higher than the renewal fee.
Prospects for the future
The LEI has become mandatory in several jurisdictions around the world and the Financial Stability Board has recently published a report stating “FSB in close coordination with GLEIF, the LEI ROC and national authorities to explore the options to improve adoption of the LEI” in Cross-border Payments in 2021-2022. African regulators may soon follow this trend. So far, there are only two African-based LOUs in Nigeria and South Africa. Having more African-based LOUs would contribute to promoting the LEI concept and facilitate LEI applications for Africa-based entities. Forging strategic partnerships could also bolster awareness raising efforts among African FIs, real sector companies, national supervisory and regulatory authorities about the LEI, 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. The accruing benefits of the LEI uptake will manifest for African entities in terms of reduced compliance costs, secured business relationships and ultimately improved access to finance, including trade finance.
To learn more about the potential of LEIs for African Economies, please click here.
 https://www.bis.org/cpmi/publ/d147.pdf / CPMI - Correspondent Banking, July 2016 – p. 23
http://www.fsb.org/wp-content/uploads/g20_leaders_declaration_los_cabos_2012.pdf and http://www.fsb.org/2012/06/fsb-report-global-legal-entity-identifier-for-financial-markets/.
 The GLEIF is a supra-national not-for-profit organization headquartered in Basel, Switzerland
 The LEI-ROC represents public authorities from around the globe that have come together to jointly drive forward transparency within the global financial markets.
 The trade finance gap declined significantly from its peak of USD120 billion in 2011 to USD81 billion in 2019 (AfDB-Afreximbank 2020).
 The International Trade Center / ITC 2018.
 https://www.fsb.org/wp-content/uploads/P131020-1.pdf FSB-Stage 3 Roadmap Report on Enhancing Cross-border Payments, Oct 2020- p12
About the authors
Hugues Kamewe- Tsafack is a Financial Sector Development specialist with over 15 years of professional experience in multicultural environment. He leads MFW4A’s activities in agricultural finance, SME finance, trade finance and banking supervision. Prior joining MFW4A, he was a Regional Advisor at the World Savings Banks Institute (WSBI) providing leadership advice to senior executives of African savings banks on enterprise reforms to transform them into fully-fledged retail banks. His work also involved analytical contributions to international organizations activities. A Harvard Kennedy School (HKS) Executive Education alumni, he was awarded a certificate for the completion of the “Rethinking Financial Inclusion” Leadership Program in 2016. He holds a PhD in Economics from the University of Lyon II in France.
Sarah Weiß works as advisor in the Financial Systems Development department at the Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH. In her work, she focuses on sustainable finance, the promotion of green investments and trade finance. Prior to joining GIZ, she held strategic project management and business development positions at Deutsche Bank AG covering the regions Europe, Middle East and Africa and is an alumna of the Mercator Fellowship on International Affairs.