Archive for: lending

Can we peer into the soul of an entrepreneur to predict business success/risk in lending? A group of researchers based at the Entrepreneurial Finance Lab at Harvard University is convinced that the probability of willful default by borrowers can be predicted with psychometrics (psycho-metrics literally means measuring the soul).

So instead of screening new borrowers based on collateral–as banks do–or on social reputation–as microcredit traditionally does–Fina Bank in East Africa is to begin screening based on psychometric testing. Applicants for small business finance in Kenya, Uganda, and Rwanda will be screened for entrepreneurial potential or future earning potential based on criteria developed by the Harvard researchers.

Psychometric testing has long been used in recruitment. The Harvard researchers have adapted four key characteristics of psychometric tests–intelligence, personality, cognition, and ethics–that have been linked to entrepreneurial success and show promise for financial institutions to reduce risk. They’ve tested it on a small sample in South Africa, and now they are applying the technique through partners around the world to the “missing middle” of financial services – small traders and business owners (SME, not micro).

What say you? Is personality the best test of business success?

Last Wednesday, the US legislature sent to President Obama new credit card rules that he signed into law last Friday. The law will regulate and restrict deceptive and unfair practices that began in the shadows of the sub-prime credit card market and have gradually crept into the mainstream. Further legislation in the works promises restrictions on payday lending (borrowing against your next paycheck, generally with very high rates and fees on short-term loans that tend to be rolled over again and again as balances pile up).

At first glance, this would not seem to have much to do with microfinance in developing countries.  But are there parallels that should concern us?

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