Bank credit is traditionally the largest source of finance in the Asia-Pacific region, but the role of capital markets has increased over time. There is substantial heterogeneity across countries, however. For capital markets to develop further, macroeconomic stability, strong property rights and enforcement of securities laws have been identified as particularly important considerations together with building of a state of the arts financial infrastructure including trading platforms, clearing and settlement systems, and transparent information sharing arrangements. Institutional investors tend to have long investment horizons and as such contribute to the stability of the local market. It may therefore be appropriate to explore ways to increase their presence in the domestic bond and equity markets. One way to do so is to promote savings through national pension funds and insurance companies. Promoting the participation of institutional investors in the domestic market may also be pursued via enhanced access for foreign institutional investors, being mindful of the risks to domestic financial stability associated with greater openness to international capital flows. Policy makers may also explore ways to take advantage of the emerging field of impact investment for the support of funding for projects with environmental, social, and infrastructure content.
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