How the poor accumulate lump sums.
I grew up under the care of my grandmother in Nguka village, Siaya County. As an elderly woman (80+ years of age) without any formal source of income, active support from relatives, or grunt from the government or NGOs, she still managed to take care of us — three brothers. In most days, we never went hungry, we never lacked clothes to wear, nor often did we lack tuition fees for primary education. How was that possible?
My grandmother never kept a written record of her cash flow, but I can testify from experience that we lived on less than $1 a day. No electricity (we used paraffin). No rent (we own the house). We spent a bigger percentage of money on food and farming (the latter being seasonal).
There are a lot of families in Africa and the Middle East that still live on below $2 a day, or even less than $1 a day as we used to live. To some extent, it seems impossible — especially if you’ve never experienced poverty to that extreme level. The reality is that it is a common occurrence and complaining and blaming the government might not just be the best solutions. The best solution, I think is to develop financial tools and devices that can be incorporated and work well in the rural and underserved areas of Africa and the Middle East. Also, teaching youths and parents how to manage their finances is a great solution — practically teaching them how to use various financial tools and instruments.
ROCK Kenya is providing students’ parents with small startup capital to help them start and run their own businesses. This teaches the parents how to manage finances and run businesses, instead of depending on handouts and borrowing from neighbors and relatives (which in most cases, breaks the long term friendships and respect).
The other side of the story that I’d like to focus on is interesting — despite the absurd poverty conditions that some regions of the world might be subjected to, the subjects, fortunately, still don’t live on a hand-to-mouth basis — they still have the means to save and accumulate good sums of money for emergencies and future expenditures. The question is how they do it?
As human beings, exploration is in our DNA. Since our existence, we’ve survived and thrived on the basis of finding favorable conditions.
As human beings, exploration is in our DNA. Since our existence, we’ve survived and thrived on the basis of finding favorable conditions. From the Darwinian theory of evolution and natural selection, we’ve learned that humans evolved and reached the current state as a result of adapting to the given conditions. Those who couldn’t adapt died (survival of the fittest). Hence, from my experience, I observed different techniques that my grandmother and other poor villagers used to accumulate lump sums to cope with their financial situations.
The rich rely on insurance covers, loans, and savings plans to cover for emergencies and accumulate lump sums of money. The poor on the other hand, cope with emergencies by exhausting their little savings, selling their precious assets (such as land), and borrowing from neighbors, friends, and relatives.
I witnessed as some wealthy members of our village took advantage of poor people’s portfolio by forcing them to sell their precious assets — mainly land — in return for paying for some of their emergencies such as health complications. I’m grateful they couldn’t manipulate my self-taught grandmother to sell her inherited lands; instead, she rented them out to earn a few backs for our upkeep. Sometimes, she rented our lands and used the money to farm our lands. She is such a genius.
Below are some of the ways that the poorest households save and accumulate money and how my grandmother used them to better our extended family’s financial wellbeing. But before going through the list, let’s find out the main reasons why it is necessary to accumulate lump sums of money among the poor:
As written in Portfolios of the poor, the three main reasons why it is necessary for poor households to accumulate lump sums include:
- Emergencies
- Life Cycle Uses
- Opportunities
Opportunities: In our village, land is viewed as a store of wealth. It might not be evident to the entire village that the motive behind investing in land is mostly economic, my grandmother, as I said earlier on, clearly understands that. Hence, most people always want to accumulate enough money to seize opportunities to buy assets such as land.
On land, my grandmother usually says that:
“Land is such a timeless and fast-appreciating asset that ‘we’ received from our respected great great grandparents. No need to misuse it by selling it to someone else. Instead of selling land, I rather model a solution to a problem that can force me to sell land.”
How the poor accumulate lump sums of money
Savings clubs (saving-up clubs). Savings clubs is one of the financial instruments that made my grandmother ‘a ton of money.’ They’re mostly built on mutual trust and obligations of the members — no legal contracts involved.
The first way for the poor to save large sums of money is saving-up clubs, which mobilizes small and steady flows, say $10 per month for 6 months, and at the end of the period, the members split the accumulated funds and each receives $60. In Portfolios of the poor, it is concluded that “the relatively small size of the monthly inputs allows them to be made without too much difficulty, but they’re large enough to accumulate to a meaningful size over time.”
At this moment, my grandmother belongs to two saving-up clubs. The first one she receives her share fortnightly, the second one monthly. The interval between the clubs is strategic, giving her a chance to receive lump sums at different times all through.
The second way is RoSCAs (Rotating Savings and Credit Association). This way, all members of a RoSCA contribute the same amount of money every period of time (say a month) and the total amount of money accumulated per period goes to one member. The cycle continues until every member has received the monthly accumulations. The RoSCA can end thereafter or the members can agree to start over again.
Portfolios of the poor’s comment on RoSCAs: “One of the beauties of the RoSCAs is that it requires neither the storage of group-held funds (there are none” nor complicated book-keeping (all that is required is a list of who has received the prize and who remains in line).
My grandmother is a member of a RoSCA type where instead of accumulating money, they accumulate food such as sugar, wheat flour, maize corns, etc and give one member at a time (monthly). This helps to minimize my grandmother’s food expenses. Also, the diversity of the food given help families to somewhat eat healthy and balanced diet meals.
The third strategy that poor households use to accumulate large amounts of money is through ASCAs (Accumulating Savings and Credit Association). ASCAs works almost similar to RoSCAs only that instead of giving in whole the individuals’ monthly contributions to one member, ASCA lends the fun to individual members in different amounts, charging interest on the loans and agreeing on a repayment plan with the borrower.
