Capital Structure Fragility in SMEs Under Monetary Tightening: Dynamics, Vulnerabilities, and Policy Implications

Collins Kwadwo Amoah-Adjei1 & Samuel Oladapo Taiwo2
1Jones Business School, Rice University
2Rawls College of Business, Texas Tech University, United States
DOI – http://doi.org/10.37502/IJSMR.2025.8719

Abstract

Small and medium-sized enterprises (SMEs) constitute a central pillar of economic activity yet exhibit structurally embedded capital fragility, particularly during periods of monetary tightening. This study develops the Monetary Tightening Capital Fragility (MTCF) framework to systematically explain how interest rate increases, credit rationing, collateral constraints, and monetary policy uncertainty interact with firm heterogeneity and institutional environments to amplify SME vulnerability. Integrating pecking order and trade-off theories with macro-financial transmission mechanisms, the article proposes a formal fragility index to operationalize capital structure risk. The analysis demonstrates that refinancing exposure, debt maturity structure, and currency mismatch significantly mediate distress outcomes during tightening cycles. Cross-country institutional differences further condition SME resilience. Policy recommendations emphasize lending infrastructure reform, macroprudential calibration, and targeted liquidity interventions to mitigate procyclicality. The study advances literature by bridging micro-level capital structure dynamics with macro-financial stability considerations and offers testable propositions for future empirical validation.

Keywords: SME capital fragility; monetary tightening transmission; financial frictions; credit rationing; institutional buffering; macro-financial stability

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