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

Some years back, Stuart Rutherford’s The Poor and Their Money was an eye-opening essay for me. It demonstrated that  the poor, just like the non-poor, need a useful lump sum of money for emergencies, opportunities and life-cycle events. It went on to describe some of the means that they use to obtain these lump sums. Now Rutherford is joined by three colleagues (Daryl Collins, Jonathan Morduch and Orlanda Ruthven) as they delve more deeply into the financial landscape and behaviors of the poor in Portfolios of the Poor: How the world’s poor live on $2 a day.

Portfolios of the Poor studied 250 households in three countries (Bangladesh, India and South Africa) over a period of one year. The households were interviewed about their financial activities every two weeks and income statements and balance sheets were generated for each household at regular intervals. The authors are frank about the limitations of the study in terms of the ability to generalize, but at the same time some remarkable insights could be drawn from consistencies across the majority of the households studied. These include:

• Irregular Cash Flow: For the poor living on $2 a day or less, a considerable problem is cash flow. Most households had fluctuating cash flows, yet needed to ensure that very basic needs were met, such as daily meals. Risks and emergencies also need to be managed as well as putting together money for larger expenses. These challenges were met using a variety of financial instruments.
• Financial Instruments: The poor use a variety of financial instruments to manage their often irregular cash flow. Most of these are informal, such as money guards, credit at shops, loans from friends or family, reciprocal lending relationships, wage advances, saving on the person(always carrying around some small amount of money), saving at home, etc.). The households studied used a remarkable number of financial instruments over the period, usually several at any given time.
• The Reliability Problem: Although the poor were shown to be adept at using a variety of financial instruments to smooth out their cash flow, a considerable problem was that many of the instruments were unreliable, creating loss at some times and not being available at others. More formalized options often were not flexible enough to match the way and timing in which income was earned.

Despite the myriad of challenges faced by the poor, Portfolios of the Poor does much to dispel stereotypes that paint a portrait of the poor as helpless, passive and ignorant. In the case studies presented, one cannot help but admire the households’ ingenuity, creativity and downright financial savvy in managing a low and fluctuating income through sometimes unreliable financial instruments. Poor households not only successfully meet basic needs, but often even manage to save something, however small, for a rainy day. Both the case studies and the household financial statements make fascinating reading and bring complicated financial realities to life.

Portfolios of the Poor does not limit itself to describing the financial activities of the poor. It goes on to look at developments in the world of microfinance. The authors suggest keys for providing better financial services targeted to households living on $2.00 a day or less. Some principles outlined  include reliability, convenience, flexibility and structure, which respond to the poor's experience.

Portfolios of the Poor is a must-read for those who provide financial services to the poor and is a critical resource as microfinance continues to develop and improve its services. For financial services to be relavent and useful, they must reflect the the true situation and needs of those for whom they are intended to serve. Collins, Morduch, Rutherford and Ruthven use their research and analysis to open a window for a clearer view of that reality and how the world's poor live on $2 a day.

This posting was a review of: Collins, D., Morduch, J., Rutherford, S. & Ruthven , O. (2009). Portfolios of the Poor: How the world’s poor live on $2 a day. Princeton: Princeton University Press. ISBN- 13: 978-0-691-14148-0