Series 1: How Poor People Manage their Money – Interactions with PoP Authors

Microfinance Focus , June 09, 2010 : MicroSave and Financial Access Initiative (FAI) organized a two day virtual conference on ‘Reimagining Microfinance around the World: Implementing lessons from Portfolio of the Poor’ on June 8-9, 2010. Based on the groundbreaking book, ‘Portfolio of the Poor (PoP): How the world’s poor live on $2 a day’, the conference was moderated by its co-authors Stuart Rutherford, Daryl Collins, Jonathan Morduch, and Orlanda Ruthven, and MicroSave’s Graham Wright.

The conference attracted hundreds of industry experts who raised pertinent questions based on the findings of the book. On the first day of the conference, Stuart Rutherford discussed the topic: Understanding How Poor People Manage their Money – Lessons from “Portfolios of the Poor” and the excerpts from the discussion are presented below.

Participant’s Question: How do poor people meet the challenges of managing their money? What mechanisms do they use?

Stuart: Among the 250 or so poor or near-poor households with whom we wrote the year-long financial diaries in Bangladesh, India and South Africa, we found thirty-nine money-management tools that they used during the year simply to shift money around as opposed to earning or spending it. They are listed in Appendix 1 on pages 206-207 of the hard-bound version of the book. Every household used at least four of the tools during the year, and some used more than ten. So a general answer to the question is they use whatever mechanism they have to hand.

We categorised these tools into three formal ones offered by banks and insurance companies and the like, semi-formal ones offered by microfinance organisations, and informal ones. The informal ones dominated in terms of variety and the extent to which they were used. All the households saved something at home in some way or other, and almost all borrowed often interest-free from friends, family and neighbours. Many were members of savings clubs (where the act of saving together helped them to save more consistently) or of saving-and-loans clubs which go on to pool savings and distribute them back to the members in rotation (as in a ROSCA) or in the form of loans (as in an ASCA).

We noticed that all of the most popular tools such as the ones described in the previous paragraph were present in all three countries. But we noticed some regional and country-specific differences. As you would expect, microfinance was much more available in Bangladesh than elsewhere, and formal services reached down to the poor much more often in South Africa than in South Asia. Informal clubs cropped up everywhere, but most often in South Africa. In general, South African households were likely to use savings and South Asian ones more likely to use loans.

Participant’s Question: I found Portfolios of the Poor a fascinating read and it’s great to have a chance to revisit these issues and see others’ perspectives on the findings. Can I ask how robust you feel the results are with respect to the financial environment in the specific areas where the research was done. Was there sufficient variation within the results to say anything about the impact of the presence/outreach of MFIs in the area on the extent to which people used informal means? How confident do you feel that the results would hold in other areas of the chosen countries? Would this be a further area of research?

Stuart: Let me take the case of Bangladesh, which is the one I know best. On the one hand the sample size was small, so we certainly don’t claim that the results are statistically representative. On the other hand we chose our respondent households carefully, and we did lots of cross-checking with other people or organisations mentioned to us by our respondents. And we were there for a whole year, not just a fleeting visit with a clip-board. We believe that the results give a pretty good insight into what is going on generally in the area.

In the second set of Bangladesh diaries (reported in Chapter Six) we were there for three years, and we were deliberately looking at how households used MFI services compared with how they used informal ones. We did find some signs (I won’t put it stronger than that) that the fuller set of services introduced by ‘Grameen II’ (the passbook savings, the long-term savings, the more flexible loans with easier repayment rules) was beginning to give the MFI a bigger share of the transactions. The South African case is a bit different: the sample was larger and the data more carefully handled, so I think the results were more robust.

Participant’s Question: Thanks for joining the virtual conference. I have a question on the choice of mechanism. In your sample, you had both rural and urban members. In urban areas accessibility to financial services is much higher than in rural areas, especially if they are remote. Also increasing competition has given multiple options to the clients who have resulted in using more than one provider for loans or savings or other services. So does accessibility to a range of financial services affect the choice of mechanisms to manage money in terms of the number of providers the poor and the kind of service providers they would like to opt to go to? Were there any insights on this from the research?

Stuart: You touch on one of the surprises of the research. I was expecting to find more activity (more money, at least as a proportion of income, going faster through a bigger range of services and devices) in the urban areas than in the rural. But this wasn’t the case in Bangladesh – and then it turned out not to be (or not very strongly) the case in India nor in South Africa.

