If you want to understand how poor people in poor countries manage money, invest in Portfolios of the Poor. The new book's four authors---Daryl Collins, Jonathan Morduch, Stuart Rutherford, and Orlanda Ruthven---took up an idea of David Hulme, to compile financial diaries of poor households. A researcher visits a poor household repeatedly, say, every fortnight for a year, and gathers detailed information on what its members earned, spent, borrowed, and saved since the last visit. Through the data collection and the associated conversations she pieces together an intimate portrait of the household's financial life. "[F]inance is the relationship between time and money...to understand it fully, time and money must be observed together." (Disclosure: I am coauthoring a CGD paper with Morduch.)
Much glory in the social sciences goes to those who study causality, who (seem to) show that A causes B. Yet the most enlightening work is often just plain descriptive, coming from a good, long stare at A or B. Of course, to do good descriptive science, you have to know what to ask and how to ask it:
The intensity of getting to know the characters in the financial diaries informed our perspective on financial behavior as much as our scrutiny of the data we collected. We and our field team got to know not only which respondents were using what financial devices, but also gained a deeper and more personal understanding of who these people were: who was oft en confused about their finances, who had family disagreements that guided their decisions, who was not coping with the circumstances they found themselves in. Money is powerful, particularly when you don’t have a lot of it, and it was only by going to the “coal face” of financial interactions between the people themselves that we felt we could understand how and why the poor managed money the way they did.
Rutherford and a small team he led compiled the first diaries, from 42 Bangladeshi households in 1999--2000. Ruthven did it in India in 2000, with 48 households. And in 2004, Collins collected diaries from some 94 families in South Africa.
Some themes of Portfolios of the Poor will be familiar to readers of Rutherford's The Poor and Their Money (free early version). Rutherford is not the sole author of the new volume of course, but might be said to be its soul author, his influence being clear. (For more on Rutherford and his earlier book, see the draft chapter 2 on my own "open book" blog, where I am writing a book about microfinance in public.) In the earlier book, Rutherford showed how poor people look to all financial services---savings, credit, insurance---to turn small, frequent pay-ins into occasional, large pay-outs. The pay-ins can be weekly savings deposits, loan payments, even insurance premia, while the pay-outs can be large withdrawals, loan disbursements, and insurance indemnities. People deploy lump sums so assembled for investing in enterprise, yes, but also for doctor's bills, school fees, funerals, weddings, even dowry. The poor's use of financial services involves much more than microcredit for microenterprise.
The new book builds on these ideas. It emphasizes that being poor in a poor country means having an income that is not just low but variable and unpredictable. At least as much as a family's average level of income (such as $2/person/day), the volatility around the average drives how the poor manage money. If you make $1 today, $4 tomorrow, and nothing the day after, but need to put food on the table every day, you will engage in complex patterns of borrowing and saving to smooth the mismatch between your income and outflows. Thus out of necessity poor people deploy more complex financial strategies than do the rich. The book tells stories of families who are constantly juggling small loans to and from friends and family; saving with local "moneyguards"; participating in savings and insurance clubs (such as burial clubs in South Africa); buying groceries from the local shopkeeper on credit; and otherwise patching together an extraordinary diversity of financial devices in order to get by.
Portfolios of the Poor also shows the embedding of these informal financial relationships in social relationships, which is both a blessing and a curse. The blessing is flexibility: an interesting discussion of moneylenders' interest rates, for example, shows how often late payments, defaults, and wrangled interest forgiveness effectively reduce rates that might otherwise seem usurious. When out of social obligation a lender forgives the debt of a woman who has just lost her husband, the lender absorbs some of the risk of the woman's life in a way that formal bankers are less wont to. The curse of socially embedded informal finance is the tincture of precariousness. Will your brother pay back? Will the "merry-go-round" savings club, in which one person takes the pot each week, keep rotating till your turn comes around? Will the moneyguard abscond?
