This year's Nobel Peace Prize went unexpectedly to Muhammad Yunus, a Bangladeshi economist and the Grameen Bank. Yunus founded the Grameen Bank in 1974 as a lending institution that would serve people to whom banks would not lend because they were extremely poor. One of many reasons banks gave for neglecting the poor was that the poor were regarded as having no assets of value which they could put up to the banks as collateral. Yunus's Grameen Bank defied banking norms and "microlending" made credit and financial services available to the poor in Bangladesh. The award recognized Yunus and the Grameen Bank for contributing to global micro-level social and economic development.

Since then, the Grameen Bank's microlending programs have multiplied around the world and assisted millions of poor people. According to the Nobel Prize committee based in Norway, "lasting peace cannot be achieved unless large population groups find ways in which to break out of poverty." Yunus and the Grameen Bank have shown that poor people, if provided the means, are able to take charge of their own development and improve their standard of living.

Proponents of microcredit are overjoyed that Yunus, one of the most significant leaders in the industry, won the prestigious Nobel Peace Prize. However, some critics have expressed concern that microlending is not the most effective means to eradicate poverty and that the Nobel Peace Prize award to Yunus and the Grameen Bank will inflate enthusiasm for microcredit - overselling its capacity to alleviate poverty and detract attention away from other programs aimed to reduce global poverty.

The Grameen Bank's Beginning

Muhammad Yunus began his career as an economist. Yunus came to the U.S. in 1969 in order to study. He obtained his PhD in Economics from Vanderbilt University and returned to Bangladesh where he joined the Economics Department of Chittagong University as a professor. In 1974, a great famine hit Bangladesh and motivated Yunus to become involved in assisting the poor in his country. He began by lending small sums of money to women who made bamboo furniture in a village near Chittagong University who made bamboo furniture. These women used the credit to buy bamboo and were able to successfully repay the money they borrowed by selling their furniture. According to the Grameen Bank's website, Yunus then launched a research project to examine if a system could be designed to lend money to the poor on a larger scale. In 1983 the Grameen Bank Project officially became an independent bank and was called the Grameen Bank. Grameen, which means "rural" or "village" in Bangla, the language spoken in Bangladesh, designated the bank as an institution for the rural poor. Today, the rural poor who are clients of Grameen Bank own 90% of its shares. The Bangladeshi government owns the remaining 10%.

Some critics have expressed concern that microlending is not the most effective means to eradicate poverty and that the Nobel Peace Prize award to Yunus and the Grameen Bank will inflate enthusiasm for microcredit.

According to the TimesOnline based in London, the Grameen Bank has lent over $5 billion to 6.6 million people. Most of that amount that has been repaid and 96% of clients are women. The Grameen Bank's model has been replicated in over 100 countries worldwide. In Bangladesh alone, Grameen Bank provides banking services in over 72,000 villages, which covers about 86% of the total villages in Bangladesh. The Grameen Bank's website boasts that it has substantially improved the lives of the poor and that this is documented by such organizations as the World Bank, the International Food Research Policy Institute (IFPRI) and the Bangladesh Institute of Development Studies (BIDS).

Microcredit and Peace

When Yunus was asked why he received the Nobel Prize for Peace he responded that microcredit eradicates poverty and this provides real peace. Sverre Lodgaard, Director of the Norwegian Institute of International Affairs and first deputy member of the Norwegian Nobel Committee, told the BBC that the Nobel's choice for the Peace Prize was right on. He explained, "More people die each year from poverty than from war, so a fight against the violence which is perpetrated through the extreme division in our world's resources is very welcome." Elizabeth Littlefield, head of a pro micro lending think tank sponsored by the World Bank, concurred, "It is simplistic to draw a direct connection between poor people improving their lives and peace, but microfinance helps alleviate poverty, creating the pre-conditions for a more stable and democratic society." According to the Nobel Committee, "Lasting peace can not be achieved unless large population groups find ways in which to break out of poverty. Microcredit is one such means."

