Portfolios of the Poor: How the World's Poor Live on $2 a Day
Reviewed by Richard Rosenberg
New book challenges common assumptions about poor people's financial lives
Richard Rosenberg is a Senior Advisor to the Research and Market Intelligence Team at CGAP.
Portfolios of the Poor: How the World's Poor Live on $2 a Day by Daryl Collins, Jonathan Morduch, Stuart Rutherford, and Orlanda Ruthven. Princeton University Press, 2009. 230pp.
People sometimes ask me to recommend a single book about finance for the poor. For years, I’ve answered, “That’s easy—get Stuart Rutherford’s book The Poor and Their Money.” But not anymore. Piling up breathless superlatives is not a particularly useful way to review a good book, but I can’t resist starting with an arm-waving proclamation that this is not just a good book but a great one, a really astonishing piece of reporting and analysis and a wonderful read as well.
The edifice of modern microfinance has been built on a number of assumptions about what poor people need. Portfolios of the Poor focuses insistently on what poor people actually do.It draws a high-resolution picture of the ways that low-income households manage their cash. This picture sheds a surprising amount of light on common assumptions, undermining some widespread ones in the process.
The book is based on hundreds of year-long financial diaries, collected about twice a month from rural and urban households in India, Bangladesh, and South Africa. The diaries revealed that households actively used a wide range of savings and loans, often many of them at once. Flow of cash in and out of these instruments ranged from 75 percent to 330 percent of annual household income in India and Bangladesh, and up to 500 percent in South Africa. Relative to their income, these poor households engaged in more financial intermediation than richer people do.
Portfolios explains this surprising result by focusing on an oft-neglected dimension of poverty. We sometimes think about poor people’s income as if the only problem is that there is not enough of it. This view misses another hugely burdensome dimension of poverty: income is variable and risky. But as the authors observe, “One of the least remarked-on problems of living on two dollars a day is that you don’t literally get that amount each day.” Because poor people live so close to the edge, they have to – and do – scramble more than the rest of us to avoid going hungry, or to scrape together the larger amounts that they occasionally need for life events or investment opportunities. Savings and loans are their principal tools for doing this, so the availability and quality of those tools were very important for the diary households.
Thus, “microfinance” as we know it is not delivering financial services to people who otherwise would have none. It is adding further tools to the ones that poor people already have at their disposal. However, most of those tools have serious drawbacks, especially in terms of reliability. When poor people need to get a loan, or to “withdraw” money that they have deposited with (i.e., lent to) someone else, that someone else may not have the money on hand, or may be unwilling to provide it for some other reason.
The authors report that diary households placed a high value on the services of microfinance institutions because of their reliability. At the same time, the households continued to use informal services because those tend to be more flexible. The book devotes a chapter to the redesign of Grameen Bank after its default crisis of the late 1990s. “Grameen II” added a lot of flexibility to Grameen’s services, and has been hugely successful in terms of uptake and (not incidentally) repayment.
Portfoliosoffers important insights on other topics I can’t do more than mention here, including poor people’s use of both loans and savings to assemble the larger amounts of cash they need for life events or investment, the importance of structured instruments that they use to reinforce savings discipline, how poor people view the prices of financial services (hint: differently from economists), and finally recommendations on how microfinance providers and others can improve the services they offer.
A core finding of the book is that the poor households in the study value and use financial services more for managing household consumption and cash flow than for business investment purposes. In other words, they are like most of the rest of us. The difference is that managing consumption is far more critical for the poor. When we are told that the evidence about microfinance lifting people out of poverty is unclear, and that many (often most) clients use microloans and savings to smooth consumption rather than to grow microenterprises, we tend to be disappointed, and to view consumption smoothing as a mere palliative. “If that’s all it is, why bother?” we ask. I suspect we react this way only because our own basic consumption needs are seldom if ever threatened. As this book demonstrates, poor people see it differently.
Recent studies have raised some doubts about the claim that microfinance is a tool of extraordinary power to lift poor people out of poverty. Maybe further studies will bear out that claim, or maybe they won’t. Either way, Portfolios of the Poor is a compelling reminder that financial services are critical tools the poor use to cope with poverty (whether or not they escape it), and that improving the reliability and quality of those service adds real value to their lives.
Of course, the authors don’t claim that financial diaries in three countries give a definitive picture of poor people worldwide. Can we say anything about the importance of microfinance to people in other settings? I think so. Hundreds of millions of poor people “vote with their feet,” demonstrating how much they value microfinance by flocking to it in droves when it becomes available, and most especially by repaying loans faithfully again and again when the predominant motive to repay is not collateral or even group pressure but rather their desire to keep future access to a valued service.
It may turn out that a year-long microloan doesn’t improve income as much as a year of women’s primary education or other social services. But the robust value proposition behind microfinance is not that each “dose” is more powerful, but rather that each dose costs much less in subsidies. Social programs like primary education and health care usually require large continuing subsidies, using up scarce tax dollars year after year. Microfinance is different: when it is done right, relatively small up-front subsidies lead to permanent institutions that can continue providing services year after year with no further subsidy needed, and expand those services to reach many millions of low-income clients who badly want them. (This, by the way, is not an argument for microfinance. It’s an argument for microfinance done right.)
We need to explain income vulnerability and observations on Richard's review
It is good to see that microfinance is becoming more empirical and not just preaching natural rights(!) or forcing people to become entrepreneurs when they are not. It is also great to see an emphasis on cash flows, fungibility, and vulnerability. What we now need is an explanation or a model of why cash flows behave in the ways described in the book and why they are so vulnerable. Is it to do with "poverty" which is often a meaningless explanation when it is used in a non-empirical and emotional way or can income vulnerability be linked to asset ownership and debt levels? Can we get diaries that are not only cash flow statements but also balance sheets?
