Responsible access to credit for sole-traders and micro-organizations under unstable market conditions with psychometrics

Abstract

In a context of market volatility, the growing complexity of financial products, and a shift towards self-employment, there is an increasing demand for inclusive financial services for sole traders and micro-organizations. To address this need, we conducted a study using real-time data from a Fintech lender in the Czech Republic to assess the effectiveness of a new financial literacy based psychometric credit scoring model (PSM) in improving access to finance for micro, small and medium sized enterprises (MSME) sector, particularly sole traders, and micro-organizations, during volatile market conditions. This study affirms that PSMs play a significant role in responsibly including this underserved sector. Specifically, we observed a 30% higher approval rate and a 23% lower default rate when utilizing the PSM versus the traditional credit scoring model (TCSM). Moreover, during the period of substantial market volatility and instability, such as the state-of-emergency during the COVID-19 pandemic, the PSM exhibited a 13% higher approval rate at a 20% lower default rate than the TCSM. This evidence supports the proposition that PSMs offer a viable option for promoting financial inclusion and targeted financial education among MSMEs in the face of instable financial markets.