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Bringng financial peace

The first-ever Nobel Peace Prize awarded to an economist recognizes a 30-year success story underwriting small businesses among the poor

Bringng financial peace

This year's Nobel Peace Prize went to a rare breed among recipients: an economist. Muhammad Yunus and his Grameen Bank of Bangladesh scooped the award last week with a poverty-easing idea he pioneered 30 years ago. Microcredit spawned a global movement that has reached 92 million, most of them women. Here's a brief look at microcredit and its impact.

What is microcredit?

Microcredit is a system of giving small loans to the very poor who have no collateral, credit history, or other means to qualify for credit from regular banks. The loans, often less than $100, allow borrowers to start businesses and support themselves and their families. The borrowers form a group where each member guarantees the others' loans. Because they are responsible for one another's success, repayment rates are usually high.

Yunus came up with the idea when he visited Jobra village during Bangladesh's crushing 1974 famine. He met a woman weaving bamboo stools and struggling to survive. She needed money for materials, but no traditional bank would lend to her, so she turned to loan sharks who charged exorbitant interest rates that gobbled her earnings.

Yunus lent her and her neighbors about $27 and was surprised to be paid back in full. He began lending in other villages. In 1983 he founded Grameen Bank. Today the bank has earned $5.7 billion and shot Yunus to fame, as well as spurred other commercial banks to imitate its success.

Why is microcredit important?

It allows the poor to become self-sufficient, rather than dependent on handouts and aid projects. Since most workers in poor countries are self-employed but lack assets for collateral, donors and development groups quickly latched onto the idea. It bypasses the shortcomings of countries where legal systems are inept and acquiring either assets or credit history are pointless because no one is recording them.

Who benefits from microcredit?

Women. According to the Microcredit Summit, they make up more than 80 percent of loan recipients. Women around the world are often their family's main caretakers, whether they sell shoes, raise cattle, or weave baskets. Since their concern is feeding, clothing, and educating their families, they are also a good risk for lenders.

A typical success story might run like this one from Rwanda: Marie-Claire Ayurwanda's husband died in the 1994 genocide, leaving her with four children to raise, including two from her brother. According to the Grameen Foundation, she used a $40 loan to start a restaurant, then later buy a phone for customers to use. Now the profits help keep her children in school.

What are the drawbacks?

Microcredit tends to miss the extremely poor, and it is only one tool to ease poverty. The Microcredit Summit Campaign reports the movement has missed those earning less than $1 a day. Since interest from loans is supposed to cover costs and keep a lender self-sustaining, there are pressures to find more borrowers and increase loan size, which reduces the average cost per dollar lent. The very poor generally only want tiny loans-as little as $2-and they would rather have a safe place to save their money. Since a large expense such as a funeral or illness may put many poor families in crisis, they would prefer not to take on debt.

Priya Abraham

Priya Abraham

Priya is a former WORLD reporter.