LONDON (Reuters) – His company may have been operating for 61 years, but that counts for nothing when Second Muguyo, finance manager at Zimbabwean copper and silver goods manufacturer Copperwares, tries to access overseas credit.
The problem? Foreign lenders and trade partners don’t know the company well enough. So when suppliers or customers demand cash payments or products up front, it locks in precious capital that can only be recouped when the finished goods are delivered – up to 10 months later.
The impact on the company’s business has been to curtail its expansion, limit overseas sales and cap hiring of local workers – a problem mirrored by firms across the country, hampering its ability to recover from years of economic slump.
“Currently, we don’t have any credit terms, even from our neighbouring countries,” Muguyo told Reuters. “We are funding our suppliers and customers left, right and centre, but we only receive it (payment) after 10 months.”
Now, help may be coming in the form of an access pass to the world’s financial system from a body set up by the G20 group of nations after the 2008 financial crisis, when regulators struggled to see who was exposed to stricken bank Lehman Brothers.
Largely confined so far to big corporates in the developed world, Legal Entity Identifier (LEIs) codes provide companies with a unique 20-character string of letters and numbers.
Copperwares is about to become one of the first mid-sized African companies to get one.
Companies undergo a series of checks to prove who they are to hold one, lowering the risk for overseas counterparties and helping the company access cheaper, more flexible funding.
Currently, just 8,251 LEIs have been issued in African countries, many to local units of major developed market companies, out of more than 1.8 million active LEIs globally.
Graphic: LEIs issued in African countries, https://graphics.reuters.com/AFRICA-COMPANIES/IDENTITY/dwvkrgnrbpm/chart.png
They could be crucial to bolstering financial inclusion on the continent.
“This LEI initiative, once we’re known out there, we expect life to be much easier; funding terms to be accessible, credit terms to be accessible,” helping Copperwares produce more, employ more people, offer better prices and boost market share, said Muguyo.
He said Copperwares estimated the market for its products in southern Africa was at least $15 million and had the potential to double in size, suggesting scope for the LEI to help the company boost revenues from just under $1 million currently.
Staff numbers could also grow from 65 to 120-130, he added.
Set up by the G20’s Financial Stability Board in 2014, the Swiss-based non-profit Global Legal Entity Identifier Foundation (GLEIF) oversees the LEI system, and has traditionally charged a fee for a company to register, something that has hampered take-up by smaller companies in Africa and elsewhere.
With the support of the German government, GLEIF is partnering with local banks to get them to conduct the due diligence checks necessary to get an LEI and ensure the company gets it for free.
By doing so, GLEIF said it hoped to help close the trade finance gap in Africa, which currently stands at more than $81 billion.
Between 2013 and 2014, less than 1% of African banks cited regulatory compliance as the main reason for rejecting trade finance applications, GLEIF said, while between 2015 and 2019 that figure had grown to around 16% as developed market banks demanded more information about their clients as part of efforts to fight fraud, money laundering and other financial crime.
“This is the first step toward greater financial inclusion and overcoming the challenges associated with access to trade finance in Africa,” said GLEIF Chief Executive Stephan Wolf.
At Copperwares, local bank NMB Bank Ltd helped Muguyo get the company’s LEI and hopes to roll out the initiative to many of its other small- and medium-sized enterprise (SME) clients.
“The pipeline is huge,” said Erasmus Bhunu, head of corporate and SME banking at NMB Bank. “Most of our customers are willing to onboard,” with more than 10 signed up so far across sectors including manufacturing and agriculture.
(Reporting by Simon Jessop and Emma Rumney; Editing by Mark Potter)