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


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.

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

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.

Riaz Haq said...


Sadia Profilevestment banker, development banker, financial sector regulator, family business leader and now entrepreneur. This is the career of Sadia Khan MBA’95D: first Pakistani woman to graduate from INSEAD and new president of the world’s most international alumni organisation. She explains how being an INSEAD volunteer has played a role in her own achievements – and how the IAA is working for the benefit of all alumni.

Salamander Magazine: Do you have a secret formula for success?
Sadia Khan: Initiative. Networking. Savoir-faire. Empowerment. Attitude. Diligence… Or, for short, INSEAD! And the best way to keep that formula fresh after graduating is to join the INSEAD Alumni Association. That’s why I’ve always been so involved at a national and international level. And the network feels more vibrant today than ever before.

SM: When you returned to work in Pakistan after many years abroad, there was no National Alumni Association… So you founded one! Why?
SK: Back in 1994, I had to fly to Dubai for my INSEAD interview, because there were no graduates to interview me in Pakistan. So I realised there was a need to galvanize the small but growing number of alumni there – and to provide a much needed networking platform for the younger generation. We started with 30 members in 2007, but managed to organise high-profile events for up to 300 people. The NAA has definitely helped to build the INSEAD brand within the country.

SM: You were an INSEAD volunteer before that, though. Had you already felt the benefits?
SK: I’d been actively involved with INSEAD since graduating. While I was based in the Philippines, I started interviewing MBA candidates and discovered that it not only kept me in touch with the school’s development but also gave me the chance to interact with the next generation of business leaders.

SM: How did you get involved at an international level?
SK: I was invited to become a member of the IAA Executive Committee as VP for Asia and communications in 2012. The highlight was probably heading up the implementation of the first Global INSEAD Day in 2013. The IAA model is based on teamwork and volunteerism and it was in that spirit that I took up my current role.

SM: How did you become the global IAA President?
SK: I have to admit I was taken by surprise when the search committee approached me earlier this year! It wasn’t a role I was vying for or even contemplating at this stage of my professional life. However, I knew there was work to be done right now in enhancing the value proposition of the IAA for our alumni, and there was a great team ready to support me in this role, within the volunteer community and within the school.

SM: Why do you believe the IAA is so valuable to alumni and to the school?
SK: An active alumni association not only helps to keep the alumni energised and engaged but also contributes tremendously to the positive branding of INSEAD. Through our activities, we not only get a chance to showcase the achievements of our members but also demonstrate our deep bonding with the institution. And nothing succeeds like success. The success of the alumni boosts the reputation of the school, while in turn the success of the school enables the alumni to bask in its reflected glory. Having a strong and active alumni network is a win-win for all.

Riaz Haq said...

#Pakistani-#American Prof Asim Khwaja appointed faculty director of the Center for International Development at #Harvard Kennedy School. He's also co-founder of the Center for Economic Research in #Pakistan. #economics #finance

Harvard Kennedy School has named Asim Ijaz Khwaja as the faculty director of the School’s Center for International Development (CID). Khwaja serves as the Sumitomo-Foundation for Advanced Studies on International Development Professor of International Finance and Development at the Kennedy School, and he will remain in that position. He will start his additional appointment as director of CID on July 1, 2019.

“I am delighted that Asim has agreed to serve as faculty director of the Center for International Development at Harvard Kennedy School,” said Dean Douglas Elmendorf. “The Center and School will be well served by Asim’s deep knowledge and experience in international development and by his proven leadership of large research initiatives with direct practical implications.”

Khwaja has been a co-faculty director of the Evidence for Policy Design (EPoD) program at CID for the past decade and will continue as an EPoD faculty affiliate. He is also co-founder of the Center for Economic Research in Pakistan. Khwaja’s areas of interest include economic development, finance, education, political economy, public finance, and institutions. His research combines extensive fieldwork, rigorous empirical analysis, and microeconomic theory to answer questions that are motivated by and engage with policy.

“I am thrilled to take up this position and grateful for the opportunity to lead the important work of the center. Under Ricardo’s leadership, the center’s reach has greatly expanded. I hope to continue this expansion by leveraging the amazing talent and opportunities at Harvard to help address some of the most pressing problems we face in the world today,” Khwaja said.

Khwaja succeeds Ricardo Hausmann as director of CID. “Asim is distinguished by his energy, excellence, and commitment to research that can help create a positive and lasting impact. I am delighted that he will lead CID,” said Hausmann, who is also a professor of the practice of international development at the Kennedy School.

Dean Elmendorf commented: “Ricardo Hausmann has led the Center for International Development with great vision and dedication for 14 years, creating an environment of innovation for faculty research and a strong development community for our students. Under Ricardo’s leadership, the center has grown immensely, and I am very grateful for his service. Moreover, Ricardo’s work around the world has shown that the combination of academic insight and practitioner’s experience can create significant positive impacts on public policy. I am delighted that we can honor Ricardo’s contributions by naming him the Rafik Hariri Professor of the Practice of International Political Economy.” That appointment also will be effective in July.

The Center for International Development advances the understanding of development challenges and offers viable solutions to problems of global poverty. It is Harvard's leading research hub focusing on resolving the dilemmas of public policy associated with generating stable, shared, and sustainable prosperity in developing countries.