If you grew up in a middle-class US household like I did, staying alive on $2 a day doesn’t just sound difficult, it sounds impossible. It sounds like trying to paint a house using half a bottle of nail polish and a toothbrush. Yet around 8% 1 of people do live on such an income. The authors of this book wanted to get a concrete picture of how those people manage to make it work. To do so, they used a “financial diaries” methodology, where researchers performed regular interviews with a set of poor households every two weeks for a year (or every month for three years, in one study) to track all their financial activity.
Four studies are covered: one from India (2000-2001), one from South Africa (2004-2005), and two from Bangladesh (1999-2000 and 2002-2005, the latter focused primarily on customers of microfinance organizations).
The title reflects one of the key findings: poor people have complex financial portfolios, composed of numerous loan, savings, and - in some cases - insurance vehicles. These vehicles are primarily “informal”, i.e., they’re arrangements among poor households, rather than services provided by organizations like banks.
Loans: Households made frequent use of interest-free loans from family or other community members, but often had to borrow from more expensive sources too. Shop credit (e.g. the grocer allowing them to pay later) was one popular form of loan. Loans from moneylenders were common as well. The book notes that although moneylenders’ rates may seem extortionate when expressed as an APR, this can be misleading; these loans generally don’t have compounding interest, may be for very short durations (“a poor person may sensibly pay 50 cents to borrow $10 for a day or so to tide her over a problem, even if the annualized rate calculates to more than 500 percent”2), and often have no penalty for drastically late payments. The authors suggest thinking of the loans as having fees rather than interest. Still, microlending institutions were increasingly drawing customers away from moneylenders.
Savings: “Savings clubs” of various kinds were widely used. One form is a “saving-up club”, which goes along the lines of: every member contributes a fixed amount each month for a year, then the total is distributed across all members at the end of the year. Another is a “rotating savings and credit association” (“RoSCA”), where “the members save the same amount as each other every period—a month, say—and the total amount saved each period is given in whole to one of the members”3 (they take turns, or use a lottery, or use a bidding system 4). There are also “ASCAs”, where members’ contributions are loaned out for profit. People also just ask other people to hold onto money for them, called “moneyguarding”. And there are “savings collectors” who help people save by visiting them daily and taking their contributions, paying back the full sum - minus a fee - once a target amount has been reached.
Insurance: Insurance policies only played a large role in the South African households, and only insurance for a specific event: funerals. The cultural expectations around funerals involve paying for transportation and food for hundreds of attendees; “[t]he South African financial diaries suggest that households need to spend about seven months’ income on a single funeral.”5 People may use a combination of “burial societies”, savings, and insurance plans sold by funeral parlors to help pay for this.
The book stresses how the decisions and concerns of the poor are shaped by the irregularity of their incomes; someone living on an average of $2 a day is typically making much more on some days and much less on others. The savings instruments described above often have zero or negative interest rates, but they help make cashflow more predictable. Irregular income is also a reason the poor take - and presumably is a reason they’re able to successfully repay - high-interest loans.
The authors think their research reveals ways that financial services could be better shaped for the needs of poor households:
…they need, above all, reliable access to three key services: day-to-day money management, building long-term savings, and general-purpose loans.6
One notable recommendation is that loans to the poor should not be conditional on being used for business:
One element of inflexibility in Microfinance is the insistence by some lenders that all loans be invested in businesses. … The diaries show, however, that poor households need to borrow for a wide range of needs, not just business, and that they are prepared to find ways of repaying loans from ordinary household cash flow.7
The book shares many details from the lives of the study participants; I really appreciate the window it provides into a world that’s so far outside my experience. There have been at least a few more studies using the diaries method, for example: on farmers in Mozambique, Tanzania, and Pakistan in 2014-2015; on garment workers in Bangladesh in recent years; on residents of Democratic Republic of the Congo in 2019-2020 affected by a specific charitable intervention; and on "Americans earning low-to-moderate incomes” in 2011-2013.
In all three areas of the South African sample, the monthly IRR is above the average stated interest rate of 30 percent per month. So the flatness of the fee structure works against these borrowers rather than for them. In one of the urban areas outside of Johannesburg, the monthly IRR is considerably above the nominal rate. This is because many of these respondents borrowed for only a few days or a week from a moneylender but paid interest for the full month.↩︎
…those members still eligible for a prize bid for it, with the prize going to whoever puts in the biggest bid. The bid money is then distributed among the members equally, so that those willing to refrain from bidding until the later rounds, when bids are smaller (since there are few bidders left), get a bigger than average prize for a smaller than average bid, as well as enjoying “interest” income from their share of the distributed bid money paid by others. Auction RoSCAs, therefore, cleverly attract savers (who bid later and are well rewarded for it) and borrowers (who bid early and pay heavily for it), and the current price of money is determined at each auction, driven by demand for it at that moment among that group of people. ↩