Are Psychometric Tools a Viable Screening Method for Small and Medium-Size Enterprise Lending? Evidence from Peru (original) (raw)
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Psychometrics as a Tool to Improve Credit Information
The World Bank Economic Review, 2016
This paper studies the use of psychometric tests, designed by the Entrepreneurial Finance Lab (EFL), as a tool to screen out high credit risk and potentially increase access to credit for small business owners in Peru. We compare repayment behavior patterns across entrepreneurs who were offered a loan based on the traditional creditscoring method versus the EFL tool. We find that the psychometric test can lower the risk of the loan portfolio when used as a secondary screening mechanism for already banked entrepreneurs-that is, those with a credit history. The EFL tool can also allow lenders to offer credit to some unbanked entrepreneurs-that is, those without a credit history-who were rejected based on their traditional credit scores, without increasing the risk of the portfolio.
Does Psychometric Testing in Microfinance Actually Work?—The Case of Sogesol
Journal of Financial Risk Management, 2020
Psychometric testing is claimed to be a powerful innovation in credit scoring. Pioneered by the Entrepreneurial Financial Lab (EFL), this technique would enhance credit decisions by screening out high-risk applicants. This thesis aims to evaluate the predictive power of the EFL’s psychometric credit scoring model in microfinance through evidence from Sogesol, a Haitian microfinance institution. This evaluation has been conducted at two different levels: (1) A sample of clients has been selected from Sogesol’s database to carry out a back test of the EFL tool, using performance metrics such as the Kolmogorov–Smirnov (K-S) statistic, the area under the ROC curve (AUC) in comparison with the existing socio-demographic model in use at Sogesol; (2) We conduct an analysis of causality between the quality of the portfolio and the credit decisions made based on the EFL tool and/or the traditional credit scoring model through the estimation of a linear regression model. The results show that the psychometric credit scoring model would present low predictive power in terms of K-S and AUC. However, the EFL tool would outperform the socio-demographic credit scoring model in use at Sogesol. The study further indicates that there would not be any statistically significant relationship between the risk level and the decision of granting a loan or not. The thesis concludes that psychometric testing in its original format would not be efficient in the context of Sogesol’s microcredit operations. Thus, the thesis develops a new credit scoring model along traditional socio-economic and behavioral lines, using logistic regression. This new model presents a better discriminatory power than the EFL tool, regarding K-S and AUC. In addition, it is well calibrated, considering the results of Hosmer-Lemeshow (HL) test and the Brier score. If properly maintained and integrated into the client selection process, this new model could significantly improve credit risk management practices at Sogesol.
Sex differences in access to a small enterprise development fund in Peru
World Development, 1990
In an attempt to ensure that the direct benefits of an urban small enterprise project were reaching women, the Industrial Bank of Peru undertook a study of the constraints to women's access to a major credit program it had initiated in the squatter settlements (pueblos jrvenes) of Lima. The study found that the low proportion of women among the program's borrowers was not due to more women being rejected when they applied for loans, but to the fact that few women applied. High collateral requirements and complicated application procedures deterred women from applying. Those women who did apply received smaller loans than men and were concentrated in garment manufacture, services and commerce. Taking these factors into account, the authors make recommendations for ways to enhance women's participation in the credit scheme and similar small enterprise programs in the developing countries.
FACTORS ASSOCIATED WITH ACCESS TO LOANS BY SMALL-SCALE BUSINESSES IN UGANDA-DISSERTATION, 2018
The objective of the study was to examine the factors associated with access to loans by small-scale businesses in Uganda. The assessment was made by entrepreneur’s level of education, Age of the business, business performance and loan application procedures. The study used primary data with a sample of 96 respondents who were small business owners in Bombo Town council. A cross-sectional survey design was used where data was collected from business owners using questionnaires. The analysis was done using frequency distribution, Chi-square statistics and binary logistic regression. In the results, majority business owners were males (67.7%), 62.4% business owners were below 30 years and majority were involved in retail shop type of business (67.7%). 65.6% of small businesses had ever obtained a loan from microfinance institution. The factors that were significantly associated with access to loans by small businesses were level of education of business owner and business performance in Bombo T/C (p<0.05). Age of the business and loan application procedures were not significant predictors of access to loans (p>0.05). In particular, access to loans was more likely to those business owners who had attended a higher level of education (Secondary level and above) (OR=0.938) and those whose businesses had positive business performance in terms of sales growth (OR=1.431). The model had a p-value of 0.048 which indicated that it was well specified and a good fit. In conclusion, the factors associated with access to loans by small-scale businesses were education level of the business owner and business performance while age of the business and loan application procedures did not show an association with access to loans. In the light of findings, the study presents three recommendations for increasing access to loans by small-scale businesses. Firstly, there is need to localize the content like loan application forms as far as requirements for obtaining a loan are concerned. This will help to encourage those whose level of education is low to also take a step for external financing. Secondly, the government and other stakeholders should engage entrepreneurs in business management education through trainings in book keeping, customer care relations and marketing to ensure that business performance is improved. Lastly, Sensitization of the business owners about the benefits of applying for loans to finance their businesses needs to be done. This is possible with financial institutions coming up with free awareness services to give information about loans to entrepreneurs to reduce the fear in them of losing their businesses to lending institutions due to failure to repay.
