Madagascar and its growing microfinance sector

Map of the regions in Madagascar

Map of the regions in Madagascar (Photo credit: Wikipedia)

Madagascar is one of the biggest islands in the world and, because of its isolation, much of its wildlife has managed to flourish uninterrupted for thousands of years. Its natural beauty and wildlife are well known and many of its animal and plant life are unique to the island and exist nowhere else on earth. What is not so well known about Madagascar is its burgeoning microfinance industry.

Microfinance is the provision of financial services to micro-entrepreneurs and small businesses that lack access to banking and related services due to the high transaction costs associated with serving these client categories. An extension of microfinance is mobile banking, and its success is well documented. The rise of the microfinance industry has been driven by a simple premise, originally associated with Muhammad Yunas and Grameen Bank who won the Nobel Peace Prize in 2006, and it is to get capital into the hands of those entrepreneurs who are cash starved and don’t have access to traditional ‘bricks and mortar’ financial institutions. These entrepreneurs need a helping hand to get their businesses up and running, and that is how the idea of microfinance came about. It allows institutions to help the poor in the ‘unbanked’ world, much in the same way credit cards have allowed people access to money in the developing world.

The World Bank has estimated that 70% of people in Madagascar live on less than $1 per day. Poverty and competition for agricultural land have put pressure on the island’s dwindling forests. Its microfinance industry was established in 1990 and has experienced massive growth over the last 10 years. It is seen as a vehicle to help Madagascar achieve some of its millennium development goals. The millennium development goals were established at the Millennium Summit in 2000 and range from eradicating extreme poverty and hunger to improving child mortality and reducing maternal deaths. Microfinance and mobile banking are seen as key vehicles for countries to achieve those goals in Africa and other parts of the developing world. It is particularly important in a country such as Madagascar, where not only do people lack access to traditional banking services, but it also suffers frequent cyclones. Microfinance has allowed people to introduce savings plans which help protect them when they hit hard times.

Microfinance is also prevalent in other parts of the developing world and there are plenty of examples of how it helps peoples’ everyday lives. It was initially thought of as a product to help entrepreneurs and small businesses, but more is being done to ensure access to financial services helps the whole population. Selco, an Indian company that sells solar-powered lighting to people who cannot afford grid-based electricity, formed partnerships with banks allowing customers to take out small microfinance loans to be paid off in instalments over 3 – 5 years. WaterCredit is another example of an organisation that decided to break up payments into smaller instalments to allow people to get access to water and sanitation in India, Bangladesh, Kenya and Uganda.

In Madagascar, and in other parts of the developing world, microfinance continues to allow people and businesses access to financial services and offers a way to completely transform small businesses. It is also being used to help people pay for essential products and services, like water, education and healthcare, and its use has therefore changed from purely being aimed at small businesses and entrepreneiurs to helping the poor as well. Of course, the poorer the person the ‘riskier’ the investment and, despite success stories around the world, more needs to be done to encourage lending to those in most need.

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