Portfolios of the Poor
Sunday April 29, 2018
"One of the biggest challenges of living on two dollars a day is that it doesn't always come." (page 181)
"Convenience, flexibility, and reliability are at the heart of building workable financial tools for the poor, and are key to understanding the economic lives of poor households more broadly. Just as we found no households truly living hand to mouth–even among the very poor–we found no households so absolutely limited in their resources that price was the overriding determinant of financial choices." (page 153)
Portfolios of the Poor is a 2009 book referenced in Scarcity. While Scarcity positions itself as explaining why poor people make bad financial decisions, Portfolios explores without judgment how people who are poor manage their money: Portfolios doesn't necessarily think a high-interest loan is "bad" if it helps someone solve a pressing problem.
The source data are financial diaries, collected in a kind of ethnographic process in Bangladesh, India, and South Africa. They follow around 250 families for a year or more each, collecting detailed information that frequently surfaces as personal anecdotes.
You can get a quick summary by reading Chapter Seven, where they present their recommendations (based on observations) in just eleven pages, with this structure:
- Opportunities: Cash-flow management, building savings, loans for all uses
- Principles: Reliability, convenience, flexibility, structure
Chapter One is a more complete overview of the book and its methods. Chapter two focuses on cash flow, and the "triple whammy" of low income, irregular income, and lack of really helpful financial instruments. Chapter three is on dealing with risk, chapter four is on building up usefully large sums of money, and chapter five is on the sometimes strange world of pricing financial instruments for the poor.
One interesting service involves having money collected and kept over time for a fee, which seems like a negative interest rate. But in a repeated setting, the difference between saving and borrowing can blur.
"In Vijaywada, there are customers who simply didn't distinguish between deposit collectors and moneylenders, so similar is the service provided. Both offered repeated money-accumulation cycles for a fee." (page 151)
The authors explore this and other cases in which the rich-world focus on interest rates may not be the most appropriate, as costs often behave more like fees. Interest is rarely compounded, for example (page 136), and terms are not always as strict as they may seem, though this doesn't necessarily benefit everyone in the same ways.
"...repayment delays are factored into the nominal price, with the effect that the customer who repays on time pays the highest price. This inverted pattern of incentives can be seen as one of the more unsatisfactory aspects of informal loan finance." (page 141)
Microfinance is not the largest money-mover in the diaries, but the authors are interested in it, and in improving it. Especially in Bangladesh many diary households were working with microfinance providers like Grameen Bank. Author Stuart Rutherford founded SafeSave which is now part of BRAC, and they also mention ASA. The main microfinance recommendation in the book is probably that loans shouldn't be only for micro-entrepreneurial purposes: people have a range of needs that loans can help with.
Portfolios was talking about behavioral economics before it was cool. It was interesting hearing about rural microfinance administered through weekly group meetings, sometimes with the risks of group liability. They also describe some people's preferences for borrowing on interest rather than spending from savings because of the attendant motivation to pay back quickly, and ideas for commitment savings devices.
There were a lot of things I wasn't familiar with, and the authors provide a helpful glossary in a table footnote on pages 207-208.
- Chit funds are a government regulated form of RoSCA (see below) found only in India.
- Pro-poor insurers are found only in Bangladesh: they adapt the methods of NGO microcredit banks to offer endowments (savings plans linked to life insurance) to the poor, and to recycle the premiums as loans to the poor.
- Saving-up clubs are clubs where participants save together toward a particular event, such as a religious festival: they do not recycle the fund as loans.
- RoSCAs, or rotating savings and credit associations, are a form of savings-and-loan club in which a fixed number of members pay a fixed sum into a pool at a fixed interval, and on each occasion one of the members takes the whole of the pool (there are many variants on this theme).
- ASCAs, or accumulating savings and credit associations differ from RoSCAs in that regularly depositing members accumulate their fund and lend it out when required to one or more of their members.
- Burial societies, as found in South Africa, are informal clubs where members insure each other against funeral costs.
- Stokvels and umgalelos are different names for South African RoSCAs and ASCAs.
- Salary timing is an agreement with others to share salaries as they arrive.
- Reciprocal interest-free lending and borrowing are loans between friends, neighbors or family members that are interest-free but bear the implied obligation to reciprocate at some time in the future.
- Mahajan and mashonisa are South Asian and South African terms for local money-lenders who lend for profit.
- Moneyguarding is having someone look after your money for you, often a relative, neighbor, employer or shopkeeper.
- Remitting cash to the village is often practiced by town dwellers as a way of saving and of building up assets in the home village. Note that in the South African study, we treated remitting cash to the village as an expense rather than a financial instrument because we knew that the households receiving the remittances were using it for their own needs rather than saving it. In Bangladesh and India, it was more often (but not always) the case that the money was invested in some way: in land or housing or lent out, for example, and we have treated remittances as savings.
One of the interesting RoSCA variants is the auction RoSCA, whereby members effectively achieve different interest rates depending on how quickly they want it to be their turn for the lump payment.
There were also terms that aren't so obscure but were still not familiar to me.
- Credit Life Insurance
- Pays off your debt if you die.
- Life-Endowment Savings
- Pays a lump sum after a term, or if you die.
- Basically a bond; maybe (even) less asset-secured.
- Net Present Value (NPV)
- For a fixed period, positive if we beat a fixed compounding interest rate, negative if not: "Am I better off over the next three years buying this investment, or putting that money in the bank at 1.5% interest? (And by how much?)"
- Internal Rate of Return (IRR)
- Compounding interest rate equivalent of an investment: "If this factory were a bank account, what would it's APR be?"
It's pretty far from the purpose of the book, but I did appreciate the excuse to finally understand IRR a little better, along with everything else.
"In human affairs, incremental improvements can provide the basis for broader changes." (page 64)
Thanks to the DC Public Library for supporting my access to this book.