Key points
- Firms in low- and middle-income countries face borrowing costs about two percentage points higher than those in high-income economies.
- The financing gap is limiting investment, technology adoption, business expansion and job creation.
- Greater access to foreign investors, deeper domestic bond markets and stronger pension savings could reduce borrowing costs.
- Lower sovereign borrowing costs also translate into cheaper financing for businesses.
Main story
Companies in low- and middle-income countries pay about two percentage points more in real borrowing costs than firms in high-income economies, according to a new study by the World Bank Group and International Finance Corporation (IFC).
The report, Curbing the Cost of Borrowing for Businesses: The Role of Bond Markets in Low- and Middle-Income Countries, said the financing disadvantage was limiting private-sector investment, technology adoption, business expansion and job creation in developing economies.
The study analysed more than 330,000 corporate bond issuances by about 50,000 companies across 138 countries between 1990 and 2024.
It found that from 2015 to 2024, median corporate borrowing costs in low- and middle-income countries were about two percentage points higher in real terms than in high-income economies. The gap was recorded in both dollar-denominated and local-currency corporate bonds.
The World Bank and IFC said the difference was not solely explained by the perceived risk of individual companies. Global financial conditions, sovereign borrowing costs, the depth of financial markets, access to foreign capital, domestic savings, corporate transparency and firm-level characteristics also influence the cost of finance.
Foreign capital could reduce costs
The study found that reducing barriers to foreign investment and increasing participation in domestic capital markets could expand the pool of capital available to companies.
For firms already borrowing through international bond markets, greater financial liberalisation was associated with an average 1.2 percentage-point reduction in borrowing costs.
The researchers estimated that if the reduction had applied to companies in the 47 least financially open countries, interest payments on international bond issuances could have been about $78 billion lower over the past decade.
However, the report said financial openness alone would not solve the problem, noting that international financial integration and domestic capital-market development should be pursued as complementary measures.
Domestic savings also matter
The report identified pension savings as another potential source of cheaper corporate finance.
It found that pension reforms that created privately managed retirement accounts helped build pools of long-term domestic savings for investment in local capital markets.
The increase in domestic institutional investment was associated with an estimated 150-basis-point reduction in real domestic borrowing yields for existing corporate bond issuers.
The study estimated that applying the effect to companies in 34 countries with relatively small private pension markets could have reduced interest payments by approximately $25 billion over the past decade.
Government borrowing costs affect businesses
The report also found a direct link between sovereign and corporate borrowing costs.
A one-percentage-point reduction in sovereign bond yields was associated with a 76-basis-point reduction in corporate borrowing yields in domestic markets and a 46-basis-point reduction in international markets.
The study said this reflects the role of sovereign bonds as benchmarks for pricing private debt, meaning higher government borrowing costs can raise the cost of finance for companies.
It therefore called for credible fiscal policies, stable inflation, consistent policy frameworks and deeper sovereign bond markets to reduce country-risk premiums and improve the pricing of corporate debt.
The issues
Expensive credit can restrict the ability of businesses in developing economies to invest, adopt technology, expand operations and create jobs. The problem is compounded by shallow domestic bond markets, limited institutional investor participation and weak secondary-market liquidity.
The report argues that reducing corporate borrowing costs requires action beyond monetary policy. Governments need stronger fiscal credibility, deeper capital markets, wider investor participation and larger domestic savings pools, while companies must improve transparency, governance and financial reporting.
What’s being said
The report’s central finding is that the cost of corporate finance is shaped not only by individual company risk but by the broader financial ecosystem in which businesses operate.
What’s next
The World Bank and IFC recommend that developing economies deepen domestic bond markets, expand access to international capital, strengthen institutional savings, improve sovereign debt markets and enforce stronger corporate disclosure and governance standards.
Bottom line
The World Bank and IFC say the roughly two-percentage-point borrowing-cost gap between developing and high-income economies is not inevitable. Deeper capital markets, stronger domestic savings, greater financial openness and credible public finances could make corporate finance cheaper and free more capital for investment and job creation.
