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Posted: 7:03 AM- Bangladesh's Muhammad Yunus and the Grameen Bank won this year's Nobel Peace Prize for advancing social and economic development by giving loans to the poor.

Yunus, 66, founded the bank, which lends to the "poorest of the poor" in rural Bangladesh without asking for collateral. The bank's so-called microcredit system has spread to impoverished communities around the world since its conception in 1976.

"Lasting peace cannot be achieved unless large population groups find ways in which to break out of poverty," said Nobel Committee director Ole Danbolt Mjoes in announcing the panel's choice of Yunus and the bank as this year's winners of the $1.4 million prize. "Microcredit is one such means. Development from below also serves to advance democracy and human rights."

Yunus started the microcredit system when he lent $27 to a bamboo-stool maker and 41 other villagers. The bank makes most of its loans to women and serves more than 71,000 villages in Bangladesh. More than a third of Bangladeshis live on less than $1 a day, according to the World Bank. "Grameen" means village or rural in Bengali.

"This is fantastic news for all poor countries around the world," Yunus said in an interview with Norway's NRK television minutes after the award was announced in Oslo. "I can't believe that this has really happened. I am so grateful."

Economics Doctorate

Yunus, who was born in Chittagong, earned a doctorate in economics from Vanderbilt University in Nashville in 1969 after receiving a Fulbright scholarship. He joined Chittagong University as head of its economics department in 1972. He served on various United Nations panels on women's health and finance, and met with world leaders including former U.S. President Bill Clinton.

A famine in Bangladesh in 1974, which killed about 1.5 million Bangladeshis, proved a turning point for Yunus, who began questioning why people who worked 12 hours a day, seven days a week, still didn't have enough to eat. The answer, he discovered, was a lack of capital and the burden of high interest rates charged by money lenders.

"Some money-lenders set interest rates as high as 10 percent a month, some 10 percent a week," Yunus said in a 1996 interview with an Independent on Sunday supplement, carried on Grameen Bank's Web site. "So, no matter how hard these people worked, they would never raise themselves above subsistence level."

Central Bank

Yunus's solution was to start a system of lending to the poor in which total interest charged can't exceed the amount of the loan, regardless how long it takes to be repaid, the bank said. In response to Yunus's lobbying, his microcredit system was adopted as a project under the country's central bank.

As of May this year, Grameen Bank had 6.61 million borrowers, 97 percent of them women.

"He has brought hope to the hopeless, giving them a cause to live," Zahirul Haque, a Bangladeshi Foreign Ministry spokesman, said in a phone interview after the prize was announced. "He has made the country and its people proud."

Some 63 million of Bangladesh's 133 million people live in deprivation, two-thirds of them in extreme poverty, the World Bank said in a report last month. Those living in poverty declined from 59 percent in 1990 to 50 percent in 2000, with rural areas accounting for almost four-fifths of this development, the World Bank said.

May Spur India

The award may spur India to develop its rural banking system, said Pawan Kumar Bansal, India's junior finance minister in charge of banking. Half of India's 1.1 billion people have no access to finance from any source, whether it is banks or local money lenders, according to Bansal.

"It is a recognition of a banking approach that ensures inclusive growth, where everyone has access to finance," Bansal said. "We welcome it."

The peace prize, worth 10 million kronor, was created in the will of Swedish industrialist Alfred Nobel more than a century ago. Past winners include Mother Theresa, the medical charity Doctors Without Borders and the 14th Dalai Lama. The prize was first awarded in 1901.

The five-member Nobel committee keeps nominations secret. Of the 191 nominees for this year's prize, 168 were for individuals and the rest for organizations. Yunus wasn't among the favorites identified this week by researchers and bookmakers in their annual predictions of the winner.

Bookmaker's Odds

Australian bookmaker Centrebet's top choice was former Finnish President Martti Ahtisaari. Ahtisaari, 69, was given an even chance of gaining the prize for brokering last year's Aceh peace accord, which ended 29 years of conflict in the Indonesian province. Indonesian President Susilo Bambang Yudhoyono, 57, had 3-1 odds, and the separatist Free Aceh Movement a 9-2 chance.

Stein Toennesson, director of the International Peace Research Institute in Oslo, predicted that the success of the Aceh peace process would capture the Nobel judges' attention.

"The only really successful peace process in the world today is the Aceh process in Indonesia, which was mediated by Ahtisaari," Toennesson said in a Sept. 28 interview. "It will be difficult for the committee to ignore it."

In his will, Nobel said the prize should be awarded to "the person who shall have done the most or the best work for fraternity between the nations, for the abolition or reduction of standing armies and for the holding and promotion of peace."

Last year's prize went to the International Atomic Energy Agency and its Egyptian director general, Mohamed ElBaradei, 64, for their work to stop the military use of nuclear energy.

The prize will be formally awarded at a ceremony in Oslo on Dec. 10, the anniversary of Nobel's death in 1896. Nobel also established prizes for achievements in physics, medicine, chemistry and literature, which are presented by the Stockholm- based Nobel Foundation. An economics award was established in memory of Nobel by Sweden's central bank in 1969.