Developing Countries’ Financial Markets. Some of the Parameters.
Parameters:
Funding investments: There are many cases where poor households in developing countries might like to borrow money to make "win-win" investments that improve their own economic well-being and the environment. However, no one is willing to loan them enough money to enable them to do so, and they often pay high interest rates for whatever money that they can borrow. These households face borrowing constraints. Lenders tend to require some collateral in order for them to obtain a loan. Loans are often made with little collateral, but lenders take into account the fact that the likelihood of default increases as the size of the loan increases. In general, a borrower's credit limit is determined by the borrower's assets in the worst possible case scenario (the investment flops), the probability of that scenario, the cost to the lender of converting the borrower's assets to cash in case of default, the borrower's credit history, and any other information available to the lender about the borrower's creditworthiness. The interest rate charged to a borrower is also determined by these considerations.
Why wouldn't a lender simply charge a prospective borrower a high interest rate rather than refuse to lend to that person altogether? Because, beyond a certain point, charging a high interest rate is self-defeating for the lender. First, there is a problem of adverse selection: the people most likely to apply for high interest rate loans are those people who, from the lender's perspective, are bad credit risks. People who are better risks would have obtained lower interest rate loans elsewhere. Second, charging higher interest rates increases the total amount (principal plus interest) the borrower has to pay back, raising the probability of default.
Technological dependence:
There are a lot of reasons that have caused an increase in technological dependence for developing market economies. Most investors and the government find better
Funding investments: There are many cases where poor households in developing countries might like to borrow money to make "win-win" investments that improve their own economic well-being and the environment. However, no one is willing to loan them enough money to enable them to do so, and they often pay high interest rates for whatever money that they can borrow. These households face borrowing constraints. Lenders tend to require some collateral in order for them to obtain a loan. Loans are often made with little collateral, but lenders take into account the fact that the likelihood of default increases as the size of the loan increases. In general, a borrower's credit limit is determined by the borrower's assets in the worst possible case scenario (the investment flops), the probability of that scenario, the cost to the lender of converting the borrower's assets to cash in case of default, the borrower's credit history, and any other information available to the lender about the borrower's creditworthiness. The interest rate charged to a borrower is also determined by these considerations.
Why wouldn't a lender simply charge a prospective borrower a high interest rate rather than refuse to lend to that person altogether? Because, beyond a certain point, charging a high interest rate is self-defeating for the lender. First, there is a problem of adverse selection: the people most likely to apply for high interest rate loans are those people who, from the lender's perspective, are bad credit risks. People who are better risks would have obtained lower interest rate loans elsewhere. Second, charging higher interest rates increases the total amount (principal plus interest) the borrower has to pay back, raising the probability of default.
Technological dependence:
There are a lot of reasons that have caused an increase in technological dependence for developing market economies. Most investors and the government find better