The economist and his bank, who will share the prize, were cited for their efforts to help "create economic and social development from below" in their home country by using innovative economic programs such as microcredit lending.
"Every single individual on earth has both the potential and the right to live a decent life. Across cultures and civilisations, Yunus and Grameen Bank have shown that even the poorest of the poor can work to bring about their own development," the Nobel Committee said in its citation.
Professor Yunus has drawn praise for advancing microcredit which has been credited with helping poor women advance their lives and pull them out of poverty.
"Economic growth and political democracy cannot achieve their full potential unless the female half of humanity participates on an equal footing with the male," the committee said.
Grameen Bank, which was founded by Yunus, provides credit to "the poorest of the poor" in rural Bangladesh, without any collateral, according to its website.
Yunus delighted
Speaking after the announcement he said "I am delighted, I can't believe it. People were telling me 'You got the Nobel Prize' but I didn't know," he told Norway's NRK public television in a telephone interview immediately after the announcement.
"All the people who have received micro-credit will be so happy, so happy to hear what you have just announced," he said.
"It will give a significant amount of energy to the whole movement, I can guarantee you that ... this is just the beginning of it.”
"You are endorsing a dream to achieve a poverty-free world," he
said.