the test of entrepreneurship: revolutionizing sme financethe test of entrepreneurship:...

The Test of Entrepreneurship:Revolutionizing SME Finance

Bailey KlingerCEO, Entrepreneurial Finance Lab

© 2011 – EFL Global Ltd. All Rights Reserved. 2

Global MSME Opportunity

* Excludes OECD

According to the IFC, the size of the global* MSME credit gap is $USD 2.5 trillion comprising over 400 million MSMEs


Latin America MSME Opportunity

The credit gap in Latin America alone is

$USD 400 billion andhome to 47‐57

million MSMEs*

* According to IFC research, excludes OECD

Why?

‐Banks don’t have the money?

‐Bankers are dumb?

‐Bankers are smart, but SME owners are dumb?

‐Something else…


SME Market Challenges

Traditional SMECredit Screening

• High cost, personnel intensive

• Backwards looking, relying on credit history & collateral that many SMEs do not have

• Little information to evaluate risk

• High risks, high costs, unexploited opportunity

EFL SMECredit Screening

• Computer‐based and highly scalable

• Forward looking, bridge into the formal credit registry / system

• Complements traditional info for more complete risk analysis

• Bigger market, lower costs, lower risk


How do we do this?

IntelligenceEthics &

Honesty

PsychologicalProfile

Business Skills

EFL Tests the Entrepreneur:

Ability & Willingness to Repay

EFL Tests deep‐rooted aspects of entrepreneurship that are statistically proven to predict credit risk


How Does EFL Work?

• Potential borrowers take a 30‐40 minute assessment on a computer, tablet or cell phone, in a branch or in the field

• The questions are dynamic and the combination of answers yields a highly predictive score

• Examples of the types of questions asked are …


EFL In Action: Example 1

1. Other people’s opinions are not important.

True False


2. A big part of success is luck.

True False


EFL In Action: Example 3

3. Remember this number for 5 seconds, then repeat it: 823460.

Right Wrong


EFL In Action

The power of SME credit scoring models in rich countries but adapted to emerging markets

# of Test T

akers

Risk


How Does EFL Work? – Scoring• Demonstrated ability to

expand lending by 3X without increasing risk targets

• Can lower default rates by 25‐40%

# of Test T

akers

Risk


How Was It Developed?

40+ years of research on

entrepreneurs

• 5 Years of research at Harvard University• Tests of thousands of entrepreneurs

across Africa and Latin America • Funded by google.org

EFL Global =

Adaptation to

credit risk+

Proven psychometrictests from pre‐employment screening

+


EFL Results

One of Africa’s largest banks used EFL to enter the massive SME segment

Champion Challenger

Bank credit risk target:10%

Loan given: If EFL or the Bank said “Yes”

+80% of new loans classified as EFL “Yes” and Bank “No,”meaning they were inaccessible without EFL

Percentage of Non-Performing Loans

Number of Clients

4.1%

12.6% 20.1%

166

138 123

EFL Yes 9.9%

EFL Yes 529

© 2012 ‐ EFL Global Ltd. All Rights Reserved 14


EFL Results

Namibia

South Africa

Angola

DRCKenya

Mozambique

Nigeria

Botswana

Malawi

Ghana

Zambia

Uganda

Zimbabwe

Lesotho

Swaziland

Tanzania

Namibia

South Africa

Angola

DRCKenya

Mozambique

Nigeria

Botswana

Malawi

Ghana

Zambia

Uganda

Zimbabwe

Lesotho

Swaziland

Tanzania

Namibia

South Africa

Angola

DRCKenya

Mozambique

Nigeria

Botswana

Malawi

Ghana

Zambia

Uganda

Zimbabwe

Lesotho

Swaziland

Tanzania

• After initial 4 pilot countries, the bank implemented the EFL tool across their entire footprint

• Bank signed on to run 50,000more tests per year for the next two years

• Current lending of nearly $USD 2 million per week


Results: Latin America• EFL’s proven risk sorting capability provides further

segmentation within the set of approved loans

At launch, loan applicants at a Peruvian bank began presenting 2x more loan applicants knowing that they can now be scored.

Mexican bank started approving loans to firms with less than 2 years of documentation.

EFL History

Harvard researchers and EFL co-founders Bailey Klinger and Asim Khwaja developed a credit screening tool for unbanked SMEs

2006

2008 Received a grant from Google.org and SNV Latin America to launch the Entrepreneurial Finance Lab project

The Entrepreneurial Finance Lab became an independent, private organization 2010

2011Winner 2012 African Business Award for Innovation2M+ USD in Lending per Week40,000+ EFL Questionnaires

2012

G‐20 Award: One of the most innovative solutions to SME finance

in the world. With IFC & G‐20 assistance, major global expansion

© 2012 ‐ EFL Global Ltd. All Rights Reserved 17


Next Steps – Latin America• FOMIN Project – Launched in Mexico, Peru, Haiti

• At least 2 more FOMIN‐supported pilots in the region

• Preliminary discussions in Brazil, Guatemala, Costa Rica, Argentina, Chile

• What could help expansion in the region

• Introductions to financial institutions (including public banks) seeking to expand lending to SMEs

• Conversations with regulators

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