Question

25. Lenders are more willing to lend if the borrower can put up collateral for the loan. Remember that collateral is something of value that by agreement becomes the property of the lender if the borrower defaults. In the United States, many small business owners borrow money for their business by using their houses or business assets as collateral. But in many developing countries, people don’t have secure property rights, or title, to the land or house in which they live. In Bangalore, India, for example, it’s nearly impossible to say who owns a piece of land and about 85% of the people in that city live on a piece of land for which they have no title. How difficult do you think it would be for a small business person in Bangalore to get a modest-sized loan?

Answer 1

: If a small business owner does not have a legally recognized title to his or her property, he or she cannot pledge that property as collateral to get a loan. And without collateral it is difficult to borrow. As a result, small businesses find it difficult to get the capital they need to become bigger businesses. Property rights in land and structures, therefore, are an important “leverage” point in the economic system. Economist Hernando De Soto’s book The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else is an important and fascinating discussion of these issues. De Soto has been working with governments around the world to improve their property titling systems so that small business people have recognized property rights that they can use to borrow