Wednesday, January 1, 2014

Harvard's Pakistani-American Eases SMB Loans in Developing Economies

Pakistani-American Prof. Asim Khwaja and his doctoral student Bailey Klinger at Harvard’s Kennedy School of Government observed that banks have money to lend, but even profitable small businesses in developing nations often cannot access it, choking growth.

Prof Asim Khwaja of Harvard's Kennedy School
Looking into the reasons, they found it was the lack of access to tools like credit agency reports and FICO credit scores which are common in developed economies. This discovery gave birth to Entrepreneurial Finance Lab to develop alternative tools for bankers to assess risks to lend money to small business owners. Their basic tool is a multiple-choice psychometric test. Here's how New York Times describes it:

The lab’s model asks questions that do not necessarily have a right answer; using an algorithm, it aims to predict whether an individual is likely to default based on how the answers relate to one another. For example, to assess their sense of personal control over outcomes — which tends to correlate with loan repayment — respondents might be asked to rate how much they agree or disagree with the statement: “I believe in the power of fate.” Another question on risk tolerance might ask them to choose between opposing responses with equal social desirability, such as: “I plan for every eventuality,” “I’m in between” or “Planning takes the fun out of life.” There are some unexpected findings: Optimism and self-confidence are good signs among seasoned entrepreneurs, but high levels in younger business owners do not bode well, statistically. And the math and reasoning questions meant to measure fluid intelligence can also assess integrity — of the loan officer. Too many correct answers can reveal that an applicant was coached.

Banks in 16 developing countries are now using EFL's psychometric test to lend money to owners small and medium size businesses. Bank financing of small and medium enterprises (SMEs) is good for both the borrowers and the lenders as well as the national economy. It's a great source of revenue and income for the financial institutions. It helps small businesses grow and create jobs. In developed economies like the United States, SMEs create about half of all business activity and almost two-thirds of employment growth. In poor nations, such enterprises, on average, account for only about 17 percent of spending and one-third of new jobs.

Asim Khwaja is Professor of Public Policy at the Harvard Kennedy School of Government. Here's his bio as posted on Harvard's Center For International Development website: "His areas of interest include economic development, finance, education, political economy, institutions, and contract theory/mechanism design. His research combines extensive fieldwork, rigorous empirical analysis, and microeconomic theory to answer questions that are motivated by and engage with policy. It has been published in the leading economics journals, such as the American Economic Review, and the Quarterly Journal of Economics, and has received coverage in numerous media outlets such as the Economist, NY Times, Washington Post, International Herald Tribune, Al-Jazeera, BBC, and CNN. His recent work ranges from understanding market failures in emerging financial markets to examining the private education market in low-income countries. He was selected as a Carnegie Scholar in 2009 to pursue research on how religious institutions impact individual beliefs. Khwaja received BS degrees in economics and in mathematics with computer science from MIT and a PhD in economics from Harvard. A Pakistani, UK, and US citizen, he was born in London, U.K., lived for eight years in Kano, Nigeria, the next eight in Lahore, Pakistan, and the last eighteen years in Cambridge, Massachusetts. He continues to enjoy interacting with people around the globe".

State of Bank of Pakistan's policies  have catapulted Pakistan to the top of the  list for microfinance in Asia. Pakistan ranks first in Asia and third in the world in Economist Intelligence Unit's overall microfinance business environment rankings. Similar support for SME sector loans can help stimulate the national economy, grow tax base and create much needed jobs to lift more people out of poverty. Tools like the EFL's psychometric test can be deployed as part of this effort to grow the SME sector.

Related Links:

Haq's Musings

Pakistan's Financial Services Sector

IBA's Entrepreneurship Report

Microfinance in Pakistan

Karachi Slum Girl at Harvard Business School

Pakistani-American Ashar Aziz's Fireeye Goes Public

Pakistani-American Shahid Khan Richest South Asian in America

Two Pakistani-American Silicon Valley Techs Among Top 5 VC Deals

Pakistani-American's Game-Changing Vision 

Minorities Are Majority in Silicon Valley 

US Promoting Venture Capital & Private Equity in Pakistan

Pakistani-American Population Growth Second Fastest Among Asian-Americans

Edible Arrangements: Pakistani-American's Success Story

Pakistani-American Elected Mayor

Upwardly Mobile Pakistan


5 comments:

Riaz Haq said...

In addition to Prof Asim Khwaja at Harvard Business School, there are other notable Pakistani-American professors of business and economics at top universities in America. Prominent among them are two names: Prof Atif Mian at Princeton and Prof Amir Sufi at University of Chicago Booth School.

Mian and Sufi have recently written a book "House of Debt" published by University of Chicago Press.

Here are excepts of their thoughts as published in a Bloomberg piece:

The point is general: Housing is a service we must all consume, whether we rent or own. A decline in the price of housing services is a good thing for those of us who plan on increasing our consumption. If my home value declines, I should only feel poorer if I was planning to decrease my consumption of housing services or moving to a less expensive area.

