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Psychometric testing makes inroads in Peru

Psychometric testing makes inroads in Peru

Posted by Juan Gavasa on November 04, 2014

If you own a small business in Peru and you want a loan, one option is to go to a bank and fill out an application. There is a strong likelihood, however, that it will come back with “rejected” stamped across it in big block letters.

Now, however, an alternative is being tested out that greatly improves your chances of success. Severino Risco, a 50-year old fish seller in Lima, is one of its beneficiaries.

He had been rejected for loans to support his business in the past but this time he received a little more than $1,000. He is faithfully repaying the loan and already has plans to ask for another, this time to branch out a little.

“They didn’t ask me about what I had, how much I wanted or whatever,” he says, “but what I would do if there was the chance of bankruptcy or what I thought about growing the business. I felt good doing it.”

What Risco underwent was a psychometric evaluation. If that sounds daunting, it is actually a new means to help banks get back to an age-old priority – that of knowing their customers. It has the potential to open their doors to many people who do not usually have access to loans because they have no credit history or they lack collateral.

After all, the word “credit” comes from the Latin credere, to believe or to trust. Psychometrics, meanwhile, is the act of measuring the soul.

“Psychometrics is a fancy sounding word,” says Bailey Klinger, chief executive officer of the Entrepreneurial Finance Lab, or EFL, based in Lima. “But it is basically a type of evaluation of personality, intelligence, skills, honesty, character, etcetera. We ask questions and turn the results into a credit score. We are doing something completely different that is actually a sensible way to evaluate risk.”

The computerised test takes an hour or less to complete. Questions range from whether interviewees like fast cars to whether price or service is more important for their business. The evaluation takes account of how the tests are completed, looking at the time it takes interviewees to respond and whether they go back to change their answers.

Nancy Lee, general manager of the Inter-American Development Bank’s Multilateral Investment Fund, says that despite economic growth over the past decade, 60 per cent of adults in Latin America are still “unbanked”. Peru has financial inclusion rate of 30 per cent, according to the IDB , below Brazil’s 47 per cent and Chile’s 83 per cent.

The test is one attempt to improve financial inclusion in the region and the IDB is putting money behind it by providing banks with guarantees to cover the risk of loans approved on the basis of ELF scores.

Klinger developed the idea on the back of a research project he undertook at Harvard University with Asim Khwaja, a professor there. Their psychometric test is currently being used in 15 countries worldwide where EFL partners with banks or other financial institutions.

Peru was one of four countries in a pilot project late in the last decade and the programme has been operating as a business in the country for the past two years. EFL works with two local banks – BanBif and Banco Financiero – and is about to add a savings and loan service in the country’s jungle region.

Dennis DiDonna, EFL’s chief operating officer, says thousands of tests have been given in Peru, resulting in tens of millions of dollars in loans that otherwise would not have been made. The expectation is for the numbers to more than double in the next 12 months.

There is some scepticism about psychometric testing, however. Zahid Ibne Hai, general manager at IDLC Finance in Bangladesh, told beyondbrics this year that potential borrowers may soon figure out how psychometric tests work and then “game” the system to produce the desired results.

Still, the system’s success in Peru has gone far beyond initial expectations and has been given a push by the banking regulator. Even Queen Máxima of The Netherlands has taken an interest, bringing along a sample of the test when she met with women micro-entrepreneurs during a March visit to Peru, when she focused on financial inclusion.

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