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ECS3701
ASSIGNMEMT 2
SEMESTER 2
ENIQUE NO
833935
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, 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 various components that make up the financial
system of a country, including institutions, instruments, and markets that facilitate
the flow of funds. In understanding the financial structure around the world, two
critical concepts arise: collateral and indirect finance. These elements play a crucial
role in shaping the dynamics of lending and borrowing, influencing how resources
are allocated and the overall efficiency of financial markets. This essay will discuss
how collateral and indirect finance contribute to our understanding of financial
structures globally, highlighting their significance, mechanisms, and implications
for economic development.
The Role of Collateral in Financial Structures
Collateral is an asset that borrowers pledge as security for a loan, reducing the
lender's risk. The use of collateral varies widely across different financial systems,
significantly influencing the accessibility of credit. In economies with well-
developed financial markets, collateral can take many forms, including real estate,
financial securities, and other tangible assets. The presence of collateral serves to
mitigate adverse selection and moral hazard problems associated with lending.
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