So from a macroeconomic perspective, in a world without mortgages, falling house prices would have negligible aggregate effects. Some households would be richer and some would be poorer. But there is no reason to believe that there would be a large aggregate “housing-wealth effect.”

So why is housing holding back the economy? It is because most homeowners use substantial amounts of debt to purchase houses. Once we acknowledge that housing is a highly leveraged sector, the conclusions of the theory are totally different. In this case, there are a number of reasons why house-price declines will affect household spending.

First, the collateral value of housing is extremely important. Households can only borrow at a 3.9 percent, 30-year fixed rate if they have home value to back the loan. A severe decline in house prices takes away this channel.

Second, the debt associated with homes means a higher rate of defaulting households. This leads to lower credit scores and more foreclosures, both of which have negative effects on household spending.

And third, even for households that choose to continue paying their mortgages, the decline in home values will lead to deleveraging as homeowners struggle to improve their financial position.

The evidence overwhelmingly supports the view that high debt levels are the central reason that house-price declines negatively affect household spending. For example, our research shows that for a given drop in home value, a household cuts back on auto purchases much more if it is highly leveraged. We also find that the reductions in household spending in counties experiencing large house-price declines are far too large to be explained by a housing-wealth effect alone.


http://www.bloomberg.com/news/2012-03-01/how-debt-ridden-housing-holds-back-recovery-commentary-by-mian-and-sufi.html

Riaz Haq said...

The International Monetary Fund (IMF) has named a Pakistani-American as one of 25 young economists who are expected to be most influential in the decades to come.
In its September edition of Finance and Development, a quarterly publication of the IMF, the Washington-based lender has named 39-year-old Atif Mian, professor of economics at Princeton University, among 25 economists under 45 “who are shaping the way we think about the global economy”.
Mian recently co-authored a book titled House of Debt, which has received critical acclaim from academia, policymakers and the general public. Nobel laureate Paul Krugman, arguably the most influential economist alive, has called Mian a leading expert on the subject of debt.
Commenting on the state of Pakistan’s economy, Mian said the foremost challenge it faces is boosting domestic productive capacity. “The low export numbers tell us that Pakistanis have trouble producing good quality products that they can then sell to the outside world (and themselves),” he told The Express Tribune.
The most important factor for long-term growth, Mian says, is the development of ‘sound institutions’ that protect an individual’s personal, contractual and property rights. Explaining that the systematic erosion of space for tolerance, plurality and peaceful coexistence is Pakistan’s core problem, Mian says the ‘rule of just law’ has been replaced by religious extremism and violence. “It is this core issue that separates Pakistan from Bangladesh and India, and restricts Pakistan’s growth potential,” he noted.
But why are militancy and extremism so dominant in Pakistan, as opposed to a country like Bangladesh that shares a common historical bond? To a large extent, the fault lies with the policies of successive Pakistani governments, starting from Zulfikar Ali Bhutto, Mian says.
“Bhutto legitimised the entry of sectarian clerics in politics by accepting the deeply flawed principle that a person’s religious belief ought to determine the extent of his or her rights as a citizen,” he said, noting that the flawed logic paved the way for sectarian politics that Ziaul Haq exploited.
In House of Debt, Mian has investigated the role of private debt – rather than the debt of the government and financial institutions – in precipitating the economic crisis of 2008. Mian and his co-author University of Chicago professor Amir Sufi argue in the book that severe economic downturns have typically been preceded by a sudden and excessive increase in household debt.
Data from the US and European economies suggest that people in the lower half of the income distribution tend to have a disproportionately higher marginal propensity to spend. Mian concludes that a shock to the wealth of subprime borrowers, like crashing home prices, results in massive cuts in their household spending. This sends the economy into a tailspin and causes foreclosures, unemployment and reduced output – a perfect recipe for an economic disaster.
Mian is one of the few public intellectuals who identify the current siege of the Pakistani state by religious extremists as a joint legacy of Bhutto and Zia. “Today’s unstable macro environment is a direct result of the Bhutto-Zia legacy, and it needs to be reversed if Pakistan is serious about growth. Doing so is not easy. But there is no other choice,” he said.


http://tribune.com.pk/story/761669/reshaping-thinking-imf-names-pakistani-among-most-influential-economists/

Riaz Haq said...

Pakistani-American Princeton economist Atif Mian at World Economic Forum at Davos, Switzerland. A conversation with Mian on how unsustainable household indebtedness led to a global financial crisis http://www.weforum.org/sessions/summary/insight-idea-atif-mian

Riaz Haq said...

Small is beautiful - unless you are a business that wants to grow. In which case, small is not so appealing. In Pakistan, where 90 percent of businesses are small or medium, challenges to scaling-up businesses have kept the private sector from realizing their full potential and contributing as much as they could to the economy. To help address a major constraint to the growth of small and medium enterprises (SMEs) in Pakistan, the U.S. Agency for International Development (USAID) is partnering with local banks to boost lending to SMEs. The new $60 million "U.S.-Pakistan Partnership for Access to Credit" was launched at last week's U.S.-Pakistan Business Opportunities Conference, as part of a larger bilateral government effort to boost trade and investment in Pakistan.

