Psychometrics as a Tool to Improve Screening and Access to Credit
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 use administrative data covering the period from June 2011 to April 2014 to compare debt accrual and repayment behavior patterns across entrepreneurs who were offered a loan based on the traditional credit-scoring 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---i.e., those with a credit history. For unbanked entrepreneurs---i.e., those without a credit history---using the EFL tool can increase access to credit without increasing portfolio risk.
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| Format: | Working Papers biblioteca |
| Language: | English |
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Inter-American Development Bank
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| Subjects: | Credit, Small Business, D82 - Asymmetric and Private Information • Mechanism Design, G21 - Banks • Depository Institutions • Micro Finance Institutions • Mortgages, G32 - Financing Policy • Financial Risk and Risk Management • Capital and Ownership Structure • Value of Firms • Goodwill, Asymmetric information;Psychometric tests;Access to credit;Credit risk, |
| Online Access: | https://doi.org/10.18235/0000199 https://publications.iadb.org/en/psychometrics-tool-improve-screening-and-access-credit |
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| Summary: | 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 use administrative data covering the period from June 2011 to April 2014 to compare debt accrual and repayment behavior patterns across entrepreneurs who were offered a loan based on the traditional credit-scoring 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---i.e., those with a credit history. For unbanked entrepreneurs---i.e., those without a credit history---using the EFL tool can increase access to credit without increasing portfolio risk. |
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