A second problem often observed in developing countries in the credit-investment process is that loans are allocated according to political considerations or ties between bank managers and the corporate sector. This practice is problematic for two reasons: First, even if the central bank can create liquidity and the financial sector as a whole is thus not be constrained by a lack of base money, banks in developing countries are often weakly capitalized. Legal minimum capital-adequacy ratios hence limit the overall amount of loans provided by the financial sector. If a large share of the loans is not allocated by.
