Yunus shares the prize with the bank he founded in the mid-1970s, Grameen Bank.
The prize was awarded by the Norwegian Nobel Committee "for their efforts to create economic and social development from below".
"Lasting peace can not be achieved unless large population groups find ways in which to break out of poverty. Micro-credit is one such means. Development from below also serves to advance democracy and human rights," wrote the committee in a statement.
Through Grameen Bank, Muhammad Yunus developed micro-credit into an important instrument in the struggle against poverty. Grameen Bank has been a source of ideas and models for the many institutions in the field of micro-credit that have sprung up around the world.
According to the bank's web site, Grameen has 6.61 million borrowers, 97 percent of whom are women. With 2226 branches, GB provides services in 71,371 villages in Bangladesh.
Professor Yunus studied economics at Vanderbilt University, where he was a Fulbright Scholar. He received his Ph.D. in Economics in 1969, going on to become an assistant professor of Economics at Middle Tennessee State University the same year.
On returning to Bangladesh he joined the Economics Department at Chittagong University.