Unbankable?

For many households around the world, living paycheck-to-paycheck is a luxury out of reach. When household income is $2 a day or less, very rarely does it come in regular increments. Such households must be creative in how they manage to put food on the table every night and pay for other assorted necessities. A glimpse of their balance sheets or assets won’t provide sense of their financial creativity. The turnover in cash flows from savings to loans and back again doesn’t register; there are far more transactions per day that don’t ultimately end up on a balance sheet. Not that anyone has time to write things down – until recently.

A quartet of co-authors actually did manage to write everything down—every wage earned, every payment, every deposit, every loan, every financial transaction. Using interviews with over 250 households twice a month for about a year each, the quartet constructed detailed financial diaries documenting what life is like on $2 day. The first and most important conclusion was that when these households do receive income, very rarely is it ever spent as soon as it is earned. Human creativity reaches a high watermark in how these households use mostly informal financing to smooth out consumption for daily needs, insure against risk, and save for major expenses.

….even for the poorest households, a surprising amount of income gets managed in this way–diverted into savings or used to pay down loans. In the process, a host of different methods are pressed into use: storing savings at home, with others, and with banking institutions; joining savings clubs, savings-and-loan clubs, and insurance clubs; and borrowing from neighbors, relatives, employers, moneylenders, or financial institutions. At any one time, the average poor household has a fistful of financial relationships on the go. (Collins, D., Morduch, J., Rutherford, S., Ruthven, O. Portfolios of the Poor: How the World’s Poor Live on $2 a Day. Princeton: Princeton University Press, 2009.)

The resulting portrait of the poor provides priceless insight into the possibilities of institutional reform. Since roughly 40 percent of the world lives on $2 a day or less, institutions targeting their needs could literally do a world of good. The portfolios of the poor today comprise mostly informal financing despite wanting more reliability, more privacy and more transparency because it offers degrees of flexibility and scale that formal financing isn’t able to offer. That could change, with updated financial regulations formed with input from private sector financial institutions hoping to serve poor households.

Financial regulations aren’t the most bankable of causes, but Portfolios of the Poor illustrates how poor households bear the brunt of outdated or non-existent financial regulation. Paying negative interest for someone to hold your savings sounds outrageous, but for 40 percent of humanity it’s what the world offers them at this point in time. Forty percent of humanity is a lot to keep locked out of the interest-paying global financial system that could use some loanable funds right now. Is forty percent of humanity a bankable cause?