Because firms need finance to exploit investment opportunities, governments have often made the financial sector an instrument of industrial policy. For example, in a majority of developing countries, governments control at least some interest rates to encourage investment in some sectors. Interest rate controls also help governments finance their budget deficits: many state owned enterprises rely on low-interest loans from the banking system, and many governments require banks to buy low-yielding government bonds or place some of their assets in low interest reserves with the central bank. Many governments are convinced of the need for reform, but are concerned about the transition to market-determined interest rates which is easier to manage when inflation is low and real exchange rates are stable.
In Colombia, interest rate controls reduced the funds available for smaller-scale industrial enterprises; the efficiency of investment fell as a result. A study of seven Asian developing countries found that interest rate controls reduced economic growth by roughly half a percentage point for every percentage point by which the real interest rate was below its market-determined rate.