Haiti: Innovative credit-scoring tool to provide new financing options for micro and small enterprises
The Multilateral Investment Fund (MIF) and the Société Générale de Solidarité (Sogesol) are launching a project to increase access to finance for micro and small enterprises in Haiti through the implementation of an innovative credit-scoring tool based on psychometrics to determine entrepreneurial ability and unlock financing.
This project hopes to achieve great scale, reaching 2,000 micro, small and medium enterprises (MSMEs) who may not otherwise have qualified for appropriate levels of financing using traditional loan/funding methods. This project is the first of its kind in the region.
The MIF is providing $340,750 in non-reimbursable resources, with executing partner Sogesol providing the remaining $133,000. Sogesol, an independent commercial micro-lending institution based in Port-au-Prince, is committed to the mission of promoting Haitian entrepreneurship through adapting traditional banking methods to respond to the needs of micro and small entrepreneurs. As part of the cash counterpart, Sogesol will be asked to finance with their own resources acquisition of the testing devices and installing them in their branches.
Haiti has a significant need for innovative tools to better assess and identify risk for MSMEs through the scarce information available. One of the main barriers that affect access to finance is the difficulty in providing real collateral. For example, 82% of Haitians do not hold clear title to their land or homes. Additionally, there is no functioning credit bureau in the country, and MSMEs often operate without employing generally accepted accounting standards, which make credit assessments by financial institutions very complicated.
In that sense, a psychometric tool to determine entrepreneurial ability and honesty has huge potential, and could become a powerful means for unlocking financing to the unattended business segment in terms of increasing access to significant levels of bank finance for MSMEs. For that purpose, The MIF has partnered with the Entrepreneurial Finance Lab (EFL), launched by researchers at Harvard University, which has developed a tool that evaluates persons rather than business: personality, intelligence, and character as direct measures of a borrower’s ability and integrity. The main advantage of this approach is that it does not rely on well-prepared financial statements, business plans, or borrowing history, and at a transaction cost that would allow for massive scale-up. Tests show that successful entrepreneurs consistently score higher on certain aptitude tests and have particular personality traits and cognitive styles.
The MIF is the first to pioneer this tool in Latin America and the Caribbean. This type of screening has been already applied very successfully in Africa. Within only a few months of launching the tool in Kenya, Standard Bank was providing over $1 million per month in unsecured working capital loans to small businesses (average loan size of $7,000) that were previously not bankable because of lack of information. It has also been used extensively for pre-employment screening.
The project will further improve this low-cost, automated tool that should be also objective and resistant to manipulation in identifying growth-oriented MSMEs and evaluating their risk. Once further implemented, this tool could represent a breakthrough in scalable, replicable and profitable lending to the missing middle, and may correct distortions that restrict productive MSME growth, thus contributing to creating productive jobs and dynamic long-term growth.
Moreover, once the project is complete, the MIF will, through case studies and workshops, share results with other local financial institutions to enhance the impact of the project and to provide those who need it with knowledge of what works, in order to catalyze behavioral changes among a broader number of financial institutions in Haiti.
By applying new and innovative strategies and techniques to facilitate access to finance in the region, the MIF honors its commitment to the peoples of Latin America and the Caribbean to use all resources at their disposal to significantly improve their lives.