So what explains this? Well, for one thing it shows that our rural areas in the three countries were all monetized – so what we found would differ from a really remote, barely monetized, area that you might find elsewhere in the world.

I think our findings suggest that the ‘drivers’ of financial intermediation are felt strongly weherever you live. So, for example, in rural reas where you don’t have many formal or semiformal providers, you may fall back more on borrowing and lending among friends and family. As it happened, in Bangladesh, the case I know best, the MFIs were already very active in the villages – maybe even more active than in the urban slums – so that may have been a particular factor there.

Participant’s Question: Aren’t you being rather conservative here? Given all the hue and cry about overlapping–using multiple MFIs–and indebtedness, couldn’t one be more confident that MFIs are getting a bigger share of the financial transactions in Bangladesh?

Stuart: Yes, there’s certainly no lack of evidence in Bangladesh, currently, of frenzied MFI activity. Still, we know from observations (some of them reported in my book on ASA), that MFI services are often used in conjunction with informal ones, and may indeed prompt an overall higher level of intermediation. Though MFIs have sharply increased the amount of money they intermediate, it would be great to see some research showing how that share has stood up relative to the share held by informal. In a ‘walk’ across Bangladesh that I did last winter, I certainly got the feel that informal finance was still very active, even as MFIs clients hopped from one provider to another.

Participant’s Question: One question I had was about the relative benefits and costs of the formal, semi formal and informal systems that the respondents used.  Are the informal means handling the need, or do they come with costs that would make semi formal or formal products a better option if they were available? I know you address this in the book (which I am using in every class I teach now), but I would like to hear a little more discussion on the relative merits of the different types of finance that poor people access.

Stuart: In the book we show how the very intensity of use of informal mechanisms and services is not just evidence for the need for tools, but also of how informal tools don’t always work well. Savings clubs can break up. Moneyguards don’t have the money the day you need it. Moneylenders don’t lend you when you most need it, or don’t lend you enough. Money saved at home gets lost, stolen, captured by more powerful people in the household or nearby, or simply spent on trivial things. And so on. Also the informal sector has some particular faults – above all that it isn’t very good at storing money for the long term, or at extending loans that can be repaid in the long term.

In the book we take the view that the semi- formal and formal sectors should certainly respond to the challenge of the informal sector – by devising and delivering products that have all the advantages of the informal (close at hand, flexible, frequently accessible) but add some other very important characteristics, of which the most important is reliability (in the sense of being sure, as a client, that you can do business on the day and in the amount promised by your provider). The formal can also solve the ‘time’ problem – it can extent loans on long terms, or help save up money over years rather than weeks or months.

In my own work as a practitioner this is very much what I want to do – learn the lessons of the informals – and then beat them at their own game! On the other hand, something is better than nothing: inadequate though informal tools can be, they can be ‘patched together’ to cover a need, at least in part, as many examples in the book show. That’s another lesson we can learn from informals – that what we offer doesn’t need to solve every problem for every client – we shouldn’t make the perfect the enemy of the useful!

Participant’s Question: A question that I had for you a long time is the following: Do you still believe that Borrowing and Debt Repayment by the poor is similar to (if not the same as) Saving; what your famously referred to as “Savings Down”? My understanding based on experience tells me differently. People, in particular poor people, have different attitudes towards saving or debt repayment. Poor people often live in an environment that is insecure as you also said and also their incomes are insecure and unstable. This makes planning of setting aside excess earnings difficult and irregular. Debt to lenders on the contrary makes the (loan repayment) obligation of owing to others stable and predictable. The money and the decision is not that of the poor person and when insecurity and instability hits them they often don’t have what you call the “Up-savings”.

Stuart: But actually, we’re not that far apart on this. Yes, I do think that for the huge majority of lump-sum-forming needs of poor people, saving-up (saving) and saving-down (borrowing) are simply two ways of doing the same thing – forming a needed sum out of a series of set-asides (deposits in the case of savings, repayments in the case of loans). Which you’ll do will depend on a number of factors: where you live (as I said in an earlier posting, there are regional traditions that help determine which you do – you may have a deposit collector but someone in another country may have a moneylender); how urgent it is (if it’s very urgent you’ll probably need to borrow unless you’re lucky enough to have some savings already built up), etc.

