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CREDIT PRIZE - An example for bankers to follow. From micro-lending to social entrepreneurship, always putting the people first.

Muhammad Yunus, the recipient of the Nobel Peace Prize, became famous for creating microcredit, a system of small-scale lending that reaches borrowers considered too small or risky by conventional lenders.

The Grameen Bank, which Mr Yunus founded in Bangladesh in 1976, lends tiny amounts - typically $200 or less, to borrowers, usually women, wanting to start or support a small business. It overcomes the usual drawback to small-scale lending, the lack of collateral and costs of monitoring, by creating peer groups of lenders who watch each other’s borrowing and can help out if a member gets into difficulties.

The idea has since spread to many developing countries, and a version of the bank was set up in Arkansas when Bill Clinton, later president of the US, was governor of the state. The microfinance institutions that operate such services have now expanded beyond the original microcredit function to include other small-scale financial services such as insurance and savings.

Interest rates on loans charged by microfinance institutions are high compared with conventional lending, typically 15-35 per cent, but bring loans to borrowers who previously had no access to lending at all at any price, or were being charged interest rates of 100 per cent or more by traditional rural moneylenders. Microcredit loans have a payback rate of more than 98 per cent.

Though the idea has been praised by both development campaigners and free-marketeers as a way of harnessing the power of the market, the amount of money has remained small compared with conventional lending, and attempts by commercial banks to enter the microcredit market have had mixed success.

In recent years Mr Yunus has proposed the more ambitious and wide-ranging concept of “social entrepreneurship” - that not-for-profit organisations can compete directly with and undercut traditional businesses while attracting investors content to gain little or no return on their capital because of the social value of such operations.

ID: 38766
Author(s): iff
Publication date: 13/10/06

Created: 19/10/06. Last changed: 19/10/06.
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