Gustavo is a young doctor who lives in a country with a relatively inefficient legal system and (probably as a consequence) an inefficient financial system. When gustavo applied for a mortgage, he found that banks (he visited many) usually required collateral for up to 300% of the amount of the loan. Explain why banks might require that much property as collateral in such a financial system. Comment on the consequences of such a system for economic growth.
Answers
Explanation:
Step 1 of 3
The fact that a bank requires collateral for up to 300% indicates that the country has relatively inefficient legal and financial systems. That is because the government is weak and does not have the ability to enforce legal contracts strictly enough to force repayment of debts. Therefore, banks take the matter into their own hands and require such a high collateral charge to make sure that they have leverage against their borrowers.
Answer:
(b) Ali is a young doctor who lives in a country with a legal and financial system that is inefficient. When Ali applied for a mortgage (house loan), he discovered that most banks demanded up to 300% of the loan sum as collateral (Security). Explain why banks in such a financial system would need so much collateral. Consider the implications of such a scheme for economic development in such country.