Financial management and the poor

Chapters 6 and 7 of Poor Economics deal with the many financial risks faced by the poor. The poor are likened to hedge-fund managers in that their "portfolios" possess great risks. But unlike most hedge-fund managers, who are liable for a fraction of the assets they manage, the poor are liable for 100% of their own assets.

The poor tend to diversify their activities in the same way an investment portfolio might be diversified. This is a necessary precaution to spread risk over several domains. However, this creates a roadblock to acquiring greater skills and experience because it's "hard to become a specialist in anything without specializing in it." It seems that doing many things at a low skill level is less profitable than doing one thing at a high skill level.

The concept of informal insurance predominates as insurance plans as we know them are simply unavailable. Informal insurance refers to a system of communal sharing and lending that acts as a safety net for those in the community who have fallen on hard times, as well as those who may fall in the future. A constant circulation of informal aid can be vital to sustaining all members of such a community. Furthermore, informal insurance is usually performed on individual bases; that is, direct assistance rather than a "common pot."

Similar to micro-credit, micro-insurance schemes have been tested in poor communities with mixed results. There are major risks involved for the lenders:
"Offering reimbursement-based health insurance for outpatient care in a country where health care is at best weakly regulated, and where anybody can set up shop as a 'doctor,' seems like the first step toward bankruptcy."
Additionally, rampant corruption, commonplace in many countries, undermines any trust the poor might have in financial institutions. Government subsidies may prove to help acceptance of traditional insurance take hold by making it more affordable.

In general, "banks are unwilling to touch the poor" for a variety of reasons, but the main constraint is the cost of gathering information about the creditor. Large institutions are not equipped for the groundwork necessary in verifying a poor creditor's standing in a small rural community. This increases the interest rate and eventually boxes out the poor from even trying for a loan.

Micro-credit has been proven to be a viable option, and can more than sustain itself as a business for the lender. Unfortunately it is quite susceptible to rumor and groupthink – it can be dismantled overnight by false information spread by bureaucratic and/or political opponents of such schemes. It also puts medium-sized businesses in a tough spot; too big for micro-credit financing but still too small for large bank finance.

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