Is a contract that legally prescribes individuals tied to the contract to obey all the clauses and conditions contained in the legally binding contract. In financial markets, banks often draw up restrictive covenants when lending sums of money to businesses to reduce the probability of the business defaulting on that loan. It is called a restrictive covenant as the bank can prevent the business from paying out extra dividends to shareholders and taking more equity to finance investment plans until the loan has been paid back to the bank. These types of contracts are drawn up to reduce the problem of moral hazard.