Portfolios of the Poor gave me the same feeling of excitement as the World Bank’s epic âVoices of the Poorâ study. Both of them are the fruit of intense scrutiny of the real lives of poor people that uncovers insights and destroys stereotypes. Poor people are most definitely not financial illiterates, but often sophisticated managers of complex financial portfolios that are essential to their survival.
Portfolios of the Poor is a financial fly-on-the-wall account of how poor people manage money. To find out, the researchers set up âfinancial diariesâ with 250 households in selected communities in 3 countries (Bangladesh, India and South Africa). For a year, researchers visited every fortnight and picked over peopleâs financial affairs. The book then assimilates the findings, and intersperses them with unmistakably real-life examples from among the 250 households (âPumza is a sheep intestine seller living in the crowded urban hostels of Cape TownâŠâŠâ)
The first and perhaps most striking finding is the sheer complexity, scale and variety of poor peopleâs financial activity. People living in poverty need financial skills more than the better off. Just to get by from day to day, they borrow, save, and exchange cash with a huge variety of friends, family, neighbours and institutions, both formal and informal. These last include savings clubs, savings-and-loan clubs, insurance clubs, microfinance institutions, and banks. âAt any one time, the average poor household has a fistful of financial relationships on the go.â Every one of the 250 households had both savings and debt of some sort, and no household used fewer than four types of financial instrument over the course of the year. Rural households have turnovers (i.e. total cash flows in or out) between 10 and 30 times greater than their asset value at the end of the year.
This constant activity is needed to deal with three broad challenges:
1. Managing the erratic cash flow of poor homes to make sure there is food on the table every day
2. Dealing with the health and other emergencies that can derail families with little in reserve. In South Africa, funerals (frequent because of HIV and AIDS) cost between 5 and 10 months household income â a huge sum for people living on the edge.
3. Raising lump sums to seize opportunities (typically to buy land) or pay for big ticket expenses like weddings (which in India took up over half the yearly income of a typical household).
The authors bring to life the importance of psychology in the financial lives of poor people: something economists have largely ignored until recently. For instance, South African women in the study joined several 
monthly âsavings clubsâ in spite of having bank accounts that would have paid them interest on their savings. They found that the extra discipline the clubs provided was valuable in itself, because it compelled them to save, no matter what. For similar reasons, poor people regularly seek out money collectors who pass by daily to pick up small amounts of cash, and then return it, minus a fee (effectively a negative interest rate), at the monthâs end. Both make complete sense in human terms, but baffle more orthodox economists.
In what seems a very fair appraisal of the ways poor households meet these challenges, the book assesses the strengths and weaknesses of their current financial arrangements in order to try and spot âgaps in the marketâ – opportunities where banks and microfinance institutions can design products that genuinely address unmet needs of poor people. This is essentially a financial âbottom of the pyramidâ exercise. They identify three weaknesses of existing arrangements:
–Â unreliability (whether loans will be forthcoming, savings lost or stolen, or informal savings clubs will disintegrate);
–Â inflexible repayment schedules imposed by microcredit providers who insist on one year repayment periods when poor people often want loans for weeks rather than months
–Â terms that can be too short: some financial needs (pensions, or saving really big sums, demand years of savings, but informal institutions are too unstable to provide this kind of timespan)
If formal institutions are to remedy these gaps, they need to pay attention to poor householdsâ needs to save and borrow in very small amounts, on a regular basis, but with flexibility in payment schedules to match their unpredictable cash flow. The authors are big fans of âGrameen 2â which has moved away from the traditional role of the microcredit lender. They identify 3 top tips for the kinds of financial products that could take off in this kind of approach:
1) a cash-flow management facility that allows poor households access to small, irregular payments of both savings and loans to tide them over the day to day variability of their cash flows
2) long term savings products
3) large lump sum general purpose loans (i.e. not just for business start-ups as many microcredit institutions have traditionally demanded) â this is the biggest potential market among the poor
Interestingly, the researchers come down against insurance, because it requires each risk to be separately insured, and âlow income households are unlikely to want to spend money on multiple policies, knowing that only some of them will bring returns.â Access to emergency lump sums instead acts as a kind of âgeneral purpose insurance.â
Most startling finding? Even people living on $1-$2 a day typically save about 25% of their income. Amazing. For their data, book reviews, etc see the bookâs website.
What impact will the book have? It feels a bit like the work of Hernando de Soto, in that it can be read in both a progressive and regressive way: progressive: poor people are active financial agents, and governments and financial institutions need to work to their needs. Regressive:Â a ‘private not public’ agenda that sees financial institutions piling into slums and villages to lend money to poor people so they can pay for a pile of services like education and healthcare that are often better provided by the state.