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

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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". …