The poor of the world live with incomes that are very small, irregular and uncertain. So, how do they manage to get by on sums that are quite often less than $1 a day? How do they cope with perpetual risk of being thrown out of work, their homes or with medical emergencies when they have no access to any formal credit? What it means is that if one is poor, managing one’s money well becomes central to one’s life — more than for any other group, however banal that may sound.
There is little understanding though of how complex the financial lives of the poor really are — what their portfolio consists of and how it is managed. Although economists and sociologists have provided much information on parts of the portfolio, such as the age-old institution of money-lending and how the newer savings groups operate, what has been missing is a close look at how the entire portfolio functions. Poor households across Asia and in South Africa, as this study reveals, have both savings and debt of some kind or the other. They use between eight and ten instruments on average and sometimes use one instrument as many as 300 times in a year, but what it entails is a regimen of “unrelenting vigilance” over cash flows. The variety of financial instruments include group savings schemes, membership of chit funds or what are termed rotating savings and credit associations (in India), membership of burial societies (popular in South Africa where members insure each other against the high cost of funerals), loans from employers, interest-free bailouts with fixed tenures from neighbours or high-cost loans from microfinance institutions (MFIs) with an average 30 per cent interest payout as in Bangladesh or at usurious rates from the local money-lenders, all of which does not necessarily indicate that the poor had a great many choices in securing credit, specially in an emergency.
Focusing on how the portfolio functions gives “new insight into the day-to-day nature of poverty and yields concrete ideas creating better solutions for it”, say the authors of Portfolios of the Poor, a book that appears to have changed general western perceptions about how the poor of the developing world live with a painstaking mapping of their financial behaviour. Around 250 households were selected from 14 locations in India, Bangladesh and South Africa for the study and detailed case diaries were maintained for a year for each of these. Although the project was kicked off a decade ago, intensive research was conducted over a 12-month period when interviewers visited households at least twice a month to put together the financial diaries.
The authors focused on how and when income flowed in and when and why it was spent, getting confidential information from the households on their compulsions for borrowing money or for taking loans at exorbitant cost even when they had some savings stashed away. All of this is enriched by the real-time commentary of the householders that appear to have developed some equation with their interlocutors. Surprisingly, say the authors, it was the tools of corporate finance — balance sheets and cash flow statements —which helped them to “begin to understand what it takes, day by day, for poor households to live on so little”. One caveat here: although the title appears to narrow the focus of the study on households earning $2 a day, this is not the case uniformly. In the study of rural Indian households based in two villages of Uttar Pradesh, as much as 61 per cent of the respondents earned less than $1 per day per person, although few were landless, whereas in South Africa, they had incomes close to $10 daily and none of them less than $3. In Bangladesh, incomes ranged between $1 and $2.
The authors make it clear from the outset that they are not projecting these households as the typical poor, but what the book does provide is ample evidence of the sophistication and intensity with which the participants thought about their finances.
Some of the incidental findings of the project are arresting, too. South Africans, it appears, manage by and large to get by on their social welfare grants which are paid to the elderly, children and the disabled; in India, the probability of losing employment is as high as 50 per cent. More than 40 per cent of the households in South Africa enjoy regular wages at a rate two-three times higher than in South Asia. And from evidence gathered in the financial diaries, South Africa appears to have done away with child labour unlike in India and Bangladesh where households are quite often dependent on their children’s earnings.
While the research is path-breaking in some aspects, the book’s prescriptions, however, are a problem. These are directly linked to the authors’ own affiliations, three of whom are involved with MFIs, either as founders, directors or senior associates. As such, their reliance on “reliable, flexible and convenient” microfinance as a solution to the general credit needs of the poor raises some concerns. Microfinance is not always a good thing for the needy as experience has shown with growing level of indebtedness of customers who are being forced to take multiple loans to service their debt. More worrying is that the business model being followed by the more robust MFIs is leaving the really poor out of their ambit.
The three billion needy of the world need some better options.
PORTFOLIOS OF THE POOR
How the World’s Poor Live on $2 a Day
Daryl Collins, Jonathan Morduch, Stuart Rutherford, Orlanda Ruthven
Permanent Black
283 pages; Rs 325