Expanding capital availability for economic development entails two types of market interventions: (1) perfecting the operation of existing capital markets and (2) creating alternative development finance institutions. The first form of intervention changes the operation of private capital market institutions either by eliminating the sources of market imperfections that create capital gaps or changing the behaviors, perceptions, and risk preferences of private financial institutions. Practitioners produce the greatest impact by changing the performance of existing capital markets since they are the primary means for financing economic activity and allocate hundreds of billions of dollars of capital. This critical area of economic development finance practice involves three interventions:
- Risk-sharing tools and policies that encourage private sector institutions to bear greater risks and extend higher-risk debt financing. Loan guarantees are the most common example of risk sharing. Other approaches include portfolio-based loan insurance and financial incentives. Chapter 8 focuses on these interventions.
- Bank regulatory policies can reduce barriers to economic development investments by financial intermediaries and create incentives and standards to expand services, lending, and investment for economic development purposes. Banks also provide an institutional platform that development finance practitioners can use to address disinvestment and capital market failure. The use of banking regulations and banking institutions to expand capital availability is the focus of Chapter 9.
- Absorbing information and other transaction costs for private lenders and investors by collecting and generating information, preparing financing applications, analyzing potential investments, or servicing loans. This is a crosscutting approach that is discussed under program models in Chapters 10 through 13 (Seidman, 2005, p. 17).