Pakistani-American Prof's Tool Helps SME Financing in Emerging Economies

Pakistani-American Prof. Asim Khwaja and his doctoral student Bailey Klinger at Harvard’s Kennedy School of Government observed that banks have money to lend, but even profitable small businesses in developing nations often cannot access it, choking growth.

Prof Asim Khwaja of Harvard's Kennedy School
Looking into the reasons, they found it was the lack of access to tools like credit agency reports and FICO credit scores which are common in developed economies. This discovery gave birth to Entrepreneurial Finance Lab to develop alternative tools for bankers to assess risks to lend money to small business owners. Their basic tool is a multiple-choice psychometric test. Here's how New York Times describes it:

The lab’s model asks questions that do not necessarily have a right answer; using an algorithm, it aims to predict whether an individual is likely to default based on how the answers relate to one another. For example, to assess their sense of personal control over outcomes — which tends to correlate with loan repayment — respondents might be asked to rate how much they agree or disagree with the statement: “I believe in the power of fate.” Another question on risk tolerance might ask them to choose between opposing responses with equal social desirability, such as: “I plan for every eventuality,” “I’m in between” or “Planning takes the fun out of life.” There are some unexpected findings: Optimism and self-confidence are good signs among seasoned entrepreneurs, but high levels in younger business owners do not bode well, statistically. And the math and reasoning questions meant to measure fluid intelligence can also assess integrity — of the loan officer. Too many correct answers can reveal that an applicant was coached.

Banks in 16 developing countries are now using EFL's psychometric test to lend money to owners small and medium size businesses. Bank financing of small and medium enterprises (SMEs) is good for both the borrowers and the lenders as well as the national economy. It's a great source of revenue and income for the financial institutions. It helps small businesses grow and create jobs. In developed economies like the United States, SMEs create about half of all business activity and almost two-thirds of employment growth. In poor nations, such enterprises, on average, account for only about 17 percent of spending and one-third of new jobs.

Asim Khwaja is Professor of Public Policy at the Harvard Kennedy School of Government. Here's his bio as posted on Harvard's Center For International Development website: "His areas of interest include economic development, finance, education, political economy, institutions, and contract theory/mechanism design. His research combines extensive fieldwork, rigorous empirical analysis, and microeconomic theory to answer questions that are motivated by and engage with policy. It has been published in the leading economics journals, such as the American Economic Review, and the Quarterly Journal of Economics, and has received coverage in numerous media outlets such as the Economist, NY Times, Washington Post, International Herald Tribune, Al-Jazeera, BBC, and CNN. His recent work ranges from understanding market failures in emerging financial markets to examining the private education market in low-income countries. He was selected as a Carnegie Scholar in 2009 to pursue research on how religious institutions impact individual beliefs. Khwaja received BS degrees in economics and in mathematics with computer science from MIT and a PhD in economics from Harvard. A Pakistani, UK, and US citizen, he was born in London, U.K., lived for eight years in Kano, Nigeria, the next eight in Lahore, Pakistan, and the last eighteen years in Cambridge, Massachusetts. He continues to enjoy interacting with people around the globe".

State of Bank of Pakistan's policies  have catapulted Pakistan to the top of the  list for microfinance in Asia. Pakistan ranks first in Asia and third in the world in Economist Intelligence Unit's overall microfinance business environment rankings. Similar support for SME sector loans can help stimulate the national economy, grow tax base and create much needed jobs to lift more people out of poverty. Tools like the EFL's psychometric test can be deployed as part of this effort to grow the SME sector.

Related Links:

Haq's Musings

Pakistan's Financial Services Sector

IBA's Entrepreneurship Report

Microfinance in Pakistan

Karachi Slum Girl at Harvard Business School

Pakistani-American Ashar Aziz's Fireeye Goes Public

Pakistani-American Shahid Khan Richest South Asian in America

Two Pakistani-American Silicon Valley Techs Among Top 5 VC Deals

Pakistani-American's Game-Changing Vision 

Minorities Are Majority in Silicon Valley 

US Promoting Venture Capital & Private Equity in Pakistan

Pakistani-American Population Growth Second Fastest Among Asian-Americans

Edible Arrangements: Pakistani-American's Success Story

Pakistani-American Elected Mayor

Upwardly Mobile Pakistan


Comments

Riaz Haq said…
FROM FIRST PAKISTANI ALUMNA TO IAA PRESIDENT: MEET SADIA KHAN MBA’95D

https://alumnimagazine.insead.edu/from-first-pakistani-alumna-to-iaa-president-meet-sadia-khan-mba95d/


Sadia Profilevestment banker, development banker, financial sector regulator, family business leader and now entrepreneur. This is the career of Sadia Khan MBA’95D: first Pakistani woman to graduate from INSEAD and new president of the world’s most international alumni organisation. She explains how being an INSEAD volunteer has played a role in her own achievements – and how the IAA is working for the benefit of all alumni.

Salamander Magazine: Do you have a secret formula for success?
Sadia Khan: Initiative. Networking. Savoir-faire. Empowerment. Attitude. Diligence… Or, for short, INSEAD! And the best way to keep that formula fresh after graduating is to join the INSEAD Alumni Association. That’s why I’ve always been so involved at a national and international level. And the network feels more vibrant today than ever before.

SM: When you returned to work in Pakistan after many years abroad, there was no National Alumni Association… So you founded one! Why?
SK: Back in 1994, I had to fly to Dubai for my INSEAD interview, because there were no graduates to interview me in Pakistan. So I realised there was a need to galvanize the small but growing number of alumni there – and to provide a much needed networking platform for the younger generation. We started with 30 members in 2007, but managed to organise high-profile events for up to 300 people. The NAA has definitely helped to build the INSEAD brand within the country.

SM: You were an INSEAD volunteer before that, though. Had you already felt the benefits?
SK: I’d been actively involved with INSEAD since graduating. While I was based in the Philippines, I started interviewing MBA candidates and discovered that it not only kept me in touch with the school’s development but also gave me the chance to interact with the next generation of business leaders.

SM: How did you get involved at an international level?
SK: I was invited to become a member of the IAA Executive Committee as VP for Asia and communications in 2012. The highlight was probably heading up the implementation of the first Global INSEAD Day in 2013. The IAA model is based on teamwork and volunteerism and it was in that spirit that I took up my current role.

SM: How did you become the global IAA President?
SK: I have to admit I was taken by surprise when the search committee approached me earlier this year! It wasn’t a role I was vying for or even contemplating at this stage of my professional life. However, I knew there was work to be done right now in enhancing the value proposition of the IAA for our alumni, and there was a great team ready to support me in this role, within the volunteer community and within the school.

SM: Why do you believe the IAA is so valuable to alumni and to the school?
SK: An active alumni association not only helps to keep the alumni energised and engaged but also contributes tremendously to the positive branding of INSEAD. Through our activities, we not only get a chance to showcase the achievements of our members but also demonstrate our deep bonding with the institution. And nothing succeeds like success. The success of the alumni boosts the reputation of the school, while in turn the success of the school enables the alumni to bask in its reflected glory. Having a strong and active alumni network is a win-win for all.

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