Investment financing on shared-risk

Capital formation in less-developed countries is discussed. Such formation has been shown to be a necessary condition for development. Banks and other financial institutions act to transfer funds from savings to investments and make decisions regarding where those investments are allocated. This conventional means of taking savings and making them investments is less than optimal. There is a superior method of channeling funds that can enhance the efficiency of the investments in the economy. In the conventional system, interest is at the core of operations. One rate of interest is paid to depositors and a higher one is charged from debtors, with the banks making profits in the process. Yet in order to be certain that the debtors pay the amount they should, investments must both have no risk and yield returns higher than the rate of interest. Since it is rare to have such an investment, it is government intervention and mathematical probability keep the banks running properly.