What the Nobel Means for Microcredit
On Friday, Oct. 13, Grameen Bank of Bangladesh and its founder, Dr. Muhammad Yunus, were awarded the Nobel Peace Prize for helping to establish the microcredit movement, which involves the granting of small loans to poor people with no collateral, across the developing world (see BusinessWeek.com, 12/26/2005, "Nobel Winner Yunus: Microcredit Missionary"). The Norwegian Nobel Committee's statement said it awarded the prize of $1.4 million to Yunus and the bank "for their efforts to create economic and social benefit from below." The statement continued, "Lasting peace cannot be achieved unless large population groups find ways in which to break out of poverty."
Still, when you think of the benefits of small loans, achieving peace and stability isn't the first idea that springs to mind. But it is exactly what Yunus, 66, is aiming for. While he may not be brokering treaties, he's actually promoting peace by uprooting one of the root causes of conflict: poverty. At the same time, he's demonstrating how effective entrepreneurialism can be.
Since its founding in 1983, for-profit Grameen Bank has lent more than $5.7 billion to over 6.1 million borrowers, 97% of whom are poor women, to help them establish small businesses and become self-sufficient. The default rate has been around 1%. An estimated 100 million people, including about 70 million people who were living at a dollar a day or less at the time of their first loan, are expected to participate in the movement by the end of this year, according to the Microcredit Summit Campaign, a group of supporters that in 1997 set the goal of reaching 100 million of the poorest families with microcredit by the end of 2005.
The Nobel Committee has a history of awarding the Peace Prize to individuals and organizations that promote economic development. The 2004 award went to Wangari Muta Maathai of Kenya, who worked to bring income to people in Kenya through the planting of trees, while raising awareness about women's rights and the environment across Africa.
"I've always felt that the greatest threat to world peace was the global poverty crisis—seeing the competition for resources and how it leads to tension and violence," says Alex Counts, the president of Grameen Foundation (http://www.gfusa.org), a U.S.-based organization that works to replicate and adapt the Grameen Bank model around the world. "I really feel that the Nobel committee is right to view peace in a broad and not narrow sense," he says.
Tech heavyweights Vinod Khosla and Pierre Omidyar are already on board. Khosla, the veteran entrepreneur and venture capitalist, supports six microfinance institutions worldwide (see BusinessWeek.com, 10/4/2006, "Vinod Khosla Talks Shop"), and Omidyar, founder of eBay (EBAY), has given $100 million to start a microfinance fund at Tufts University (see BusinessWeek.com, 11/4/2005, "Tiny Investments, Big Changes").
"Professor Yunus is inspiring on so many levels," Omidyar says. "His work in microfinance has opened the door to a new perspective on business as a force for social good. As he points out, the poor are extremely entrepreneurial as a matter of survival. A microloan is a tremendous tool in the hands of the poor and economic self-empowerment can create a permanent path out of poverty. My hope is that his Nobel Peace Prize will draw more private capital to microfinance so that we can scale the sector effectively and make poverty history." The Gates Foundation recently declared microcredit to be one of its major objectives as well (see BusinessWeek.com, 5/2/06, "Microfinance: Services the Poor Can Bank On").
The microcredit movement, which started in the 1970s, has spread to every country in the developing world, but recent growth has catapulted it to the forefront of public consciousness. "The movement has hit its stride, especially in the last couple of years. [There are] a whole host of new players that are moving incredibly fast—it's not just an isolated thing in one or two places, especially relative to the lack of progress in other poverty eradication efforts," says Vikram Akula, founder and CEO of an India-based microfinance institution, SKS Microfinance, that adds about 30,000 borrowers a month and now serves about 350,000 total. "You cannot have world peace when there are 2 billion people living in abject poverty. The award to Yunus sends a message that economic development is a critical component of creating world peace," adds Akula.
But Yunus' approach to tackling poverty has been broader than just granting loans, and Grameen now has about 10 offshoots, in businesses ranging from solar power to cellular technology to health care. On Nov. 7, Grameen plans to launch a partnership with France's Groupe Danone (DA) to bring yogurt-making facilities to rural Bangladesh. Yunus calls these kind of partnerships "non-loss companies," since they're not being used to maximize profit but to provide sustainable solutions to some very tough problems in the developing world.
As the movement goes mainstream, more and more corporate players are getting involved. In the past two years, Citigroup (C) has scaled up its microcredit support and services devoted to guaranteeing loans, supporting technology improvements, and spreading the word among other banks. "There is a real high-performance story around microfinance and groups like Grameen in social and financial input. Our role is to help communicate that to a wider group of financial institutions," says Bob Annibale, the global director of microfinance at Citigroup. And Deutsche Bank (DB) has developed an $80 million fund that invests pension and institutional investors' funds in microfinance, with a small rate of return.
AIG (AIG), the multinational insurance and financial company, recently invested $5.25 million in a three-year partnership with ACCION International, a global microfinance organization based in Boston, to develop and deliver innovative financial products like financial literacy and, eventually, insurance, remittances, and other products. "We've been following the industry for some time," says Ned Cloonan, AIG's vice-president for international and corporate affairs. "We were always looking for the right time to do more. We're calling the investment 'beyond credit' because we feel that the industry is ready for the introduction of additional products and services that go beyond straight lending, and we want to play a role in developing that capacity," says Cloonan.
The award will raise the profile of microcredit organizations working in the U.S. and abroad, as more and more capital is directed toward banking for the poor (see BusinessWeek.com, 9/20/2006, "$50M Microfinance Pledge Is Largest Ever"). "The whole industry is growing and the Nobel Prize gives it more of a global stature of acceptability, that there is something about microfinance that is fundamentally right," says Asad Mahmood, director for social investment funds at Deutsche Bank.