Lowering Barriers to Credit with Psychometric Assessments

February 4th 2021 by Michael Hickey

A 2015 FAO fact sheet stated that "low levels of investment in agriculture" in Ghana was partly due to "a lack of technical knowledge on risk assessment and management." Most people in Ghana, especially rural smallholder farmers, do not have a credit history. Without a credit history to look at, lenders are less able to assess lending risk. However, AgroFides sees the potential for psychometric methods to fill this information asymmetry.

Merriam-Webster says psychometrics is "the psychological theory or technique of mental measurement." It is one place where psychology and statistics intersect and is an important tool in modern psychological studies. Quantifying psychological observations is essential in hypothesis testing and objective mental assessment. The IQ test (as contentious as it is) is a well-known example of psychometric scoring. The use of psychometric methods breaches non-academic and medical use and is frequently deployed in recruitment, education, and coaching. Its use in fintech is fairly new and potentially provides access to credit to many previously locked-out borrowers. By focusing on Ghanaian farmers, AgroFides is developing the tools to produce relevant results with a culturally-tailored psychometric test.

Examining credit history shows if this person has paid their previous debts. Whereas, a psychometric assessment shows if this is the kind of person to pay their debts. Neither method seeks to answer if a person can pay their debts. That is determined by examining the potential borrower's financial statements or journals. Instead, both of these methods answer the general question: given who they are or what they have done, will this person pay their debts?

So a psychometric test has the advantage of being easily accessible for lenders and easily provided by borrowers. It also has the benefit of redeeming a smallholder farmer's "unattractive" financial appearance. In place of credit history, borrowers can still seek out cash flow loans to finance their farms. When seeking this kind of loan, lenders examine the borrower's revenues, expenses, assets, and liabilities to see if the borrower would be able to cover their debt obligations. If the borrower does not meet the lender's requirements, they may be rejected or face stricter conditions of payment. Smallholder farming in Ghana is characterized by inefficiency and unproductivity due to a lack of capital. A common conclusion in Ghanaian agtech research is that credit access is well-interlaced with productivity. This means that many farmers who currently do not have ideal financials could produce them given the chance. AgroFides' alternative credit method gives farmers the chance to access the needed credit while avoiding stricter conditions of payment.

Research from Western Michigan University has found that collateral security "is the most common requirement banks demand from their borrowers in Ghana. … The property used as collateral is usually weighted against the requested amount of loan to make sure the price of the property involved is the same or exceeds the loan" to mitigate the high risk. This raises the stakes considerably for farmers who may fail to pay their debt in time for any variety of reasons. For example, the weather is a critical influencer of productivity because most smallholder farmers practice rainfed irrigation. Through this scheme, well-meaning farmers could lose vital property hurting their livelihood, family, and community despite being perfectly competent. With an appropriate psychometric test, farmers and lenders can avoid raising the stakes so high to lower the risks.

AgroFides seeks to lower the walls that bar farmers from improving their livelihood. Farmers in Ghana are largely held back by the lack of credit, and credit access is constrained by the lack of credit history. Psychometric analysis answers questions lenders find unanswered due to information asymmetry. It provides an accurate risk profile by quantifying a farmer's willingness to pay back a loan and will strengthen Ghana's farming industry.