A major barrier keeping small banks from lending to micro-entrepreneurs is screening: how do you evaluate the potential of an applicant who has little or no collateral, business experience, or credit history? Evaluations in several developing countries have shown that the same psychometric tools used in corporate hiring can help lenders evaluate borrows and limit risk when traditional credit applications fall short.

Researchers Asim Ijaz Khwaja, Bailey Klinger, and Carlos del Carpio took a set of the psychometric instruments reviewed and gave them to a sample of 1,580 small business owners. The sample contained an equal mix of males and females, typically between the ages of 25 and 54. Each client was given the series of assessments by representatives of their financial institution they were borrowing from. Researchers collected loan repayment history from the financial institution, and profit levels as reported by the entrepreneurs, to compare to responses on the psychometric assessments.

The results show that there are some psychometric dimensions that have statistically and economically significant relationships with business profitability, which is of significant interest to investors, entrepreneurs, and capacity builders, and also that have significant relationships with default risk, which is of significant interest to lenders. These questions could provide the boost to predictive power needed to bring millions of striving small business owners into the formal financial system and give them the capital they need to grow their businesses, if they can be successfully leveraged for credit screening.