EFL was selected as one of the most innovative solutions in the world to unlock access to finance for SMEs in developing countries.

Click here to find out more about the SME Challenge!

At its annual meeting, the Group of 20 launched a competition to find the best models worldwide for public-private partnerships that catalyze finance for small and medium enterprises (SMEs). The Entrepreneurial Finance Lab (EFL) was selected as a winner of the challenge. The EFL is pioneering the use of psychometric screening tools of entrepreneurial ability and honesty to unlock large-scale bank finance for SMEs in developing countries.

Entrepreneurial Finance Lab Research Initiative (EFLRI)

OUR GOAL

EFLRI’s goal is to evaluate the impact of psychometric screening tools and alternative financial contracts on access to finance and entrepreneurial growth in the developing world’s ‘missing middle’.

 

 

As featured in Business Week:

A Test to Identify Entrepreneurs

 

"Harvard researchers have a way to help banks screen loan applicants easily. The goal: to spur lending to small and midsized companies in the developing world." 

Finance and the Missing Middle. Emerging and developing economies have a large number of micro-firms and some large firms, but far fewer growth-oriented Small and Medium Enterprises (SMEs) compared to developed economies. Despite evidence of high returns, these firms face critical problems in accessing finance. See ‘the missing middle’ for more details.

A new approach. The barriers to finance in the missing middle show that unlocking entrepreneurial potential in developing countries requires a new approach to screening and risk evaluation. Psychometric testing offers such a solution. These tests have been used extensively in the academic studies of entrepreneurs, as well as in for pre-employment screening with great success (link to readings). A battery of these evaluations of personality, intelligence, and character could provide direct measures of an entrepreneur’s ability and integrity, can be automated, do not require a credit history, and are resistant to manipulation. When combined with the right financial contracts, they could represent a breakthrough in profitable lending to the missing middle.

The Entrepreneurial Finance Lab Research Initiative is currently pursuing three major activities:

  1. The drivers of entrepreneurial ability. We have pilot tested various psychometric instruments on over 2000 entrepreneurs across Africa and Latin America, and are currently analyzing this data to better understand the psychological and intellectual drivers of entrepreneurial ability and risk of default. This research will lead to a series of papers on topics such as the role of intelligence versus personality in entrepreneurial ability, differences in the drivers of entrepreneurial ability across countries and cultures, and the interactions between business characteristics, personal characteristics, and firm performance.
  2. Psychometric screening & Micro-Equity. Psychometric screening tools measure future upside potential rather than traditional risk management tools used by banks for debt contracts, which only measure downside risk. This makes psychometric screening particularly well-suited for alternative quasi/micro-equity instruments. Such contracts have the added advantage that they provide positive incentives for the investor by having them directly share in investee success.  From the Islamic Finance perspective it also offers Shariah-compliant financial contracts. In partnership with the Harvard Kennedy School (HKS) Middle East Initiative and the HKS Belfer Center for Science and International Affairs Dubai Initiative we are studying the applicability of these tools to the region and searching for partner financial institutions to gather data from local entrepreneurs.
  3. Impact of psychometric screening on access to finance. The Entrepreneurial Finance Lab Research Initiative has partnered with EFL LLC, a private company working with financial institutions to implement psychometric screening tools. EFLRI is evaluating the impact of these pilot trials on risk, performance, and overall access to finance.

For more information on these research initiatives, please contact EFL@hks.harvard.edu.

 

For more information on EFL’s screening technology, please visit www.efinlab.com.