Migration and financial stability: the poor neighborhood among the best fund managers
I continue discussing the results of a research project I conducted on Filipino migrants in Paris, to understand how migration is used as an investment strategy. This led me to deepen the literature on the financial strategies of the poor, which is often the demographic group from which most migrants come. I needed to understand in a larger way, why do people have to migrate? Why can’t they just invest their wealth in their homes or become good entrepreneurs, study hard for better jobs in order to lift themselves out of poverty? Do they lack savings and investment skills? What is the bottleneck? Finally, why do they manage to achieve financial stability elsewhere and what about the financial strategies of the poor?
There is a general idea that in order for a person to get rich then he or he should have been smart with money. And that if one is poor, it is because of negligence or lack of prudence in matters of money. This idea extends to – anyone who is rich is smart with money and anyone who is poor is financially illiterate. But this is often not the case. Many rich people have simply inherited their wealth and can appear rich when they are in fact deeply in debt, while many poor people are born into poverty with no way out, no matter how skilled they are. We make assumptions because we only observe the rich and their successes.
In addition to a host of socio-economic problems, the poor suffer from what the authors Collins et al. (2009) * refer to a “triple whammy”: low incomes, unpredictability of these incomes and lack of access to quality and appropriate financial services. While the first two issues are very difficult to deter, the third is something that can still be resolved. Financial inclusion is the buzzword for this – it is the provision of affordable financial services to disadvantaged and low-income segments of society. Financial inclusion is measured through access to financial services, which separates people who are “bankable” (ie sufficiently creditworthy to maintain an account) and those who are “unbankable”.
Understanding the financial strategies of the poor has become increasingly possible with the increasing research on microfinance. In addition, a revolutionary project that led to the book Portfolios of the poor broadened these findings widely by shedding light on how the “bottom billions” run their day-to-day lives – looking at cash flows rather than balance sheets. The authors systematically followed 250 poor households in Bangladesh, India and South Africa over the course of a year. I have reviewed this literature which has revealed that the poor are some of the best fund managers! First, the poor use group lending and borrowing in a way that would make economists proud; second, they let women make decisions about money; third, because they have a diversity of financial needs, they are driven to create complex portfolios and relationships to manage them. And, finally, and what is most surprising: the poor hate debt and are constantly saving. Interestingly, these are all characteristics that the migrants in my study had. Let’s discuss the first feature today.
Group loans and borrowings work for the poor. This method has been one of the main innovations brought by microfinance to the banking sector. The group lending method consists of self-formed groups of borrowers (usually three to ten members) who know each other and take joint responsibility for repaying loans from microfinance institutions (MFIs) to members. of the group. The idea is that, because they know each other, they will avoid forming a group of individuals who have higher risk profiles, thus reducing the problems of information asymmetry between the MFI and the borrower and resulting in a lower probability of default. Forming a group also increases peer pressure, which substitutes for collateral in a situation where they had no physical or monetary assets. In addition, there is a reputation issue – when members attend meetings, they feel they need to exemplify their reliability. This characteristic was also important for savings. Being able to save as a group has increased responsibility and social pressures and made saving more important. This shows that the poor are able, in their own way, to reproduce even the most sophisticated theories of investment involving moral hazard and adverse selection. Don’t overlook their sophistication.
(To be continued)
* Collins, D., Morduch, J., Rutherford, S., and Ruthven, O. 2009. Portfolios of the poor: how the world’s poor live on $ 2 a day: Princeton University Press.
Other references are available on request.
Daniela “Danie” Luz Laurel is a business journalist and featured producer of BusinessWorld Live on One News, formerly Bloomberg TV Philippines. Previously, she was a permanent professor of finance at IÉSEG School of Management in Paris and maintains teaching affiliations at IÉSEG and Ateneo School of Government. She also worked as an investment banker in the Netherlands. Ms. Laurel holds a doctorate. in Management Engineering with concentrations in Finance and Accounting from Politecnico di Milano in Italy and an MBA from Carlos III University in Madrid.