Since the terrorist attacks in New York City and Washington DC on September 11th, 2001 and the bombings in London that occurred in July 2005, many political leaders have suggested that poverty in the developing world may precipitate terrorist attacks on the West, namely the United States and Europe. Patricia Hewitt, the former Secretary of State for Trade and Industry of the British government, stated during an interview with the New Statesman journal in 2003, that there is a clear connection between terrorism and poverty. She warned that if the West did not do more to assist poverty suffered in developing countries then the West would "pay a price in increased terrorism and increased insecurity all around the world."

According to the Nobel Committee, "Lasting peace can not be achieved unless large population groups find ways in which to break out of poverty. Microcredit is one such means".

On the first day of the 2005 G8 Summit, an annual political meeting between the heads of state of eight of the most politically and economically powerful countries in the world (Canada, France, Germany, Italy, Japan, Russia, the U.K. and the U.S.), a series of explosions struck the London underground transportation system. In the aftermath, British Prime Minister Tony Blair alluded to the connection between poverty and terrorism and stated that the G8 commitment to improving the destitution suffered in developing countries was an act of defiance against terrorism.

Not Everyone Is Convinced

Some scholars, however, question the extent to which microcredit can significantly reduce poverty let alone contribute to world peace. They argue that microcredit helps poor people to cope with living in poverty rather than helping to lift them out of it. According to the economic journalist, Gina Neff, "After eight years of borrowing, 55% of Grameen households still aren't able to meet their basic nutritional needs - so many women are using their loans to buy food rather than invest in business." This was also the case in Niger where I worked with a microlending project. I observed the difficulty women had repaying their loans. They were in a state of such extreme poverty that many could not afford to invest the loan and instead used it as cash to purchase food and medicine. Once we realized this, we began providing free health and nutrition education to reduce incidences of malnutrition and diarrhea. Women were able to improve their children's health and did not use the loans as often to pay for medicine. As a result a slight difference in loan repayment rates began to show. For much of the developing world, however, where debilitating illnesses prevent people from using their loans to generate income, either because they need the cash to pay for treatment or because they are too ill to work, the extent to which microcredit can help is limited. This is especially true in Sub-Saharan Africa, for example, where 300 to 500 million people suffer from malaria.

Why Is Microcredit So Popular?

In spite of criticism and concerns over whether or not microcredit is an effective means to eliminate poverty, support for microcredit has grown significantly in the last decade. World leaders, international institutions and high profile celebrities like Hilary Clinton and Jennifer Lopez have publicly endorsed microcredit. The United Nations even named 2005 the "International Year of Microcredit" and sponsored a multitude of global events to help microcredit gain attention and support. This has also coincided with an ideological shift in development programs and policy. In the United States support has moved toward programs that emphasize self-help rather than dependency on government. Microcredit has been sold worldwide as a "free-market" kind of development approach. This rests well with those who believe market-based approaches to development are superior to state-based initiatives in which the state becomes responsible for providing economic opportunities and social services.

The End of Poverty, a Long Journey Ahead

Yunus has championed microcredit as "free-market" development that empowers the poor by encouraging and enabling them to participate and grow their own economies. By "free market," Yunus means one in which even the poor can participate. However, this is a misleading statement because it fails to address the other factors that contribute to global impoverishment besides a lack of access to financial services. First, microcredit is relatively insignificant when it comes to the billions spent each year by the U.S. and Europe to subsidize domestic agriculture and other industries. Protective trade barriers like subsidies, quotas and tariffs imposed by rich countries make certain that domestic producers dominate the global market. A microloan will do nothing to enable a small sugar farmer in Mozambique, for example, to compete with the heavily subsidized sugar beet industry in Europe.

In spite of criticism and concerns over whether or not microcredit is an effective means to eliminate poverty, support for microcredit has grown significantly in the last decade.

Microcredit should not be oversold. Poor people in many parts of the world need more than small loans and it will take more than microcredit to lift these people to an acceptable and humane standard of living. It seems logical that financial services should be made available to the poor if it can help alleviate the poverty they suffer, however, it is also important to be mindful that microcredit is not a panacea and has its limitations. For example, where there are highly vulnerable groups of people because of humanitarian crises like the 2004 tsunami that struck countries in southeast and south Asia or in parts of Sub-Saharan Africa where there are high rates of disease like malaria, tuberculosis or HIV/ AIDS, microcredit may not be the best means of assistance. In these instances microcredit can even exacerbate the situation by placing additional burdens of debt on groups who are already struggling to survive.

