The Inter-American Development Bank (IDB) has approved the creation of a $25 million facility to improve access to finance for micro, small and medium-sized companies (MSMEs) in Latin America and the Caribbean.
The new facility will provide senior loans as well as risk-sharing and partial credit guarantees for as many as eight financial intermediaries seeking downscaling strategies into the MSME segment through the implementation of psychometric testing, an innovative credit scoring methodology developed by Entrepreneurial Finance Lab.
Participating financial intermediaries will also benefit from technical cooperation provided by the Multilateral Investment Fund (MIF), a member of the IDB Group, to help implement this psychometric tool.
“This facility will allow financial institutions to pilot this new scoring system to reach a segment of the economy that currently has little, or no access to credit,’’ said Marcelo Paz, the project team leader at the IDB’s Structured and Corporate Finance Department. ”Many good prospective clients find it hard to comply with traditional credit requirements. This project will provide financial institutions with an innovative credit assessment tool that will help them expand their MSME portfolio while identifying creditworthy clients in an efficient and cost effective way.”
Psychometric testing, which has been already piloted by 11 financial institutions in Africa and Latin America, is an alternative tool that allows financial intermediaries to lend to creditworthy MSMEs that have been unable to access credit because they fail to meet bank requirements, such as prior credit history, complete financial statements, collateral, etc. to assess financial risk.
The tool is automated, low cost, and it enables financial institutions to analyze an entrepreneur’s “willingness to pay” through a psychological profile test that focusses on certain attributes such as ethics, integrity, intelligence, personality and business skills and use this information to assess the creditworthiness of a micro, small or medium-sized company.
The facility is expected to be available for the next four years and loans and guarantees provided by the facility may be denominated in U.S. dollars or in local currency and have tenors from three to 10 years. Resources provided by the facility may be complemented with co-loans, co-guarantees and/or syndicated loans depending on market conditions.
The facility is part of beyondBanking, an IDB program that promotes sustainable banking principles and practices in Latin America and the Caribbean.
About the IDB's Structured and Corporate Finance Department
The Structured and Corporate Finance Department (SCF) leads all IDB's non-sovereign guaranteed operations for large-scale projects, as well as those linked to companies and financial institutions. Through its Loan Syndication Program, SCF acts as a catalyst, helping to engage third-party resources by partnering with commercial banks, institutional investors, co-guarantors and other co-lenders for projects with high developmental impact.