Gustavo is a young doctor who lives in a country with a relatively inefficient l
ID: 2795133 • Letter: G
Question
Gustavo is a young doctor who lives in a country with a relatively inefficient legal and financial system. As a result, when he applied for a bank loan to set up his clinic, the bank required collateral worth 300% of the requested loan amount. Comment in your own words on the following questions (please be brief and to the point): a. b. C. Why did the bank ask for that much collateral? (Give at least TWO reasons) What are the likely consequences for the overall economic and business activities in the country? What can the government and the regulators of that country do to improve conditions?Explanation / Answer
Answer 1:
The collateral helps the bank to recover the maximum amount of the loan if the borrower defaults, as the chances of the defaults are higher reason being the inefficient legal system which weakens the property rights also.
Second reason is that if the country has the inefficient legal system, they cannot impose the strong law for recovery of the debt which can lead to high risk for the bank to lend the money to the borrower.
Answer 2:
The consequences for the overall economic and business activities in the country are as follows:
There will be less investments and the growth would be very low as compared to the other strong nation.
Chances of foreign investments will be low and thus the foreign trade is not at all possible for such nation.
Answer 3:
In order to improve the condition government should improvise on their legal system, make changes in the existing laws, this will help the country to bring more investment in the country and thus will lead to the overall development for the country.
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