Entrepreneurial Finance Lab

Providing financial institutions around the world with tools they can use to identify high potential entrepreneurs

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Web http://www.efinlab.com/
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About the project Edit

EFL has developed effective, automated and scalable tools to identify high potential, credit worthy entrepreneurs. These tools are based on psychometric principles, drawing on results from decades of research.

The psychometric tests developed by EFL allow financial institutions to gain information on SME entrepreneurs they would otherwise not have. These tools have been statistically proven to reduce risk and have been used by financial institutions in 20 countries. The results of over 32,000 applications have shown that EFL Tools can reduce default rates and expand lending while carefully controlling risk.


Themes

In what ways is this project unique and creative? Edit

EFL utilizes a proprietary psychometric application process that incorporates an entrepreneur’s attitude and outlook, ability, business acumen and character to identify high potential, credit worthy entrepreneurs.

• 30-60 minute automated application: low transaction costs
• Measures credit risk without depending on business plans, credit history or collateral
• Has shown accuracy in dozens of countries around the world
• Used in microfinance, banking, venture capital, and training organizations
• Technology originally evaluated at Harvard-based lab funded by Google.org
• Durable questions resistant to gaming and manipulation

What is the social value of this project? Edit

EFL has expanded access to finance for entrepreneurs worldwide. Developing countries have a large number of informal, low-growth microenterprises and some large firms, but relatively few SMEs. In developed economies, formal SMEs account for around 57% of total employment, but only account for 18% of employment in low income countries [1]. This gap is called the “missing middle.”

[1] Ayyagari Beck & Demirguc-Kunt 2003

Tens of thousands of entrepreneurs across dozens of countries and languages have used our application, from one-person microenterprises borrowing $800 to medium sized enterprises receiving financing of over $500,000.

Macroeconomic Impact

The low transaction cost and highly scalable nature of EFL enables rapid global adoption and therefore creates a significant social impact. If the distortion in the firm size distribution in developing countries was removed and the distribution regularized, thus “filling” the missing middle, estimates suggest that the GDP across developing countries would increase by over $3.6 trillion dollars annually.

This shift would create millions of new SMEs in a handful of our countries of operation alone: 2 million in Nigeria, and over half a million in each of Kenya, South Africa, and Colombia.

By filling in the missing middle SMEs would have a significantly larger impact than that of the microfinance revolution, given the much larger employment and growth contribution of SMEs compared to informal microenterprises.

What is the potential of this project to expand and develop? Edit

The type of technology developed by EFL (psychometric tests) is very scalable. It replaces traditional means, like interviews, of assessing potential in SMEs.

What was the triggering factor of this project? Edit

EFL began initially in 2006 as an idea of co-founders Bailey Klinger, a fellow at Harvard’s Center for International Development and Asim Khwaja a professor at the John F. Kennedy School of Government at Harvard University, while they were participating in the CID South Africa Growth Initiative. They were struck by the fact that entrepreneur’s access to finance could be such a problem in South Africa, a country with a financial system more developed than many OECD countries. After spending some months analyzing the problem, Asim and Bailey focused on low-cost screening tools and alternative financial contracts as methods to stimulate entrepreneurial finance.

EFL has forged ahead as a leader in applying psychometric principles to screening entrepreneurs. Along the way EFL has built new partnerships, increased testing and expanded access to finance for entrepreneurs worldwide.

What is the business model of this project? Edit


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