Small and medium enterprises (SMEs) are considered engines of economic growth and development, especially in developing economies, yet they continue to be disproportionately rejected from trade finance. However, there is evidence that this barrier is not impacting all SMEs the same: women owned SMEs are more likely to be rejected from trade finance than SMEs owned by men. One of the reasons for this higher rejection rate is issues with customer due diligence (CDD) and related trade due diligence. In this blog we explore how the Legal Entity Identifier (LEI) can not only overcome this barrier for all SMEs, but also be a tool to empower women owned SMEs.  

CDD and the rising trade financing gap for SMEs 

 SMEs are often referred to as the backbone of the economy. In Africa, they make up 80% of firms, employ between 60% and 70% of the population and contribute a whopping 50% to the continent’s GDP. Yet they struggle to access opportunities to grow and expand their business into the international market. In 2020 alone, 40% of the global SME applications for trade finance were rejected compared to only 20% for corporates.  

One of the most cited reasons for the high rejection rate of SMEs is CDD concerns. When SMEs apply for trade finance, the financial house considering the application must collect their CDD data, verify the registration and status of the SME as a legal business and juristic persona, and then aggregate the trade due diligence data on a per institution basis to verify the due diligence data. These processes require considerable skill and high costs from finance houses and are key factors in making it too expensive or complex to conduct CDD for SMEs with smaller deal size sand hence low to no profit margins for the finance house.  

While this barrier is hindering all SMEs from trading in the global market, it appears to hinder some SMEs more than others. In 2020, the average rejection rate for women owned SMEs was 44%, notably higher than the 38% for male owned firms.  

The case for gender-linked trade finance solutions  

Much of disproportionate impact on women can be attributed to deep seated structural and institutional gender-based inequalities and industry specific realities (i.e. different industries having different innate deal sizes and financing requirements) with women owned SMEs tending to have lower revenues and turnover. Thus making them more vulnerable to the minimum trade finance deal size that would be financially viable for the finance houses given the cost of due diligence. Globally, this has led to women owned SMEs being 2.5 times more likely to have 100% of their proposals rejected by banks than male owned SMEs (ADB, 2017). 

Based on data from the IFC, we know that women owned SMEs that export are more likely to earn more, employ more people, pay those people better, and are more productive than women-owned SMEs who only operate domestically. Denying them access to trade finance due to their deal size profitability thus directly hinders them from improving their deal size profitability. This makes the case for gender-linked trade finance solutions and solutions that will have a proportional impact on women owned SMEs. 

The LEI: a tool to unlock the economic potential of women owned SMEs in Africa 

The LEI is a simple and elegant solution to reduce CDD and trade due diligence related barriers to trade finance. It is a globally recognised and standardised form of verified ID for businesses that holds much of the required due diligence information, such as access to key legal reference data, on an SME. The LEI thus simplifies the bank’s due diligence process by removing the need for it to request information from SMEs and then verify that information through local authoritative sources, often at a substantial cost. It therefore reduces the risk of doing business with SMEs and reduces the cost of compliance, making it more affordable to consider SMEs with smaller deal sizes within financing profit margins. This is further supported by a recent B20 paper which suggests exploring the opportunity to promote the LEI as a worldwide unique identifier to support a “Global Value Chain” passport, thereby minimizing the burdensome and too-often duplicative trade finance processes, which particularly hinder SMEs. 

Although the LEI is not a gender specific solution, it has the potential to have a proportionate impact on women owned SMEs. Fifty-eight percent (58%) of SMEs in Africa are women owned and, more so than anywhere else, the LEI has the potential to unlock substantial economic development and employment opportunities in Africa. It’s because of this that Cenfri and Cornerstone partnered with the Global Legal Entity Identifier Foundation (GLEIF) to bring the LEI to Africa. As a result of this project, many SMEs in Zimbabwe have been provided with LEIs by their financial institution as part of the client onboarding process. Once women owned SMEs obtain LEIs, they can easily prove to their counterparties who they are in a digital way and unlock international trade opportunities. There has been no better time to shift our focus from the sheer quantity of women owned SMEs in Africa to the quality of empowering women owned SMEs in Africa. 

For more on the potential of the LEI, specifically to bridge the MSME identification gap click here, and for more on the LEI feel free to contact Lezanne A. Janse van Vuuren.