May 2010
By FAI
Borrowing to Save: Perspectives from Portfolios of the Poor Brief
When it is difficult to save, those who manage to build up a lump sum are reluctant to draw down on it. In fact, they are often so loathe to touch their savings that they willingly borrow at expensive interest rates. While the phenomenon of borrowing while saving is puzzling from the standpoint of traditional economics, it’s a regular feature in the financial diaries described in Portfolios of the Poor: How the World’s Poor Live on $2 a Day. This brief describes simultaneous borrowing and saving, and provides evidence for an explanation rooted in the difficulty of rebuilding savings. This evidence leads to another seeming contradiction—why high interest rates on loans may in fact be a desirable attribute for some borrowers.