Moreover, because there is no consensus on the precise definition of long-term finance, wherever possible, rather than use a specific definition of long-term finance, the report provides granular data showing as many maturity buckets and comparisons as possible.
Importance of long-term finance Extending the maturity structure of finance is often considered to be at the core of sustainable financial development.
Indeed, some argue that attempts to promote long-term credit in developing economies without addressing the fundamental institutional and policy problems have often turned out to be costly for development. “Institutions, Financial Markets and Firm Debt Maturity.” Journal of Financial Economics 54 (3): 295–336.
For example, efforts to jump-start long-term credit through development financial institutions in the 1970s and 1980s led to substantial costs for taxpayers and in extreme cases to failures (Siraj 1983; World Bank 1989). “Law, Finance, and Firm Growth.” Journal of Finance 53 (6): 2107–37.
In well-functioning markets, borrowers and lenders will enter short- or long-term contracts depending on their financing needs and how they agree to share the risk involved at different maturities.
What matters for the economic efficiency of the financing arrangements is that borrowers have access to financial instruments that allow them to match the time horizons of their investment opportunities with the time horizons of their financing, conditional on economic risks and volatility in the economy (for which long-term financing may provide a partial insurance mechanism).
Back to Key Terms Explained Definition Long-term finance can be defined as any financial instrument with maturity exceeding one year (such as bank loans, bonds, leasing and other forms of debt finance), and public and private equity instruments.
Maturity refers to the length of time between origination of a financial claim (loan, bond, or other financial instrument) and the final payment date, at which point the remaining principal and interest are due to be paid.
Equity, which has no final repayment date of a principal, can be seen as an instrument with nonfinite maturity.
The one year cut-off maturity corresponds to the definition of fixed investment in national accounts.