Rarely are banks or economists considered to be in the pantheon of great humanitarians. Money, after all, is said to be the root of all evil. Yet that sentiment is a luxury only the rich can afford. To the billions of people who live in abject poverty, money is the only source of hope — which is why the Nobel Peace Prize for 2006 is to be awarded to the founder of the microcredit movement, which puts money into the hands of the poor.

Muhammad Yunus and the lending institution he created in his native Bangladesh in 1976, Grameen Bank, have been named winners of this year’s prize for their efforts to nurture economic development at the grassroots level. The bank pioneered the use of microcredit — providing small loans, without requiring collateral, to foster entrepreneurship among the rural poor.

For people without access to credit, this opportunity can be invaluable. It gives them the ability to take a subsistence-level venture and enable it to grow and earn a return. The financing allows them to expand production and get a better bargain on raw materials. In providing this break, as the Nobel committee notes, Yunus and Grameen have shown that even the world’s poorest citizens can work toward and achieve their own development.

Speaking to the Nobel Foun-dation upon receiving news that he had won the prize, Yunus stressed that poverty is not a natural, inevitable phenomenon. He insists it is an artificial creation that can be eradicated. “It doesn’t belong to human civilization, and we can change that. We can make people come out of poverty,” Yunus says.

“People can change their own lives, provided they have the right kind of institutional support,” Yunus adds. “They’re not asking for charity; charity is no solution to poverty.” The solution, he suggets, is to ensure that people have opportunities: “That’s all we are doing. We didn’t do anything special; all we did was we lent it to the poor people, and that makes the trick. That makes the change.”

Indeed, the Grameen model is not charity. The bank provides loans that must be repaid. Traditional financial institutions don’t want this business because the borrowers don’t have any credit history or collateral. Grameen cleverly gets around this obstacle by relying on peer pressure rather than requiring physical assets to back up the loan. Borrowers are organized in groups of five, and the availability of future funding for every member of the group is contingent upon the initial loan being repaid. The method has proven very successful in getting the poor not only to take loans but to pay them back — vaulting them from the vicious cycle created by poverty into a virtuous cycle of investment, work and reward.

Repaying the loans is also important because it means the initiative isn’t a one-time thing; it is sustainable. As a result, the microcredit movement has expanded far beyond Yunus’s initial efforts to help millions of the world’s poor.

Indeed, microcredit has become widely accepted as an effective development strategy. The Economic and Social Council of the United Nations proclaimed 2005 as the International Year of Microcredit, to promote awareness of microcredit and microfinance (the provision of other financial services, such as savings and insurance, to the world’s poor). According to the Microcredit Summit Campaign Report for 2005, as of Dec. 31, 2004, microcredit institutions have served 92.3 million people.

Not only has the development of microcredit opened opportunities for the world’s poor, it has leveraged the beneficial effects by focusing on improving the lives of women, who often have no economic mobility or status in very poor societies. According to Grameen Bank’s latest numbers, 97% of the 6.6 million borrowers are women. Similarly, the Microcredit Summit Report notes that 83.5% of the poorest microcredit borrowers are women.

“Microcredit has proved to be an important liberating force in societies in which women in particular have to struggle against repressive social and economic conditions,” the Nobel committee observes. “Economic growth and political democracy can not achieve their full potential unless the female half of humanity participates on an equal footing with the male.”

The availability of financial services is critical to realizing many of these lofty goals. In an interview with the World Bank after it was announced Yunus had won the Nobel, Syed Hashemi, a senior microfinance specialist at the Consultative Group to Assist the Poor (a consortium of development agencies), explains: “It’s no secret that small loans to poor people, especially women, can support microenterprises, helping families boost their incomes. But poverty is about much more than the lack of money; it’s multidimensional. Over the long run, access to finance — loans, but also savings and money transfer services — has been shown to contribute to better nutrition, education, housing and other essentials.

@page_break@“The Nobel really underscores that microfinance is no longer a niche development field, but has become part of the financial mainstream,” Hashemi adds. “The original Grameen business model — group lending, and mostly to women — has been adapted and developed by thousands of microfinance institutions from Latin America to Africa to East Asia and beyond.”

