We spoke to Stephan Wolf, CEO at GLEIF, to discuss the potential for digital identity to revolutionize trade finance and to catch up on a recent initiative in the Global LEI System designed to promote greater financial inclusion in developing economies.

For readers not familiar with GLEIF, could you provide a short overview of what GLEIF is?

The Global Legal Entity Identifier Foundation (GLEIF) was established by the G20 and the Financial Stability Board in June 2014 as a non-for-profit organization. It was founded to support the implementation and use of the Legal Entity Identifier (LEI) to increase transparency and support regulatory supervision, specifically in capital markets. The LEI is now widely mandated for this purpose, by regulators in over 200 jurisdictions around the world, with the scope of the system now being extended to engage with other market sectors.

GLEIF’s role today is to ensure the operational integrity of the Global LEI System. It continuously increases both the information available within, and the quality of, the LEI data pool. GLEIF aims to make public access to LEI information easier and to support the development of new, innovative use cases.

Could you explain briefly what an LEI is?

The LEI is an alpha-numeric code that links to high quality business card information describing the legal entity. Each LEI belongs to a system in which the identity of a legally registered organization, or ‘legal entity’, can be verified quickly and efficiently by anyone, anywhere. It can be thought of as a globally recognized digital ID card for businesses.

There are currently 2 million LEIs in circulation, each one containing information about an entity’s ownership structure, enabling questions of identity (‘who is who’) and ownership (‘who owns who’) to be answered unambiguously.

What should be a priority for the finance industry in 2022?

Principally, the global finance industry must support the growth of a sustainable, climate-conscious economy in 2022. Financial institutions must also look to open up access to trade finance to create more inclusive trade networks around the world.

A 2017 report from the International Finance Corporation contends that 65 million firms around the world have an unmet annual financing need of $5.2 trillion. Given that small to medium-sized enterprises (SMEs) make up around 90 per cent of businesses worldwide[1], this trade finance gap disproportionally affects SMEs. Some 45% of SMEs in developing economies are struggling to access the funds needed to grow and expand.[2] Those in finance need to help bridge this gap.

What trade finance challenges are SMEs facing globally?

Despite the critical role SMEs play in the developing economies, many lack the robust business credentials and, as a result, their access to trade finance is either severely limited or denied altogether. Increasingly stringent regulatory requirements are compounding the problem, particularly in the areas of Know Your Customer (KYC) and Anti-Money Laundering (AML), both of which have emerged as new and growing challenges for banks seeking to lend to SMEs. On the African continent, for example, less than one per cent of banks between 2013-14 cited regulatory compliance as the primary reason for rejecting trade finance applications. Between 2015 and 2019, however, as compliance requirements have increased, this figure has grown to circa 16 per cent.[3] LEIs can help banks to overcome this compliance burden. They are a recognized form of business ID which banks can use to support the identification process.

How is GLEIF supporting SMEs to overcome these challenges and create a more sustainable and inclusive financial system?

In August 2021, GLEIF launched an international flagship project designed to expand financial inclusion among SMEs in developing economies, and especially on the African continent, by getting LEIs into the hands of businesses that need them.

SMEs across Africa contribute significantly to job creation and economic growth, yet their financial inclusion rates remain low. According to the Reserve Bank of Zimbabwe, Zimbabwean SMEs contribute more than 60% of the country’s GDP, yet only 3.8% of the banking sector’s loans and advances are extended to these businesses.[4] As part of the initiative, Zimbabwe’s NMB Bank Limited has taken on a new role in the Global LEI System known as a the Validation Agent – the first in Africa – which is now enabling it to obtain LEIs for its SME clients.

Participating SMEs are already beginning to realize the benefits of LEI adoption, negotiating better overseas credit terms and gaining access to escrow and guarantee facilities which bolster their ability to negotiate and trade in larger volumes, more frequently, and with less cost. NMB has also noted that the LEI holds the potential to reduce compliance bottlenecks SMEs experience when executing international transactions.

What benefits does the Validation Agent status bring to banks in developing economies?

