Hedge funds based in Ireland will be able to lend to companies under new rules drawn up by the Central Bank.

Such funds domiciled in Ireland have traditionally been prevented from lending as it was viewed too risky by the financial regulator, however they may soon be allowed to create specialised funds to lend internationally.

The Central Bank has issued a consultation paper on its proposed rules today and expects them to be in place by the end of the year.

With banks still reducing their lending to households and corporations in the wake of the financial crisis, there has been increased demand for new sources of lending from firms in Ireland and abroad.

"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 is drawing heavily on new regulations devised to prevent a repeat of the banking crisis to regulate funds which lend money.

Under the rules, a loan fund will not be able to lend more than a quarter of its assets to one borrower and the amount of debt the fund can take on will be capped at a ratio of one to one, meaning that if a fund has assets of €100m it can borrow another €100m.

The move comes as the European Central Bank and the Bank of England are trying to resurrect the European Union's market for asset-backed securities as a way of getting credit flowing to smaller businesses and plug some of the gap left by banks.