Financial institutions the world over have the financial checklist and tools to assess the creditworthiness of the borrower. These tools mainly focus on the borrower’s paying capacity, collateral, credit rating etc. Yet we all know the limitations of such tools as in many cases the default rates have been staggering. It has become an intractable problem as borrowers, for one reason or the other, become defaulters. Credit management, therefore, is posing a major challenge for financial institutions. One reason why the assessment fails is because the profiling of the borrower is heavily dependent on his/her financial health ignoring the psychological make- up of the person. A reliable and comprehensive approach would be to use both the financial tools as well as the psychometric tools to get a complete picture of the motivations, attitudes and financial background of the borrower. A McKinsey report states that Psychometric tests can lower default rates by 25%-40% and without any banker supervision the assessment is 45% of traditional assessment measures.

The ‘willingness to (have) credit’ of farmers is perpetually high but the existing mechanism to provide necessary and required credit or any financial solutions from Banks is not supportive enough. In developing markets, credit assessment of the owner of a small piece of agricultural land unknown to a lender is often subjective, time-consuming and expensive, potentially involving home visits by loan officers to interview applicants and their neighbours. Credit bureau coverage remains non-uniform, many times non-existent, reflective of the fact that many consumers in these markets have little or at times no previous history with financial institutions. Constraints of traditional credit processing are the key drivers of the credit gap in the farming community.

Banks are generally looking for substantial collateral as risk mitigation measures for furthering credit to MSME/small hold farmers(SHF). In most developing economies, however, MSME/SHF usually does not have access to these guarantee mechanisms, such as non-real estate-based collateral. This situation, combined with the overall lack of information about these potential borrowers’ creditworthiness, contributes to a virtual exclusion of this group of borrowers from formal credit markets.  However, several classes of institutional arrangements offer these borrowers valid substitutes for individual collateral, and to the lenders’ low-cost alternatives to imperfect creditworthiness information. An increasing number of finance institutions provide credit to the poor on the basis of “social collateral”, through which borrowers’ reputation, or the social networks to which they belong, take the place of traditional physical or financial collateral. Since these arrangements build, to various degrees, on the extent and strength of personal relationships, they provide a fertile ground for the analysis of the role of social capital in the provision of credit. While social collateral is being used for group lending, there is evidence of using individual social capital as a measure to provide a guarantee of credit for marginalized people.

Our consortium known as L3 represents three partners who specialise in innovative financing tools, innovative Post Harvest Loss Prevention (PHL) Strategies and, the use of psychometric profiling to determine borrower’s creditworthiness. We work extensively in Africa. L3 denotes Leasing for Leveraging Livelihoods. The following is a short description of our project to determine the entrepreneurship and creditworthiness of the Small Hold Farmers (SHF) and the Farmer Organizations(FO) in the Southern highlands of Tanzania. We believe that this innovative approach of determining potential leadership among farmers with their creditworthiness would open up doors for them to lease agricultural machinery as well as obtain loans at the right time.

Approach & Methodology

  • The approach adopted had the following objectives:
  •  To assess the entrepreneurial capabilities and creditworthiness of the selected FOs, SMEs and Millers
  •  To assess the organizational performance of SACCO/ AMCOs’
  • To collect data and estimate the market potential of contracting services
  • To initiate the process of developing work plans for the selected FOs. SME & Miller

 One of the major objectives of the project was to facilitate the leasing of tractors and equipment through our innovative leasing mechanism. The critical success factors for a comprehensive leasing program are the inherent entrepreneurial capabilities of the selected stakeholders as it will determine the prospects of generating revenue and income by the stakeholders by judiciously utilizing the mechanization solutions not restricted to only the maize value chain. It is equally important to assess the creditworthiness (beyond standard financial due diligence that might not be able to capture the contextual realities!) of these stakeholders which strengthens the revenue generation capabilities resulting in greater viability of the business.

As mentioned earlier we have developed propriety tools known as Business Excellence Index (BXI) and Creditworthiness Excellence Index (CXI) to quantitatively measure entrepreneurial capabilities and credit worthiness respectively.

