Knowledge Note

Small and medium enterprises (SMEs) often face greater credit constraints than large firms because they lack audited financial statements and other information about their operations, and as a result, financial institutions have difficulties assessing the risk of lending to them. The Entrepreneurial Finance Lab (EFL) has developed an alternative credit information tool, based on psychometrics, which can potentially be used by lenders to better screen loan applicants. This note highlights the results from a pilot exercise conducted in Peru, which shows psychometric credit scoring can increase access to credit for small and medium enterprises who do not have a credit history, without increasing default risk for the lender. The results illustrate the importance of information for assessing credit risk and expanding use of credit. Increasing the quality of the information that credit bureaus can access could improve credit-scoring models and increase lenders confidence in these scores, even for entrepreneurs who have not previously borrowed from formal financial institutions . To conclude, EFL offers a practical solution to financial institutions in countries where well-developed credit bureaus are in the process of consolidation