Dec 30

What Defines A Good Entrepreneur: How the Entrepreneurial Finance Lab is Revolutionizing Global Entrepreneurship

Last month I was speaking with an old friend, Esther, about global entrepreneurship in developing countries. Having worked previously in microfinance, I thought I knew a great deal about how entrepreneurship was being fostered by banks abroad.  It was at this point in the conversation that she asked me if I was familiar with the work done by the Entrepreneurial Finance Lab in developing countries. I admitted I had never heard of them but was curious to learn more about how this company was working with global banks to cultivate and grow new businesses.  As a result I reached out to EFL marketing manager Penelope Silva to learn more about their model and their story. Below are some highlights from our discussion.


A Need, a Thought and a Potential Solution


Entrepreneurial Finance Lab was born on the banks of the Charles River at the Harvard Kennedy School, by Professor Asim Khwaja, and then student Bailey Klinger. What they saw was a need in developing countries for determining how to lend medium-sized loans to entrepreneurs. Unlike microfinance loans that share the risk in self-help groups, the issue addressed personal loans that one single individual is responsible for repaying. In Western society all loans are backed by personal collateral, and determined by credit scores that the entrepreneur has developed over the duration of his life. In emerging countries, this is not a feasible or realistic way to determine loans.  As a result, personal business loans are relatively few in number and high in risk.


The question that Asim and Bailey had was whether or not it would be possible to determine an accurate system for the banks to lend to these developing market entrepreneurs.  They then developed a credit-scoring technology using psychometric principles and other non-traditional methods. The technology includes a 45 minute application administered by the bank to the entrepreneurs to determine their credit scoring and their loan requirements. Asim and Bailey felt that their technology would be able to accurately predict the likelihood of the success and loan payback potential of an entrepreneur or small or medium-sized enterprise.   In 2008 they won a Google.org grant for their pilot project. The pilot project showed promising results. By 2010 EFL had spun out as a separate entity from the Harvard Kennedy Initiative and became its own private entity.  In that same year it partnered with Standard Bank and began working in various countries. The application methodology was taught to the banks and administered by them to the prospective entrepreneurs. The accompanying data was collected in a centralized database and measured by EFL.


Accuracy, Assumptions, and Application


The initial work with Standard Bank in Africa proved fruitful for both the bank and EFL. EFL has dedicated data and account managers working with the banks throughout the world both on the ground and remotely. EFL has been proven to lower a banks default rate by 40% and increase their loan portfolios by over 100%. It is now operating in 15 countries and is partnered with many of the top tier banks across the world from Africa, Asia, Central and South America. Through its technology, over 46,000 credit applications have been given out, accounting for over $150 million dollars for entrepreneurial ventures in these developing markets.  Over $1.7 million per week is lent out using EFL’s methodology.


The methodology is universal across the globe, but the scoring range for lending differs per country according to the culture, region and bank. As the EFL team compiles more data from the banks and the local entrepreneurs, they are fine-tuning and gaining further accuracy and insight to make their technology more refined. As Penelope says, “the model is never static and the technology is constantly evolving.”  With the data set growing, and the advent of the big data revolution, the expectation within EFL is that its system will be even more powerful and predictive in the years to come.


The Present and the Future


In a world with a proliferation of new ideas and technologies fighting for the limelight, EFL is just starting to establish market trust and recognition. Over the next five years, the loan-market in the developing and emerging countries is valued at 2 trillion dollars.  A pioneer in psychometric and non-traditional lending evaluation, EFL is on the forefront to help define this market.  The success and well-being of these developing global markets and the entrepreneurs within it, in many ways relies on the continued and future successful application of the innovative EFL technology.





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