The New Alchemists of Credit
One fear a loan applicant faces is having to tell your life story to a stranger (a loan officer or investment officer) who can be more inquisitive than the priest or the village barber.
And what may be even more cumbersome than credit issues, which ironically derives from the Latin word “credititus” meaning, among other things, “to have confidence,” is not having enough information to “tell the story” to accompany the loan application documents. All of this is to earn the trust from those in charge to prove who we are, what our real age and name is to those who define the frequency with which we can go out to eat at a fancy restaurant.
Now imagine the face of a small or micro-entrepreneur – someone who needs a loan to maintain appropriate inventory level or to buy a computer that lets him double his sales – during such an interrogation. And he did not think to present documents proving his income because his accounting systems are handled with the same level of sophistication of an algebra workbook of a teenager in love.
In the days before the Internet – how could we live without it? – the opinions of neighbors, teachers, store owners, or the friends and enemies of a person from the community was sufficient to determine the character of a person. Now that we’re living in a hyperconnected world, then why not give the same function to social networks? That was the thought process of two Americans, Jeff Stewart and Richard Eldridge, creators of Lenddo, a platform of references and recommendations from social networks.
The platform is simple: Register on the Lenddo website; invite people we know well and who can attest to our character, and finally link our Lenddo account to our favorite social networks, such as Facebook and Twitter. The references received along with information on our social networks will allow Lenddo to calculate a score that reflects our honesty, sincerity, and consistency in the information we provide. That score increases as we have more activity on social networks. Once we reach a certain score, we are eligible to get a loan that can be used to cover education, health or home improvements. Great, right? It is clear that this model will evolve to handle more variables, but for now it is a productive way to use many of the hours we spend in front of computers or tablets.
But don’t think that the originality and ingenuity started here. A talented group of young visionaries, concerned with the perennial problem of the lack of access to financing for small entrepreneurs, created the Entrepreneurial Financial Lab (EFL) who designed their own proprietary psychometric application which analyzes one’s entrepreneurial, management ability and business acumen. In this way, they were able to assign a risk rating and identify entrepreneurs worthy of funding. (Read more about EFL here).
The psychometric application is already being used in 20 countries by micro-finance institutions, venture capital funds and investor “angels” or “patient” capitalists, and takes into consideration the specific cultural aspects in each geographic corner. This application is really breaking paradigms by transforming qualitative information into quantitative data to make credit decisions. True to its Greek etymology, it is an application that “measures the soul”, not only entrepreneurs but especially to those who have the decision to approve or reject a loan in their hands.
The second International BASE Forum, held by the IDB on June 6 and 7 in Medellin, Colombia, set the stage for these creative finance entrepreneurs to socialize with 1,7000 people who have innovated using alternative tools to measure the risk of linking the base of the pyramid. These companies have shown that even the measurement of risk is an aspect of business that must be adapted and modified according to the profile of the BoP. Despite the obstacles, it is clear that the effort and desire to include this market segment and to enhance their skills and buying power is satisfying and impacts the quality of life of the BoP.
Johnny Jirón is an Investment Officer at the IDB’s Opportunities for the Majority Initiative.
Editor’s Note: This post also was published in Spanish on NextBillion en Espanol.