Relying on psychometric tools to screen SME loan applicants departs from the typical uses of such tools and thus required EFL to develop a psychometric credit-scoring tool from scratch. EFL researchers started by quantifying the characteristics of people who had defaulted on a past loan versus those who had not, and of people who owned small businesses with high versus low profits. The researchers grouped these characteristics into three categories: personality, intelligence, and integrity (Klinger, Khwaja, and del Carpio, 2013). They initially worked with a personality assessment based on the five-factor or “Big Five” model (Costa and McCrae, 1992), an intelligence assessment based on digit span recall tests (a component of the Wechsler Adult Intelligence Scale), the Raven’s Progressive Matrices tests (Spearman, 1946), and an integrity assessment adapted from Bernardin and Cooke (1993).

The researchers’ hypothesis was that these assessments would allow them to identify the two main determinants of an entrepreneur’s intrinsic risk: the ability to repay a loan, and the willingness to do so. Entrepreneurial traits, measured via personality and intelligence tests, determine an entrepreneur’s ability to generate cash flows in the future—cash flows that can, in turn, be used to repay any debt owed. Honesty and integrity traits, measured via the integrity test, determine the entrepreneur’s willingness to pay, independent of the ability to do so.<sup>9</sup> After identifying questions that could potentially predict credit risk and trying out a first prototype of their tool, EFL developed a commercial application based on the responses to their tool and subsequent default behavior. The commercial application is based on the same quantitative methods used to generate conventional credit scores. It contains psychometric questions developed internally and licensed by third parties relating to individual attitudes, beliefs, integrity, and performance, as well as conventional questions and the collection of metadata (i.e., how the applicant interacted with the tool). The EFL tool has been constantly improving. The version that was used in the pilot we study was the “Africa v2 psychometric credit score”, and was initially created based on 920 pilot tests in Africa. The most recent version of this tool currently

> 9 An extensive body of literature has documented links between personality or intelligence tests and entrepreneurship or business performance (Ciavarella et al., 2004; De Mel et al., 2008; 2010; Djankov, McLiesh, and Shleifer, 2007; Zhao and Seibert, 2006). To date, the existing evidence on integrity and willingness to repay loans comes from EFL itself ( <mark>Klinger, Khwaja, and del Carpio, 2013</mark> ). A higher integrity score is related to a lower probability of default (honest entrepreneurs default less) and also to lower business profits (honest entrepreneurs are less profitable). Further evidence comes from a pilot of the EFL tool among Argentinean SMEs (Klinger, Castro, Szenkman, Khwaja, 2013). The EFL tool was administered to a random sample of 255 SMEs borrowing from a public bank. For each SME, the EFL responses were then compared to its repayment history with the bank. SMEs that were rejected by the psychometric-based scorecard were up to four times more likely to have defaulted on their past loans than those accepted by the scorecard.

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