Portfolios of the Poor: How the World's Poor Live on $2 a Day, Daryl Collins, Jonathan Morduch, Stuart Rutherford, and Orlanda Ruthven (Princeton, N.J.: Princeton University Press, 2009), 320 pp., $30 cloth.

Portfolios of the Poor is the culmination of a research project that spans ten years and three countries, and examines the cash flow of almost 300 households among the poorest of the world. The result is a fascinating and humanizing insight into the economic lives of the global poor, and a valuable resource for attempting to improve those lives.

The authors focus on the financial “triple whammy” of low incomes, work that can be irregular and unpredictable, and a lack of financial tools. Living on $2 a day does not mean receiving that exact amount each day; incomes can be casual, seasonal, or subject to all sorts of unpredictability. Yet money is needed on a daily basis to keep a household running, and occasionally in large sums to address emergencies.

Interestingly, the research reveals that none of the households studied lived hand to mouth, despite their extreme poverty; all juggled both savings and borrowings on a regular basis, sometimes even going hungry in order to save. The diversity of “financial instruments” used by poor households is remarkable, from savings clubs and moneyguards (freelance individuals who hold savings for a fee) to informal lending of both money and food between neighbors and acquaintances. “The diaries have shown that it is because of, not in spite of, their low and uncertain incomes that poor people are extremely active in financial intermediation.”

One of the central arguments of the book is that while the informal sector has evolved to suit the needs of poor households, formal financial institutions have been lagging behind in terms of flexibility, accessibility, and convenience, despite an enormous potential demand for financial products that suit the cash flows of the poor. On the other hand, the informal sector can be unreliable and lacking in privacy, often leaving families vulnerable.

The authors thus argue that an appreciation of the small balances and irregular incomes of poor households, combined with the stability of the formal financial sector, is what is most necessary to improve the everyday lives of the world's poorest. Further, microfinance can be extremely important for satisfying broader needs, such as education and health, facilitating regular savings to deal with school costs, or providing lump sums to deal with medical emergencies.

Prospects appear positive as the recent boom in microfinance institutions spreads further. In particular, the notable progress of Bangladesh's pioneering pro-poor Grameen Bank is analyzed in detail, and offered as an exemplar for the microfinance sector. Nonetheless, even Grameen remains imperfect in terms of its appreciation of the financial needs of the poor, and the book concludes with an illuminating analysis of the way forward for the sector.