Conclusion

Abstract

While these current and potential entrepreneurs face numerous hurdles, the evidence clearly shows that the difficulties of financial intermediation for small and medium-sized enterprises are both significant and costly. Overcoming this barrier represents both a major profit opportunity for lenders and a major development opportunity for society at large, including of course entrepreneurs themselves. New tools that allow for screening and risk evaluation for small and medium-sized enterprises with low transaction costs and without depending on pre-existing information like borrowing history or business plans could represent a breakthrough in solving this problem. We have proposed one such tool, the use of psychometric tests, and evaluated its potential both conceptually, based on past studies, and based on a newly collected international dataset. The results show that there are some psychometric dimensions that have statistically and economically significant relationships with business profitability, which is of significant interest to investors, entrepreneurs, and capacity builders, and also that have significant relationships with default risk, which is of significant interest to lenders. Some of them are found to hold with surprising stability across a wide variety of countries, cultures, and business types. These questions could provide the boost to predictive power needed to bring millions of striving small business owners into the formal financial system and give them the capital they need to grow their businesses, if they can be successfully leveraged for credit screening. The Entrepreneurial Finance Lab (or EFL for short) is a company set up to work with banks to deploy this technology and realize this potential. Since 2010, the company has been implementing a credit-screening tool including psychometric content similar to that reviewed above, and modeled using the Bayesian hierarchical methodology.