Selected Issues


Selected Issues

Financial Sector Development and Access to Credit1

Madagascar’s financial system, largely dominated by the banking sector, has been robust, displaying some flexibility to support the economy. It has also shown some signs of deepening over the past few years but still lags peer countries, with access to credit particularly limited. Building on an updated review of financial sector performance, this paper takes stock of the sector’s recent performance; examines the main impediments to access to finance in the country, both on the supply and demand sides; and explores potential measures to overcome them.

A. Introduction

1. Madagascar made progress towards macroeconomic stability over the past few years. Economic growth reached 5.2 percent in 2018 and inflation decelerated to 6.1 percent on an annual basis from a peak of 9 percent in 2017. Revenue mobilization continued to improve, and the country accumulated international reserves. In line with the improved macroeconomic environment, the financial sector deepened. Credit to the private sector is on an upward trend, albeit below the level of comparator countries.

2. Against this backdrop, the objectives of this paper are threefold. First, it aims to takes stock on the performance and efficiency of the financial sector as of end-2018. Second, it reviews the main factors hindering access to finance from both the supply and demand sides. Third, it explores potential solutions and best practices to improve access based on the country situation.

B. Financial Sector Performance and Efficiency

3. The Malagasy financial system is mildly diversified. The financial landscape comprises banks, microfinance, insurance companies, pension funds, savings institutions, non-deposits collecting financial entities and electronic money intermediaries (Table 1). Financial markets are limited to a foreign exchange and a bond markets where the state remains the sole issuer of securities.

Table 1.

Madagascar: Structure of the Financial System (as of end-December 2018)

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Source: The Malagasy Authorities, IMFs Staff calculation

Do not include PAOMA (Paositra Malagasy) due to data unavailability

4. The financial sector is shallow and largely dominated by banking activities. Financial assets only account for 34 percent of GDP in 2018, with the banking sector holding up to 79 percent of total assets. Mostly foreign-owned, the banking sector is concentrated around four banks which detain more than 80 percent of total outstanding loans and credits (Table 2 in Annex).

Banking Sector

5. In 2018, the banking system remained sound, highly profitable, liquid, and relatively insensitive to market risks. Most financial soundness indicators in the banking sector have seen an improvement since 2012 (Figure 1). A benchmarking exercise with comparator countries indicates that banking system of Madagascar performed relatively well (Figure 2). Comparisons suggest:

  • Capital Adequacy. Overall, the banking sector has remained well capitalized and robust to withstand potential shocks on its balance sheet. All banks have respected the minimum regulatory requirement of a solvency ratio of 8 percent. This ratio stood at almost 14 percent at end-2018, an improvement over 13 percent in 2017. At the same time, capital has appeared sufficient to cover losses from non-performing loans as indicated by the non-performing loans net of provisions to capital ratio which has continued to be on a declining trend from around 26 percent in 2013 to 16 percent in 2018s.2 Even in an extreme scenario of a stress test where banks have to constitute an additional 25 percent provision on loans to risky activities, most of the banks remain sound. Despite this good performance, however, the country’s performance lags behind comparator countries.

  • Asset Quality. The non-performing loans to total gross loans ratio is down from 11 percent in 2012 to 7 percent in 2018, indicating an improvement of the quality of the assets. Nevertheless, it remains above the international standard of 5 percent, and is about at the median level compared to comparators.

  • Earnings. Profitability remains high thanks to high interest rate spreads and low operating costs. The return on equity (ROE) and assets (ROA) ratios reached 35 and 4 percent, respectively, in 2018. In the SSA region, the country’s banking system remains among the top-three performers in terms of profitability.

  • Liquidity. The system continues to be liquid and banks seem to be in a comfortable position to service potential short-term withdrawals of their deposits. Under severe stress scenarios, however, the situation could deteriorate quickly for some banks. A simulation of a massive withdrawal of 25 percent of customers deposits or 25 percent outflow of short-term liabilities would result in 5 to 6 banks breaching the minimum regulatory requirement. Comparison with peers indicates a ranking among the top-four most liquid banking system of the region.

  • Sensitivity to market risk. Banking exposure to interest and exchange rate risks appears limited. Lending is mostly on the short-run reducing the maturity mismatch between assets and liabilities. The net open position in foreign exchange to capital ratio is less than 20 percent as per the regulatory norm, and both the ratio of foreign currency denominated loans to total loans and the ratio of foreign currency denominated liabilities to total liabilities stay low. Madagascar ranks among the top-5 less exposed countries to exchange rate risk of the SSA region.

Figure 1.
Figure 1.

Madagascar: Key Financial Soundness Indicators Changes Developments

Citation: IMF Staff Country Reports 2020, 061; 10.5089/9781513534213.002.A004

Note: (+) indicates on augmentation while (-) indicates a dimunutionSource: The Malagasy Authorities, IMF Staff calculation
Figure 2.
Figure 2.

Madagascar: Financial Soundness Indicators

Citation: IMF Staff Country Reports 2020, 061; 10.5089/9781513534213.002.A004

Sources: Malagasy Authorities; and IMF FSIs Database.

