Portfolios of the Poor : How the World’s Poor Live on $2 a Day is a book from 2010, by Daryl Collins, Jonathan Morduch, Stuart Rutherford, and Orlanda Ruthven. This article is intended to summarize my key takeaways from the book, and a reflection of opportunities available in Indonesia.
“Not having enough money is bad enough. Not being able to manage whatever money you have is worse.”
This sentence sums up the core point this book is trying to deliver to us. In this book, the authors assess how the poor manages their money in several countries (Bangladesh, India, South Africa), how each country differs, and what kind of instruments they use. The book offers an interesting take and meaning to money management for poor people. Instead of just looking at financial inclusion metrics such as savings accounts, the authors use the method of “financial diary” for households to record their cashflow and transactions.
The Poor is not stupid
Poor households try their best to manage their money with the limited instruments that they have. A poor household can use up to 5-6 financial instruments to support their life. The lack of sustainability in their earnings combined with sudden expenses makes it difficult to gather up large sums of money. For example, when you hear that a person gets about 2$ per day on average, this does not mean that they can always get 2$ everyday. The volatility of income is very high, one day they make 10$, then makes 0$ for 5 days, then makes 1$ the next day, and then make 5$ the next day. On average, that’s 2$ per day, but it’s hard to plan ahead when they don’t know how much they can make tomorrow. This volatility also makes it tougher for the poor to be able to utilize insurance products which require premiums every month/year.
And there are occassions that will demand large lump sum of money, such as healthcare, weddings, funerals, sudden business opportunity. As it’s hard to gather a meaningful sum of money through daily earnings, even just 1 issue can wreak havoc on their livelihood.
The instruments that they use is community based
Such as savings club (like ‘arisan’ in Indonesia), loans from friends and family, paying back favor to friends and family, the poor relies on their community instead of formal institutions. The rate of interest if annualized is very high, but in reality, the interest are often not compounded and there’s the informal component where interest can be forgiven. This makes the loans more flexible to the needs of the poor and helps them in managing their money. Grameen bank’s top-up loan system helps them even more where for example, you took a 200$ loan, paid back 100$ plus 5$ interest, then you can take out 100$ loan again, so you have 200$ principal loan in the end.
The catch from community based instruments like these are that there’s no privacy, and can be stressful. Also, as most doesn’t have properly documented system, there’s a lack of transparency for people to know whether the service is honest/not.
Getting large sum of money done through loans instead of savings
As mentioned above, gathering a meaningful sum of money through daily earnings is difficult, and being disciplined to save in the face of sudden needs and situations makes it even more difficult. This is why many poor households get a meaningful sum of money through loans, and then they’re compelled to payback the loan in a flexible schedule. This makes them able to get a meaningful sum of money at the right time, while paying it back slowly.
Key areas to focus
- Reliability – The delivery of products and services at the promised time, in the promised amount, and at the promised price. In the face of all the unreliable factors in poor people’s lives, there needs a reliable financial services for the poor to utilize.
- Convenience – The chance to take and repay loans, make and withdraw deposits, frequently, close to home or work, quickly, privately, and unobtrusively.
- Flexibility – Ease with which transactions can be reconciled with cashflows.
- Structure – Regularities that promote self discipline, such as regular visit by bank workers, planned savings schedules, loan repayment schedules.
Where Indonesia Is At The Moment and The Opportunities
As branchless banking efforts improve, promoted heavily by Bank Indonesia (BI) and Indonesia Financial Services Authority (OJK), with the Laku Pandai program, I dare say Indonesia is at the forefront of innovation in micro financial services. With hundreds of thousands of Micro Financial Insitutions (MFI / LKM in Indonesian), micro financing in Indonesia is advanced and reached edges of the country that banks and other institutions cannot reach.
In the Laku Pandai program, anyone can be a bank agent. These agents are empowered to be the point of contact to their clients, can register their clients for savings, and can make deposit/withdrawals from the client’s savings account. They get some income from the transaction, the bank can reach more people, and more people can access financial services from banks.
With the volume and the number of people in Indonesia, innovation in financial services for the poor can have a multiplier effect and I believe it’s in the government’s best interest to encourage these innovations. 1 innovation can lead to it being adopted by multiple organizations to serve different markets.
Opportunities that I see in the horizon:
- Fintech to support microlending and other financial services
- Create brokerage services / agencies to utilize banks and financing companies services, and channel it to communities and remote areas
- Opportunity for consulting services to support people from all over the country to start a small financial services
- Systemizing ‘arisan’ / savings club through free application/website and creating an ‘arisan’ registry for financial services authority to keep track and protect these community based financial services