By Megha Rana
Financial education programs for the poor cannot be normative, meaning they cannot be structured around the behavior of a Western, financially stable person. Financial programs are often made for the middle class and the curriculum consists of teaching budgeting, debt management, investments, etc. However, for the over 678 million people worldwide who live at or below the poverty line ($1.90/day)*, these concepts are alien . How could an individual struggling to fund their next meal or to buy basics needed for cooking such as propane or wood, begin to grasp these concepts? The approach must change to focus on the realities of how the poor cope with their circumstances, recording best practices and formalizing them.
*Please note that $1.90/day does not mean that the poor actually earn this daily, rather it is an average of incomes. It is not unusual for there to be days where everyone in a family of 5 will work and days where only 3 out of the 5 work.
Bringing financial literacy to those in extreme poverty must focus on stabilizing their lives first and then on stabilizing their wealth. For instance, for the 8.9 million Kenyans living in poverty (earning less than $1.90/day), what are solutions to help them maximize options for managing their low and unpredictable cash flow? Those working as day laborers in Nyamboyo Village typically earn $1.20/day, often with no regular schedule of work. So, they may work a few days one week earning $1.20/day, but then they may have weeks without any work or income.
Therefore, new programs must be adapted from traditional programs. They must start with a deep understanding of how the poor successfully cope and survive on substandard incomes. Financial education must also take into account the additional risk faced by the poor who have minimal control over outside circumstances and the resulting, unexpected expenses. Something that may seem relatively small to a person of moderate means, such as a short illness that requires a doctor’s visit and medication, may wipe out a poor person’s savings as well as prospects of daily income while they are sick. Witness the effects of the COVID-19 pandemic when, in its first year, many people worldwide had to survive months without work or worked in unsafe conditions. With no steady income flow, the risks of COVID were compounded by risks of starvation. Also, their expenses increased as masks and soap became essentials.
In Kenya, there is an additional complexity to teaching financial literacy to the poor. Those who come from generational poverty only have the long-term experience of “just enough” for survival. Extra income (a rarity) immediately goes to expenses that have been put off, such as clothes for growing children, a store of dried foods, or medicine that has been foregone. People who have never had money to spend have not developed planning skills. They cannot afford to spend time considering or dreaming of what they would do with extra.
In this context, concepts such as budgeting and investing are alien. What use is a budget when your overarching worry is earning enough today to provide an evening meal for your family? Why use a budget when your children wear rags and you can’t afford medication for your elderly parents? It is a major creative challenge for educators to provide the context so individuals in poverty can understand the relevance of a budget or any other financial planning skill.
In our upcoming blogs, we will share examples of programs that are effectively teaching financial concepts to the poor, helping them to improve their lives as well as think about the skills necessary to move beyond subsistence existence.
Sources:
Wentzel, Arnold, Why Financial Education Fails the Extremely Poor (December 2013). Available at SSRN: https://ssrn.com/abstract=2518533 or http://dx.doi.org/10.2139/ssrn.2518533V