The Missing Middle: Developing countries have a large number of informal, low-growth microenterprises and some large firms, but relatively few SMEs.
In developed economies, formal SMEs account for around 57% of total employment, but only account for 18% of employment in low income countries [1]. This gap is called the "missing middle."
Research shows that these firms have high returns to capital [2], yet the main providers of capital, commercial banks, microfinance institutions, and private investors, face a key barrier in taking advantage of this opportunity: how to identify high-potential, low-risk entrepreneurs in a low transaction cost way and with little available information. Training programs, business incubators, and other support services face similar challenges in targeting their services.
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[1] Ayyagari Beck & Demirguc-Kunt 2003
[2] Banerjee & Duflo 2004, McKenzie & Woodruff 2008
EFL has developed effective, automated and scalable tools to identify high potential, credit worthy entrepreneurs. These tools are based on psychometric principles, drawing on results from decades of research. The EFL Tools have been statistically proven to reduce risk and have been used by financial institutions in over 20 countries. Results have shown that the EFL Tools can reduce default rates and expand lending while carefully controlling risk.