Question

how does the demand for collateral affect a poor persons capacity to borrow?

Answer 1

Money lenders ask for a collateral as security against the loans that they give. If the borrowers fail to repay the loan, the lender has the right to sell the asset or collateral to recover the loan amount.

Since the poor people do not have a collateral to offer, they have a poor chance of borrowing. Also, they cannot get any loans or credit from formal sources of credit like co-operatives or banks.

So, they prefer to take loans from known people like friends, relatives, money lenders etc.