The African Continental Free Trade Agreement, which came into effect in 2021 created the African Continental Free Trade Area (AfCFTA), potentially the largest single market on the planet.
One of the major objectives for the creation of AfCFTA is the breaking down of national boundaries and other barriers that hinder cross-border trade, to allow for seamless trade and promotion of economic activities among African countries.
However, despite the very bright prospects of a new era of socio-economic prosperity on the continent, what may pose as an obstacle to the realization of the objectives of AfCFTA is the lack of visibility of African businesses, especially small and medium enterprises (SMEs), in the global business arena.
This lack of visibility, caused by the absence of a legal entity identifier (LEI), is the reason they cannot access the much-needed credit that should enable their growth.
Businesses in Africa face borderless trade financing challenges not only because of size, but because they are mostly unknown outside their domains.
While these businesses are not directly excluded from trade finance, they are often given unfavourable loan repayment terms which result in indirect exclusion.
To participate effectively in international business, therefore, African businesses, including SMEs and startups, must see Legal Entity Identifier as an imperative.
Legal Entity Identifier
Whether a business is registered on the African continent or in offshore locations as in some cases Mauritius.
The LEI is a major requirement due to mandates for trade reporting obligations such as the Financial Markets Act, 2018.
The use of LEI is required by African entities when they are trading and reporting and if conducting activities within the United States, European Union or the United Kingdom.
The global initiative gives business entities worldwide backing to succeed, especially with its roll out for African SMEs.
The LEI provides globally recognized business identities to SMEs. In innovative partnership local banks act as the first Validation Agent in Africa, using the bank’s usual onboarding process for business clients, including “know your client” (KYC) and “anti-money laundering” (AML) checks, to verify the identities and ownership information on businesses.
This helps SMEs access more favourable trade terms in international transactions and improve their access to finance.
The prospect of having African businesses best positioned for the global business arena explains the excitement that greeted the appointment of two African professional including Nigeria’s Dr. Folarin Alayande, a Nigerian international development economist, technology investor and financial services executive, as a non-executive director of the Global Legal Entity Identifier Foundation (GLEIF).
These appointments point to the significant and interest to drive the adoption of Legal Entity Identifier across Africa in alignment with GLEIF’s strategic priority of enabling digital trust for enterprises worldwide, and ultimately bringing more African businesses to the fore.
In 2023, Sub Saharan Africa witnessed significant growth despite the decline in funding over the last two quarters, which reflects global economic realities.
Although, Fintech startups and innovation hubs have thrived, particularly in countries like Nigeria, South Africa, Kenya, Egypt and Ghana, addressing diverse financial needs from payments to SME services.
Block chain and cryptocurrencies also gained traction; regulators worked on fostering innovation, while ensuring consumer protection. The use of AI and data analytics increased for credit scoring and risk management.
The Fintech sector played a crucial role in advancing financial inclusion, improving cross-border payments and addressing the financial needs of small businesses as well as individuals.
However, it wasn’t all rosy as concerns about e-fraud overshadowed some of the fine moments thereby highlighting the need for ongoing vigilance and regulatory adaptation in this rapidly evolving landscape.
This pressure persists, as industry watchers are concerned and worried about the rising global cost of funds and the declining shortage of investment across the continent.
Several startups in 2023, like PayDay, Bundle, Pivo, 54gene, Dash, Vibra, to mention but a few, either closed shop, or are on the verge of doing so, blaming the situation on financial and non-financial challenges, as well as lack of funding.
The year showed greater need to deepen corporate governance structures across Fintechs, and the overall financial service sector, especially for those seeking to explore international markets or seek funding rounds.
This is where LEI comes in to assist. As a globally recognized form of business identity, it would give African entities greater credibility when they apply for finance, engage in international trade and establish new supplier relationships for manufacturing processes.
The African Fintech landscape witnessed 26 publicly announced acquisitions over the last two years, according to Tekedia – a whopping 270 per cent growth from between 2019 and 2021. Industry players should therefore expect more of such moves from 2024. This figure is from publicly known acquisitions and shows significant growth of the African landscape.
It is expected that 2024 would bring in more consolidation of efforts among Fintechs and also between larger corporates and Fintechs, to explore synergies.
Mergers and acquisitions still serve as a strategic tool to allow startups to overcome the current funding landscape, while also delivering returns for existing stakeholders.
“Based on the current funding landscape, it is only fine to predict that more acquisitions would be considered by existing startups and the traditional banks and corporates seeking to leverage the strength and agility of the startups to consolidate on their offerings in the market”, according to Adeshina Adewumi, a renowned finance expert, Chief Executive Officer/Founder of Trade Lenda.
In conclusion, Africa needs improved investments to drive borderless economic activities with off-the-continent opportunity of creating an impact, particularly at a time AfCFTA is expected to boost borderless economic trade significantly, making Africa a single market of 1.3 billion people, and a cumulative GDP of over $3 trillion.
