This year’s Nobel Peace Prize was won by Muhammad Yunus, an economist from Bangladesh, along with the bank he founded, the Grameen Bank. Yunus’s great idea was something known as ‘microcredit’, an idea that has pulled thousands of people out of poverty. Microcredit itself is an interesting concept, helpful in learning about poverty and how a modern capitalist society works.

To understand microcredit you first have to understand how people make money. Money is made by selling something you possess, a skill, labour, agricultural produce from your land, or even a good idea. But you cannot always sell something immediately; your skills may not always be needed, or crops may take some time to grow, or your good idea may need to be developed further. If you want to start a factory, you first need to buy machinery to use in the factory. If you want to set up a shop, you first need to stock your shop full of things so that people have something to buy.

So how do you start?

If you’re well-off, you’ll probably have some money saved up that can be used to buy the things needed to start a business. Or you could borrow money from your parents, relatives, friends or neighbours. They will lend you money with the expectation that when you finally make money you will be able to pay them back, maybe with a little profit added. 

Yet another way to get money to start a business is to borrow from the bank. Banks lend money on condition that the money is returned with a little something added to it called interest. A person has to prove that she/he is capable of paying back the loan, or that they have something valuable that the bank can take and sell if they don’t pay back the bank. This something valuable is called collateral. Banks are businesses and they expect to make money. If someone doesn’t have collateral they can’t borrow money from the bank to start or expand their business. 

Notice that all these ways of borrowing money imply that you need to have something before you can start a business, even if it is just a reputation. But what happens if you have a great idea to make some money to support yourself and your family, have lots of skills, and are willing to work really hard to turn the idea into reality… but are very poor?

This is where microcredit, Dr Yunus’s great idea, comes in.
 
Microcredit is just that: micro and credit. It is the giving of very small, in fact tiny, loans to very poor people so they can start their own businesses. What microcredit organisations do is that by giving poor people small loans, they started the ball rolling. Another way of putting it is that microcredit allows people living in poverty to climb on to the first rung of the business ladder. Keep in mind that this is not charity. It is giving poor people money so they can start a business, make more money than they borrowed and then pay back the loan. It’s a business. And that means that microcredit banks too have to make money by ensuring that loans are paid back, with interest. That way they can afford to give out more loans and also pay their staff salaries.

What the big banks missed out on was that extremely poor people work just as hard as anybody else, have just as good business sense as anyone else, and want to be as successful as they can. They also pay back their loans once their newly-formed business takes off, just like everybody else. All they need is a little push. Microcredit successfully enables extremely impoverished people to become self-employed and start little businesses that allow them to generate a regular income and break out of the poverty trap. With the help of loans, poor people become ‘entrepreneurs’, people who have the ideas and talent to start their own businesses.

Muhammad Yunus founded the Grameen Bank in 1976 to offer small loans to the poorest people in Bangladesh. The story goes that while he was a young economics professor at Chittagong University in Bangladesh he lent some money to some poor craftsmen. He also served as guarantee to bigger banks when these craftsmen decided they needed a bigger loan. This convinced him that poor people were bankable. Since then the Grameen Bank has issued over $ 5 billion in loans to several million borrowers. Because there is no collateral, Grameen Bank designed a system of ‘solidarity groups’ -- small informal groups made up of people in a village who have taken loans from them. These solidarity groups help conduct business with representatives of the Bank, and support each other’s efforts at economic self-advancement. It also puts social pressure on people to pay back their loans.

Many, if not all, microcredit loans are given to women. This is because, firstly, women are much more likely than men to repay loans. And secondly, loans to women tend be useful for the entire family compared to loans given to men. Also, giving loans to women increases the social position of women, which is low in society in general but even lower in poor communities. Today, 96% of Grameen’s borrowers are women.

Since it first started, the idea of microcredit has moved on to what is called ‘microfinance’, providing complete bank services to poor people including savings and various types of small insurance. Most important, the success of Grameen Bank has helped start similar microcredit banks all over the developing world.

When the Nobel Committee gave the Nobel Peace Prize to Dr Muhammad Yunus and Grameen Bank it made the link between poverty and peace. “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.”

-- Manoj Nadkarni