If one considers mortgage finance that is not part of the usual gamut of microfinance, then the statement that, relative to their income, "poor people engage in more financial transaction than rich people" may not be valid. A mortgage can be anywhere between 10 to 50 times income and it is available to rich people. Poor people may engage in many more micro financial transactions in terms of number of transactions but again if one considers credit cards as a temporary loan, then rich people may engage in more transactions than poor people even in terms of absloute numbers.
".......millions of poor people “vote with their feet,” demonstrating how much they value microfinance by flocking to it in droves when it becomes available, and most especially by repaying loans faithfully again and again when the predominant motive to repay is not collateral or even group pressure but rather their desire to keep future access to a valued service". For an identical conclusion for East Africa (Uganda and Tanzania) see "Member-Owned Financial Institutions: Lessons from Uganda and Tanzania 1997 to 2004". www.ruralfinancenetwork.org
Thank you Richard for informing us about a great book.
Ahmad Jazayeri Independent rural/microfinance consultant Canada
10 Oct 2009
Excellent Resource and Great Review
I agree with Richard. After reading Portfolios of the Poor, I have just supplemented my recommendation for the number one book to read for an introduction to how poor people manage their finances. I used to recommend Rutherford's book but now I will recommend Portfolios of the Poor with equal vigor. The stories and information contained in the book are informative, well documented and extremely insightful. Thank you Collins, Morduch, Rutherford, and Ruthven for your great contribution to the microfinance literature.
Robert Gailey Point Loma Nazarene University United States
07 Oct 2009
Economic and financial profile of the poor
4. Thanks to Richard for darwing our attention to the study on the ‘profile of the poor’ (Collins and others) It certainly portrays wealth of information on the profile of the poor more from economic and financial perspectives. They are useful and unique but highly compartmentalized to fit in a well structured ‘balance sheet’ table under two columns Asset’ and ‘liability’ at household level. Since poverty is multifaceted and the lifestyle of the poor in the given environ is highly inter related with both financial and non financial factors at household level ,a phenomenological insight through a multidecisiplinary research would enable us to perceive the inherent facts on human behavior and concealed causal relationship between financial and non financial inputs in each one of their profile and break many myths in the process of poverty reduction .through MF platform.(For example pl see my response to posting in CGAP MF blog – ‘ Mohmend Yunus and Michael Chu debate Commercialization’ reveling the concealed facts on collection /repayment brought out by anthropologists )
Last the profile indicated cash flow management as ‘routine’ with the kind of loan management with MFI on one hand and money lender on the other hand . It is unethical and suicidal. indicating the irretrievable from ‘debt trap’ as you also envisaged. In this context, two quotes reflecting the some dimesnion of profile of the poor meirt attention of MF community.
“ Indian farmers born in debt, live in debt, die in debt and bequeaths debt”
“The credit supports the farmer as the hangman’s rope support the hanged”
Varadarajan rengarajan Independent consultant -Microfinance India
06 Oct 2009
Very helpful + an aside
Thanks Richard, for this very helpful review.
As an aside, Daryl Collins, one of the co-authors of Portfolios of the Poor, will be featured at a panel discussion on matched savings programs on October 15 at the New America Foundation in Washington, D.C. Information is here: http://www.newamerica.net/events/2009/savings_international_development.
United States
28 Sep 2009
Hurrah for Portfolios of the Poor & Rosenberg's review!
As a fairly recent participant in the microfinance industry, I have always been struck as to how ferociously microfinance is presented to the public as lending to microentrepreneuers, when many studies and experiences point out the fungible nature of money and the frequent alternative uses by microborrowers.
For this reason, I am very happy to see Portfolios of the Poor come out, and that it receive acclaim from such a recognized expert as Rich Rosenberg. I believe with Rosenberg that this work will assume a seminal place in the industry - that helping to create or improve access to financial services for the poor is a legitimate goal of microfinance writ large.
Limiting the definition of microfinance to "financial services to microentrepreneuers" is at best poor business practice (shrinks the potential market, overlooks many poor people's real needs) and at its worst, deceptive labelling practice (in light of the known frequent diversion of funds)that at one end of the chain leads people to lie in order to receive loans, and to loan officers turning a 'blind eye'to uses so long as repayments are timely, while at the other end attracting donor and SRI money based on a false premise.
Peter Wall Wall's Street Advisor Services United States
28 Sep 2009
Microfinance and family structure
I endorse the findings and conclusions of the author.
I have been working in South Asia for several decades in natural resource management including agriculture and livestock activities. Microfinance was a tool in one way or another. With some exceptions, it became evident that microfinance was not the springboard of small business. Microfinance was used for family consumption on the whole. I would go one step further. Microfinance by supporting family consumption provided continuity to the family unit, at least in South Asia. So that rural societies did not disintegrate. In other areas of world, i.e. some Central American and African countries, rural poverty disintegrates the family unit. Family members begin migrating in search of better opportunities.
Thus the contribution of microfinance is that it maintains the family structure. Without stable family units, it is difficult to start up any small or medium enterprise.
Eduardo Quiroga SYLVAGRO Canada
25 Sep 2009
A must read book for the financially secure
I bought and read this book and regard it as the most informative I have yet read in the area of microfinance. It is an astonishing journey into the economic lives of people far from where I live but I believe it has something to say to me about the economically disadvantaged in my own town in the USA. We also have the "unbanked" among us in rather considerable numbers and I suspect they have similar coping mechanisms.
