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Local and regional governments in Croatia are organized in the forms of cities, municipalities and counties. Each local unit has a legally prescribed responsibilities and scope of work. At the moment, there are 576 local and regional government units in Croatia, of which 20 are counties, City of Zagreb has a dual status as a city and a county, 126 are cities and 429 are municipalities. In order to fulfill their tasks, local governments must have sufficient budget revenues at their disposal. Partly because of a large number of local governments and inefficient territorial division, there is a problem of low fiscal capacity of many local units that are unable to fund all the public needs on the local level. Especially difficult for local governments to finance are investments in long-term capital (development) projects. According to present legal regulation, local governments acquire budget revenues such as tax and non-tax revenues, grants and capital revenues. Beside these, local units can borrow financial funds from banks and other financial institution and/or issue debt securities on the market. This paper examines the role of debt securities, namely municipal bonds issued by the local governments in the Croatia in order to acquire sufficient financial funds for financing long term capital projects on the local level. The main legal regulation in Croatia and basic criteria and constrains on local government borrowing and municipal bond issuing will be analyzed. Additionally, the relative contribution of borrowed funds and municipal bonds in the overall budget structure will be discussed along with possibilities and challenges for their increase in the future. The paper will present an overview of municipal bonds and their characteristics issued by local governments in the period to present date. A proper model of financing capital investments on the local level is of great importance for development of local communities. Therefore, local governments must find new ways to acquire additional financial funds to finance large capital projects, such as infrastructure, schools, hospitals, roads and similar. Issuing of municipal bonds by some local governments is certainly one of the models that should be utilized in the future more often. This paper attempts to indicate main advantages of municipal bonds as a source of revenues of local government budgets, as well as to point out possibilities for further developments in the field.