#2 in the Financial Inclusion Interview Series – What bridging the $81bn trade finance gap could mean for Africa with Barry Cooper from Centre for Financial Regulation and Inclusion (Cenfri)
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: Barry Cooper, Technical Director, Cenfri
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.
Barry Cooper is a Technical Director at the Centre for Financial Regulation and Inclusion (Cenfri), an independent, not for profit think tank which works on African financial sector development.
Cenfri has a wide reach across Africa, holding relationships with both regulators and Financial Service Providers (FSPs). Cenfri’s role in the initiative was multifacted and involved finding candidate banks in suitable jurisdictions where the initiative could have the most impact on MSMEs and act as a demonstration case; engaging with regulators regarding the initiative; leading working sessions with the selected bank to guide them through the LEI process and address any challenges; and report writing and validation; among others. Cenfri and Cornerstone Advisory Plus’s evaluation mechanism successfully identified suitably 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 become involved with the initiative?
Cenfri has done a lot of work on identity, anti-money laundering (AML), counter financing of terrorism (CFT), know-your-customer (KYC) and MSME finance issues and this opportunity resonated with our work. In addition, we strive to lead on best and next practices and were greatly attracted to this initiative as this was the first in Africa, and provided a significant opportunity to shape key practices.
How does your organization benefit from its involvement in the LEI initiative?
Involvement in this initiative benefits Cenfri as we gain unique learnings from prototyping the process, helping to inform our approaches to solving MSME finance issues, particularly in our focus countries in Africa, which include Zimbabwe.
The LEI initiative has also provided a tool that we can recommend to institutions and regulators to address AML-CFT, compliance and de-risking challenges. In addition, Cenfri obtained its own LEI, which we can benefit from using ourselves.
What problems does LEI usage enable SMEs in Africa to overcome in the medium to long-term?
There are 54 states in Africa, each with their own incorporation bodies and registries, which each have varying processes and idiosyncrasies. Reliable verification and further incorporation of information for due diligence and risk management processes require high local country skill levels, can take significant time and is prohibitively costly and hence employed more in larger transactions. MSME, and even some corporate, transactions in Africa are either not progressed or are subject to default assumptions of higher risk.
LEI usage enables MSMEs to obtain a much stronger identity which is globally accessible, trusted and verified. Local banks have deep expertise in their national systems, risks and processes. The LEI harnesses this knowledge in a globally accessible format. The LEI is positioned to overcome risk management information asymmetries enabling better formal trade flows through more accessible trade finance, more accurate finance risk ratings, reduced unfavourable risk premiums, limited transaction delays and fewer outright rejections. It also helps to create more visibility for MSMEs and increases opportunities to trade and connect with partners they may otherwise not have been able to connect with. In addition, it can solve compliance challenges for AML-CFT by ensuring they are adhering to the highest standards globally.
What would the African SME landscape look like if Africa’s $81bn trade finance gap could be narrowed? What would this mean for the regional economy?
Narrowing the $81bn trade finance gap could have material implications for the African economy and its people, with the potential to enable significant growth and competitiveness in international markets. The question remains whether changes in trade activity would be inclusive with positive impact at the lowest income levels or if the benefit would be limited to primary industries and existing corporates, benefitting established social strata. Positive measures, like the LEI, are intended to help MSMEs to participate on a fair footing, promoting sustainable growth and economic diversity. Contributing over 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 the supply of services more efficiently throughout markets. Narrowing the trade gap should link with fostering intra-regional trade between African countries to further enable inclusive growth and development.
What opportunities could be created for the people of Africa if all SMEs could be equipped with globally recognized business ID?
Equipping all SMEs with an 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 particularly for trade within the Africa region which in the past has been systemically difficult between 54 states. The LEI will greatly enhance the accessibility and competitiveness of MSMEs not only globally but within their countries and the region. As mentioned previously, moderate MSME growth can have a significant impact in employment across diverse economic sectors and particularly at the lower income levels. Through enhanced networking effects the LEI can also result in better distribution of goods and services across countries, enabling access to additional local, sustainable products and services for Africans.
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Barry Cooper is a Technical Director at Cenfri. He has a particular interest in the development and regulation of digital payment instruments and currencies, with an emphasis on the impact of financial regulation on human rights. Since joining Cenfri, Barry has led Cenfri’s payments and financial integrity work as theme manager for FinMark Trust and then FSD Africa under the Risk, Remittances and Integrity (RRI) programme and several projects across sub-Saharan Africa, conducting research into a range of financial challenges to provide actionable recommendations for governments, donors and the private sector. In addition to his work at Cenfri, Barry currently sits on the Covid-19 Remittances Task Force and served on the focus group on digital financial services at the ITU. He is the director of the PRIME RAI CDD initiative on behalf of IFAD with the objective of enabling lower income, rural and female recipients at the last mile through more innovative and accessible KYC and CDD processes, whilst improving overall compliance and risk management effectiveness.