The Development Problem

  • Bailey Klinger
  • Asim Ijaz Khwaja
  • Carlos del Carpio
Chapter
Part of the SpringerBriefs in Psychology book series (BRIEFSPSYCHOL)

Abstract

There is a huge lost opportunity in emerging markets. Between 310 and 380 million of small business owners want loans, and could earn very high rates of return on that additional capital if they could get it. Banks have this capital available, and want to lend it out, particularly to small businesses since competition in that segment is low, unmet demand is high, and the interest rates that can be paid are very attractive. But the connection between the banks and entrepreneurs just isn't happening, because it is extremely difficult for banks to evaluate risk and know who to lend to. The entrepreneurs running these small businesses typically lack credit history and collateral. They don't have well-formatted trustable financial statements, and many of their transactions are with cash. So banks have no means to identify the high-potential, honest entrepreneurs. Lending to small businesses in advanced economies suffered this same problem, until the banks started evaluating and serving small business more like they serve the mass individual segment rather than treating them as mini-corporations. One of the key innovations was to use individual borrowing history of the owner to evaluate risk for the small business loan, applying quantitative credit scoring. This approach lead to a rapid expansion in profitable and sustainable small business lending, because it leveraged what information was available, and did it in a way that kept transaction costs low so that banks could make a large number of smaller loans to businesses. But what can be done in emerging markets, where credit bureaus lack the depth and breadth of coverage?

Keywords

Economic Crisis Income Expense Stein Conglomerate 

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Copyright information

© The Authors 2013

Authors and Affiliations

  • Bailey Klinger
    • 1
  • Asim Ijaz Khwaja
    • 2
  • Carlos del Carpio
    • 1
  1. 1.Entrepreneurial Finance LabCambridgeUSA
  2. 2.Harvard Kennedy SchoolCambridgeUSA

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