Friday, October 22, 2010

Measuring The Soul Of An Entrepreneur

Can we peer into the soul of an entrepreneur to predict business success/risk in lending? A group of researchers based at the Entrepreneurial Finance Lab at Harvard University is convinced that the probability of willful default by borrowers can be predicted with psychometrics (psycho-metrics literally means measuring the soul).

So instead of screening new borrowers based on collateral – as banks do – or on social reputation – as microcredit traditionally does – Fina Bank in East Africa is to begin screening based on psychometric testing. Applicants for small business finance in Kenya, Uganda, and Rwanda will be screened for entrepreneurial potential or future earning potential based on criteria developed by the Harvard researchers.

Psychometric testing has long been used in recruitment. The Harvard researchers have adapted four key characteristics of psychometric tests–intelligence, personality, cognition, and ethics–that have been linked to entrepreneurial success and show promise for financial institutions to reduce risk. They’ve tested it on a small sample in South Africa, and now they are applying the technique through partners around the world to the “missing middle” of financial services – small traders and business owners (SME, not micro).

What say you? Is personality the best test of business success?

Psychometric test may be useful to study the soul (the behavior) of human beings. Where as in the case of an enterprise, the test appears to cover partially since the process of business success/risk lending depends on not only the behavior of the soul of entrepreneur but also the presence of conducive environment available for the functioning of the enterprise besides the occurrence of co-variant risk in the given place/area./region. Here the environment indicates presence of physical potential such as, power, link roads, raw materials ( timely, adequately and qualitatively needed by the small enterprise ) marketing, pricing, storing etc. for supporting the successful running the enterprise and therefore business success.

Unless these supporting facilities (non financial services) are dovetailed with financial services adequately for the enterprise, there may be business failure and more lending risk Further political influence and eventually government policy for financial sops like loan relief / waiver of interest etc., (as in case of India) for capturing popular votes, also corrupt the soul of the small entrepreneur, and also influence his repayment behavior. In that case the loan delinquency may not be probably due to willful default.

In this context, how these non financial business potential in terms of above inputs, which also influences level of the entrepreneur’s income earned, and repayment ethics, are taken cognizance of in the psychometric test?

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