Probability of default (PD)

What is probability of default (PD)?

Probability of default (PD) is the estimated likelihood that a borrower or counterparty fails to meet its obligations over a set period, usually one year. It is a core input to credit risk models — including the Basel framework banks use — and is expressed as a percentage.

Traditional PD models lean on financial statements, payment history and credit-bureau data. But those inputs are backward-looking and, for many private UAE companies, thin or unavailable.

Adverse legal events — a judgment, a regulatory enforcement action, an insolvency filing — are forward-leaning evidence that a counterparty is under stress, and a sensible PD view in this market reads them alongside the financials rather than waiting for the numbers to catch up.