In the view of the book's authors, "semiformal" microfinance---the kind you've heard of---stands out in the financial lives of the poor for its rule-bound reliability. If the Grameen Bank says you will be eligible for a new loan in 17 weeks if you maintain your payment record, you can bank on it. In the spirit of diversification, poor people welcome this distinctive style of finance into their portfolios, along with informal services. The book's emphasis on this point helped me appreciate that the essence of formality is abstraction from social context. In the ideal, participants in a formal financial arrangement are legal persons, parties to a contract that precisely stipulates obligations. Whether the persons are rich or poor, giant corporations or tiny families, should not matter.
That great strength is also, as so often, a great weakness: in this case, rigidity. Classic microcredit disburses once a year, but husbands do not fall sick on such a neat schedule, which is why other forms of finance must still fill in. Yet the authors are optimistic that microfinance can become more flexible, mainly because it already has at the Grameen Bank, whose "Grameen II" reforms in the early 2000's transformed it more than most realize. Savings can now be withdrawn at any time....except from a popular new "pension" savings plan through which clients bind themselves to contributing a sum such as $1/month for 5 or 10 years in return for 12%/annum interest at maturity. Loans can now be "topped up": halfway into a one-year loan repayment, you can borrow back to the full amount. The book closes by calling for more such reforms in Bangladesh and beyond, so that reliable microfinance can cater to the true financial needs of the poor. Even as they laud the changes at Grameen, they ask for more:
The interface with the microfinance institutions remains the weekly village meeting, a breakthrough of the 1970s that is now looking somewhat stale: meetings consume too much precious time, there is no privacy, individual needs go unrecognized, the male workers tend to patronize the women members, and more and more members skip the meeting if they can, preferring just to show up and pay their dues as quickly as possible. Working almost exclusively with women may well have started as a commendable attempt to right a gender imbalance, but…more and more critics point to the failure to find ways to serve men. Many microfinance institutions say that they have abandoned joint liability, but field staff, fearful of loan arrears, continue to impose some forms of it. Similarly, despite attempts to make repayment terms and schedules more flexible, most loans are still for one year with equal invariable weekly payments that cannot be prepaid….Most clients are still routinely pressured into taking out a fresh loan as soon they have repaid an earlier one.
For me, this quote highlights two major lacunae in the book. The first is a full-bore discussion of gender. The authors make explicit that their unit of analysis is the household not the individual. Yet surely they gained insight into how men and women within a household cooperate and vie in managing money. Microfinance's long-time focus on women is predicated on the belief that women are more likely to invest extra resources in the health and education of the family, and repay loans more reliably. Did Collins et al. see that in their microscope? Or have men gotten a bad rap?
The second gap, more understandable since it lies farther from the core contribution of the book, concerns the business imperatives of microfinance. These I came to appreciate in writing Microfinance as Business. If microfinance officers still pressure people to borrow, they probably do so out of an institutional need to maintain the flow of business. Historically, the focus on women arose in part because they proved more pliable to the peer pressure of credit groups, which made them cheaper to lend to. The need to keep costs in line with the small transactions of the poor limit how far microfinance groups can go in providing quality service. Grameen II pushed the frontier in Asia beyond where most might have guessed it could go, and new technologies may push it farther, but the principle seems essential for understanding how much microfinance can help the poor manage their money. The gulf between what the poor need and what they get will always be with us.
Read this book somewhat backwards. The authors make great use of other people's stories, but hide their own story till Appendix 1. That plus the conceit, which seems quaint in the blog age, that four authorial voices are one gives the main text a slightly ethereal quality. Read the story of the financial diaries themselves and peruse diarists' stories in Appendix 2, in order to appreciate the lessons in the main text.
I close with my favorite display in the book. It shows the average recorded discrepancy between total inflows and total outflows for each household in South Africa on each biweekly visit. It typically took 6 visits---three months---to get the discrepancy close to zero and convince researchers they were seeing the whole picture. Lots got left out early on. That is a cautionary tale for those who study data from one-shot surveys of households. The truth is an elusive thing. Portfolios of the Poor shows the power of financial diaries to pursue it.