Reading time: 4 – 6 minutes

I recently finished reading “Portfolios of the Poor: How the World’s Poor Live on $2 a Day” by Daryl Collins, Jonathan Morduch, Stuart Rutherford and Orlanda Ruthven. The book was based on a handful of “diary” studies compiled by one of the authors. The diary studies were designed to get to the heart of how the poor manage their money.

Prior to the “diary” studies researchers tended to look at the finances of the poor in an aggregate sense (i.e. using beginning and ending balances for each household and even higher level data). The aggregate view of the finances of the poor, it turns out, does not capture the essence of how the poor manage money.  “Portfolios of the Poor” suggests that one has to look at the cash flows of poor households to really understand how the poor manage their money and what tools they need from the financial sector to improve their lives.

The “diary” studies looked at households in Bangladesh, India and South Africa and took samples of data from the households every two weeks.  This data – the cash flows of the poor – showed that the poor are active money managers and are constantly on the lookout for better financial products that more closely fit their needs.  In fact, the average household in the study turned over multiples of their yearly income each year via a handful of financial tools. For example, the Indian sample turned over 0.75 – 1.75 times their annual incomes on average.

Having spent a lot of time over the past 4 years thinking about microfinance I have to say that I thought I had a firm handle on things but “Portfolios of the Poor” and the data the authors uncovered through their “diary” studies caused me to see microfinance in a new light.  Here are some of the more surprising pieces of information that the “diary” studies revealed:

• The $2/day mark that is often quoted is misleading. The real trouble the poor have is not necessarily the small amount of money they earn (thought that is, of course, a big problem), it is the irregularity (and uncertainty) of their paydays.
• Lower incomes require more, not less, financial management. In other words, the poor do not use financial tools despite their low income, they use them because of their low income.
• The poor do not live hand to mouth (as a lot of people think).
• While microcredit is fantastic, most poor people still prioritize getting food on the table each day, not starting a business. More needs to be done with savings vehicles of different types and more flexible loan offerings to help with this pressing need.
• The most frequent lenders (in the “diary” sample) are still friends and relatives (who tend to loan interest free) showing that there is still a lot of room for microfinance to grow.
• What the poor really need are cash management tools.
• When looking at microfinance and other financial instruments the poor use to manage their cash flow one needs to think in terms of fees, not interest rates. A lot of financial instruments geared toward the poor don’t compound.  Along with that fact, the poor tend to view themselves as paying fees for a service, not interest rates on money borrowed (this is probably why the poor pay for savings in a number of cases, earning what is effectively a negative interest rate).

If you read through the list above I am quite sure you were surprised by at least some of those points.  If you want to learn more about how the researchers arrived at those conclusions please check out the book.

One last note before I conclude: The authors of “Portfolios of the Poor” put together a nice list of three hurdles the poor face in terms of money management.  Here is their list (i.e. “The Triple Whammy”):

• Small income
• Irregular income (or more importantly – an unpredictable income)
• Poor access to financial services that meet their needs

Of course this list is also a set of opportunities for existing banks and microfinance institutions as well as for upstart institutions. Here is the list recast as opportunities:

• Create tools to help poor households manage money on a day-to-day basis (e.g. revolving checking/savings accounts without set deposit or withdrawal terms).
• Create tools that help poor households build savings over the long run (e.g. structured savings accounts with set terms and deposit schedules that can perhaps be borrowed against to add flexibility).
• Create tools that help poor households borrow for all uses, not just to start microenterprises (e.g. loans for emergencies and healthcare needs).

If you are interested in international finance, international development, economics or microfinance I highly recommend reading “Portfolios of the Poor.” It is an engaging read and provides many insights that don’t come to the surface after only a cursory look at microfinance (e.g. the poor are much more financially sophisticated than people think).

Reading time: 2 – 4 minutes

I wrote a post over two years ago (actually on the eve of FeedBurner’s sale to Google) where I discussed the need for microlending in the U.S. and the issues that U.S. microlending initiatives faced.  I also provided an idea for a possible solution that involved a “Kiva-like” site where organizations could find individuals to contribute to U.S. based microfinance loans.

I had almost forgotten about that post but was reminded of it when I received a comment on it a couple of days ago from Sam at Accion USA.  It turns out that Accion USA and Kiva recently partnered to allow Kiva users to fund U.S. based microloans. I am very excited about this news.  The Accion/Kiva partnership will create more opportunities for microentrepreneurs in the U.S. and it will certainly help us to start gathering the data needed to see if microlending in the U.S. is feasible over the long term.

Sam’s comment was incredible and worthy of a blog post on its own.  I suggest you read it in full if you have a chance.  For those that are short on time I will summarize Sam’s comment below.

• A lot of the concerns I stated in my original post have been addressed over the last two years.
• Microentrepreneurs overseas are limited by scale (this is a problem I am well aware of) but microentrepreneurs here are not since there is more credit available in the U.S. – via standard banks and other institutions – to help microentreprenurs to continue to scale their businesses.
• Microentrepreneurs in the “first” world are more likely to occupy niche industries where they fill gaps in local markets. In contrast, microentrepreneurs in the third world often find themselves in the position of being the main source of income for a community.
• Credit cards are not necessarily direct competition to U.S. microlenders.
• U.S. microloan rates are competitive with private sector loans.
• The greatest struggle for U.S. microlenders will be the fight to achieve sustainability (right now they are dependent on donations).

If you are interested in learning more about Accion USA’s U.S. microlending programs please check out AccionUSA.org or follow Accion USA on twitter (@Accion_USA). You should also check out Kiva.org if you are interested in making your first microloan. For more more general microfinance information you should check out #mifimon (Microfinance Monday) on twitter to follow the real-time microfinance conversation and get insight from experts around the world.

I am excited to see how microfinance develops here at home and to continue to think about how it will evolve and achieve sustainability. Congrats to Accion and Kiva for taking a big step toward a thriving U.S. microfinance sector.