The questions may be deceptively simple. You may be asked to feed in a ‘yes’ or ‘no’ on the computer question like: do you enjoy going to parties? How many numbers can you remember in a sequence? Do you like to experiment with your mobile handset?
Innocuous queries these may seem. But in reality, you are made to reveal a lot to the software about your entrepreneurial traits. Welcome to the world of psychometric tests of SME (small and medium sized enterprises). The test is developed by the Entrepreneur Finance Lab (EFL), a branch of the Harvard Kennedy School’s Centre for International Development. A Pakistani Harvard Professor, Asim Khawaja, is co-founder of the EFL and Chairman of its board.
In flat 30 minutes, the test will assess your traits like drive, intelligence, attitude, outlook, ability, ethics and above all, business acumen and quantitative skills, to tell whether you have the potential to become a successful entrepreneur. If you pass muster, you will be given a bank loan that will overwhelm you, that too without the backing of collaterals.
The test is making headway in many African and Latin American countries and is on the way to neighbouring India as well. It contains about 150 questions and is relatively cheap to administer. The EFL claims its psychometric test has the same or better accuracy as traditional credit scoring models - used in developed countries to predict default by corporate clients - albeit without requiring business plans, credit history or collaterals.
It is not a psychological or personality test, and its scope is limited to assessing the entrepreneurial potential of a candidate and credit scoring.
It is based on the eminently logical principle that trustworthy business people share some common skills, character and behaviour. It implies that advanced studies have uncovered a host of psychological, sociological and cognitive features, which have robust links to entrepreneurial success.
Experts are already saying that it is like the magnet that finds the needles in a haystack. Measured against scores of other applicants, the test can identify entrepreneurs with the highest potential and the lowest risk.
Another advantage of this screening test is that it measures future upside potential, rather than downside risk, as is done by banks using traditional risk management tools. Research already shows that the EFL test reduces default by 20-45 percent for a comparable SME loan given by banks.
Psychometric, which means “measurement of the soul”, refers to the use of questionnaires to measure knowledge, abilities, attitudes and personality traits. Psychometric tests, as we know, are used by large corporations and banks for pre-employment screening. Over 29 percent of employers in the US use psychological assessments of employees for selection and development, and 80 percent of employers use intelligence and ability tests.
Between 2002 and 2007, the use of personality assessments for selection in the US went from 21 percent to 59 percent of surveyed employers; the use of cognitive ability tests went from 26 percent to 41 percent; and the use of more general skills/knowledge tests went from 12 percent to 56 percent. This shows the use of psychometric tests is rising among corporations. Closer to home some Chinese and Indian banks have recently added psychometric tests to probationary officers’ recruitment.
The EFL test has primarily been developed to address the problem of what is called the ‘missing middle’ in financing. Developing countries have many informal micro-enterprises and large corporations, but very few SMEs (for example, in India only 6 percent of the MSMEs are registered).
Underlying this ‘missing middle’ problem is that while there is a rapidly expanding micro-credit sector and sophisticated corporate banking, there is relatively little financing for SMEs. In part, bank lending is stymied by a lack of appropriate, low-cost screening tools to identify high potential entrepreneurs, since SMEs often lack extensive business plans, collateral or borrowing history. Globally, there are 400 million SMEs that fall into this financing gap.
The EFL claims its partner banks triple their lending volume without increasing risk, by tapping into new segments with little competition. Tens of thousands of entrepreneurs across dozens of countries and languages have used the application, from one-person micro-enterprises borrowing $800 to medium-sized enterprises receiving financing of over $500,000, this according to a USAID study, which is now taking the test to the Muslim countries for Sharia-based lending.
The test has been refined over the last four years. The current test involves multiple choice, true or false, and mathematics, and is completed in about 30 minutes; unlike an hour earlier. The EFL has partnered with some of the leading banks in Africa and Latin America, including Standard Bank of South Africa and BBVA Bancomer of Mexico.
The USAID, which well recognises this shortcoming, is actively promoting this solution by saying that such low-cost psychometric tools could provide a viable alternative to the traditional screening methods; the requirements for which are prohibitively difficult for typical SME business owners to meet. The low transaction cost and highly scaleable nature of psychometric-based credit scoring enables rapid global adoption and, therefore, creates a significant social impact.
If the distortion in the firm size distribution in developing countries was removed and the distribution regularised, thus ‘filling’ the missing middle, estimates suggest that the GDP across developing countries would increase by over $3.6 trillion annually. This shift could create millions of new SMEs.
In Africa, an initial research and adaptation of the tool has already started to catalyse private-sector scale-up. Financial institutions in the continent are now lending out over $1.5 million per week based on these tools to small-scale entrepreneurs, who would have previously been rejected.
This test can especially come in handy to both public sector and private sector banks in Pakistan that are currently either struggling or reluctant to lend to the micro and small enterprises. A prudent use can not only allow the bank managers to more confidently lend larger amounts to the SMEs, but in the process also fend off charges of corruption and favouritism in lending. Most importantly, it can unleash a culture of growth that is based on fair opportunity and equitable distribution.

The writer is an entrepreneur and economic analyst.  Email: