It is hard to imagine for those living in the developed part of the world that two fifths of people today manage to survive on two dollars a day. Moreover, it is even harder to believe that poor people, who normally should lack financial sense, live rich financial lives and even manage to have their own "Portfolios". In the book Portfolios of the Poor: How the World's Poor Live on $2 a Day, the authors Daryl Collins, Jonathan Morduch, Stuart Rutherford and Orlanda Ruthven describe the findings of a detailed study and give an inside on how people live on so little resources. The data was collected by a team of skilled interviewers that recorded financial transactions and comments during visits to poor families from different slums of Bangladesh, India and South Africa. The interviews took place at 15-day intervals over the span of one year.
Money management is a fundamental and well understood element of every-day life of people. This statement doesn't alter when it comes up to people who don't have much to manage. The book argues that for poor people, managing money well is absolutely central to their existence - more than any other social groups of people. In the first chapter, the authors directly dismiss the assumption that readers may have - that very poor people live on hand-to-mouth practices, immediately consuming the small amount of resources once they get it. The research data clearly concluded that even families living on less than $1 a day per person rarely consume every penny of income as soon as it was earned. Typically, they save when they can and borrow when they cannot.
The authors clearly deliver the message that poor people have a need of good reliable financial services as much as people from the developed part of the world do. They regard the people living in the part of the world where they conducted the research as suffering from a "triple whammy". New York Times regarded the "triple whammy" in the developed world a synergy of government cuts, declining corporate giving and less favorable tax. Portfolios of the Poor states that the poor are also subjected to the "triple whammy" - consisting of low incomes, irregularity and unpredictability and lack of tools. The authors found that of all the commonalities the poor that were taking part in the research, the most fundamental were that households were coping with incomes that are not just low, but also irregular and unpredictable, and that too few financial instruments are available to effectively manage these uneven flows of cash.
The book clearly explains that when a person lives on $2 a day that person may get $1 a day for months at a time and then get $3 a day for a period of time and then even make nothing. Because of the unpredictable income, interviewed households saved/lent money and borrowed when in need. As a result, households registered high levels of financial cash-flows in relation to income each household. Consequently, households with lower incomes require more rather than less financial management and financial institutions.
When it comes to financial institutions, the authors found out that most of the household's transactions were carried out with informal partners rather than with formal institutions like banks and insurance companies. The informal sector has proven to be the best provider of borrowing and lending low amounts of money because of its flexibility and ease of use. Moreover, many households refused the services of microfinance institutions because their main need is to save, and not to borrow. Furthermore, surprisingly as it may seem to western people, the poor have to pay interest in order to keep their savings in the formal sector.
Funerals, failed health, loss of employment, weddings, and religious celebrations, all of these require significant investments and require diverse access to capital. Saving and borrowing strategies used by poor households reveled in the book are quite different from the western part of the world. Authors found out that the instruments that help them leverage their capacity to save into larger sums of money to be of two kinds. There is the "accumulators" that allows them to save regularly at fast rates (ex. RoSCA) and the "accumulators" that encourages them to save regularly to pay down large loans - "borrowing in order to save".
In the last part of the book the authors described the changes in the semi-formal and formal financial sectors. It focused on the Garmeen II's innovations impacts on what authors indentified as key financial needs that millions of poor families find difficulty in meeting - managing cash-flows and building lump-sums thorough long-term saving and through borrowing. Also, the study reveals that the early hope of microfinance lending - that every loan would be invested in a microenterprise - has proven to be wrong. The book proved that most of the poor households rely on microfinance institutions in order to manage their cash-flows, only a small portion of them being actually invested in businesses that would generate incomes.
Finally, I believe that the book is a good read. The really great thing about it is the fact that the research the authors made debunks many misconceptions that westerners have, like poor households hand-to-mouth practices; microfinance institutions lend money at a very low interest rate; microfinance institutions lend only to the development of microenterprises; the poor appreciate interest free loans, etc. The truths in this book have greatly influenced the way I view microfinance, poverty and the development of the poor, moreover it turned around my view on the importance of financial tools in the developing world.
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Top reviews from other countries
Meg N
Inspired Research into How Others Live on $2 a Day
Reviewed in Japan 🇯🇵 on August 26, 2017
