Mohammed Yunus and Grameen Bank awarded Nobel peace prize for lending efforts to very poorest citizens of Bangladesh

From CNN Money: OSLO (Reuters) -- Bangladeshi economist Muhammad Yunus and the Grameen Bank he founded won the Nobel Peace Prize on Friday for grassroots efforts to lift millions out of poverty that earned him the nickname of "banker to the poor."

Yunus, 66, set up a new kind of bank in the 1976 to give credit to the very poorest in his native Bangladesh, particularly women, enabling them to start up small businesses without collateral.

"In Bangladesh, where nothing works and there's no electricity," Yunus once said, "microcredit works like clockwork."

The Nobel committee awarded the prize to Yunus and Grameen Bank "for their efforts to create economic and social development from below," it said in its citation.

"Lasting peace cannot be achieved unless large population groups find ways in which to break out of poverty. Microcredit is one such means. Development from below also serves to advance democracy and human rights," it said.

Yunus and Grameen were surprise winners of the 10 million Swedish crown ($1.36 million) award from a field of 191 candidates. The prize will be handed out in Oslo on Dec. 10.

"This is fantastic, unbelievable. Thank you," Yunus, whose autobiography is called "Banker to the Poor," told Norway's NRK television after the announcement.

Returning from a Fulbright scholarship in the United States, Yunus was shocked by the 1974 Bangladesh famine and headed out into the villages to see what he could do.

He discovered the women were in severe debt to extortionate moneylenders, and Yunus's initial aim was simply to persuade a local bank manager to step in and offer the villagers regular credit. The banker said it was impossible without a guarantee.

Yunus set out to prove him wrong and has never looked back. Grameen - the word means village in Bengali - has now disbursed $5.72 billion since its inception. Of this $5.07 billion has been repaid -- a loan recovery rate of 98.85 per cent.

"Across cultures and civilizations, Yunus and Grameen Bank have shown that even the poorest of the poor can work to bring about their own development," the secretive five-member Nobel committee said in announcing the award.

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Microcredit is loaning small sums to the poor, at market but not unreasonable interest rates. It's not worth it to the big banks to make these loans: the sums are too small, and the poor have no collateral. Under Yunus, Grameen went into the market. Microcredit institutions will make loans to groups of people; if one defaults, all will not get credit. This leverages the social networks that countries like Bangladesh have, but which have become less important in developed countries. The fact that the borrowers are paying market rate gives them incentive to repay, as does the fact that they will face shame if they default.

Microcredit is not charity, in the sense of giving out handouts. Grameen does have run charity programs, some of which make small interest-free loans to beggars. However, what makes it work is that they help people start their own small businesses by giving out market-rate loans, which they would not be able to get othewise. And in Bangladesh, "small business" might mean selling snacks in a cart by the side of the road. "Small business" in the Third World is a lot smaller than in, say, America. Microcredit institutions also often provide business education to their borrowers. I bank with Self-Help Credit Union, a community development financial institution (its principles are similar to Grameen), and they require borrowers to file a concrete, viable business plan before taking out a loan. Self-Help's first loan was a to a non-viable business, which defaulted. If you just hand out money, you will not make a social impact.

Microcredit institutions may be more effective in the Third World. There are community development financial institutions that have viable businesses and make noticeable impacts on communities, but there are not very many (Self-Help is based in North Carolina, and Shorebank is based in Chicago and I think Detroit). The reasons aren't very clear. I speculate that one reason is because the markets in the developed world are dominated by large corporations; there isn't a huge amount of room for family businesses to enter the market. For the poor here, the solution is not to go into business. It's to get a decent job paying a living wage ... and there are no such jobs. There is definitely a need for credit unions to take the place of payday lenders, and make small loans to get people through the month at a more reasonable interest rate (some have accused payday lenders of predatory practices). But the solution here is more complicated than forcing businesses to pay living wages - they would simply outsource more jobs, and pass on the costs to the rest of us, and then we'd be back where we started.

That should in no way detract from Grameen's success. In fact, they are expanding by engaging in a telecom business. They loan phones to villagers, who in turn loan use of the phone to their neighbors. Admittedly, capitalism has many ugly flaws, but Grameen is capitalism near or at its finest.

For more info, try this article from The Motley Fool: http://www.fool.com/news/commentary/2006/commentary06101823.htm?ref=foolwatch

TMF is a financial services site that encourages investors to tell Wall Street to shove it where the sun doesn't shine, and educate themselves and invest on their own. Grameen's ethos is parallel to theirs, and they have donated to Grameen in the past. They also offer a selection of investment newsletters.