Description: Psychometrics as a Tool to Improve Screening and Access to Credit

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Psychometrics as a Tool to Improve Screening and Access to Credit

This paper studies the use of psychometric tests, which were designed by the Entrepreneurial Finance Lab as a tool to screen out high credit risk and potentially increase access to credit for small business owners in Peru. The analysis uses...

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Bibliographic Details
Main Authors:	Arráiz, Irani, Bruhn, Miriam, Stucchi, Rodolfo
Language:	English en_US
Published:	World Bank, Washington, DC 2015
Subjects:	BUSINESS OWNERS CREDIT MARKETS ALTERNATIVE CREDIT SMALL-BUSINESS LOAN BARRIERS TO GROWTH ECONOMIC GROWTH DEPOSITS PEOPLE FINANCING FORMAL FINANCIAL INSTITUTIONS LOAN PERFORMANCE INTEREST CREDIT SCORE CREDIT AVAILABILITY BIAS PRIVATE CREDIT LACK OF FINANCE ENTREPRENEURS CAPITAL STRUCTURE FINANCIAL STATEMENTS INFORMATION SHARING CREDIT SCORING LOAN ASYMMETRIC INFORMATION PROBABILITY OF DEFAULT BORROWERS PAYMENTS INTERNATIONAL BANK BUSINESS SUCCESS CASH FLOWS INFORMATION ASYMMETRIES LENDER BANK COMPETITION MICROFINANCE INSTITUTIONS WILLINGNESS TO PAY PUBLIC CREDIT SMALL-BUSINESS SMALL BUSINESS INTERNATIONAL FINANCE LOAN APPLICANTS CREDIT UNIONS FINANCIAL INSTITUTION LOAN DEFAULTS COMMERCIAL BANK CONSUMER CREDIT CREDIT BUREAUS UNION FINANCES LENDING DECISIONS CREDIT SCORES PAYMENT BUSINESS LOAN FINANCIAL INSTITUTIONS DEBT LIMITED ACCESS LENDERS GOOD CREDIT LOANS ENTERPRISES PROPRIETARY INFORMATION APPLICATION PROCESS FINANCIAL SYSTEM FINANCE BANKS UNIONS LOAN REPAYMENT CREDIT DECISIONS FORMAL FINANCIAL INSTITUTION FEDERAL RESERVE CREDIT CONSTRAINTS CREDIT-SCORING BUSINESS MANAGEMENT CAPITAL FEDERAL RESERVE BANK CREDIT HISTORY INFORMATION SMALL ENTERPRISES BUSINESS CREDIT FAMILY ACCESS TO FINANCE GENDER BANK CREDIT WORKING CAPITAL REPAYMENT POTENTIAL LENDERS CREDIT INFORMATION CREDIT HISTORIES PROPERTIES LOAN PORTFOLIO CREDIT REPORTING JOB CREATION PAYMENT HISTORY ACCESS TO LOANS ASSETS SMALL BUSINESS OWNERS DEFAULT EMPLOYERS CREDIT BUREAU MICROCREDIT PROFITABILITY CREDIT RISK ACCESS TO CREDIT MICROFINANCE ECONOMIC DEVELOPMENT FINANCING OBSTACLES FUTURE—CASH FLOWS BANK LOANS BUSINESS OWNER SMALL BUSINESS CREDIT FINANCIAL INTERMEDIATION ID BANKRUPTCIES BALANCE SHEETS CREDIT- SCORING LOAN SIZE FINANCE CORPORATION LARGE FIRMS NET WORTH MARITAL STATUS COMMERCIAL LENDING RISK MANAGEMENT LENDING CREDIT APPLICANTS ENTREPRENEURIAL FINANCE ENTREPRENEUR ARREARS CREDIT HISTORY FINANCIAL CONSTRAINTS FORMAL CREDIT SMALL BUSINESSES CREDIT REGISTRY CASH FLOW DEVELOPMENT BANK CREDIT APPLICATION EMPLOYEES
Online Access:	http://documents.worldbank.org/curated/en/2015/12/25516966/psychometrics-tool-improve-screening-access-credit http://hdl.handle.net/10986/23471

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Summary:	This paper studies the use of psychometric tests, which were designed by the Entrepreneurial Finance Lab as a tool to screen out high credit risk and potentially increase access to credit for small business owners in Peru. The analysis uses 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 Entrepreneurial Finance Lab tool. The paper finds 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. For unbanked entrepreneurs—those without a credit history—using the Entrepreneurial Finance Lab tool can increase access to credit without increasing portfolio risk.