Q&A: So what is microfinancing?

Microcredits have helped change the lives of many rural people

The award of the Nobel Peace Prize to Bangladeshi economist Professor Muhammad Yunus has focused the attention of the world on the microcredit scheme he pioneered.

So what are microcredits?

They are very small loans, typically less than $100 (£54), made to the rural poor in developing countries who normally do not qualify for traditional banking credit.

This is often the only way they can establish a business and lift themselves out of poverty.

Professor Yunus founded his Grameen Bank in 1976 during a devastating famine in Bangladesh.

Today it has 6.6 million borrowers of whom 97% are women.

This focus on female borrowers in a society where women are frequently forced to take responsibility for their entire family is one of the characteristics that caught the Nobel Committee's attention.

Grameen, which means village, is an idea that has spread to more than 40 countries including Sri Lanka where women's banks were already a familiar concept.

How do microcredits work?

Grameen transactions take place at the village level, usually in a local hall or temple.

Typically a Grameen borrower will use a loan to buy tools and equipment to set up on their own.

As the microcredit idea has grown the Grameen organisation has extended into foundations dedicated to fisheries and irrigation.

By avoiding both employers and unscrupulous local money lenders the Grameen loan aims to break a circle of exploitation that frequently condemns rural villagers to lives of poverty.

The Nobel Committee cited how his Grameen Bank aids the poor "to bring about their own development".

And the concept of extending loans to a largely female client base has also been credited with reducing domestic violence by giving women a previously unattainable degree of independence.

So it's worry free money then?

Not quite. Critics argue that the Grameen idea is in danger of being oversold.

And because the loans are often repaid by villagers banding together in loan clubs, this has led to accusations that some of the poor can come under peer pressure to repay the money they owe when times are tough.

Grameen Bank has also survived accusations that it lacked adequate funds, though Professor Yunus was adamant that his bank could repay all of the money it raised from the commercial sector.

Despite some concerns, Professor Yunus and his ideas have attracted a growing band of advocates, including the former US President Bill Clinton and his wife Hillary.