...bad borrowers and attract those better positioned to assess and manage risk. A collateral requirement partly or fully shifts the risk of loss of the principal from the lender to the borrower. Collateral thus increases the expected return of the lender and reduces the expected return of the...

...contract. According to Binswanger, Me Intire, and Udry (1989) collateral basically has four effects. At a given interest rate: (1) it increases the expected...variance of return) for the lender; (2) it partly shifts the risks of loss of the principle from the lender to the borrowers; (3) it provides additional...