Mohammad Yunus won the Nobel Peace Prize last week for pursuing a revolutionary idea -- that the poorest of the poor can help themselves to self-employment with tiny loans.
The Nobel Committee called the idea, which has come to be known as microcredit, one tool that large populations can use to break out of poverty.
Yunus trusted that even the most impoverished people had enough drive and creativity to build small businesses, and he believed a few dollars could mean the difference between begging and self-sufficiency.
Yunus started the project in Bangladesh in 1976 with the goals of extending banking to poor people, reducing their exploitation by money lenders, and creating opportunities for self-employment. He also wanted to reverse the "age-old vicious circle of low income, low saving, and low investment." By extending a little credit as investment, even the poorest could create income, savings, and more investment.
It earned Yunus the nickname of "Banker to the Poor." His local project, called Grameen Bank -- for "village" or "rural" -- turned into an independent bank by 1983.
These days, borrowers use their loans to buy milk cows, cloth, pottery, and even cellular phones. The bank says its repayment rate is close to 99%.
Instead of asking its borrowers to offer collateral, the bank sets up enforcing social contracts that use a measure of peer pressure. Borrowers are put in groups of five, and only two can take out loans. The others become eligible for loans after the first two prove they can repay responsibly. Borrowers make small weekly installments toward repayment.
The bank even has special rules for beggars, and offers them interest-free loans. Often disabled or old, beggars are encouraged to generate some income by selling popular consumer items door to door.
Yunus said the prize will feed his long-term vision to alleviate global poverty one tiny loan at a time.
That idea, and the success of his Grameen Bank, changed the way people view the poorest of the poor and proved that people who had been ignored by banks could be responsible financial citizens. Microfinance has spread far and wide since Yunus' bank opened.
According to the Microcredit Summit Campaign, a Washington, D.C., advocacy group, more than 3,100 institutions reported reaching more than 90 million people with microloans by 2004. More than 80% of the loans went to women.
Some major institutions now participate. Banking giant Citigroup (NYSE:C) lends its banking and management knowledge to microcreditors and offers grants to microfinance institutions through its foundation.
The idea also has insurance companies investigating the possibilities of micro-insurance. According to The Wall Street Journal, companies like American International Group (NYSE:AIG) and Allianz (NYSE:AZ) are looking into tiny life and disability policies for poor people in the same microlending markets.
Yunus' bank embodies a few Foolish ideas: Trust people to make the financial decisions that will be in their best interest, and they can educate and enrich themselves. And, of course, a few dollars can make a huge difference over the long haul.
As such, it may not surprise you to learn that Grameen was a multiyear recipient of our annual Foolanthropy campaigns' support, and The Motley Fool couldn't be more pleased that a charity our own readers nominated and supported for many years has been honored in this way.
As it happens, our Foolanthropy 2006 campaign kicks off today. This is Foolanthropy's 10-year anniversary, and we're asking for your very best nominations. If you'd like to nominate Grameen, other microloan program, or any charitable organization, post to our Foolanthropy discussion board.
Fool contributor Mary Dalrymple does not own any stock mentioned in this article. She welcomes your feedback.