Finance is an important enabler of economic growth anywhere in the world. For Pakistan, which needs annual economic growth of at least 7 percent just to keep up with the number of youth expected to enter the labor market each year, this financing is important not only for the economy but for stability. Yet the private sector credit to gross domestic product (GDP) and financial depth ratios in Pakistan trail behind leading emerging economies.

In the SME segment, the volume of lending and types of financing tailored to SME needs have been very limited. A World Bank study found that only 16 percent of total credit in Pakistan went to SMEs. Moreover, about 70 percent of SME borrowing was used for working capital while only about 12 percent went toward long-term investment. Another survey shows only 11 percent of micro, small, and medium enterprises (MSMEs) in Pakistan report having access to finance, below the 15 percent international average and well below percentages reported in higher performing middle-income countries like Brazil and Turkey (30 and 48 percent respectively).

Despite these limitations, SMEs make an out-sized contribution to Pakistan's economy. The same World Bank study found that SMEs in Pakistan employ nearly 70 percent of workers in the manufacturing, services, and trade sectors and generate an estimated 35 percent of manufacturing's value addition. They also contribute over 30 percent of GDP and more than 25 percent of export earnings. Thus, alleviating a key constraint to their growth could lead to substantial increases in the number of jobs for Pakistan's large number of youth and greater income generation.

The new Partnership reflects a shared commitment to promote broad-based economic growth in Pakistan. Private sector investment was identified as an essential ingredient for growth in the Government of Pakistan's Vision 2025 strategy. The Partnership is part of a larger umbrella of U.S. support to SMEs in Pakistan to help them grow and expand into new markets. It will provide partner banks- Bank Alfalah, JS Bank, Khushhali Bank and First Microfinance Bank- with a loan portfolio guarantee through USAID's Development Credit Authority (DCA). The guarantee will lower the risk to the banks for lending in sectors they would otherwise perceive as being too risky. It will also encourage partner banks to extend longer-term loans and introduce credit products that address the needs of SMEs.

With more access to finance, small and medium businesses are poised to make even larger contributions to the Pakistan economy than they do now. The new U.S.-Pakistan Partnership for Access to Credit will make it possible for dynamic SMEs to be more than small and beautiful. After all, beauty is in the eye of the beholder and for businesses eyeing scale-up, there are few things more attractive than being able to grow.

http://www.huffingtonpost.com/borany-penh/eyeing-business-growth-in_b_6865186.html

Riaz Haq said...

#Chinese, #Pakistani and #Indian groups sue Harvard U. for racial bias in admissions. #Pakistan #India #China http://n.pr/1EjX8hU

A group of more than 60 organizations has filed a complaint with the federal government claiming Harvard holds higher expectations for its Asian applicants than other minorities.

The coalition is made up of nonprofit organizations, including Chinese, Pakistani and Indian groups, and it claims Harvard uses racial quotas to control the number of Asian-Americans on campus.

"Asian-American applicants shouldn't be racially profiled in college admissions," says Swann Lee, a Chinese-American writer from Brookline, Mass. "Asian-Americans should have the playing field leveled."

Lee is the mother of twin 11-year-old boys. She helped organize the coalition because she worries her sons will be discriminated against. She wants Harvard, and other schools, to end race-based admissions.

"A lot of colleges really look up to Harvard and they will see what Harvard is doing and they will do something in the same vain," she says.

So the group filed a complaint with the federal government.

"We are asking the Department of Education and the Department of Justice to look into the black box that is the Harvard admissions process," Lee says, "so we can see what is really going on."

The complaint follows a lawsuit making similar claims that was filed in federal district court last year.

Lee and other members of the coalition cite research that shows to get into Harvard, Asian-Americans have to score much higher on the SAT than white, African-American and Hispanic students. And they say Harvard's admissions process lumps together different groups of Asian applicants into a single, high-performing stereotype.

"We are really diversified, with totally different cultural backgrounds and traditions and philosophies," Lee says.

Harvard officials wouldn't talk on tape, but in a statement, the university said its admissions philosophy complies with the law. The school points out that the percentage of admitted Asian-American students has spiked — from 17 percent a decade ago, to 21 percent. The population of Asian-Americans in the U.S.? Just 6 percent.

So what do students think? The coalition doesn't include groups on campus. Many Asian students I spoke with didn't want to talk about the issue. Some who did, said racism is still a problem here.

"I definitely see instances of it on campus," says Danielle Suh, a senior from Austin, Texas. The 22-year-old Korean-American says she feels discrimination through small, subtle ways. Still, Suh doesn't agree with the premise of the complaint.

"If there is a problem that we're lumping all of these groups that face different structural issues together," Suh says. "Then the response for that is even more nuanced affirmative action policies that give students who have faced different inequities growing up, the opportunity to account for those inequities."

Claims of discrimination against Asian students at elite colleges aren't new at Harvard and elsewhere. The University of North Carolina is battling a lawsuit claiming black and Hispanic students were given preference over Asian-Americans.

One response to the Harvard complaint has come from Asian-American members of the U.S. Commission on Civil Rights, who fear it could be a "back door attack on affirmative action."