Alternative financial instruments for less developed countries

Specifically, the study examines: (1) major policy restrictions on the growth of savings and investment, i.e., interest rate caps, restrictive tax policies, collateral requirements, government control of security pricing, prohibitions on some methods of finance (e.g., leasing), and the effect of Islamic banking codes; (2) policy constraints that prevent private sector banks from engaging in term lending, i.e., prohibitions on the issuance of the long-term instruments needed to support such lending and unfair competition from subsidized development banks; and (3) specific prohibitions on term lending for privatization. A final section suggests new approaches for: (1) the development of instruments that transfer funds - both among financial institutions and between financial institutions and productive enterprises - in a timely and cost-effective manner and that mobilize indigenous resources; (2) policies that encourage banks in developing countries to undertake term lending but minimize misallocation of scarce investment resources; and (3) involvement of international institutions in this policy development. (Author abstract, modified)