Name: Portfolios of the Poor
Rating: 3.3 (21 reviews)
Author: Daryl Collins, Jonathan Morduch, Stuart Rutherford, Orlanda Ruthven

What’s in it for me? Learn that the lives of the world’s poorest aren’t exactly what you’d think.

Have you ever given any money to OXFAM? Maybe you’ve donated to Save the Children or Christian Aid? Chances are, a lot of you will have, at some point in your life, given to an organization focused on helping the poorest people in the world.

When we see images of hungry, impoverished people in the media, we can’t help but feel like they need our help, which may prompt us to give to NGOs and charities. However, this might not be the best way to help.

These blinks explain why the developed world’s view of global poverty is inaccurate. Extreme poverty does not turn people into charity cases, unable to help themselves. In fact, those who live in poverty are incredibly smart financially, and have many complex networks for raising capital and making investments.

In these blinks, you’ll discover

how those without writing skills are able to keep track of financial commitments;
why living on $2 per day isn’t what it seems; and
why merely having a bank account can be a way out of poverty.

Though lacking a stable income, those living in extreme poverty have strong, effective money management skills.

When we hear about people living in extreme poverty – subsisting on a meager $2 a day – it’s easy to assume that they’re leading the toughest lives out there. And this is only the first assumption we tend to make about the world’s poorest people.

We also often assume that people with little money spend any and all cash as soon as they get it. But that’s not true. People living on an average of less than $2 a day usually set aside a small amount of savings – a nest egg for covering unforeseen expenses and tiding over periods without income.

For instance, Hamid, who lives in Bangladesh, always keeps a little cash on him for emergencies, stashes enough money at home for food and also puts aside the necessary amount for making improvements to his home.

But since most of the world’s poorest people are illiterate, they keep track of and manage their finances through oral communication with their friends and families. For example, a husband might tell his wife that he’s trying to save money for their children’s school supplies, and that he’s going to take a job at a local store to earn some income and borrow the remainder from their neighbor. Now that she knows his plan, the man’s wife can remind him to stick to his commitments.

In fact, the ability to manage money in such ways is absolutely key for extremely poor people. Because their income is usually irregular, paying back loans is a real difficulty. For instance, farmers earn practically all their yearly income during two or three peak months of harvest and virtually nothing for the rest of the year. Naturally, it’s difficulty for them to stay on top of monthly payments during periods of low-income, a fact that makes good money management vital to their success.

Social bonds and cooperation are crucial for the poorest people to make due with what they have.

When your friends fall on hard times, they can count on you for support. And if you find yourself in trouble, you know they’ll return the favor. Well, the same thing is true for the poorest people in the world. Despite the poverty they live in, everyone in these communities joins together to help out when someone is in need.

In fact, both official and unofficial social contracts bolster the financial strength of the poor. One official agreement that’s common in communities where people live on less than $2 a day is collective investment – a joint effort to bring in more income for everyone. For instance, certain banks, like the Grameen Bank, founded by Muhammad Yunus, focus on lending money to poor communities. Access to such credit streams enables those in poverty to raise the capital necessary for small businesses and to collectively grow their wealth.

People in the developed world misunderstand poverty in other countries, and this makes it hard for them to help.

When people in wealthy first-world countries see images of and hear testimonials about extreme poverty in foreign countries, it’s common for them to have a compassionate response and want to do something practical to help out. As a result, people and groups across the world are lending a hand in the effort to end global poverty, generally by working with international organizations like NGOs.

Despite their good intentions, however, groups like this can actually perpetuate misunderstandings about the world’s poorest people.

National organizations can drastically improve the situation of the world’s poor by offering reliable and professional financial services.

So, international organizations have a difficult time comprehending the realities of poverty in different countries. The good news is that national institutions and groups, like the Association for Social Advancement, or ASA, and BRAC, both based in Bangladesh, can provide both assistance and more effective solutions.

How?

Key ideas in Portfolios of the Poor

About the Author

Daryl Collins is the senior associate at Bankable Frontier Associates in Boston. She was responsible for organizing the latest version of the financial diaries in South Africa and holds both a B.Sc., and an M.Sc in Economics from the London School of Economics.

The other three authors, Jonathan Morduch, Stuart Rutherford and Orlanda Ruthven, are all experts in economics with international experience, primarily in microeconomics.