Why Lenders Ask for Collateral:
1. Security for the Lender: Collateral is like a safety deposit. It gives the lender something valuable as a backup in case the borrower can’t repay the loan.

2. Risk Reduction: It helps lower the risk for the lender. If the borrower can’t pay back, the lender can take the collateral to cover the loan amount.

3. Better Loan Terms: Offering collateral often means getting a lower interest rate or being able to borrow more money. It gives borrowers access to better loan terms.

4. Approval Assurance: For people with little credit history or lower credit scores, collateral can increase the chance of loan approval. Lenders feel more secure lending money when collateral is provided.

5. Following Rules: Sometimes, rules or laws require lenders to take collateral to make sure they’re lending responsibly and managing risks.

Collateral makes lenders more confident in giving loans by lowering their risk. It’s like a guarantee that helps people borrow money or get better loan deals.

How Money Simplifies Exchange:
1. Standard Value: Money has a fixed value recognized by everyone, unlike barter where items’ values vary. This makes transactions easier as the value is agreed upon.

2. Eases Transactions: With money, you don’t need to find someone who wants exactly what you have and has what you want. You can sell your item for money and use that money to buy what you need from anyone.

3. Portability and Divisibility: Money is easy to carry and can be divided into smaller units. This makes it handy for transactions of various amounts.

4. Widely Accepted: Almost everyone accepts money, allowing transactions with many people beyond just those in your community.

5. Maintains Value: Money doesn’t spoil or lose value quickly like some goods. You can save it and use it later, making it a reliable way to hold wealth.

6. Simple Economic Decisions: Money helps in comparing costs and making decisions because it provides a common measure of value.

Money’s simplicity and universal acceptance make trading easier, promoting smoother transactions and simplifying economic decisions for individuals and businesses.

How Poverty Affects Borrowing Capacity:

1. Irregular Income: Poorer individuals often have unstable or low incomes, making it difficult to meet formal lenders’ income criteria for borrowing.

2. Lack of Assets: They may not possess valuable assets to use as collateral for loans, a requirement by formal lenders, limiting their borrowing capacity.

3. Documentation Challenges: Limited access to formal documentation like stable income proofs or credit records reduces eligibility for loans from regulated lenders.

4. Limited Access to Formal Credit: Geographical isolation, lack of awareness, or discrimination restricts access to formal financial services, reducing borrowing opportunities.

5. Reliance on Expensive Informal Credit: Due to restricted access to formal credit, they might turn to informal sources like moneylenders, facing higher interest rates and debt traps.

Understanding these challenges helps recognize the barriers faced by poorer individuals in accessing fair and affordable credit.

Reasons for Difficulty:

1. Regulatory Challenges: Informal lenders operate outside formal rules, making oversight complex.
2. Lack of Records: Transactions often lack documentation, making monitoring tough.
3. Diverse Practices: Varied lending methods across regions hinder standardized regulations.
4. Social Dynamics: Informal lending relies on trust and community ties, resistant to external oversight.
5. Geographical Reach: Informal lenders serve remote areas, making monitoring logistics challenging.
6. Resource Constraints: It demands substantial manpower and technology, often not readily available.
7. Balancing Act: Supervision must balance consumer protection with supporting financial inclusion efforts.

While supervising informal lending could protect consumers, complexities in its diverse, unstructured nature pose challenges for effective oversight.