Portfolios of the Poor

1. Poor households are active, sophisticated money managers.

no matter where we looked, we found that most of the households, even those living on less than one dollar a day per person, rarely consume every penny of income as soon as it is earned.

Beyond hand-to-mouth. Contrary to common assumptions, poor households do not simply spend money as soon as they get it. They actively manage their meager incomes, saving when possible and borrowing when necessary, demonstrating a fundamental understanding of financial planning. This involves a complex web of transactions and relationships.

Diverse financial tools. Households utilize a surprising array of financial instruments simultaneously. These include storing savings at home, lending to or borrowing from neighbors and relatives, joining savings clubs, and engaging with formal or semiformal institutions like banks or microfinance providers. An average poor household might use nearly a dozen different types of instruments in a year.

High financial turnover. The volume of money flowing through these financial instruments is often large relative to annual income. Households push money into savings or loan repayments and pull money out through withdrawals or new loans, with total turnover sometimes exceeding annual income. This highlights the intensity of their financial activity, which is often missed by static surveys.

2. Low, irregular, unpredictable income creates a "triple whammy."

It is a “triple whammy”: low incomes; irregularity and unpredictability; and a lack of tools.

Income is not steady. The benchmark of "two dollars a day" is just an average; actual income fluctuates wildly. Poor households, often in casual, part-time, or self-employment in the informal economy, face unpredictable daily earnings, seasonal variations, and vulnerability to external shocks like illness or market downturns.

Compounding challenges. This irregularity and unpredictability make basic budgeting incredibly difficult. Ensuring food is on the table every day, dealing with unexpected expenses, and planning for future needs becomes a constant struggle when the timing and amount of income are uncertain. This inherent instability necessitates active financial management.

Limited suitable tools. The existing financial instruments available to the poor are often ill-suited to handle these uneven cash flows. While informal tools offer flexibility, they lack reliability. Formal tools offer reliability but often lack the flexibility needed to match the unpredictable nature of poor households' incomes, exacerbating the challenges of the "triple whammy."

3. Daily cash flow management is a constant, vital challenge.

...their main objective was cash-fl ow management.

Ensuring daily needs. The most fundamental financial task for poor households is transforming irregular income into a dependable resource for daily survival, primarily food. This requires constant vigilance and manipulation of small sums of money to bridge gaps between earning and spending.

Patching and stretching. Households achieve this by patching together funds from various sources. This includes small savings kept at home, tiny interest-free loans from neighbors or relatives, and short-term credit from local shopkeepers. These transactions are frequent and often informal, prioritizing convenience and flexibility over formal terms.

Beyond income smoothing. While consumption smoothing is part of it, cash flow management is broader. It's about ensuring liquidity for immediate, often unpredictable, needs. The tools used are typically close at hand and require minimal paperwork, reflecting the practical constraints and priorities of managing money on a day-to-day basis with limited resources.

4. Coping with risk relies on patching resources, often lacking insurance.

To be poor in Bangladesh, India, or South Africa is to live not only with the diffi culties of managing life on a day-to-day basis, but... to live with the risk of large-scale disruption to lives and livelihoods.

Risks are omnipresent. Poor households face a higher incidence of severe risks than wealthier populations, including serious illness, injury, death, job loss, crop failure, theft, and property destruction (e.g., slum fires). These events can quickly derail a family's precarious stability.

Financial impact of shocks. Emergencies rapidly become financial crises. Without adequate insurance or savings, households are forced to cope by selling precious assets (like land or jewelry), drawing down meager savings, or taking on debt. These coping mechanisms often have damaging long-term consequences, pushing families deeper into poverty.

Insurance gaps. Formal insurance is rarely accessible or affordable for the poor, and informal risk-sharing mechanisms (like village insurance) are often fragile or incomplete. While some specialized informal insurance exists (like South African burial societies), most risks are managed using general-purpose tools like savings and loans, highlighting the need for more accessible and reliable risk-management solutions.

5. Building usefully large sums is essential for opportunities and life events.

Putting together large sums for big events, though, is at least as big a challenge as managing the day-to-day basics.

Funding life's milestones. Beyond daily survival and emergencies, poor households need lump sums for significant life events and opportunities. These include weddings, funerals, education expenses, home construction or repair, buying productive assets (like livestock or business stock), or even migrating for work.

Piecing together funds. These large sums are rarely accumulated in a single, dedicated long-term savings account. Instead, they are typically assembled piecemeal from various sources. Households simultaneously draw on savings, take loans from multiple providers, receive gifts or contributions from family and friends, and sometimes sell assets.

Saving and borrowing roles. Both saving and borrowing play crucial roles in this process. Savings clubs (accumulators) help households set aside small amounts regularly. Loans (accelerators) provide immediate access to larger sums, often with structured repayment schedules that mimic saving discipline. The ability to combine these strategies is key to achieving larger financial goals.

6. Informal finance dominates but lacks reliability and transparency.

Many of the shortcomings of informal fi nance are aspects of its general unreliability.

Ubiquitous but fragile. Informal financial tools, like interest-free loans from neighbors, moneyguarding, and savings clubs, are the most frequently used instruments. They are convenient, flexible, and often have no explicit financial cost, building on existing social relationships.

