Financial development eases borrowing constraints by lowering collateral spread.
Institutions that support financial development make it easier for people to borrow money by reducing the difference in collateral requirements between high- and low-risk borrowers. As financial systems improve, the gap in collateral spread decreases, allowing riskier borrowers to use a wider range of assets as collateral. In more advanced financial markets, risky borrowers can use various assets like land to secure loans, compared to less developed markets where the options are limited.