The design of BXI & CXI:

The BXI and CXI have been administered through a battery of tests with the purpose to measure

  • the entrepreneurial qualities present/absent in the sample
  • the creditworthiness for making them eligible to get the lease facility for farm equipment including tractors. 

The methodology used to achieve this was twofold. Detailed interviews with individual members, discussions with the functionaries and members of the Farmer Organizations and the administration of the batteries have been carried out. We have used four batteries/instruments. A brief description of the batteries employed is provided below.

Battery, I:

This was used to measure the following three dimensions of our interpersonal behaviour that has implications for entrepreneurial styles.

 Inclusion Dimension- The need to include others in one’s company. The potential entrepreneur needs to have the ability to mix with people and network easily without any stress. Usually, people fluctuate between being loners or extroverts.

 Control Dimension- The need to dominate/influence others. An entrepreneur needs to have the ability to influence and control others and also control the outcome. On this dimension, people fluctuate between being very dominant or abdicators.

 Affection Dimension- Usually successful entrepreneurs have the ability to genuinely love their peers/ superiors and subordinates. This makes their leadership acceptable to all. Usually, people on this dimension go overboard (too sympathetic) or emotionally cold.

 Battery II:

Through this questionnaire, we measure the following attributes:

 Achievement Motivation (Ach M) - The need for achievement is a primary human motive that can be defined as a need to achieve success or excel at a given task. It was David McClelland who asserted that while most people do not possess strong achievement-based motivation, those who do, display consistent behaviour in setting goals. Individuals satisfy their needs through different means and are driven to success for internal as well as external reasons. Those who have a high degree of need for achievement (N Ach) set challenging but realistic targets. In this sense, they are different from gamblers or foolhardy risk-takers. They set achievable goals which they can influence with their effort and ability. This results-driven approach is almost invariably present in the personality makeup of all successful business people and entrepreneurs.

 Locus of Control (LC) - Locus of control refers to the extent to which a person believes they can control events affecting them. Individuals who believe that they can control what happens to them are “Internals” or internally motivated and have an Internal locus of Control. Those who believe that outside factors such as luck, fate or external elements control their life are “Externals” or externally motivated and have an External Locus of Control.

Empirical evidence suggests that those who have internal locus of control, display high initiative and are more likely to be successful entrepreneurs. They believe that their success or failure is a direct outcome of their action or inaction. They do not attach much importance or significance to luck or fate in their scheme of things

Need for Dominance (ND) - In society, the relative position of an individual is determined by the structure of the society and the relative importance given to various occupations. Domination is the condition of having control or power over people or things. Like many other needs of humans, the need for dominance is a motive to acquire a dominating position in society. An entrepreneur controls his or her work and is perceived to have relatively more power over the events in their life than a salaried person. Also, people who don’t want to be in a subordinate position or don’t want to take orders from anyone else tend to work for themselves. A high need for dominance is a key attribute of a successful entrepreneur.

 Passion for Work (PW) - An individual’s passion for his or her work comes from self-motivation to work more to achieve the target /goal. It creates an insatiable hunger for excellence. However, many people do not enjoy their work and do it to earn their livelihood, rather than out of interest. For entrepreneurs, being passionate about their work is not only important but crucial because it directly affects their enterprise. They constantly need to discover new ways to sustain and expand their business, maintain their client base and look for new opportunities. If they are not enjoying the work they are doing, it may result in failure.

 Self-Efficacy – It is defined as people’s beliefs about their capabilities to produce designated levels of performance that exercise influence over events that affect their lives. Self-Efficacy beliefs determine how people think, feel, motivate themselves and behave. Entrepreneurs are perceived as having a high level of assurance in their capabilities and who approach difficult tasks as challenges to be mastered rather than as threats to be avoided. They set for themselves challenging goals and maintain a strong commitment to them when met with failure, they heighten and sustain their efforts and quickly recover their sense of efficacy after it Also they attribute failure to insufficient efforts or lack of knowledge and skills which they think can be learned.

