By granting small loans - the first was only $27 - Yunus allowed the poorest farmers and beggars in Bangladesh to develop their own businesses and income.
Since its creation in 1971, Bangladesh has been mired in poverty. About half of the country's 147 million people live below the poverty line and person per capita income is only $2,100.
The Nobel Committee's choice was considered a surprise from a wide field which included peace brokers in the troubled Indonesian Aceh Province and U2 frontman and activist Bono. The award was also unusual because Yunus' accomplishments were not directly related to peace efforts
"Lasting peace cannot be achieved unless large population groups find ways in which to break out of poverty. Micro-credit is one such means," Ole Danbolt Mjoes, director of the Nobel committee, said in making the announcement at Nobel headquarters in Oslo, defending the decision to award Yunus the $1.36 million prize.
"Development from below serves to advance democracy and human rights," said Mjoes.
In an interview with reporters, Yunus pledged to use part of his prize to establish a business devoted to feeding the poor in Bangladesh and to build an eye hosptial.
"It's very happy news for me and also for the nation," said Yunus. "Now the war against poverty will be further intensified across the world. It will consolidate the struggle against poverty through micro-credit in most of the countries."
A Fulbright scholar, Yunus returned to Bangladesh in the mid 1970s and became a pioneer in micro-financing. Under the system, anyone can qualify for a loan, but lenders are grouped together to instill social responsibility.
In the years since he founded Grameen Bank (from the word meaning "rural" in Bangladeshi), Yunus has lent $5.72 billion, 97 percent of which has been repaid.