Dec 31, 2013

Innovative Tool in Micro-finance

From this article in the NYT
Banks in 16 countries are using a psychometric test to predict future behavior — specifically, whether someone will pay back a loan. Originally a Harvard doctoral project, the Entrepreneurial Finance Lab’s test has increasingly won the confidence of risk-averse bankers in places where, many economists believe, credit bottlenecks are severely stunting growth.
Since Standard Bank, Africa’s largest, first adopted E.F.L.’s model in Kenya in 2008, bankers around the world have used it to lend more than $200 million, in average amounts of $7,500, to entrepreneurs who would not have otherwise qualified, the finance lab’s founders say. Now an independent company based in Lima with about 30 employees, the Entrepreneurial Finance Lab has grown with the help of grants, including a $3.6 million prize for being among the winners of a G-20 challenge for small-business financing in 2011.
Some of the questions are
“I plan for every eventuality,” “I’m in between” or “Planning takes the fun out of life.”
Facinating! Some illustrative videos of how it works are in the Lab's website. 

In Haiti, and probably in most of the developing countries, banks do not lend to new (small) businesses - businesses that have not gotten credit before, which perpetuates a circle of poverty. This new test can help to change that. The test might create a secondary market of information, in the sense that if I need a credit I can ask successful entrepreneurs who have passed the test in the past. Of course the test can change the questions, but just the fact that I can learn what kind of answers or attitudes make people pass the test can be very useful. 

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