 Battery III:

 In order to validate the earlier Battery results we used one more battery that also measures the need for achievement (N-Ach). Usually, successful entrepreneurs exhibit a high degree of the need for excelling in whatever they do. This is their main driver and provides them with a certain degree of focus.

 Battery IV:

Creditworthiness Excellence Index (CXI) is an innovative tool that profiles the borrower on various psychological parameters that influence his borrowing behaviour. Modern research indicates that various traits and attributes influence our spending patterns. These attributes also determine if the borrower has entrepreneurial qualities in him or not. The CXI measures these attributes and comes up with a picture of the borrower with a high degree of accuracy. This coupled with the financial appraisal would make the lending process foolproof.

Some of these attributes and their descriptions are given below:

  • Conscientiousness
  • Business Skills
  • Ethics & Honesty
  • Extraversion
  • Need for Achievement
  • Locus of Control
  • Passion for Work

A brief description of these attributes is given below:

 Conscientiousness

Conscientiousness implies being perfect in any assignment. Such individuals do believe in hard work and planning. They are disciplined and organized in various tasks/projects that they undertake. Being cautious is also one of the aspects of conscientiousness. Usually, a credible borrower is a very conscientious one and from that viewpoint, we need to assess the borrower on this attribute of personality.

 Business Skills

To run any enterprise successfully one needs to have few business skills. A few of the important and critical business skills are the ability to plan and set goals, the ability to motivate and network with colleagues and customers, time management, team building and prudent fiscal discipline.

 Ethics & Honesty

While Business Skills denote the ability, present or absent in the borrower ethics and honesty represent the willingness element of the personality. Our research indicates that conscientiousness is the most accurate predictor of ethical and honest behaviour.

 Extroversion

The extroverted person reflects assertiveness, optimism, drive, dominance and leadership. It also indicates that such a profile is more likely to take risks. Now it needs to be determined if this is a moderate risk or a foolhardy risk. Both have serious implications for creditworthiness.

 Confidence

For starting any new venture, the key attribute needed is confidence. Confidence in oneself, as well as a strong belief, is the trait with that one can make a difference.

 Need for Achievement

To achieve perfection and success in any enterprise is reflected in the need for achievement. People with a high degree of need for achievement set for themselves the goals that have stretch in them. Not very easy and also not unrealistic is the pattern for setting the goals. Such people always focus on results – an essential attribute of entrepreneurs.

 Locus of Control

People with an internal locus of control always believe in their efforts to produce results. People with an external locus of control always take solace in factors such as luck or destiny to rationalize their success or failure. People with internal locus of control are more likely to be good at managing a business.

 Passion for Work

Individuals with a high degree of passion for work or who self-driven are have intrinsic motivation always at its peak. They are also passionate about what they do and they have a healthy dislike for failure.

The organizational assessment tools deal with the following attributes;

a.)    Financial Status and Management of the Farmer Organization

b.)   Quality Control & Sustainability

c.)    Governance

d.)   Operational efficacy

Once the Psychometric profiling is done we validate the results with the group. This includes providing them with non-threatening feedback. A robust and workable business plan is then created with consensus. Then a lease arrangement is worked out with individual borrowers and the FOs. Care is taken to ensure 100% of the risk is covered through innovative mechanisms. Thus, a farmer gets the tractor and allied equipment and a business plan that helps him/her to get on to the job with vigour. At this stage, we provide innovative solutions to avoid PHL. It has been the experience in Africa that despite bumper yield lots get wasted due to inadequate storage, bad logistics as well as unscientific management.

The beauty of the tool is that for each dimension we are able to get a numerical score denoting the presence/absence of that particular trait. These then are plotted against the standards and a complete profile in terms of borrower’s creditworthiness emerges. This combined with traditional financial diligence makes the assessment about the repaying capacity and ability full proof. The total time taken per farmer is less than 90 minutes. We have deployed this tool in Senegal, Tanzania and in Bangladesh with startling results. We believe that determining entrepreneurship and creditworthiness are absolutely essential for small hold farmers as well as financial institutions as this will ensure that the right financing at the right time will result in a good harvest through the deployment of appropriate tools and the harvest can be maximized by innovative prevention of post-harvest loss.