#1 in the Financial Inclusion Interview Series – Yann Desclercs from Cornerstone Advisory Plus speaks about countering the de-risking trend in African economies with the LEI
Following the launch of GLEIF’s digital business identity initiative designed to bridge the trade finance gap in Africa, we’re catching up with our key partners to hear their thoughts on how the project will bring about greater financial inclusion for SMEs on the continent and beyond.
Author: Yann Desclercs, Managing Director, Cornerstone Advisory Plus
All around the world, small and medium sized enterprises (SMEs) lack the legal documentation that can prove who they are to banks, service providers and other businesses. As a result, millions are struggling to access trade finance and create partnerships, particularly in developing economies.
Following the launch of GLEIF’s digital business identity initiative designed to bridge this trade finance gap in Africa, we’re catching up with our key partners to hear their thoughts on how the project will bring about greater financial inclusion for SMEs on the continent and beyond.
We spoke with Yann Desclercs, Managing Director, Cornerstone Advisory Plus to discuss how broad adoption of the LEI in the African financial system could help to reduce the continent’s trade finance gap. Cornerstone Advisory Plus is an advisory firm based in Cote d ́Ivoire, West Africa. It specializes in compliance advisory and training services for private and public sector institutions, including regulators and financial sector supervisors.
As part of the multi-stakeholder initiative, Cornerstone Advisory Plus assisted with the coordination of the project in collaboration with the other project partners. In addition, the Cornerstone team provided technical content and insight, facilitated stakeholder engagements and conducted data analysis with a special 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 broad LEI usage have on the broader financial system?
African financial institutions are struggling to access international correspondent banking networks, either because they do not have the critical size required in terms of volume of activity, or, more importantly, because they are not always fully compliant with international AML and KYC standards and sanction regimes. As a result, the African financial system is widely perceived as high risk by the international financial community. International banks have therefore formed the assumption that establishing links with these institutions would lead to costly due diligence processes, which would outweigh the potential additional revenue generated by transaction fees. The outcome of this risk vs reward analysis usually prevents these banks from establishing links with African financial institutions and can lead to them severing ties from existing relationships, a phenomenon known as ‘de-risking’.
Broad usage of the LEI can provide greater transparency in the African financial system. This would help improve the risk assessments for individual entities together with the perception of system itself, opening it up to a worldwide network of international financial institutions. This would certainly help support the effective inclusion of African financial institutions in the global economy.
Do you think the broad usage of the LEI could also have an impact on SMEs in the region?
Of course. As we know, de-risking has a huge impact on African economies and SMEs in particular, which make up the largest economic subset. A recent report from AfDB and Afreximbank shows that the continent’s trade finance gap is estimated at US$81bn, largely due to compliance and KYC issues and de-risking. SMEs are the most affected by this issue. Reversing the trend of de-risking by fostering transparency of the African financial system through the broad adoption of the LEI could help to reduce the trade finance gap for SMEs and wider African economies.
How can the LEI initiative help banks with their internal processes? How can they become more efficient as a result?
Banks that participate in this LEI initiative and take on the role of a Validation Agent can leverage their existing KYC process to obtain LEIs for their customers, with minimal to no additional steps, depending each bank’s KYC framework. As a result, participating banks can obtain strong global business IDs for their customers and help them to address globally recognized verification processes, all while streamlining their internal processes for periodic KYC renewals and ongoing customer information updates.
Another key benefit of equipping clients with an LEI is the simple identification of parental links between corporations using the GLEIF database, which can prove particularly useful in establishing beneficial ownership links as required by FATF recommendations and most jurisdiction’s laws. All these efficiency gains in the KYC process could eventually lead to greater cost efficiency by reallocating compliance resources proportionally and utilizing an effective risk-based approach as per FATF’s first recommendation, which is translated into most international and national laws.
What strategic benefits can banks realize by participating in the LEI initiative? How does it help them grow revenue, opportunities or market share?
Participating banks can benefit from improved risk perception within the international financial community, ultimately leading to increased trade capacity and corresponding market share. They can also develop a competitive edge by offering their customers globally recognized business IDs, delivering additional benefits for their SMEs and corporate customers.
This competitive edge coupled with the enhanced trade capacity could lead to significant growth in both market share and revenues, subject of course to an aligned and appropriate commercial, marketing and communication strategy.
What kind of ID services could an African bank anticipate developing once it has equipped its SME customers with LEIs?
The sky is the limit. However, for the purpose of this interview, let’s focus on existing platforms such as the MANSA repository created and managed by a partnership led by Afreximbank. The MANSA repository is a single source of the primary data required for the conduct of customer due diligence on African entities including financial institutions, corporates and SMEs. Subject to an agreement between MANSA initiative and GLEIF, the LEI could be offered as an option/choice for the identification verification part of the repository. The LEI being an internationally recognized global business ID, it could potentially add on to the already established reputation of the MANSA repository and fast track the onboarding for all entities who already have an LEI.
This fast-tracked onboarding process could apply to any other national or regional ID platform on the continent. To achieve this in practice, discussions need to be conducted between GLEIF and the platform managers around the continent in order to establish collaborative avenues in order to reach an LEI-based onboarding process in the existing ID platforms.
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Yann Desclercs has over 20 years of experience in audit, operational risk, compliance and AML in West Africa, working within international financial institutions, such as Citibank, and global audit firms. During his 10 years spent at Citibank, he worked across a range of key initiatives as Vice President and Regional Chief Compliance Officer for the West Africa cluster. Yann joined Cornerstone Advisory Plus in 2017 as Managing Director, where he continues to work on compliance assignments, assisting banks to bring their compliance framework up to international standards in a challenging environment of correspondent banking de-risking.