Accessibility to auxiliary amenities as non accounting information to predict MSMEs credit risk in Trincomalee district of Sri Lanka

Abstract

The nature of Micro Small and Medium sized Enterprises (MSMEs) often creates obstacles in giving proper financial statement information for estimating credit risk. Alternative models for SME loan default prediction being suggested in literature employ non-accounting information as supplements to financial statement information-based models thereby enabling more practical and accurate prediction of loan default. Using the data collected from randomly selected 62 MSME borrowers from Trincomalee District of Sri Lanka, this study has found that Accessibility to Auxiliary Amenities, an important supporting factor driven by the external environment which is mostly beyond the control of the organization, is also significantly correlating with nature of repayment of commercial loan extended to MSMEs. Rural/Urban Characteristics, Distance from the lender, Accessibility to Market, Accessibility to Communication and Accessibility to Public Institutions and Utilities are the proxies employed for Accessibility to Auxiliary Amenities and are found to have statistically significant relationship with MSME credit risk. Accessibility to Auxiliary Amenities is therefore significant non accounting information signaling MSME credit risk. This finding derives an overall evidence for the fact that the environmental factors will also assist to predict MSME credit risk.