By becoming Validation Agents, financial institutions can offer an entirely new service to their clients, helping them to save time and resources when partaking in international transactions and opening up opportunities to access greater trade finance. Although the full benefits of the LEI are fully realized in the long term, NMB has already begun to note initial benefits for its day-to-day business operations, establishing itself as the ‘first mover’ in the region, and taking advantage of its ability to onboard clients quickly and efficiently.

From a regulatory perspective, banks who adopt the role of Validation Agent must undergo a rigorous training program to adhere to GLEIF’s regulatory standards. This provides an opportunity for the bank to ensure its due diligence procedures are watertight.

What economic benefits can be realized in both developed and developing economies by embracing the LEI as a universal system of business identity?

Equipping legal entities worldwide with globally recognized identities will enable greater participation in domestic and international markets. This increases flows of inbound capital that stimulate economic development. By giving developing-market SMEs access to global trade, a vast number of new products and services become available to the world, enabling broader and more competitive supply chains for businesses worldwide. Additionally, using one global identifier, the LEI, will help bring transparency to these enriched supply chain relationships, ensuring greater trust for all participants.

How else is the LEI supporting the creation of a more inclusive and sustainable economy?

In addition to the launch of the digital identity initiative for developing economies, GLEIF also recently partnered with OS-Climate and Amazon to facilitate financial sustainability. The partnership enables real-time LEI data to be made publicly available in the cloud, via the Amazon Sustainability Data Initiative (ASDI) data catalog. By making this data readily available alongside other key climate-related data sets, such as carbon emissions and climate projections, investors are empowered to make more environmentally-friendly financial and investment decisions.

What is needed from the international financial community to realise the full potential of the LEI?

As LEI adoption increases across all fronts, so does the world’s confidence to trade with businesses that collectively drive their economies. Looking for new, innovative ways to encourage global stakeholders to leverage the LEI is the key to increasing the flows of international, inbound capital and investments that enables faster, sustainable economic development. As the financial community continues to support the pursuit of broad LEI adoption, its full potential will be unlocked.

For example, the Sustainability Accounting Standards Board (SASB) XBRL taxonomy was recently publsished and recommended the use of the LEI in ESG reporting. This gives financial institutions and governments a structure for ESG reporting and the option to integrate the LEI in a standardized and globally recognized manner.

Aside from GLEIF’s efforts to support financial inclusion, what is next for the foundation in 2022?

A key priority for GLEIF moving into 2022 is the development of the vLEI (verifiable LEI), an extension of the Global LEI System to create a fully digitized LEI service that can enable instant and automated identity verification between counterparties operating across all industry sectors, globally. Currently, the vLEI beta software is completing its initial sandbox stage as part of the cross-industry development program to create its technical architecture. Imagine being able to automatically establish digitized trust between organizations, without the need for human intervention. The possibilities here are almost limitless. Once complete, the vLEI has the potential to become one of the most valuable digital credentials in the world; it will be the hallmark of authenticity for all legal entities everywhere.

About the author:

Stephan Wolf is the CEO of the Global Legal Entity Identifier Foundation (GLEIF). Between January 2017 and June 2020, Mr. Wolf was Co-convener of the International Organization for Standardization Technical Committee 68 FinTech Technical Advisory Group (ISO TC 68 FinTech TAG). In January 2017, Mr. Wolf was named one of the Top 100 Leaders in Identity by One World Identity. He has extensive experience in establishing data operations and global implementation strategy. He has led the advancement of key business and product development strategies throughout his career. Mr. Wolf co-founded IS Innovative Software GmbH in 1989 and served first as its managing director. He was later named spokesman of the executive board of its successor IS.Teledata AG. This company ultimately became part of Interactive Data Corporation where Mr. Wolf held the role of CTO. Mr. Wolf holds a university degree in business administration from J. W. Goethe University, Frankfurt am Main.

[1] Small and Medium Sized Enterprise Finance section, World Bank website

[2] The MSME Finance Gap, IFC 2017

[3] African Development Bank’s Report Trade Finance in Africa: Trends Over the Past Decade and Opportunities Ahead

[4] www.rbz.co.zw