Overview
Asian SMEs will be able to access loans, join supply chains, and grow their operations with the support of a standardized, electronic ID platform.
Few people are even familiar with the phrase Legal Entity Identifier (LEI) in the banking sector. It makes sense, considering how difficult it is to link a directory of legal companies to reliable information flows that satisfy legal requirements, expand credit availability, cut expenses, and support business expansion.
Despite this, the Global Legal Entity Identifier Foundation (GLEIF), established in 2014 by the G20 following the global financial crisis of 2007–2008 and directly supervised by the Financial Stability Board (FSB), is leading an initiative that could revolutionize how we assess risk, lend money, or conduct business by simply using the LEI. Legal entities participating in international financial and commercial activities establish the LEI, a distinct, electronic, 20-digit standard identifier. It offers a common and identifiable code, similar to a passport or vehicle registration number, that serves as the foundation for previously unattainable data, enabling the identification and verification of legal entities and the linking of data from several sources to this one identity.
On the GLEIF website, the entity registers its official name, registered address, and details of its ownership structure, including the names of both direct and ultimate beneficial owners. This information must be updated yearly (for a small cost). Searches are free for users, and registration is open to businesses of all sizes and activities worldwide.
Understanding LEI Allocation Process And Oversight
Before the allocation of Legal Entity Identifiers (LEIs), global Local Operating Units (LOUs) play a crucial role in ensuring accuracy and consistency in registration. This involves cross-referencing information provided during registration with local databases such as business directories and credit bureaus. Oversight of this process falls under the purview of the Global Legal Entity Identifier Foundation (GLEIF), which reports to the Financial Stability Board (FSB) and ultimately the G20. The GLEIF is tasked with monitoring, verifying, and maintaining the integrity of LEIs.
Addressing Financial System Vulnerabilities
The 2008 financial crisis underscored the importance of accurately identifying financial system exposures. One of the key contributors to the crisis was the inability to identify exposures at the level of parent companies or groups, rather than individual entities. This challenge stemmed from various factors, posing difficulties for rapidly evolving financial institutions.
LEI Role In Enhancing Transparency
The LEI serves as a common thread of identity, ownership, activities, and performance for each entity within the financial system. By linking entities through LEIs, it establishes a harmonized flow of information across banks, irrespective of their scale. This ensures transparency and facilitates risk management by providing a consistent framework for tracking exposures and activities throughout the organization.
This would shorten the time it takes to finish manual operations across several departments, subsidiaries, and functions by providing more accurate data that is easily available in one location.
The bank’s risk management will improve with the sharing of cogent data. For compliance purposes, higher quality data decreases false positives and boosts reliability.
Along with accelerating new partnerships and streamlining credit evaluations, the LEI will improve the effectiveness of operational and market risk monitoring. Plus, expenses will go down overall.
A trading company should also be considered. A large number of these businesses are small and medium-sized enterprises (SMEs), and they often have a heavy workload that includes contract negotiations, ordering and billing, securing funding, obtaining raw materials, processing, manufacturing, packing, shipping, and distributing goods, as well as receiving, processing, making, and reconciling payments.
Because a corporation can gather information about a single entity—a customer, supplier, shipping company, or insurer—that all divisions of the trading company can access, the LEI will aid in streamlining such a labour-intensive industry. This process will gradually enhance the dependability of its records by developing a portfolio of previously unobtainable performance and historical data by counterpart.
Similar to a bank, an organization can reduce the possibility of questionable transactions or possible fraud by consulting more comprehensive records of past interactions with specific parties, such as an attempt to reroute cash.
Businesses Will Grow As A Result Of The LEI
To begin with, the GLEIF search feature helps businesses find and assess new vendors and buyers in their target markets, which gives them more confidence to grow their enterprises.
Creating these kinds of databases also aids big businesses in their search for new clients, including small and medium-sized businesses. As a result, these businesses, who are already able and willing to join in Asia’s supply chains, have additional commercial options.
Smaller organizations frequently find it difficult to keep complete business records, which is necessary for them to get financing. A series of authenticated transactions involving distinct buyers and sellers will provide a history of performance and payment that is significantly more significant and pertinent to the ongoing, dynamic character of a trading business than a collection of financial statements that are several years old.
Banks will be more inclined to pay small sellers and buyers early thanks to these new information sources. As data accumulates, SMEs in Asia can actively demonstrate the successful management of their businesses, thereby boosting their cash flow even in the absence of collateral and comprehensive, audited financial information.
Current and trustworthy commercial information derived from the LEI would also support the proliferation of e-commerce in trade finance, an industry that is still in its infancy, particularly in emerging Asia.
Conclusion
It is evident that registering is merely the first—though crucial—step toward realizing the full potential of this system.
Not only financial institutions and trading organizations, but all entities including government departments and agencies, companies, property and share registries, tax offices, sanctions lists, anti-money-laundering and know-your-customer directories, and auditors would need to adopt the LEI. It is only then that well created information portfolios can be really complete and meaningful.
Banks can encourage clients to register in order to promote worldwide adoption. They ought to concentrate on SMEs in particular, supporting them as they expand into new markets and build their companies, or in situations where credit information discrepancies have kept tiny but otherwise prosperous companies from getting financing.
When market participants widely adopt the LEI, it will enable various platforms to communicate since there will be a single standard agreed upon by all, facilitating transactions throughout their entire life cycle. However, scalability cannot occur if we all wait for others to take the lead.
The amount of individuals who are willing to engage with these outcomes directly affects the likelihood of achieving them. Furthermore, without the LEI, the legitimacy of these networks will be questioned.
