Default rates in the loan market for SMEs: Evidence from Slovakia

Financial markets in emerging economies are often perceived as more risky than those in developed countries. We investigate whether this is true for loans to SMEs using a unique unbalanced panel of nearly 700 loans made to SMEs in Slovakia between 2000 and 2005. Several probit and panel probit models show that liquidity and profitability factors are important determinants of SME defaults. Moreover, we find that indebtedness significantly increases the probability of default. Liability as proxied by the legal form of SMEs has important incentive effects. Finally, there exist significant differences between sectors. We show that default rates and factors converged to values found in developed financial markets.