Understanding the Use of Long-term Finance in Developing Economies

IMF Working Papers, April 26, 2017

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Short paper reviewing recent literature on the use of long-term finance in developing economies (relative to advanced ones).
Objective: identify where long-term financing occurs and the role of different financial intermediaries and markets in extending long-term financing.
Publication date: April 26, 2017.

Banks are the most important providers of credit but do not seem to offer long-term financing.
Capital markets have grown since the 1990s and can provide financing at fairly long terms, but few firms use these markets.
Only some institutional investors provide funding at long-term maturities.
Governments might help to expand long-term financing, although with limited policy tools.

Banks: dominant in credit provision; limited role in long-term maturities.
Capital markets: expanded since the 1990s; potential to supply fairly long-term finance; low firm participation limits impact.
Institutional investors (including Insurance companies, Mutual funds, Pension spending entities): only a subset provide funding at long-term maturities.
Market characteristics and frictions (maturity, issuance maturity, market failure) limit broader use of long-term finance.

Government interventions could help expand long-term financing, but available policy tools are limited.
Addressing barriers to firm participation in capital markets and enhancing the role of institutional investors could increase long-term funding availability.
Policy focus areas implied by the literature: deepen capital markets, improve incentives for institutional investors to hold long-term assets, and consider targeted government measures where market failures persist.

Subject: Bank credit, Banking, Capital markets, Expenditure, Financial institutions, Financial markets, Insurance companies, Loans, Mutual funds, Pension spending
Keywords: banks, bond markets, capital market, capital market capitalization, Capital markets, Central America, economies stock market capitalization, Europe, finance, finance shift, financial crises, financial intermediaries, firm financing, Global, income economy, institutional investor, institutional investors, Insurance companies, investment finance program, investment horizons, issuance maturity, Loans, long-term debt, long-term finance, market, market failure, maturity, Mutual funds, Pension spending, saving needs, short-term debt, stock market capitalization, WP

Understanding the Use of Long-term Finance in Developing Economies
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