Despite the industry’s incredible successes, it has had its share of problems, too. For one, according to the CGAP, the very poorest often don’t have access to microcredit because, while the loans these programs provide aren’t collateralized, they are expected to be repaid. So, they usually appeal to those that already have some form of income.

“If a woman has no reliable income source, she may feel that obligating herself to make a regular weekly or monthly payment will make her more vulnerable rather than less. Although her investment of the loan proceeds in a new microbusiness may raise and stabilize her income, this investment is a risky proposition, given that a large percentage of microbusiness start-ups fail,” it notes.

According to the CGAP, three billion people still lack access to any sort of financial services. It wants to see more mainstream financial institutions get involved in the business of offering microfinance.

“We want those in the financial mainstream to realize what Professor Yunus proved to the world three decades ago: that poor people are just as reliable as the better-off when it comes to repaying loans, saving money and making use of basic services such as money transfers,” says CGAP CEO Elizabeth Littlefield.

Indeed, more mainstream financial institutions are catching on. U.S. banking giant Citigroup Inc. has long been a participant in the microcredit industry. And this year, the Microcredit Summit is coming to Halifax in mid-November, with Citigroup, Royal Bank of Canada, Bank of Nova Scotia and ING among the conference’s sponsors. (Notably, Yunus is scheduled to attend the conference, too.)

Yet, as traditional financial firms get more involved with microcredit, they are altering it. At a recent conference hosted by the Wharton School of the University of Pennsylvania, it was reported that institutional lending in the Third World has grown tremendously in recent years, but, in the process, it has changed. More firms are providing credit, but their need for profit pushes them away from lending to the very poorest part of the population and toward people with the ability to ante up collateral.

There are also systemic issues — such as weak legal systems and a lack of property rights — preventing the growth of financial services in the Third World. The World Bank, for example, ranks Bangladesh 174th out of 175 countries in its ability to enforce contracts, and 167th in registering property.

In a report published earlier this year, Mehnaz Safavian, an economist with the World Bank, argues that access to credit is impaired by legal systems that don’t recognize forms of collateral other than land or buildings. By expanding the list of what can serve as collateral, clarifying creditor priority and enforcing contracts, countries can promote easier access to financial services, it suggests.

As well, the CGAP points out, microcredit interest rates remain stubbornly high, despite the appearance of competition in this area. For example, it reports that interest rates remain at about 15% in Bangladesh — and this is charged on the original principal for the life of the loan, which, the CGAP says, works out to about 29% on an annual basis (Grammen’s rate is 10%, or about 19% on an annual basis).

These rates haven’t responded to competition, the CGAP suggests, because the loan providers haven’t had the scale to afford price competition, nor has there been much demand for it. Borrowers may value things other than price, such as credit availability, service and product flexibility. They also often don’t know any better — they don’t have access to competitive price information nor the sophistication to seek it out.

To foster a more competitive price environment for microcredit, the CGAP recommends the sorts of policies familiar to advocates for Canadian financial consumers: improving financial literacy; requiring transparent, comparable pricing; and collecting market information.

There are lessons in the microcredit movement for Canada, too. Indeed, the same principle employed by Yunus and Grameen is at work here. Vancity Credit Union, for example, offers a peer lending program that allows entrepreneurs with no collateral or credit history to get loans starting at $1,000 for terms of three to 24 months, at prime plus 3%, by organizing themselves in small groups. All members of the group guarantee the loans. Vancity also offers a term deposit that is invested in microcredit projects worldwide.

What does money-lending have to do with world peace? According to the Nobel committee, “Lasting peace cannot be achieved unless large population groups find ways in which to break out of poverty. Microcredit is one such means.”

“It’s important not to think of microfinance as the ‘magic bullet’ when it comes to poverty alleviation,” Hashemi stresses. “It’s one of many strategies. But it can lead to empowerment and social stability, as the Nobel committee has acknowledged.”

It’s going to take more than microcredit to save the world. But a clever, determined economist and some financial innovation can do a lot of good in the meantime. IE