Improving Credit Risk Analysis with Psychometrics in Peru

This paper presents an overview of access to finance in Peru and examines the efficiency of psychometrics as a possible solution to evaluate credit-worthiness of small business owners seeking a loan. It presents the results of a pilot test carried out on the loan applicant pool of Financiera Confianza, the fourth largest MFI in Peru. Findings include:

• Informal firms, which represent a significant proportion of employment and economic activity in Peru, face significant barriers in accessing finance due in part to the limitations of current approaches in risk analysis that are highly depended on collateral and credit history;
• Enhancing risk-analysis using psychometrics has the potential to reach MSME owners that are traditionally rejected due to a lack of business and credit history, collateral, and co-signers;
• MSMEs rejected by a psychometrically enhanced application scorecard have a probability of defaulting that is up to four times greater than those accepted by the scorecard.