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October 17, 2006
Nobel Prize Links Microfinance to Peace
    by Bill Baue

The granting of the Nobel Peace Prize to Muhammad Yunus and the Grameen Bank breaks new ground by explicitly linking economic development to peace development.


The announcement late last week that microfinance pioneer Muhammad Yunus and the Grameen Bank received the 2006 Nobel Peace Prize carries significant implications for microfinance and socially responsible investing (SRI). Beyond shining the world spotlight on the success of microfinance, the Prize helps validate the use of financial mechanisms to promote social causes such as poverty alleviation--and peace.

"The one message that we are trying to promote all the time, that poverty in the world is an artificial creation," said Professor Yunus told the Nobel Committee upon learning he had won the Prize. "It doesn't belong to human civilization, and we can change that, we can make people come out of poverty and have the real state of affairs."

"So the only thing we have to do is to redesign our institutions and policies, and there will be no people who will be suffering from poverty," he continued on the phone from Bangladesh. "So I would hope that this award will make this message heard many times, and in a kind of forceful way, so that people start believing that we can create a poverty-free world."

The origins of the Grameen Bank date back to 1976. The famine then plaguing Bangladesh inspired Prof. Yunus to strike out from his economics teachings at Chittagong University in order to address the economic realities surrounding him first-hand. In the nearby village of Jobra, he met a group of women yearning to start their own businesses but lacking the capital or collateral for a traditional bank loan. Prof. Yunus calculated the amount the group of 43 women said they needed--a mere $27, which he immediately lent out of his own pocket.

Microfinance rests on this foundation of making very small loans collateralized by support groups--mostly women--who jointly commit to repay. Microfinance has become established as a financial tool increasingly supported by mainstream investors such as Citigroup (ticker: C) and Deutsche Bank (DB). However, the fact that Mr. Yunus did not receive a Nobel Prize in Economics but a Nobel Peace Prize represents a groundbreaking distinction.

"The Nobel Committee is expanding the traditional understanding of peace advocacy and has taken a new step in honoring someone for using economic activity to bring about peace," said Terry Mollner, a founder of the Calvert Group and board member of several of its SRI mutual funds. "There's no question that microfinance helps poor people pull themselves up by their bootstraps in a way that is sustainable, but to say it also advances peace is a bold and powerful assertion."

In the late 1980s, Calvert invited Muhammad Yunus to serve on the board of the World Values International Fund (ticker: CWVGX), which he did until the early 2000s.

"We wanted him to bring his microfinance expertise to the board, but it also brought him from Bangledesh to the US four times a year, where he continued his work of spreading the word on microfinance," Dr. Mollner explained. "This helped Muhammad incubate microfinance here."

The relationship was symbiotic, as Calvert helped push the expansion of microfinance and community investment across the SRI field. There are now ten mutual funds, five institutional investors, and more than twenty financial advisers and money managers committing $19.6 billion to community investing in the Social Investment Forum's "One Percent or More" campaign. Almost a quarter of the $100 million portfolio of the Calvert Foundation, established in 1995 as a nonprofit independent of the Calvert Group to implement community investment, is invested across 42 microfinance institutions (MFIs), according to its executive director Shari Berenbach.

"In the long run, we see that microfinance is helping the community investment field to grow--as more people learn about microfinance and come to recognize that you can use investment as a tool to end poverty," Ms. Berenbach told SocialFunds.com.

The shift of microfinance from a niche market practiced primarily by SRI to a mainstream practice does not come without challenges. The Nobel Prize now opens the gates for even more assets to flood into microfinance, posing great opportunities but also more challenges.

"On this day of great celebration, we urge caution," wrote David Satterthwaite, CEO of Prisma MicroFinance, on MicroCapital.org in response to the Nobel Prize announcement. "[M]icro-banks currently lack the institutional strength to become large (“scaled”) organizations due to unprofessional management, opaque governance, and meager balance sheets."

"Poverty continues to dwarf micro-banks," he continued. "Broad and deep institutional capacity is required to deliver credit as a human right."

On the other hand, microfinance has outgrown subsidization by charitable donations and subsidies.

"Now that microfinance has turned the corner, such donations and subsidies wreck progress by distorting competition and retarding the institutional capacity of emerging micro-banks," Mr. Satterthwaite wrote. "Now that the flood gates have opened, we will soon start to see melt-downs of microfinance sectors in specific countries due to over-investment, be it investments for a return on capital, or subsidies, or donations which continue to flow contrary to established best-practices."

 

 
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