Home to 70 percent of the world’s trillion-dollar mobile money market, Africa is a trailblazer in the fast-evolving sector of digital financial services. Madagascar is a more recent example of the continent’s success in this area, with over a third of the population now able to use mobile money for everything, from paying bills to person-to-person transfers, to even saving or getting a loan, making it a big driver of financial inclusion.
By Olivier Monnier
In Madagascar, Facebook Messenger is not just for chatting with friends. Leveraging the social network’s popularity among Malagasy, microfinance institution Première Agence de Microfinance (PAMF) launched a service in 2021 that allows the country’s three million Facebook users to apply for credit or open a savings account through the app.
"Facebook Messenger is so widely used in Madagascar that it has great potential to improve access to financial services," says Santatra Andriamparany, Head of Digital Financial Services at PAMF Madagascar, which is part of the Aga Khan Development Network (AKDN).
This initiative is one of a growing number aimed at increasing financial inclusion in Madagascar which, at around 81 percent, has one of the highest poverty rates in the world. As they scale, these solutions also provide an opportunity to help entrepreneurs launch and grow businesses, increase access to basic services such as electricity, and improve government tax collection.
Since being introduced about 15 years ago, mobile money services in particular have revolutionized the financial services industry and each year are becoming easier, quicker, and less expensive to use. Africa leads the way with 70 percent of the world’s $1 trillion mobile money market and nearly 185 million active wallets.
In a remarkable turn, Madagascar now has more mobile money accounts — over 10 million — than bank accounts. Between 2016 and 2020 alone, mobile money transactions have more than doubled in value, reaching $639 million.
"Madagascar is a predominantly rural, agriculture-based country with a challenging road infrastructure and serving this population with financial services was seen for too long as not only costly, but risky," says Matthew Leonard, a microfinance and digital finance specialist at IFC. "This changed when mobile money operators came online and rapidly grew to have millions of clients, many of whom had never been reached by formal financial institutions."
Madagascar’s mobile money ecosystem is also quickly diversifying.
While customers still mainly use their accounts for traditional person-to-person transactions to family and friends, more and more are using mobile money to pay bills, receive their salary, save money, or take out loans. Built from partnerships between mobile money providers and financial institutions, digital savings accounts and — even more so — nano-loans products are among the most popular of the newer services.
“Madagascar is among the African and Indian Ocean countries where digital credit products, going from just a few dollars to several hundred dollars, have been the most successful,” says Mathieu Berthelot, Chief Executive Officer of Orange Money Madagascar, one of the country’s three mobile money providers.
An Orange Money's proximity cash point in Ankatsakatsa Sud. Photo: Courtesy of Orange Money Madagascar
A big advantage of mobile money, especially for people living in more remote areas, is that clients with a basic mobile phone can apply for and receive a loan in seconds without having to fill out paperwork or visit a bank. A scoring tool based on cellphone and mobile money customer records lets the providers and financial institutions assess applicants’ creditworthiness and default risk.
“Most of our clients are excluded from the traditional financial system, either because they are not eligible or because they are reluctant,” says Andriamparany from PAMF. “Mobile money solutions and digital financial services can help overcome these obstacles.”
The benefits are reaching far beyond simple purchases and transfers.
Baobab+, a social enterprise operating in the energy and digital sectors in several African countries, has teamed up with Madagascar’s mobile operators to offer solar home kits. With only a third of the population having access to electricity, and those in rural areas the most deprived, the initiative has the potential to power the nation.
Using a pay-as-you-go prepaid service, Baobab+ allows clients to buy equipment on credit and pay it back through a flexible, low-rate installment payment system via their mobile device. This has enabled more than 100,000 households acquire solar kits since 2016.
Digital microfinance services can be a boon for Madagascar’s small businesses too, particularly in the agricultural sector which employs 75 percent of the population.
To meet a growing demand, BNI Madagascar, one of the country's leading banks, launched KRED, an all-digital microfinance brand in 2019, which allows micro, small, and medium-sized enterprises (MSMEs) to apply online for loans of up to $1,200. In the past three years, KRED has approved more than 25,000 lines of credit to MSMEs.
The Malagasy government itself is banking on digital financial services to modernize and streamline some of its operations, including digitizing the payment of teachers' salaries and scholarships for students in remote areas, as well as the collection of taxes from individuals and SMEs. It is also exploring launching a digital currency (e-ariary), following the lead of several other African countries.
A man sells mobile phones in Madagascar. Photo: Shutterstock
Turning obstacles into opportunities
Despite the inroads, many challenges need to be overcome in the push for nationwide financial inclusion, which remains one of the lowest in Sub-Saharan Africa.
One challenge is regulation. The country took an important first step in this area in 2016 by adopting legislation on e-money and e-money institutions. However, according to the World Bank and IFC’s 2021 Country Private Sector Diagnostic for Madagascar, more can be done to further enhance the enabling environment, including the regulatory framework.
For example, extending access to the USSD protocol — a communications system used by cellular phones for services such as mobile money — beyond mobile operators would lower market entry costs and tariffs, the study said. The establishment of a national switch, a set-up offering full interoperability from bank accounts to e-money wallets, would also facilitate transactions, it added.
The study also noted that the sector would benefit from stronger infrastructure for sharing credit data. While Madagascar has improved access to information through a public credit registry and a new private credit bureau, both launched in 2020 with support from IFC, the country could develop new tools to further strengthen client identification and enable a more transparent and competitive environment, the report said.
Finally, to fully leverage opportunities offered in the space, the study points to the need for Madagascar to boost access to electricity, strengthen internet and mobile connectivity, and make improvements on financial and digital literacy. With 54 percent of the population still not connected to a mobile network in 2020, Madagascar has one of the lowest mobile penetration rates in the world.
While the challenges are all very real, Orange's Berthelot prefers to look at the positive side, seeing them as opportunities for investment.
"Mobile money has already become the main tool for financial inclusion in Madagascar and it has been a game changer for so many people”, he says. “But there's still so much more to do, and I believe the bulk of the growth is still ahead of us."
Published in February 2023