Can the Grameen experience work in Africa? Can Africa learn from the revolutionary micro-finance solutions pioneered by the Grameen Bank experience in Bangladesh? The bank's founder and the bank itself were awarded the 2006 Nobel Peace Prize. Neil Ford discusses the philosophy behind the system.

The decision to award the 2006 Nobel Peace Prize to Muhammad Yunus and the Grameen Bank in Bangladesh has underlined the potential of micro-finance in developing countries. Micro-finance banks have been set up in most African countries over the past decade but the sheer scale of the Grameen operations is staggering. Providing individuals or very small businesses with access to what are often very small sums of money may seem like a marginal contribution to economic growth but it can widen a nation's economic base and promote the kind of growth that leads to real increases in living standards.

All too often, jumbo infrastructural projects are still portrayed as the key to economic development. Giant dam schemes, large thermal power plants and new port developments all have their place in the grand scheme of things, but they are of little use without a vast network of water pipelines, transmission lines, and road and rail links to transport goods to and from the port.

In the same way, the construction of a new aluminium plant or opening of a new copper mine can make a contribution to economic growth but every strong, well balanced economy is based upon thousands of very small businesses that form the underbelly of a nation's social and economic life.

It is often overlooked that large and medium sized businesses make a smaller contribution to GDP than small businesses in many western economies. This is not the case in most African states, despite the fact that over 90% of African workers are employed by very small scale enterprises, largely because most do not pay income tax and their economic endeavours are rarely included in GDP calculations. It is therefore easy to ignore their contribution to national life.

However, turning a small fruit stall or cleaning operation into a larger enterprise is perhaps more difficult in sub-Saharan Africa than almost anywhere else on Earth. Sole traders or partnerships have virtually no access to credit and often have little money left over to reinvest in their businesses.

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Much has been written in recent years about promoting small and medium sized enterprises (SMEs) but the deep roots of any economy lie in even smaller businesses and this is where micro-finance can play a role.

Small sums, big impact

The sums involved may be very small but can make a massive difference to a small trader. Moreover, replicated many times over in a district, province, nation or continent, they can genuinely help to revolutionise economic prospects.

Properly targeted micro-lending can also help to overcome cultural difficulties, such as the lack of access to credit for women, or some social and ethnic groups, in many societies. Africa can therefore learn a great deal from Muhammad Yunus' success in promoting micro-finance.

While working as professor of economics at Chittagong University in Bangladesh, Yunus realised that most poor people in his country only had access to finance at very high rates of interest, because of their lack of collateral.

In addition, most banks were only prepared to offer substantial loans, often far higher sums than people needed. Perhaps appropriately, his Grameen, or village, banking system started very modestly. During a famine in 1976, he lent a grand total of $27 to 42 women in the village of Jobra. Repayment rates were relatively high, interest rates low and the system was able to grow quickly.

Grameen Bank has now provided credit to over 7m people, 97% of them women. Most loans are very small and rarely exceed $100. In Bangladesh, the bank usually operates in local temples or village halls. Loans are often used to improve irrigation or to buy new tools to improve efficiency.

Yunus said that he developed his micro-finance system to turn a "vicious circle of low income, low saving and low investment" into "a virtuous circle of low income, injection of credit, investment, more income, more savings, more investment, more income".

The bank itself is mainly owned by its customers, although the government has taken a 10% stake. Yunus says: "You have to have those financial facilities coming to them because it is totally unfair to deny half the population of the world financial services."

The chairman of the Nobel committee, Ole Danbolt Mjoes, said that Yunus and Grameen Bank had been chosen because of "their efforts to create economic and social development from below. Development such as this is useful in human rights and democracy."

As part of the Nobel Prize, Yunus was awarded 10m Swedish krona ($1.35m), which will be used to find new ways of helping poor people set up their own businesses.

He responded: "I'm very very happy. It's a great honour for us and for Bangladesh. It's a recognition of our work. As a Bangladeshi, I'm proud that we have given something to the world. Our work has now been recognised by the whole world. It's recognition of our movement to ensure the rights of the poor. With this recognition, we expect that the model we have developed will spread across the world."

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The South African experience

Although micro-finance banks have been set up in Africa, far greater access to credit needs to be provided. Gross domestic savings in sub-Saharan Africa averaged about 8% of GDP during the 1980s, compared with 25-35% in Southeast Asia at the same time. Indeed, most studies conclude that the rate of saving in Africa has fallen over the past 30 years. While other factors have undoubtedly played a role in the region's generally poor economic performance, the lack of development in the financial sector, including low savings rates and very restricted access to credit, are surely among the more significant influences.

Micro-finance institutions are more active in South Africa than in almost any other country in the region. Both the government and non-governmental organisations are committed to improving living standards among poor people, particularly in rural areas, in order to overcome the nation's historic social and ethnic imbalances.

South Africa's highly developed established banks have also been encouraged to become involved in micro-finance initiatives and so new micro-finance banks have been able to provide far more funding to more people than their counterparts in the rest of the continent. More than 8m South Africans have now received $3.6bn in loans from micro-finance banks.

However, even here much more needs to be done. Many argue that the established banks still only lend money to people with employment, or their own home, or both. In such cases, they are far removed from Grameen Bank and there is still a place for micro-finance institutions in the country.

Hennie Ferriera, the chief executive of Micro Finance South Africa, which is based in Pretoria, argues: "You still find loan sharks in the townships. They charge ridiculous rates like 100% a week, but a lot is being done to address it." Most small loans in South Africa are still taken out for the purchase of food and alcohol, rather than to secure investment.

Nevertheless, the country's largest banks are making some effort to provide services to the 16.5m adult South Africans, around half the adult population, without bank accounts in the country. The Mzansi system was set up last year to provide basic banking services to such people. It is estimated that 500,000 Mzansi accounts were opened within 12 months of the new accounts being offered. Once customers have held bank accounts for some time, their financial track record can be used to help them to secure access to credit.

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The Norwegian Nobel Committee's statement

"The Norwegian Nobel Committee has decided to award the Nobel Peace Prize for 2006, divided into two equal parts, to Muhammad Yunus and Grameen Bank for their efforts to create economic and social development from below. Lasting peace cannot be achieved unless large population groups find ways in which to break out of poverty. Microcredit is one such means. Development from below also serves to advance democracy and human rights. Muhammad Yunus has shown himself to be a leader who has managed to translate visions into practical action for the benefit of millions of people, not only in Bangladesh, but also in many other countries.

Loans to poor people without any financial security had appeared to be an impossible idea. From modest beginnings three decades ago, Yunus has, first and foremost through Grameen Bank, developed micro-credit into an ever more important instrument in the struggle against poverty. Grameen Bank has been a source of ideas and models for the many institutions in the field of micro-credit that have sprung up around the world. Every single individual on Earth has both the potential and the right to live a decent life. Across cultures and civilisations, Yunus and Grameen Bank have shown that even the poorest of the poor can work to bring about their own development.

Micro-credit has proved to be an important liberating force in societies where women in particular have to struggle against repressive social and economic conditions. Economic growth and political democracy cannot achieve their full potential unless the female half of humanity participates on an equal footing with the male. Yunus' long-term vision is to eliminate poverty in the world. That vision cannot be realised by means of micro-credit alone. But Muhammad Yunus and Grameen Bank have shown that, in the continuing efforts to achieve it, micro-credit must play a major part."