What the book is about

Portolios of the Poor tries to answer the question ‘How do the poor live on $2 a day?’. It’s based on regular interviews with over 250 families in Bangladesh, India, and South Africa which allowed the researchers to build up a detailed picture of the financial transactions these families made. Their main argument is that the poor have sophisticated financial lives. They use many different financial tools that together create ‘financial portfolios’.

Chapter 1 is available online if you want to get an overview. If you get the book, the most important chapters to read for an overview are chapters one and seven.

Key takeaways

Poor people’s incomes are low and irregular

People on low incomes have problems not only because they have little money, but also because that their earnings are irregular as they are often casually or self employed. The well-publicised idea of the poor living on $2 a day or less means people often don’t realise that variability of income is a big problem for the poor as well as low income.

Poor people use many financial tools to cope and often create their own

no matter where we looked, we found that most of the households, even those living on less than one dollar a day per person, rarely consume every penny of income as soon as it is earned. They seek, instead, to “manage” their money by saving when they can and borrowing when they need to. They don’t always succeed, but over time, even for the poorest households, a surprisingly large proportion of income gets managed in this way—diverted into savings or used to pay down loans. In the process, a host of different methods are pressed into use: storing savings at home, with others, and with banking institutions; joining savings clubs, savings-and-loan clubs, and insurance clubs; and borrowing from neighbors, relatives, employers, moneylenders, or financial institutions. At any one time, the average poor household has a fistful of financial relationships on the go. – p.3

They also create their own financial instruments. For example, RoSCAs are commonly used as a saving method.

In a RoSCA the members save the same amount as each other every period - a month, say - and the total amount saved each period is given in whole to one of the members. This continues until everyone has received the “prize” at which point the RoSCA comes naturally to a close - though of course its members may choose to start another cycle immediately or at any later time. – p. 116

The fact that poor people are creating their own financial instruments suggests that there could be demand for projects that either assist them in this or create better alternatives.

Three needs drive much of the financial activity of poor households

  1. Managing basics: cash-flow management to transform irregular income flows into a dependable resource to meet daily needs.
  2. Coping with risk: dealing with the emergencies that can derail families with little in reserve.
  3. Raising lump sums: seizing opportunities and paying for bigticket expenses by accumulating usefully large sums of money. – p. 18

These three needs don’t map cleanly onto borrowing, insurance, and saving as you might expect. Instead, poor households combine many different instruments to meet their needs. For example, they may use both saving and borrowing to manage day-to-day cash flow.

The financial instruments available to the poor are often low quality

the dominance of the informal sector in the lives of our diary households should not be interpreted to mean that poor households are happy with the instruments available and have no need of anything else. Far from it. – p. 53

They argue that informal financial instruments have these main weaknesses:

  • Unreliability: Informal financial partners are often poor themselves and so may not have the money you need, when you need it or they may not follow through on their promises. Insecurity is also a problem, with savings sometimes lost or stolen.
  • Lack of privacy: Financial relationships with family and friends can be stressful and a source of shame.
  • Lack of transparency: The terms of the financial arrangement such as interest are not always clear and people can easily be defrauded.

The poor can’t rely on only insurance to manage risks

there are so many risks, resulting in so many emergencies, that it is unrealistic to expect poor households to contain them by means of the single financial strategy of insurance. Dealing with emergencies is so crucial that even where insurance is available to them, poor households often have to draw down savings and seek loans to make up the losses in full. – p. 19

This area is fast growing and may not be neglected

Financial services for poor people - that is, microfinance, as provision of these services has become known - is enjoying unprecedented growth. New resources of all sorts are pouring in from every side. More and more providers are setting up shop in more and more countries around the world, some of them fired up by the vision of improving the lives of the poor, others lured by the prospects of profits, and many - the so-called double bottom line institutions - attracted by both. In the last few years, the level of private financial investment has increased sharply so that microfinance is no longer so dependent on the public purse. New technologies, especially mobile devices in the hands of field staff and clients, and smart computer programs in the back offices of providers, promise huge boosts to productivity, lower costs, and greater convenience. Ideas for new financial products for the poor are being launched almost daily, and clever ways of testing their efficiency and their impact are being devised. – p. 175

The opportunities to help

Helping poor households manage money on a day-to-day basis

This would involve helping households manipulate “small and irregular or unreliable incomes to ensure that cash is available when needed” to pay for small regular expenses.

A solution for this should:

offer poor households access to a cash-flow management facility that combines convenience with capacity. It would provide the chance to make small-scale savings of any value at any time with the right to withdraw on demand; and at the same time it would offer loans of a modest value that can be taken quickly, on demand, at any time, and repaid in small (and if necessary, irregular) installments. – p. 178

Helping poor households build savings over the long term

Poor people want to save and often have enough money to, and their use of savings clubs like the RoSCAs show that they do save. But existing methods like savings clubs don’t work well over the long term. Long term savings are important for dealing with big events like marriages, purchasing large assets, and dealing with emergencies.

So, a solution should:

offer long term contractual savings products. These mimic savings clubs by making it possible to save small sums on a regular basis, but add the opportunity of doing so safely over the long term. – p. 179

Helping poor households borrow for all uses

poor households lack dependable access to credit, especially for larger sums that are needed to deal with major life-cycle events, big purchases, and emergencies – p. 179

So a solution should offer:

lending for a wide range of uses. The basic mechanisms are already available, because the development of uncollateralized lending has been the single biggest and most widespread achievement of the microfinance movement. But many microfinance providers still prefer their borrowers to use their loans for just one purpose - microenterprise. Where this is enforced, clients cannot borrow for other vital uses even when they have the cash flow to service the loans. Our own research in Bangladesh, as revealed in the previous chapter, show that many loans ostensibly taken for microenterprises are used for other purposes. It is time for microfinance not merely to face up to this reality, but to embrace the opportunity that it presents. By offering general-purpose loans, matched in value and structure to the cash flows of poor households, microfinance would open up to the biggest single market it is likely to find among the poor (especially the urban poor who tend to be waged rather than self-employed), and one that would be greatly appreciated by most of our diary households. – p. 179

Principles for designing a solution

A solution should be:

  • Reliable: It “should deliver services at the promised time, in the promised amount, and at the promised price”. Most services the poor deal with are unreliable, as are their own incomes. This unreliability makes life harder and having reliable financial partners would help.
  • Convenient: It should give the “chance to take and repay loans, and make and withdraw deposits, frequently, close to home or work, quickly, privately, and unobtrusively”.
  • Flexible: It should be flexible enough that people can use it given their cash flows.
  • Realistic: It should offer regularities that promote self-discipline. For example, scheduled visits by bank workers, or planned payment schedules for loans or savings.