6. Risks to the banking system continue to be contained, but close monitoring is needed in light of the authorities’ ambitious plans to scale-up investment.

  • Credit risk. Banks in Madagascar have been traditionally risk averse, resulting in a moderate increase of credit over the past years. Despite a high concentration of the loans in few sectors, the former remains adequately provisioned reducing credit risk.

  • Concentration risk. Despite a diversification effort, loans continue to be mostly directed to a few sectors including commerce. While this might be a source of potential vulnerability, data should be interpreted considering sectoral performances. For example, the commerce sector, largely dominated by oil companies, has regularly displayed growth even during crisis time.

  • Sovereign risk. Although investment in government securities has regularly increased, loans to the sovereign are unlikely to cause vulnerabilities for the following reasons: (i) the authorities’ moderate risk profile of debt distress; (ii) the banks’ self-imposed ceiling on their exposure to the government; and (iii) the authorities’ ongoing efforts to reduce reliance on bank financing through higher revenues mobilization and monetary policy reforms.

  • Liquidity risk. A priori, this risk appears low due to the excess liquidity in the system. But, in view of uneven distribution of liquidity across banks, close monitoring is needed to ensure that liquidity remains available.

  • Interconnectedness risk. Risks resulting from banks’ interactions with each other and with other financial institutions seem to be limited. Banks’ aggregate balance sheets indicate that claims on other credit institutions are less than 15 percent of total banking assets on average. In addition, despite some recent improvements, the interbank market remains embryonic.


7. Microfinance institutions (MFIs) have boosted access to financial services in rural areas. Over the last few years, MFIs activities have expanded rapidly, even though the sector only counts for 5 percent of the total financial system assets and less than 2 percent of the country’s GDP. MFIs outstanding deposits and loans have augmented exponentially in line with the increased numbers of customers (Figure 3).

Figure 3.
Figure 3.

Microfinance: Outstanding Deposits and Loans

(in billion of Ariary)

Citation: IMF Staff Country Reports 2020, 061; 10.5089/9781513534213.002.A004

Source: The Malagasy Authorities; and IMF Staff calculation.

8. Despite rapid growth, the financial performance of MFIs appears mixed. Overall, the sector remains well-capitalized. Assets are of good quality and credit risk stays low as illustrated by the declining NPLs to total loans ratio. Loans are covered by deposits and activities seemed to be profitable even if profits remain modest due to high operating costs (Figure 4). Nonetheless, the sector is prone to some liquidity issues as pointed out by low liquidity ratios, with MFIs liquid assets insufficient to cover short-term liabilities.

Figure 4.
Figure 4.

Microfinance: Quality of Assets and Profitability

(in Percent)

Citation: IMF Staff Country Reports 2020, 061; 10.5089/9781513534213.002.A004

Source :The Malagasy Authorities and IMF Staff calculation.

9. Recent performance seems to indicate that the business model of MFIs may need to be reconsidered. The stagnation of the number of institutions coupled with the slow growth of the numbers of beneficiaries and low profitability seem to point out that the financial model of the sector might have reached its limit. Governance issues that some MFIs were victims of, stress the need to strengthen sectoral supervision. The recent adoption of the new law on Microfinance was a positive step but it should be followed by the adoption of implementation decrees.


10. The use of insurance services is limited despite national coverage and diversified products. Being the second most important in terms of size in the country, the sector weighs 7 and 2 percent of the total financial assets and GDP, respectively, in 2018. It is mostly dominated by two state-owned companies which hold more than 70 percent of the market shares. Access to insurance services is as low as 3 percent of the adult population.

11. Activities in the insurance sector have shown good progress in the last few years, but the financial performance appears mixed. The sector’s turnover increased by 39 percent over the past six years, driven by non-life insurances, and total assets grew by almost 57 percent over the same period. The solvency ratio, measuring the financial capacity to fulfil contractual commitments, remains higher than the minimum regulatory requirement; this is also the case of the outstanding premium ratio, which measures non-paid to the written premiums. Nonetheless, profitability remained flat and even declined from 7.3 percent in 2017 to 6.2 percent in 2018.

12. Investment in the sector requires close monitoring to ensure its financial viability. More than two thirds of total assets in the sector are invested in financial assets, including T-Bills and share purchases. Such level of portfolio concentration could potentially be a source of risks for the sector and need close monitoring.


13. The pension system in Madagascar consists of public and private schemes. The public sector pension sector comprises two schemes covering the career civil servants and the military (CRCM, Caisse de Retraite Civile et Militaire) and contractual government employees (CPR, Caisse de Prévoyance et de Retraite). The private sector pension (CNAPS, Caisse Nationale de Prévoyance Sociale) provides for a general regime, as well as specific ones for the agricultural sector and household employees. Pension services coverage remains low with the public pension system covering only 3 percent of the workforce against 10 percent for the private pension system.

14. The public pension system has been in continuous deficit for years, mainly due to its generous design. The system continues to function thanks to regular transfer by the government, and arrears accumulation. Reforms adopted so far to reduce the deficit have not been effective as they relied on an incorrect evaluation of the system: while the system has been always managed as a pay-as-you-go scheme but it effectively does not work as such—the pensions payment is simply treated as a budget line under spending in the budget. Efforts to strengthen the financial viability of the system should be directed toward better controlling pension expenditures.