But I strongly agree with you that that isn’t to say that poor people see the two (saving and borrowing) as the same. I agree that there’s often a stronger propensity to repay loans than accumulate savings. In the book we note the woman who took an expensive loan instead of withdrawing available savings for exactly this reason. We also note people who ‘borrow to save’ – that is, borrow money to put it into a savings account (or buy gold) because that’s the most efficient way to form that lump of savings. In my own work as a practitioner I’m trying to exploit this propensity

Participant’s Question: Although the portfolios of the poor focus on particular localities at particular points in time, you have been studying these issues for many years, do you see significant changes in how people manage their money over time?  Innovation is important if we are to increase access to a broader range of safe, convenient and inexpensive financial mechanisms. Following this theme – from the South African experience  did you find people using the Mzansi Account and the various M-Banking Accounts? These are important as they were both attempts to change the dynamics of banking with the poor. Thinking about Grameen II, which you mention is another example of innovation? Do you see these innovations appearing in the portfolios of the poor?  Ill discuss this theme more tomorrow as I have a posting on Kenyas rapid increase in formal and semi formal services between 2006-9  as it fits better into day twos agenda.

Stuart: Having just come back from your part of the world – Kenya – I’m more than ever convinced that poor people’s financial behaviour adapts rapidly to opportunities they are offered. I’m thinking specifically of a dozen random conversation I had with people on the streets of Kisumu and nearby small markets. What I heard was that M-PESA, the mobile-phone-based money transfer platform, is finding its place in the way poor people manage their personal finances, including informal devices like ROSCAs and ASCAs, and also their informal borrowing. In general, M-PESA seems to increase intermediation volumes and improves reliability and confidence – so there’s a kind of happy upward spiral. I’m posting a note about my conversations on the FAI website.

For the Bangladesh diaries we didn’t report the figure as a percentage, so I’d have to go back to the data to work it out. But yes, there were losses, in ROSCAs and ASCAs that failed, in moneyguards who didn’t give back the cash, and borrowers who failed to repay. There were also some regrettable losses in the semi-formal field, with poorly-performing MFIs swallowing savings, and in the formal pro-poor insurance field, where poor management meant several households lost their deposits. Daryl had the best data-management system for diaries for all three countries, so she may be able to come up with a figure for South Africa.

Participant’s Question: My limited experience says me that the mechanisms to manage money vary widely across occupation, income and the nature of household cash flow. And I feel that the requirement of savings and credit (and subsequent mechanism to deliver the same), also cannot be generalised for the entire low income client segment. For example, the cash flow and household finance for a migrant garment factory worker of Dhaka shall be different than that of a Taxi driver of the same city. It would be great, if someone throws some light on your experience on the segmentation of poor(subject to definition) on the basis of the mechanisms in managing savings or credit? Also, if there exists such possibilities of segmentation, what shall be the parameters for the segmentation?

Stuart: Our research written up in the book Portfolios of the Poor, highlights many differences in financial services needs across location and occupational groups. For example, the India work showed that small traders had far greater working capital demands than other occupational groups (wage workers, small farmers) and were the only group who responded well to the product offer of the MFI operating in our rural site. Our urban respondents desperately needed services to help them remit money back to the village and a safe and convenient way to save from regular wages.

We also find that people’s employment relationship influence the kinds of financial tools they can access since many such devices are employer-linked (e.g. employers are moneyguards and organize savings groups, employers give interest-free loans in the form of wage advance, employers bring workers close to a bank branch they would otherwise struggle to access… Conversely, long hours by urban wage workers also shortens the time they have available to organize finance from other informal sources (friends, relatives, neighbours, moneylenders) and keeps them in slums where the trust and stability required to make group mechanisms work is in short supply.

But in spite of these differences, we were struck by the commonality of the needs of these poor people, across three countries and a total of 14 research sites, across diverse livelihoods and across income groups ranging from under $1 to over $10 per capita per day (PPP).  The financial services needs were threefold:

(i)                  Help with cash-flow management: services which combine convenience with capacity

(ii)                Help with building savings: building on the strengths of savings clubs (commitment, local trust, clean accounting…) with longer-term options for accumulation

(iii)               Loans for all uses: getting over the focus on micro-enterprise lending in unsecured loans, embracing the opportunity of general purpose loans

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