According to Portfolios of the Poor written by a leading group of researchers, 40% of the world’s 7 billion people live on less than $2 a day. What makes matters worse is the irregularity of their income. If they knew they were going to earn $2 every day it would be possible to build a budget around it. But they don’t know. During harvest season they may have plenty to eat and even be able to save. At other times they may have to live on one meal a day and borrow to make ends meet. How can someone deal with those massive changes in income? To make things even more dire are expensive emergencies, such as an illness, a burial, or a whole host of other things.
Those of us in the developed world have the option to deal with these issues through credit, insurance, and savings. These services are somewhat available to the poor in developing countries through microfinance institutions. The most popular ones are microcredit institutions like Grameen Bank and Kiva. Grameen Bank was founded by Muhammad Yunus in 1983 and gives out micro loans of the equivalent of a few hundred dollars. Yunus and the Grameen Bank jointly received the Nobel Peace Prize in 2006 “for their efforts to create economic and social development from below”.
The Grameen’s Bank main purpose is to provide credit for entrepreneurs who are building a business. Since people don’t have credit histories Yunus found a different way to verify people’s credit worthiness. One of Grameen’s main requirements is that a group of people, usually five women, vouch for each other. If one can’t pay, the other four women will cover her payment thus keeping the group’s credit line open. In this way Grameen is able to minimize losses.
In the more than 30 years since Grameen’s founding many microcredit institutions have sprouted up all over the world. There are even Silicon Valley startups addressing its needs. One of the best known organizations is the non-profit Kiva, which serves as a funding source for many microcredit institutions in 82 countries. Kiva allows donors to see who is requesting funds and the reason for it. Lenders can then lend the money, and once it’s repaid they can either re-lend it or withdraw it. The entire loan amount goes to the borrower because Kiva’s operating expenses are supported by separate donations.
Does Borrowing Money Make People Better Off?
Despite millions of dollars invested in microcredit institutions its effectiveness at alleviating poverty has not been confirmed. There are many stories of people doing really well thanks to it, but there are also many stories of becoming severely indebted. David Roodman spent years investigating microfinance institutions. In his book, Due Diligence: An Impertinent Inquiry into Microfinance, Roodman argues that results are inconclusive. This reflects the fact that credit is neutral. It is not inherently good to have a lot of available credit or no credit at all. What is good or bad is the outcome of using the credit. If a poor woman has access to microcredit, but no way of using it to generate more income or unable to repay it on time, it’s possible that using the credit may prove too expensive.
Roodman does state that microsavings institutions are more promising. This makes sense. Being able to safely save for the inevitable emergencies allows people to get ahead. In fact, this is one of the cornerstones of financial well-being for many financial counselors, from David Ramsey to yours truly. Once you have enough cash set aside for emergencies you will be better able to weather difficulties and take advantage of opportunities.
There are many advocates of microcredit because it appeals to our dream of “pulling yourself up by your bootstraps”. There’s a lot to be said for people having the initiative to build a business, but there also needs to be understanding of basic finances, and this is where comprehensive financial planning comes in. Because everyone deals with money, everyone would benefit from being well-versed in it. This includes people who live on an average of $2 a day. On the other hand, it may turn out that they are well-versed in topics the rest of us in the developed world would benefit from learning.
Working at a Microfinance Institution
All of us have a different story of money. I love learning people’s stories and the wider my exposure the easier it will be to see innovative solutions and pick up patterns. When I think of what it might be like to be so poor I get a whole list of questions:
- What does conspicuous consumption look like? Do the poor also try to keep up with the Joneses?
- Does the fact that credit is not available make them more diligent savers?
- Is the stress comparable to those who are poor in the US, like the minimum wage workers described in Nickel and Dimed: On (Not) Getting by in America by Barbara Ehrenreich? Or is the stress more painful given the lack of governmental safety nets?
- What do they think of their future?
- If I live with the ultra-poor and the ultra-rich where would I feel most comfortable?
- What type of tools do they use? Portfolios of the Poor states some people take out loans to force themselves to “save” in order to avoid penalties. Plus, if a family member or friend asks for money a microcredit user you can calmly say that she is paying back a loan. That’s much easier to say than saying she is saving money for a rainy day or to pay for a wedding.
My intuition says that the struggles and glories of a human life are more similar than we’d suspect, regardless of exterior circumstances. One very good way to test this is to work at a microfinance institution to find out. I first learned of these organizations in college and actually wrote my honors thesis on microcredit’s dubious effectiveness. At the time I applied to a scholarship to go visit a microfinance organization in person, however I did not receive the funding. Once again I am contemplating visiting one of these organizations in person.
My end goal is to be of service to others as a financial planner. I can do so now as a service provider at a microfinance institution. I have the freedom in my life to leave my current work position and fly off for a few months. I am fluent in Spanish and French and there are plenty of microfinance institutions in South America and West Africa that require English translation help and other services. I’m certain that taking this leap will do me and my future clients good. One thing is for sure: I will be transformed by living in a third world country for 6+ months while working at a microfinance institution. I am thrilled at the prospect of it!