BILLIONS of people around the world live on less than $2 per day—what many in the developed world easily spend on a cup of coffee. As global leaders work to stabilize the financial systems of the world's largest economies, they also have an unparalleled opportunity to include poor households in meaningful reform that expands access to those who need it most.
It may seem nearly impossible to survive on so little, but that perception derives from assumptions about the lives of the world's poor—assumptions that are often unfounded, but shape and restrict how the world addresses the challenges of living in poverty. In a new book published by Princeton University Press, Portfolios of the Poor: How the World's Poor Live on $2 a Day, Jonathan Morduch, public policy and economics professor at New York University's Robert F. Wagner Graduate School of Public Service and director of the Financial Access Initiative, and researchers Daryl Collins, Stuart Rutherford and Orlanda Ruthven, provide the first in-depth examination of how the world's poorest households patch together their financial existences—and finds that they do so with surprising sophistication and complexity. Portfolios of the Poor offers new thinking about how poor households manage their financial lives and describes fresh ideas for reducing poverty by creating and expanding banking tools and services.
Morduch and the researchers spent a year recording biweekly household "diaries" of villagers and slum dwellers in Bangladesh, India and South Africa, tracking penny by penny how these individuals and families manage their money.
Portfolios of the Poor demonstrates that the poor are not living hand-to-mouth, but save and borrow with an eye towards the future; that they are maintaining complex financial lives because they are poor, not in spite of it. The book shows that the real tragedy of poverty is not just that the poor have limited resources, but that they lack access to the financial tools and services that would enable them to best leverage the resources they do have.
"Common misperceptions about the capacity of the poor to manage finances limit the scope and potential impact of policy and available financial tools," said Morduch. "Microfinance demonstrates that many poor households are fundamentally bankable, and can borrow, invest, and repay loans. Our systematic research revealed unexpected insights into the realities of living on $2 a day, and compels us to ensure financial reform is not boxed in by the original vision of microfinance.
The insights we found support a broadening of the scope of microfinance policies to deliver loans for general purposes, enable savings, and add meaningful consumer protections."
Among the families the researchers met are Hamid and Khadeja, a Bangladeshi couple who are active money managers despite their limited income of $70 per month; Nomsa, an elderly South African woman who cares for her four grandchildren on a limited government stipend; and Sandeep from Delhi, who leverage an extensive network of friends and neighbors to develop informal financial partnerships, from taking a loan from a neighbor to participating in local savings clubs.
Understanding how these poor households manage their financial lives – even learning that they do in fact possess financial "portfolios"– provides an important foundation upon which to build policy agendas and sustainable financial tools. Solutions must address both the challenges poor households face as well as their capacity to manage complex financial lives. The authors' recommendations for reimagining and enhancing microfinance-driven solutions include facilitating cash flow, providing increased consumer protections, providing better savings products, and expanding microfinance beyond entrepreneurship.
Portfolios of the Poor captures the richness and complexity of poor people's financial lives. Answering key questions about how the poor manage their money is a critical first step towards creating new and better financial tools for poor households.
BOOK INFORMATION:
Portfolios of the Poor: How the World's Poor Live on $2 a Day, Daryl Collins, Jonathan Morduch, Stuart Rutherford, Orlanda Ruthven, Princeton University Press, June 2009, http://press.princeton.edu/titles/8884.html
ABOUT THE FINANCIAL ACCESS INITIATIVE:
The Financial Access Initiative (FAI) is a consortium of leading development economists focused on substantially expanding access to quality financial services for low-income individuals, offering the next generation of thinking about microfinance. FAI is housed at the Robert F. Wagner Graduate School of Public Service (www.wagner.nyu.edu) at New York University and led by managing director Jonathan Morduch and directors Dean Karlan (Yale University) and Sendhil Mullainathan (Harvard University). FAI focuses on basic research and measurement tools that reveal the most effective means of implementing microfinance initiatives. FAI studies the value of microfinance by identifying the demand for financial services; the impact of financial access on incomes, businesses, and broader aspects of well-being; and mechanisms that can increase impact and scale of microfinance. For more information please visit www.financialaccess.org.