Hidden costs and risks. However, informal finance suffers from significant drawbacks. It often lacks reliability (partners may not have funds when needed), privacy (financial struggles are public), and transparency (terms can be unclear or negotiated ad-hoc). Savings can be lost or stolen, and reliance on social ties can lead to stress, shame, or damaged relationships if obligations aren't met.

Limited capacity. Informal networks have limited financial depth. It is often difficult to raise large sums quickly, forcing households to approach multiple lenders or accept unfavorable terms. While valuable, the dominance of informal finance reflects a lack of better alternatives rather than complete satisfaction with the available tools.

7. Formal and semiformal finance offer reliability but need more flexibility.

Microfi nance services, on the other hand, tend to be reliable, but not always fl exible.

Reliability is a key strength. Compared to informal options, formal (banks, insurers) and semiformal (microfinance institutions) providers offer greater reliability. They operate with clearer rules, provide services at promised times and amounts, and offer more security for savings. This reliability is highly valued by poor households.

Inflexibility hinders access. However, these institutions often lack the flexibility needed to match the unpredictable cash flows of the poor. Standardized loan terms (e.g., one year, fixed weekly payments) and limited withdrawal options for savings accounts can make it difficult for households to manage their money effectively, sometimes leading to default or underutilization of services.

Mismatch with needs. Microfinance, traditionally focused on microenterprise loans with rigid repayment schedules, often doesn't align with the diverse and immediate needs of poor households for consumption smoothing, emergencies, or flexible savings access. This mismatch limits their reach and impact, despite their relative reliability.

8. Price is complex; convenience, flexibility, and reliability are key drivers.

Poor households care about price, but they also care about convenience and fl exibility and are willing to pay for those features.

Beyond simple interest. The cost of financial services for the poor is not just the stated interest rate. Transaction costs (time, travel, emotional toll) and the value placed on convenience, flexibility, and reliability significantly influence choices. A seemingly high-interest informal loan might be preferred if it's available instantly and nearby, or if repayment terms are flexible.

Fees vs. rates. High annualized interest rates on short-term informal loans are often better understood as flat fees for quick access to cash. Paying a small fee for a few days' use might be perfectly rational, even if the annualized rate is astronomical. Similarly, poor people may pay fees to save (e.g., with a deposit collector) for the discipline and convenience it provides.

Negotiated prices. Stated prices, especially in informal lending, are not always the final prices paid. Relationships, prior obligations, and the borrower's circumstances can lead to renegotiation, forgiveness, or delayed payments, making the actual cost of borrowing less transparent but potentially more flexible than initially stated.

9. Microfinance is evolving to meet broader needs beyond business loans.

Grameen II, however, would contribute to a diff erent set of messages, based around the provision of broad banking services, including savings, increasingly tailored to individuals and their multiple needs.

Shifting focus. Pioneers like Grameen Bank, initially focused almost exclusively on microenterprise credit, are recognizing the broader financial needs of the poor. Grameen II introduced more flexible loan terms, individual savings accounts with easy access, and commitment savings plans.

Meeting diverse needs. These innovations address the core challenges identified in the diaries: passbook savings help with day-to-day cash flow, flexible loans (like top-ups) assist with emergencies and diverse expenditures (not just business), and commitment savings facilitate long-term accumulation. This moves microfinance towards being a comprehensive money management provider.

Client-driven evolution. The success of these new products, like Grameen's pension savings, demonstrates that poor households eagerly adopt tools that better match their actual financial lives and priorities, even if those priorities differ from the institutions' initial assumptions about business investment. This evolution is driven by understanding and responding to client demand.

10. Long-term savings products are in high demand and transform portfolios.

A slower but ultimately more powerful way to create large sums is to accumulate them in a reliable savings account.

Demand for commitment. Poor households actively seek ways to save regularly over time, often using informal savings clubs for discipline. However, these clubs are typically short-term. Reliable, long-term savings products, like Grameen's Pension Savings, meet a significant unmet demand for accumulating larger sums safely.

Building capital. These commitment savings accounts allow households to build substantial capital over several years, providing resources for future needs like education, weddings, or asset purchases. This is a crucial step towards greater financial security and the ability to pursue larger aspirations that are difficult to fund through short-term means alone.

Transforming portfolios. The introduction of such products shifts the composition of poor households' portfolios. It increases the share of secure, individually owned, long-term financial assets, providing a stable foundation that complements their use of short-term tools for cash flow and borrowing for immediate needs.

11. A huge opportunity exists for reliable, convenient, flexible financial tools.

By combining the insights from the diaries with the experience of the new wave of microfi nance organizations, we can ensure that poor households have a chance to better their fi nancial strategies and improve their lives.

Unmet demand. The diaries reveal a vast, active market for financial services among the poor, driven by the fundamental need to manage low, irregular incomes and cope with risk and large expenditures. Existing tools, both informal and formal, are often inadequate, leaving significant gaps.

Principles for design. Successful pro-poor financial services must prioritize reliability, convenience, flexibility, and appropriate structure. Reliability builds trust, convenience ensures accessibility, flexibility matches unpredictable cash flows, and structure promotes discipline for saving and repayment.

Path to universal service. By focusing on the core needs – day-to-day cash flow, long-term savings, and general-purpose loans – and designing products based on these principles, microfinance and other providers can dramatically improve the financial lives of the poor. This could position financial services as one of the first high-quality, near-universal basic services available to the world's poor.

Last updated: May 26, 2025