Title: Default risk modelling for small-to-medium enterprises in the context of stressed conditions in an undeveloped economy

Authors: Frank Ranganai Matenda; Mabutho Sibanda

Addresses: School of Accounting, Economics and Finance, University of KwaZulu-Natal, Westville Campus, University Road, Westville, Private Bag X54001, Durban, 4000, South Africa ' School of Accounting, Economics and Finance, University of KwaZulu-Natal, Westville Campus, University Road, Westville, Private Bag X54001, Durban, 4000, South Africa

Abstract: This paper designs stepwise logit models to predict the default probability for small-to-medium enterprises (SMEs) under downturn conditions in an undeveloped economy. The primary focus of this study is to recognise and interpret the determinants of default probability for SMEs. We apply an empirical data set of Zimbabwean defaulted and non-defaulted SMEs for applicability and effectiveness motives. Our experimental results indicate that the ratio of (current assets - current liabilities)/total assets, the earnings before interest and tax/total assets ratio, the book value of total assets, the real GDP growth rate, the inflation rate, the ratio of net sales/net sales last year, the age of the firm and the ratio of bank debt/total assets are all robust determinants of default probability for Zimbabwean SMEs. The implication here is that firm and loan features, accounting ratios and macroeconomic factors should be incorporated when forecasting default probability for SMEs in the context of stressed conditions.

Keywords: default risk; downturn conditions; small-to-medium enterprises; SMEs; developing country; covariates; stepwise logit models.

DOI: 10.1504/AAJFA.2025.148664

Afro-Asian Journal of Finance and Accounting, 2025 Vol.15 No.5, pp.590 - 621

Accepted: 02 Oct 2023
Published online: 18 Sep 2025 *

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