Thursday, October 7, 2010

How to live on $2 a day

By Jonathan Morduch, Financial Access Initiative

Could you live on $2 a day? Think about it, surviving on little more than the price of a Justin Bieber song on iTunes... More than 2.7 billion people face this challenge every day. Yet, they manage to put food on the table, keep a roof over their heads, plan for medical emergencies, and even save for retirement. How do they do it?

A Complicated Juggling Act

Microfinance loans, like those provided by Kiva lenders, play an important role. But microcredit is just one piece (albeit an important one) of the surprisingly sophisticated financial lives of the poor. We know this thanks to a yearlong study of villagers and slum dwellers in Bangladesh, India, and South Africa. To learn more about how poor people make ends meet, we used "financial diaries" to track, penny by penny, how nearly 300 poor families manage their money.

The stories of these families are often surprising and at times truly inspiring. We discovered that most poor households do not live hand to mouth, spending what they earn in a desperate bid to keep afloat. Instead, they lead active financial lives that sometimes resemble our own, here in the developed world.

Meet Hamid and Khadeja

One family we spent a year talking to was a young Bangladeshi couple, Hamid and Khadeja and their young son. They live in a slum in the Bangladeshi capital of Dhaka. Their home consists of cement block walls and a tin roof. They share bathroom and kitchen facilities with eight other families.

Hamid earns most of his income driving a rickshaw, but he is a “reserve” driver, which means that he doesn’t work every day, and therefore can’t count on a steady and regular paycheck. Khadeja supplements her husband’s unpredictable income with her earnings as a seamstress. On average the couple earns $70 per month—20 percent of which is spent on rent and much of the rest on food. The family of three survives on an uncertain 78 cents per person per day.

Yet despite their meager earnings, Hamid and Khadeja maintain an active “portfolio” of financial tools. They set aside money in savings—hidden away at home, or left with a moneyguard—maintain a credit account with the local shopkeeper, and swap food with neighbors. This unexpectedly intense financial life is necessary because, as Khadeja notes, “if you’re poor, there’s no alternative.”

How does microfinance help?

Hamid and Khadeja’s story is a good example of the “triple whammy” of poverty: the poor have small incomes that are irregular and unpredictable, and a lack of good financial options to make the most of the money they do have. Formal financial services, like bank accounts, are often too far away, too expensive and too inflexible. Through our work with these 300 families we learned how microfinance can help meet these challenges, and make living on $2 a day more manageable.