The Nobel committee's choice for this year's peace prize should not mean that other means of assistance that are equally if not more effective than microcredit are ignored. Studies conducted by the World Bank and the Philippine Development Institute, suggest that investment in infrastructure like roads and bridges and agrarian land reform were as good and sometimes even better at lifting people out of poverty than microcredit. John Tierney of the New York Times wrote that Wal-Mart has done more for the poor than microcredit. Tierney refers to a study conducted in 10 Asian and Latin American countries that found that the average apparel worker in Honduras, for example, makes about $13 per day, significantly more than the average microentrepreneur.

Despite some criticism, microcredit has made a difference. It has brought unprecedented global attention to the issue of poverty and access to financial services around the world. Yunus's work with the Grameen Bank is also significant because it has illustrated the industriousness and persistence of the poor and that given the means, the poor for the most part are able to improve their livelihoods. Microcredit initiatives should continue, however, resources that support other types of development programs should not be diverted or sacrificed to support microcredit programs.

Hopefully this year's Nobel Peace Prize celebrating microcredit will not inflate expectations of microcredit's capacity to reduce global poverty. The trade barriers imposed by rich countries also play a key role. Microcredit should not divert attention away from this issue and allow rich countries to avoid having to address the subsidies, tariffs and quotas they use to protect domestic industries and which penalize poor countries. More than microcredit has to happen if the world is serious about eradicating poverty. Christina Barrineau, Chief Technical Advisor to the International Year of Microcredit 2005, said, "Poverty eradication is not a simple, linear process. And microfinance is not a simple solution. It is a long-term proposition and only a component of poverty eradication."

Links:

1. 2006. "Credit to microcredit: An imaginative Nobel Peace Prize that defies the past [online]." Financial Times. London (UK). 14 Oct. pg. 10. Available from Proquest. ID 1146580671 (subscription required).
   
   
2. BBC.co.uk, 2005. "G8 leaders agree $50bn aid boost." BBC. 8 July. Available from: BBC News.
   
   
3. Cimagala, Roy, Fr., 2006. "Commentary." BusinessWorld. Manila. 18 Oct. pg. 1. Available from Proquest. ID 1146580671 (subscription required).
   
   
4. FT.com, 2006. "Full text of Nobel Peace Prize citation [online]." Financial Times. London. 1 Oct. pg. 1. Available from: Available from: Financial Times.
   
   
5. Gooneratne, Ayesha, 2006. "Spreading the Gospel of Microcredit [online]." Inter Press Service News Agency. 11 November. Available from: Inter Press Service News Agency.
   
   
6. Grameen Bank, "A Short History of Grameen Bank [online]." Available from: Grameen Bank.
   
   
7. Hossain, Farhad, 2002. "Small loans, big claims." Foreign Policy. Washington: Sep/Oct., Iss. 132, pg. 79, 3 pgs. Available from Proquest. ID 160010861 (subscription required).
   
   
8. Kampfner, John, 2003. "Terrorism: The price we pay for poverty [online]." New Statesman. London. 3 Feb. Vol. 16, Iss. 742. pg. 20, 2 pgs. Available from Proquest. ID 283920581 (subscription required).
   
   
9. Meo, Nick, 2006. "Follow me and beat poverty, Nobel winner tells West [online]." The Times. London.14 October. Available from: The Times.
   
   
10. Tranovich, Anja, 2006. "The Hope and Hype of Microcredit [online]." Inter Press Service News Agency. 10 August. Available from: Inter Press News Agency.
    
    
11. Talbott, Strobe, 2001. "The other evil." Foreign Policy. Washington: Nov/Dec., Iss. 127, pg. 75, 2 pgs. Available from Proquest. ID 86972336 (subscription required).
    
    
12. UN Capital Development Fund, 2006. Information about the UN International Year of Microcredit can be found at International Year of Microcredit.

Contributed by Cory McCruden, a Rotary World Peace Fellow and writer for Global Envision.

To read definitions related to microfinance see, Defining Microfinance.



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