Psychometric test good for C'bean creditworthiness

The Inter-American Develop-ment Bank (IDB) says it has found that psychometric testing is a good predictor of creditworthiness and a cost-effective way for financial intermediaries in Latin America and the Caribbean to reduce the costs of their credit-assessment operations.

The Washington-based financial institution said the testing is a tool that has been successfully used by human resource departments for pre-employment screening for several years and more recently it has been adapted to help financial intermediaries assess the credit-worthiness of potential borrowers.

"Simulated implementation of the testing by banks suggests a 20 to 45 per cent reduction in defaults and a 15 to 30 per cent increase in profits, with operational costs of the lending process at less than 40 per cent of the cost of traditional evaluation and due diligence," the IDB said.

"Overall, the test exceeded the predictive power of traditional credit-scoring models in developing countries," it added.

The IDB said its facility will allow as many as eight financial institutions to pilot psychometric testing in the region.

Results from the initiative will help the region close its estimated financing gap of between US$330 billion to US$410 billion for small and medium-size companies, stating that it will be "a game-changer for businesses that could be a major resource for growth in Latin America and the Caribbean."

Developed by Harvard's Entrepreneurial Finance Lab Research Initiative, the IDB said psychometric testing for credit assessment is automated, costs little, and has already been implemented by financial institutions in 11 countries in Africa and two in Latin America.

- CMC

The IDB said potential borrowers have to answer a list of 150 questions measuring their intelligence, business skills, personality, ethics, character and beliefs. This information generates a score that allows financial institutions to assess the potential borrowers' willingness to pay back a loan.

- CMC