Recommended Reading

Portfolios of the Poor: How the World’s Poor Live on $2 a Day

by Collins, Morduch, Rutherford & Ruthven

This recently published book has got a lot of buzz amongst the microfinance industry as providing new insights into the actual financial activities of < $2/day (key UN definition of very poor) families.  The book includes the one-year financial “diaries” of 250 families living on $2/day in Bangladesh, India and South Africa painstakingly collected by researchers after building trust with families to share their daily financial transaction details.  These are summarized into cash flow and household “balance sheet” statements to analyze the fascinating volume and scale of financial transactions which these families  juggle in order to survive, and occasionally thrive.

There are a lot of good insights in this book and I recommend it for those who value data in order to design innovative and helpful financial services for base of the financial pyramid families.  Here are a few highlights I noted:

• Every family had both loans and savings
• Families accessed on average of 8-10 different financial instruments in the year
• Cash flow turnover was up to 300-500% of total net income
• Incomes are not just low, but also uneven and unpredictable … creating higher complexity to manage cash
• Families often borrow even when they have savings
• It is not uncommon for savers to pay interest/fees rather than receive them to those holding their savings
• Moneylenders are often used for short-term loans … interest paid perceived as a convenience fee rather than interest rate
• Flexibility/adaptability is a critical factor when the poor select financial services
• Financial transactions outside the formal financial system (including MFIs) greatly outnumber those with MFIs
• The downsides of informal financial transactions:  unreliability, lack of privacy, lack of transparency

Poor households would benefit greatly from reliable, convenient, reasonably pricing “formal” financial tools to help with:

• daily cash flow management
• savings (for long-term needs)
• borrowing for flexible uses