Back in 2006, the Bangladeshi Muhammad Yunus was awarded the Nobel Peace Prize for founding the Grameen Bank in Dhaka and pioneering the concepts of microfinance and microcredit. His work to alleviate poverty by granting loans to entrepreneurs too poor to qualify for traditional bank loans, has given him the nickname of banker to the poor. Since the early developments of the Grameen Bank in 1977, microfinance institutions (MFI) have flourished around the world to give access to credit to even more poor people. After having explained what microfinance really is and how it works between the actors and the beneficiaries, we will go through a case study of Madagascar with its achievements and perspectives.
Microcredit is a low amount credit bearing interests, granted to entrepreneurs and small businesses that are excluded from the traditional banking system, because of their inability to meet the criteria set by these institutions (identification documents, guarantees, minimum deposit, etc.). With this type of credit the recipients can create or develop an income-generating activity, thus allowing them to build their own way out of poverty. It can be granted to individuals as well as groups where each member of the group is a guarantee for the other. Falling in line with the United Nations’ Millennium Development Goals, microfinance makes it its mission to break the cycle of poverty through an offer of both financial and social development tools, aiming at the improvement of the beneficiaries’ living conditions. The impact of microcredit can be measured in terms of the increase in the recipients’ economic power and social inclusion and the reduction of their vulnerability to economic shocks, but beyond that, it should be understood as a prodigious tool in the service of empowerment.
It is crucial to understand that microfinance is not charity. It consists in delivering financial and non-financial services to people that have no access to formal financial institutions and give them the opportunity to participate in the global development process. However, microcredit is not just about financial support. It also provides the micro-entrepreneurs with non-financial services such as business advice, training programmes, professionalisation and consciousness raising workshops about diverse topics and sectors of activity. The recipients of microfinance are for the most part from geographically, economically or socially isolated sections of the population and their activities belong to the informal economic sectors such as small trade, farming, street vending, handicrafts…They live mostly in precarious situations and suffer from poor education and training. It is true, there has been huge criticism regarding some MFIs and especially India’s microfinance sector who was once touted as a saviour of the poor and a good bet for investors. The reason is that there is a great diversity of MFIs and that a minority of them make profit out of the loans, but for the sake of this article we will only consider the ones that work in a social manner. In other words, MFIs whose business model is not for profit.
Madagascar is a beautiful island country, known for its exceptional biodiversity but plagued with poverty. According to the UN Capital Development Fund (UNCDF), about 85% of the population lives on less than $1.25 a day. To make matters worse, the global economic crisis of 2008 and the political one that followed due to the demission of the President, have hurt the tourism industry and the local economy.
Madagascar’s microfinance sector was established in the 90’s, but began to experience rapid growth only in the past 10 years — the sector is booming since 2008. According to the statistics from the General Treasury of Madagascar, the number of microcredit customers rose from 530,000 in 2008 to 1.1 million in late 2013 and affects today about 20% of households which makes one in five households involved in microfinance. Deposits grew by 56% per year while loans reached an annual growth of 35%. At the end of 2013, the outstanding credit was estimated at 130 million Euros for a total savings of 99.9 million Euros. Before, a big share of households relied on informal moneylenders, who would charge annual interest rates for unsecured loans of 120-400% – compared with MFI’s average rate of 36% for the same period, or 2-4% a month. In an interview to the British daily newspaper The Guardian, Justine Sija, a 60 year old Malagasy woman, declares: ”I used to make 10,000 to 20,000 Ariary (about $4.50-9.00) a day. Now, with the credit, I can make double that amount. I can put my four grand children in school, buy some livestock and save the rest of the money. Eventually, I plan to sell other goods as well, like rice and other local products.”
The programmes implemented by the MFI are working and businesses are growing, however Madagascar remains a poor country with a very low Human Development index at 0,498 (2014 estimates for 2013) as reported by the United Nations Development Programme’s Human Development Report. Therefore, the microfinance sector faces new challenges for the coming years. First, it needs to extend its market share to cover a larger proportion of the population. This could be achieved through the modernisation of its management system with computerisation. Allowing the microfinance professionals to connect with the newly created „central risk“ platform, would allow them to fight against over-indebtedness and multi loans subscriptions. Moreover, with 40% of the Malagasy population owning a mobile phone, developments in mobile money transfer and banking services would be innovations to work on to contribute to gain more clients and develop the country. Indeed, reimbursing a loan could be an expensive and time-consuming task. Most of the micro-entrepreneurs live in rural areas not necessarily very close from the MFI. Going to the microfinance office is therefore a costly operation with commute expenses and time not spent working. If all the micro-entrepreneurs were able to reimburse regularly their loans right from their mobile phone, it would be a major progress as much for them as for the MFI that could follow up more precisely its clients’ reimbursements. Finally, professionalisation of the sector is vital. The MFIs employees have to receive advanced and appropriate training to convince even more foreign investors, donors and the Malagasy state to fund them.