Portfolios of the Poor - Book Summary

Discover unexpected insights into the financial lives of the world's poorest

Have you ever felt compelled to donate to organizations like OXFAM, Save the Children, or Christian Aid? It's likely that you have, at some point, felt the need to lend a hand to those struggling with extreme poverty.

The heartbreaking images that we see of hunger and poverty in the media motivate us to donate to charities and non-profit organizations. However, this approach, though well-intended, may not be the most effective solution.

This summary proposes an argument that the common perception about global poverty by many in the developed world might be off the mark. We often think of people living in extreme poverty as helpless victims in need of charity. But the reality is far from this misconception. In fact, the financial acumen of those living in poverty can be astonishingly sophisticated, with many using complex systems to generate capital and manage their investments.

In the course of this summary, you'll gain insights into how people, even without formal education or literacy skills, manage their financial obligations, why living on two dollars per day might not mean what you think it does, and how the simple act of owning a bank account can serve as a beacon of hope in the fight against poverty.

Impoverished individuals have keen money management skills, despite their unstable income.

When we picture someone surviving on a mere two dollars a day, we tend to imagine the absolute harshest of living conditions. That's just the tip of the iceberg when it comes to our assumptions about the world's poorest.

Contrary to popular belief, individuals living in extreme poverty do not spend their money impulsively or recklessly. Instead, they often squirrel away small amounts as savings — a safety net to fall back on during unforeseen financial emergencies or periods of no income.

Take Hamid from Bangladesh, for instance. He always carries a small amount of emergency cash, stashes away some funds at home for essentials like food, and sets aside money for home improvements.

It's interesting to note that most of the world's poorest are illiterate. However, they have unique methods to track and manage their finances, primarily through verbal communication with their immediate social networks. To illustrate, a father might communicate his financial strategy to his wife — he may be planning to save for their children's education, work at a local store to earn some extra cash, and borrow the rest from a neighbor. Once she is aware of the plan, the wife can serve as a valuable reminder for him to stay committed.

Managing finances in this manner is nothing short of a survival skill for those living in extreme poverty. Their income is often irregular, making the repayment of loans a formidable challenge. For instance, farmers typically earn their entire yearly income during the brief harvest period and virtually nothing for the rest of the year. This income inconsistency makes meeting monthly payments incredibly challenging — underlining the crucial importance of good money management.

Social connections and community cooperation are essential survival strategies for those living in poverty.

When you encounter a rough patch, you often turn to your friends for help, confident that they would do the same for you if their circumstances were reversed. This mutual reliance on social networks isn't limited to the privileged — it's a critical support system for some of the world's poorest individuals.

Both official and informal social agreements significantly contribute to the financial resilience of those living in poverty. For instance, collective investment is a commonly observed practice in communities where individuals subsist on less than two dollars a day. This involves pooling resources to generate a higher income for the community as a whole. Some banks, like the Grameen Bank established by Muhammad Yunus, specifically target lending to poor communities. This access to credit enables individuals in these communities to raise capital for small businesses, stimulating collective wealth growth.

Besides these official arrangements, there are also informal, tacit agreements within these communities. A common practice is the extension of informal credit to individuals who are less fortunate by those with a regular income — this could be a shopkeeper or a friend. These informal loans help maintain an acceptable standard of living even during particularly tough times.

However, financial assistance isn't the only form of support prevalent in these communities. Given that money is scarce, community members often exchange practical, non-monetary aid. For example, it's not unusual for someone to borrow a bit of salt or a handful of rice for a meal, with the understanding that they'll repay the favor or provide something else in return, such as a chunk of cheese.

Furthermore, the close bonds in these communities provide numerous non-material forms of support — ranging from babysitting and emotional counseling to taking care of the sick. These intricate networks of mutual assistance and reciprocity underscore the incredible resilience of communities living in poverty.

Global misunderstandings about poverty can hinder effective aid and assistance.

When citizens of affluent countries witness the harrowing scenes of extreme poverty in distant lands, they're often moved to help. As a result, countless individuals and organizations worldwide have pledged their support to eradicate global poverty, typically partnering with international entities like NGOs.

Despite these commendable intentions, such endeavors can sometimes perpetuate misconceptions about the world's poorest populations.

International organizations tend to establish standard measures of poverty which, unfortunately, they apply indiscriminately, failing to consider the diverse realities of impoverished individuals. For instance, earlier we explored how incomes among the poor are highly irregular — a factor these standard poverty measures like "a dollar a day" fail to account for.

While these individuals may have an average income that exceeds a dollar a day, it's the unpredictability of their earnings that proves detrimental to their financial stability.

Such one-size-fits-all poverty standards are often applied uniformly to all impoverished individuals worldwide, irrespective of their unique contexts. This approach fails to accommodate the vast disparities between different regions. For example, an income of $2 a day translates to vastly different living standards depending on the location.

Two dollars a day may enable a modest existence in Bangladesh, but it would be woefully insufficient in New York City due to the stark difference in living costs.

Furthermore, attempts to normalize global living standards and income measures to accurately represent relative poverty often fall short. The truth is that it's an immense challenge for international organizations to accurately gauge poverty across diverse economies, societies, and cultures.

Domestic organizations can significantly enhance the financial prospects of impoverished citizens through professional, reliable services.

Given that international organizations often struggle to grapple with the diverse realities of poverty worldwide, it's heartening to know that domestic institutions can step in to provide effective aid and solutions. Organizations like the Association for Social Advancement, or ASA, and BRAC in Bangladesh are prime examples of such entities.

How do they make a difference?

These organizations take into account the needs of impoverished communities for safety and reliability, offering avenues for these individuals to securely invest their scarce resources. In countries like Bangladesh, India, and South Africa, banks strike deals with governments to make financial growth opportunities more accessible to the poorest citizens.

One such initiative is guaranteeing that every individual has a personal bank account. This seemingly simple provision offers crucial protection against theft — a pressing issue in many impoverished nations — preventing misplacement of funds and enabling formal investments.

National organizations also aid the poor by regulating the costs of financial products. In countries housing extremely impoverished populations, these entities ensure that prices adhere to two principles: affordability for the majority and sufficient margins to fuel small business growth.

One of the most noteworthy contributions of these national organizations is the introduction of professionalism into financial transactions within these economies.

Professionalism might seem like a given, but in countries marred by poverty, many financial transactions tend to be informal and lack official documentation, often involving neighbors or local businesses without any signed agreements.

However, when individuals invest officially through registered organizations, the dynamic changes. Financial partners are held accountable by written contracts and are bound by law. This level of professionalism instills confidence and smooths the operation of these cooperatives, setting them leagues apart from their informal counterparts.

Summing it all up

The crucial takeaway from this book:

Through collaboration, clever investments, and out-of-the-box thinking, individuals can triumph over even the harshest financial adversities. By understanding and learning from the survival tactics employed by the world's poorest populations, we can discern how best to support them.