Poor people unable to borrow to invest

Most poor people with some kind of earnings are not able to address emergency situations because even if they have some form of savings, most of their money is kept in illiquid form, a new survey has indicated.

The Financial Diaries survey August 2014 highlighting the financial lives of the poor shows a great tradeoff between the two financial management challenges facing the poor, that of ensuring short-term liquidity and making long-term investments in the future.

While keeping most of their savings in illiquid form enables many poor households to save in order to invest, even if modestly, there seems to be a lack of appropriate products that enable borrowing for investment. Most borrowing is informal and very low value, the survey showed.

"But it also means that when urgent, unexpected needs arise, there is often no money on hand to navigate the emergency," the survey commissioned in 2012 by Financial Sector Deepening (FSD) of Kenya says.

"The result is that many households are falling short on both. They both forgo immediate and urgent expenditures on things like medical care and appear to underinvest in livelihood improvements."

Researchers conducting the survey visited 300 different households across five areas of the country every two weeks for an entire year. According to the study, the medium household held the equivalent of 129 per cent of their monthly income in financial assets, versus the equivalent of about 53 per cent of their monthly income in liabilities.

"This financial asset accumulation is higher than we have observed among low income people in other countries," the survey says in part. However, only about 9 per cent of the typical household's savings are held in formal institutions. Instead, this money is mediated informally.

The study says most earning poor people also have a strong preference to not leave money idle, instead preferring to immediately put the money into good use, even as it is being saved. "Our respondents told us that money should be working. The result is a preference to spend-as-you-earn in many cases, immediately translating income into helpful uses," it adds.