Criteria for Assessing Small and Medium Enterprises' Borrowers in Ghana
This study focused on developing an insight into the decision making process which lenders employ in granting loans to SME borrowers. Questionnaires were administered on selected bank branch managers of conventional banks, rural banks and savings and loans companies. Findings from this study has brought to the fore some interesting revelations. The results indicated that when loan managers are deciding on whether to accept or reject an SME loan application, intended purpose of loan, repayment of previous loan, repayment schedule, type of business activity, size of loan relative to size of business and availability of collateral, ranked highest on their criteria list. On the contrary, CVs of clients, government guarantee of loans, charges on assets and gearing ranked lowest on the criteria list in terms of importance. The relevant factors identified in this study showed that lenders took particular interest in risk when dealing with SMEs. This is not out of place, as every business seeks to make profit and thus they need to be sure of recouping their monies when they lend them out to small businesses. It is thus very necessary for SME borrowers to develop an understanding of the decision criteria used by financial institutions in order to increase the probability of getting their loan request approved by fulfilling the required criteria adequately. During the past decade, the financial sector in Ghana has undergone major changes mainly through the financial sector structural adjustment programme as part of the economic recovery programme. Moreover, globalisation, mergers and acquisitions, and the emergence of new technologies have contributed dramatically to stiffer competition and pressures on profitability. In such a competitive marketplace, attracting profitable customers is a priority of all the financial institutions' (FI) managers especially banks. Banks are profit-seeking institutions that must provide acceptable returns to shareholders or go out of business. However, they operate under the objectives of profit maximisation through appropriate risk management strategy (Sinkey, 1998). This means that they must be prudent in the application of sound lending practices to assess the credit risk of the borrowers. It is reported that earnings from the lending activities account for more than 80 percent or more of the bank's profits (Wong, 1997). To estimate the borrowers' probability of default, FIs focus on the borrower's creditworthiness through gathering, processing and analysing timely and accurate information and small firms are no exception. The small business sector is now an increasingly important source of profitability for the banks. When lending to small businesses, the major task of lenders in reducing or avoiding credit risk is to overcome the problem of asymmetric information. This problem occurs when one party to a contract knows relevant information which has a material effect on the contract, but which is not known to the other party. The small business borrowers when approaching the banks for loans always have an information advantage over the bankers that sometimes lead the former to overstate the soundness of their business projects in relation to the funding sought (Storey, 1994). Banks usually end up making unprofitable loans. Furthermore, the action of these borrowers who successfully obtain bank loans is not directly observable by the bank. These borrowers might use the funds for other purposes than stipulated in the loan contract. Therefore, banks must not only investigate the creditworthiness of the small business borrowers but also monitor their activities once they have obtained the loans.
Determinants of Access to Bank Financing in SMEs in Mexico
Journal of Risk and Financial Management
Several empirical studies indicate that the lack of financing is one of the main barriers that affects the economic growth of small and medium enterprises (SMEs). The main objective of this investigation was to determine to what extent the economic sector, the enterprise size, the characteristics inherent to the enterprise, the legal status, the variables linked to the performance of the enterprise, and the attributes of the owner influence the access to the bank financing of SMEs in Mexico. Using a discrete-response probit regression model, the impact of enterprise characteristics on the probability of obtaining a bank loan was determined. The data collected are from the Enterprise Surveys of Mexico, carried out by the World Bank. The sample of 1480 enterprises is representative by enterprise size, by economic sector, and by region. The research has a quantitative approach with a correlational scope, and a nonexperimental and transectional design. One of the main results highlights...
2011
We use a novel experimental approach to look into the ‘black-box’ of the underwriting process for small business loans in India, a large emerging market. This research seeks to facilitate successful lending to small and medium enterprises by the formal banking system. This sector has been identified as the “missing middle,” too large for microfinance, but often lacking the credit history or collateral assets typically required by the formal banking sector. The findings of our research aim to identify market-based interventions that can reduce bias and default-risk in lending, with the objective of improving the financial access of previously unbanked entrepreneurs in an emerging market.