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Whether it’s Bangladesh, India, South Africa or most recently Kenya and the United States, Financial Diaries studies are revealing that the financial lives of people earning little share a lot in common. By tracking the daily financial transactions of low-income people over time, these research projects are providing a window into the distinctly complex and strategic financial lives of the poor. They’ve shown that, across the board, scarcity and uncertainty lead low-income people to search for – and create – multiple, diverse and complementary financial solutions. Lets look at a few of these solutions, and how they come into play in both the U.S. Financial Diaries (conducted by the Financial Access Initiative/CFSI) and in the Kenya Diaries that our institutions* have undertaken.

Managing the uncertain

One major fact of life for many participants in these studies is that incomes are too small and too turbulent. Take for example the Taylors, a family profiled in the U.S. Financial Diaries. Over a nine-month period, the Taylors’ total monthly income ranged from a low of USD $1,390 to a high of USD $4,560 – that is 200 percent above and 38 percent below their median monthly income. In Kenya, Morris and Lydiah’s household experienced similar swings above and below their median monthly income, from a high of USD $172 to a low of USD $19 – equivalent to 180 percent above and 68 percent below their median monthly income. But it’s not just income: basic needs and the expenditures those needs create also go up and down unexpectedly. Uncertainty in a context of scarcity makes both planning for the future and dealing with the present incredibly stressful, complex, and often impossible to do well simultaneously.

Building a strategic financial toolkit

Faced with complexity, low-income families respond strategically to meet their financial needs, often using a broader variety and larger number of financial tools than the wealthy, and using those tools more intensively. For example, Patrick in Kenya uses 17 different devices, formal and informal, to help him manage the many demands of running his charcoal stove-crafting business, keeping his sons in secondary school (a major expense in Kenya), supporting his wife and younger children at his rural home, and managing day-to-day ups and downs. Patrick’s portfolio is a carefully constructed assembly of financial tools. Formal instruments like his bank account (which allows him to keep larger sums of money safely stored) play a vital role alongside informal instruments like his savings groups (which help him build larger lump sums just in time to pay school fees).

Informal tools are not second-best choices; in many cases they are the best tool for the financial job. Patrick’s bank account just can’t offer the same value proposition that his savings groups do: step-by-step accumulation with flexibility in the payment schedule, a little touch of social pressure, and the knowledge that his contributions today are immediately going to work helping other members until it’s his turn. Each tool is used to do a different job, and for the poor, there are many financial jobs to do.

Understanding the differences

While there are clear parallels in the way lower-income families in a generally rich context like the United States and in generally poorer contexts like Kenya create portfolios, there are also clear differences, stemming mostly from disparities in economic and institutional development. In Kenya for example, formal labor markets are less robust, social safety nets are much less widespread, and incomes and the transaction sizes they support are much lower. These features of the economic landscape generally mean that the poor in a place like Kenya have relatively fewer choices, and need their financial tools and social networks to work even harder. Here are a few examples of these differences:

1. Moving up versus staying put. Seventy-seven percent of respondents in the U.S. Financial Diaries reported that “financial stability” was more important than “moving up the income ladder.” Our respondents in Kenya—72 percent of whom were living on less than USD $2 per day—expressed quite the opposite sentiment. These households had strong inclinations to “develop” and advance economically. But without extensive formal labor market opportunities, that “development” is achieved through productive investment, like buying stock for a small food-retail business or a bag of fertilizer for a maize cultivation.

Unlike the U.S. study, respondents in Kenya were not under-saving. Households in the Kenya study were saving a significant amount relative to their incomes. But nine out of 10 dollars of those savings were tied up in illiquid forms (including savings groups, deposit-taking microfinance institutions, and credit unions) where it could build into sums that would enable productive investments. So, when short term, unexpected needs arose—like a child needing to see a doctor—there was not enough money immediately on hand to make sure that need could be met quickly. Instead, people often delayed care and turned to friends and family to help. Affordable, right-sized liquidity was not always immediately available in the credit market.

2. Effectiveness of safety nets and redistribution. Though they’re expanding, public safety nets in the form of cash transfers and subsidized health care are far more limited in Kenya than in the U.S. Social protection is the responsibility of extended families. The median household in our study received 15 percent of its income over the course of a year in the form of gifts and remittances from their social networks. These relationships seemed to be primarily redistributive, flowing from the moderately better off to the moderately worse off, and the giving seemed to increase when needs increased. But these kinds of voluntary network arrangements—in the absence of public safety nets—are often incomplete, cover different individuals unequally, and are not fully reliable to come through in time with sufficient funds to cope with costly emergencies. As a result, our respondents lived close to the edge when hit with even moderately sized shocks like illnesses.

This reality means that most money needs are social needs. The tremendously popular M-PESA service recognized that, tapping a huge network of informal flows from person to person. And new opportunities to serve the low-income market are likely to ride to some extent on these deeply embedded social ties.

3. The challenge of micro transactions. Finally, our Kenyan households had much less money overall than U.S. households, and managed it in much smaller increments, in terms of income flows, financial flows and expenditures. For example, the median size of a single expenditure transaction in our Kenya study was just USD $0.47. Financial services providers wanting to deliver a larger number of more valuable financial services to this market face a daunting challenge. It’s not easy to make a business off of such tiny flows.

But it is possible. In a country where there are very few credit cards, there is M-PESA. And where there are no payday lenders, there is now M-Shwari. We’re hopeful that insights from the Financial Diaries will help inspire a new generation of digital services in Kenya that may look very different from the landscape in the U.S. It’s our hope that as the financial market develops in Kenya, it will continue to be tailored to the real needs of the low-income population.

*The Kenya Financial Diaries research project was funded by Financial Sector Deepening (FSD) Kenya and The Gateway Financial Innovations for Savings (GAFIS) project, funded by the Bill & Melinda Gates Foundation. This research was implemented in partnership between Bankable Frontier Associates and Digital Divide Data Kenya.

Paul Gubbins is Research Lead at the Center for Insights into Financial Inclusion, FSD Kenya.

Julie Zollmann is a Senior Associate at Bankable Frontier Associates, and was the Principal Investigator on the Kenya Financial Diaries team.