Microfinance pioneer awarded Nobel Peace Prize

Muhammad Yunus and the Grameen Bank have been awarded the 2006 Nobel Peace Prize. 

This is a powerful statement by the committee (which is appointed by the Norwegian parliament) of the role of poverty reduction in promoting peace.

As the Grameen Bank has shown, access to financial services such as credit can make a huge contribution to improving the lives of the poor. 

Microfinance has become a very popular cause in international development, especially among the large private foundations of North America.  Supporting microfinance appeals to the notion that we should give the poor a hand up, not a hand out.  It appeals to our sense that we should find ways to unleash the entrepreneurial spirits of those who are unfortunate enough to have been born in poor countries. 

But there remain important questions about microfinance.  There remains very little systematic empirical evidence of the impact of microfinance on the incomes and well-being of the poor.  Grameen's main measure of its success – its repayment rate – is impressive but tells us little about what impact microfinance has actually had.

In my view, it is impossible to argue with the view that the poor benefit, probably substantially, from access to affordable financial services, including credit, savings, insurance and remittances.   But as I argued here in November last year, it does not follow at all that it is a good idea for donors and foundations to subsidize microfinance.  After all, the Grameen Bank was developed without donor assistance.

So many congratulations to Muhammad Yunus for his well deserved award, and to the Nobel Peace Prize committee for recognizing the power of economic growth in poor countries to promote peace.  But let's think carefully before we all climb on to the microfinance bandwagon. It is not clear that subsidizing microfinance is a high priority for helping the developing world to grow its way to prosperity.

More at Pienso, Marginal Revolution and NextBillion. Update: Also Mark Thoma, Audemus

5 thoughts on “Microfinance pioneer awarded Nobel Peace Prize”

  1. Pingback: Tim Worstall

  2. Even the repayment statistic is questionable. According to the October 14 WSJ, Grameen counts a loan as overdue only if the borrower has missed more than 10 consecutive payments. Using that criterion Citibank might also have a 98% repayment rate.

  3. Anthony

    There is a lot of interest from donors and philanthropic foundations in financing microfinance with cheap (or free) money.  Bill Clinton has put together a big consortium including charities and donors; the Omidyar Foundation has made a non-commercial $100m grant to Tufts, etc.

    Owen

  4. I’m glad I stumbled across this blog entry, because I am considering subsidising microfinance myself, and am interested to discover that this is not viewed by everyone as a good thing.

    Is the objection based on a fear that such subsidy may lead to negative results, or merely that it may not be the most efficient method of obtaining positive results?

    If the former, why?

    If the latter, which methods would be more effective (from the perspective of a person who wants to invest in something positive)?

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