Investigating the Financial Lives of the Poor
Collins, D.

The Financial Diaries method

Daryl Collins is the Director of the South African Financial Diaries project, funded by FinMark Trust, the Ford Foundation and the MicroFinance Regulatory Council of South Africa.

Mambongo's sheep intestine cooking station

A 50 year old single woman, Mambongo* lives with her three children and one grandchild in a crowded flat in one of the roughest areas outside Cape Town, South Africa. Her main source of income is a small business cooking sheep intestines. A government-sponsored child grant, income from a casual job and periodic small gifts from an aunt supplement this income. Her primary financial concern is making ends meet on a daily basis, and making sure her family enjoys a good Christmas each year.

How does Mambongo manage her money and try to meet these financial goals? The Financial Diaries, a data collection method initially conceived by David Hulme and Stuart Rutherford, author of The Poor and Their Money, answers such questions by tracking household cash flows over the course of a year. With its rich set of data, the Financial Diaries aims to help policymakers, the financial industry and donor agencies understand financial management practices of the poor so they can strategize on how to increase financial access for these households.

Finance: Where time and money intersect

Very little systematic research has been done into the precise methods that poor people use to manage their money. Many household surveys ask questions about loans and savings behavior, but most ignore or under-report informal services and often miss a fundamental element of finance - time. By taking into account time, the Financial Diaries method is able to capture two elements that are not observed in one-time household surveys:

1. The complexity of a household's financial transactions: Talking to households over time allows us to unravel the details and capture the entire set of cash flows.
2. The success or failure of financial management: This can only be assessed by observing a build-up of savings or how quickly a loan is paid off over time.

Poor households in the study do not actually keep a 'diary' themselves. They are interviewed by a team of skilled field researchers who record transactions and comments during home visits every other week. These field researchers ask respondents detailed questions about their financial flows during the prior two weeks - for example, did they take a loan, deposit money into an account, or take goods on credit?

The South African Financial Diaries

Building on the first Financial Diaries studies in Bangladesh and India in 1999 and 2000, the South African Financial Diaries were implemented in 2004-2005 using different techniques to collect a more complete set of cash flow and balance sheet data. A specially built database made it possible to improve data quality in two ways:

1. Questionnaires specific to each household were generated, based on data from the previous interview. This innovation simultaneously shortened the interview time, while facilitating a higher precision of recall, even for small financial transactions.
2. Field workers were able to calculate an on-the-spot reconciliation of household cash flow statements, which allowed them to easily target small cash flows that households may have forgotten or avoided discussing.

The South African Financial Diaries method tracked, with high precision, a set of over 200 income, expenditure and financial transaction daily time series for each household. Aggregated across households and over time, the margin of error across the sample becomes an average of 6% of sources of funds after 6 interviews.

In addition to tracking a large amount of quantitative data, the Diaries simultaneously provides rich qualitative data. Part of the interview time is spent in open-ended conversations with households, allowing researchers to follow households' financial dilemmas, opportunities, and strategies as they play out from week to week.

The case of Mambongo

To see how this method of data collection yields a complete set of ongoing financial accounts, let's return to the story of Mambongo. Though she was illiterate and could not speak English, she was not intimidated by the detailed financial questions the research team asked her. A strong woman, solid in both appearance and personality, she could remember her cash flows for the previous two weeks and recall exactly how she made her financial decisions. She explained that in April, she took a loan from a moneylender to help the cash flow in her business. She also belonged to eight different savings clubs over the year. One club helped fund her cash flow requirements for business inventories (she received a payment in April), while the others were ear-marked savings for Christmas. The table below shows the complete set of cash flows for April 2004, the combined results of two interviews.

Results: Better understanding financial management in poor households

Mambongo's broad array of savings, credit and cash flow instruments is typical of the poor households surveyed using the Financial Diaries. Households in the 250 households surveyed in Bangladesh, India and South Africa used, on average, ten different types of financial instruments. Tracking the entire portfolio of financial instruments over time has yielded a number of insights across a broad spectrum of poverty-related questions, including:

• The median Diary household in South Africa saved an astonishing 21% of their income every month. However, those savings rarely accumulated for more than several months, and usually were tied to a specific purpose, leaving poor households with little savings to use for unexpected emergencies or opportunities.
• Although physical assets, like livestock and land, make up most of a household's net worth, their median value over the year was virtually unchanged. Net financial assets (assets less liabilities) are far more dynamic. Households accumulated savings month by month and by the end of ten months, the median household had 14% more in net financial assets than they started with. This is a significant amount of asset accumulation, taken from small incomes, over a short period of time.
• Funerals provide frequent unexpected financial shocks in South Africa, often costing up to 7 months of income. Despite holding a portfolio of funeral insurance instruments, 61% of South African Diaries households are underinsured against the cost of a funeral. Eighty percent of these households would lose over half of their monthly income should the highest income recipient in the household die. Even by selling liquid assets, only 1/3 of the sample households would be able to maintain their pre-death living standards for a year or more.
• Households are also not prepared for long-term goals like retirement. Only 15% of single adults and 18% of married couples in the Financial Diaries sample would have more than 5 years of retirement support by the time they retired. While the middle and high income households benefit from employer-provided provident and pension plans, most low income South Africans depend on the small state-provided Old Age Grant for support in their old age.

A new book called Portfolios of the Poor, due to be released in Spring 2009, will bring together the findings of the Bangladesh, Indian and South African Financial Diaries.
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Posted: 28 Apr 2008

Related links:

SafeSave

FinMark Trust

Savings Month, Article One: Too Poor to Save?

Related Documents:

The Poor and Their Money

Money Talks: Conversations with Poor Households in Bangladesh about Managing Money
Looking at the money management behavior of 42 low income Bangladeshi households

The Financial Diaries: Investigating the Financial Lives of the Poor in South Africa
Presenting a detailed picture of the financial lives of the poor in South Africa