... economic units of funds, through the provision of either Loan or Equity finance. Parties involved are: - * Entrepreneurs * Banks (Financial Intermediaries) * Investors (suppliers of capital) In order to outline the credit market equilibrium in the general context of this study it is essential to understand the features within its environment and how the interplay of these features drive the market to equilibrium. These features are as follows: Market Assumptions: * Parties are risk neutral * All projects cost "K" and all return "K" if unsuccessful * Banks are unable to observe the project which an entrepreneur invest * Capital is provided under the standard debt contract. * The expected gross return of any project PiRi + (1 -Pi)K Demand for Funds: * A firm demands funds at his maximum expected profit, if successful: E (II) =[PiRi + (1 - P) K] - K(1 +P) Expected Profit (Success)= Expected gross return - Expected return to bank. * An entrepreneur will ...

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