, ECS3701 Assignment 2 (COMPLETE ANSWERS)
Semester 2 2024 (833935) - DUE 27 September 2024
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QUESTIONS
2.01 Discuss how collateral and indirect finance are used in explaining the
basic facts about financial structure around the world. [10]
Introduction
Financial structure refers to the mix of different sources of financing that
organizations use to fund their activities. This can include various forms of debt
and equity, each contributing uniquely to a firm’s capital structure. Understanding
how collateral and indirect finance fit into this framework can shed light on the
variations in financial systems across countries. This discussion explores how these
concepts help explain the fundamental characteristics of financial structures
worldwide, highlighting their roles in risk management, access to capital, and the
influence of institutional frameworks.
Collateral in Financial Structures
Collateral is an asset pledged by a borrower to secure a loan. It serves as a form of
protection for lenders, reducing the risk of loss in case of default. The importance
of collateral varies significantly across different countries and financial markets,
influenced by legal, economic, and cultural factors.
1. Risk Mitigation: In many economies, especially in developing countries,
collateral plays a crucial role in mitigating the risks associated with lending.
Lenders often require borrowers to provide collateral as a safeguard, which
can enhance access to credit for individuals and small businesses that may
lack established credit histories. For instance, in countries with
underdeveloped credit markets, such as parts of Africa and Latin America,
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