In order to implement large capital projects that cannot be financed from current budget revenues, local self-government units decide on long-term borrowing. It is most often realized by using long-term bank loans, while there is an alternative in the form of issuing municipal bonds. Municipal bonds represent an instrument of long-term borrowing widespread in the practice of countries with a developed capital market, while in less developed countries the use of bank loans dominates. Local self-government units in Croatia borrow almost entirely using bank loans, while there are individual examples of issuing municipal bonds. In view of the above, the aim of this paper is to provide a theoretical and practical presentation of municipal bonds as an instrument of external financing of public needs and to explore the possibility of their application as well as to offer the framework needed for a stronger application of the aforementioned practice in Croatia. Individual cases of issues of local units in Croatia are significant for the Croatian capital market and the possibility of applying municipal bonds in the future. During the issue, in most cases, the interest rate was set lower than the active interest rate of the banks, therefore the cost of borrowing was lower compared to the use of bank loans, and the issues were justified. Also, the legislative framework in Croatia foresees the borrowing of municipal bonds, regulates their offer to the public and their listing on the regulated market. The low development of the capital market in Croatia has a negative impact on the application of this instrument, especially in the context of a small number of participants and low liquidity. Also, Croatia is traditionally a bank-centric country, which contributes to the low development of the capital market and low awareness of the use of municipal bonds at the local level, while for this purpose it is necessary to educate staff. A positive incentive for the practice of using municipal bonds could come from the implementation of a credit rating system that would reduce the asymmetry of information based on the credit rating and potentially increase the interest of investors in issuing local units in Croatia.