Ireland-based hedge funds will be allowed to lend money under new rules announced by the Central Bank.

While such funds had previously been precluded from lending as it was considered too risky by the regulator, they could soon be allowed to create special funds to lend to business.

The Central Bank today issued a consultation paper on the issue and the rules could be in place by the end of the year.

Since the financial crisis there has been a dearth of lending to homes and businesses with increased demand for credit.

“In our view this is a sector that should be subject to some additional regulation,” said Martin Moloney, head of markets policy at the Central Bank.

“If you have loan origination funds operating out of Ireland and lending into other countries there are potential cross-border issues. We wanted to deal with that upfront and we have been very focused on the financial stability issues.”

The Central Bank will use regulations devised to prevent a repeat of the banking crisis to regulate the lending.

According to the plans, a fund will not be able to lend more than a quarter of its assets to one borrower.

In addition, the fund’s debt will be capped at a ratio of one to one.

Both the European Central Bank and Bank of England are trying to get funding flowing for the likes of SMEs.

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