Nobel laureate touts microcredit, but how does it work?
by Justin Cole Tue Nov 14, 5:38 PM ET

HALIFAX, Canada (AFP) - Few people had heard of microcredit before a determined Bangladeshi economist called Muhammad Yunus won this year's Nobel Peace Prize, but Yunus has put the industry in the spotlight as a potential poverty-busting tool.

But what is microcredit, or microfinance as it is known in the banking community, and how does it work?

Yunus, 66, believes it is one of the most effective tools for alleviating dire poverty, and he has been the star guest of the 2006 Global Microcredit Summit being held here this week.

About 2,000 microcredit pioneers and practitioners from around the world have travelled to this Canadian city to swap ideas and exchange experiences.

Microcredit is essentially a tiny loan that is granted to a poor person without collateral on the basis that they will use it to expand a small business, such as a food stall or clothes-mending enterprise.

Loan sizes vary, but the average loan issued by Grameen Bank, which was founded by Yunus in 1983, is 100 dollars.

Hundreds of small microcredit institutions or credit unions have sprung up around the world in Grameen's wake, issuing loans as small as a couple of dollars up to 1,000 dollars.

Yunus believes microloans can help destitute people, commonly defined as those living on under one dollar a day, to break the poverty barrier.

Grameen, which means village, targets most of its loans at women as it believes they are most responsible for running a family's finances.

Yunus concedes, however, that the loans are not a magic bullet, and should be coupled with better education and healthcare.

Al-Jawhara Al-Wabili, chairwoman of the Saudi Society For Human Rights, has overseen a small microcredit program in Saudi Arabia for six years that works solely with women.

"This work has been very successful. Many of the women have come back to get new loans. The average loan is around 3,000 Saudi rials (about 800 US dollars)," she said.

Her clients, who have grown from 30 to 300 women, use the money to build businesses selling sweets, beverage, eggs or tailoring.

Lennart Bage, the president of the UN's International Fund for Agricultural Development, stressed that such enterprises are small scale.

But he said "if you multiply it by hundreds of millions of people you get tremendous bottom-up expansion of the economy, and most importantly increase the incomes and create a better standard of living."

Grameen Bank is unusual in that it is entirely self-sufficient, while many other microcredit groups receive charitable grants or official donations.

Yunus claims that almost 99 percent of Grameen's lenders repay their loans. The bank has issued 5.7 billion dollars in loans.

Some critics point out that the interest rates charged by microcredit lenders can be high, with Grameen's reaching up to 20 percent.

However, proponents say they are lending to often-illiterate people with no credit histories, and scant if any savings, who would be turned away by conventional banks.

One of the key hurdles facing the sector is that it is not easy to set up a microcredit lender in many countries, because of restrictive banking regulations.

"It may sound easy, but it's a big challenge in many countries," Bage said.

Some governments, however, are promising to improve the regulatory terrain for microcredit groups.

"Governments in developing countries must demonstrate a strong political commitment towards supporting microfinance as an integral tool of poverty alleviation programs," Pakistani Prime Minister Shaukat Aziz told delegates on Sunda