15. The private pension system has started facing financial challenges as well as assets management and supervision issues. Although the system currently collects more than it pays, the design of the system as well as investment choices need to be reconsidered as they could affect the financial viability of the sector.

Caisse d’Epargne de Madagascar (CEM)

16. One of the oldest active financial institutions, CEM plays a major role in savings mobilization. Fully owned by the government, the main objective of CEM is to collect household savings via three main products, namely regular savings books, term accounts, and retirement savings plans. Being the first institution to represent Western Union in the country, CEM is also very active in providing cash transfers services. In 2018, its assets amounted to 3.1 percent of total financial assets or 1 percent of the country’s GDP. The number of savings accounts reached almost 1.2 million over the same period.

17. CEM seems to be in relatively good financial health but there are sources of vulnerabilities which need to be monitored. Assets have been increasing as well as net income, although the latter remains low due likely to increasing costs. The concentration of the deposits with credit and other financial institutions (66 percent of assets in 2018) could be a source of concern, exposing the sector to an eventual financial vulnerability of these institutions. The recent licensing of CEM as MFIs will boost its resources and diversify its activities.

Paositra Malagasy

18. Despite some financial difficulties, PAOMA remains a major player for financial inclusion due to its large footprint across the country. The activities of PAOMA have been affected by the diminution of mailing services. To compensate for its losses, the institution has tried to diversify its services, but financial difficulties went on accumulating. In 2017, the institution was audited with the aim to develop an action plan for its development.

19. The implementation of the recommendations by the audit is mitigated. On the one hand, the action plan has not been developed yet and PAOMA has started to work on new mobile banking services (Paositra Money) despite the recommendation that it should refrain from doing so pending the completion of the action plan. On the other hand, some of the recommendations by the audit have been implemented, namely: (i) taking stock of its property assets; (ii) preparing a full audit of its customer accounts; and (iii) working on procedures manual as well as on the audits of its financial statement for the period 2015–2017.

Mobile Banking

20. Mobile banking services development has been exponential, boosting access to financial services. The service is used to transfer and deposit money as well as to make payments in various transactions. The system counts three electronic money intermediaries with the number of accounts exploding from less than 140,000 in 2010 to almost 10 million last year. The volume of transactions grew concomitantly and went from 2 to about 200 billion of Ariary over the same period.

21. Due to lower operating costs, mobile banking is likely to become the future of financial inclusion in Madagascar. Financial institutions increasingly resort to electronic money intermediaries to support their activities, on the model of BNI Madagascar who recently launched a new credit product named KRED, aimed at SMEs operating in the informal sector mainly relying on mobile technologies.

C. Access to Credit—Main Obstacles

22. Despite a relatively sound financial system, financial intermediation remains low. Credit to the private sector ratio is well below the one in peer countries (14 percent of the GDP at end-2018 against an average of 25 percent for SSA countries) despite the upward trend of these past years. Getting credit continues to be difficult with the country ranking 132th out of 190 in terms of access to finance.

23. Credit activities remain concentrated. A risky environment and the inexistence of capital markets for long-term placement explains the concentration of the credit on short-term segments (Figure 5). Moreover, credit mostly benefits to non-capacity enhancing sectors, such as commerce which got 22 percent of the total credit in 2018 whereas growth supportive sectors such as energy or construction got respectively 4 and 3 percent (Figure 6). Not only credit level is low, but it is not used very efficiently.

Figure 5.
Figure 5.

Banking Credits by Category

(In Billions of Ariary)

Citation: IMF Staff Country Reports 2020, 061; 10.5089/9781513534213.002.A004

Sources: Malagasy authorities; IMF staff.
Figure 6.
Figure 6.

Banking Credits by Sector

(In Billions of Ariary)

Citation: IMF Staff Country Reports 2020, 061; 10.5089/9781513534213.002.A004

Sources: Malagasy authorities; IMF staff.

24. Both supply and demand factors can explain the low access to credit, along with other factors including macroeconomic, political and judicial environment.

Supply factors include:

  • Asymmetric information. In the absence of a credit bureau, getting information on borrowers’ creditworthiness appear to be costly, encouraging financial institutions to focus on those whose information are complete and easily verifiable.

  • Weak protection of creditors rights. In Madagascar, for example, the existing bankruptcy law does not prioritize creditors to be paid in case of business liquidation.

  • Unfavorable business environment. Despite reforms to improve the business climate, borrowers continue to operate in a difficult environment. The last Doing Business report ranked Madagascar 161st out of 190 in terms of business environment, with a score regressing from 48.9 last year to 47.7 this year.

  • Political instability. Volatile political situation linked to the electoral cycles of the past three decades have created a risky environment, comforting banks in their risk-averse position. As result, credit portfolios expansion remains subdued and credit activities focus more on the short term, limiting economic expansion.

Demand Factors include:

  • Low financial inclusion. In Madagascar, financial inclusion is well below of the level of comparator countries. Only 30 percent of the adult population have access to formal financial services with the percentage of the same population having access to credit being as low as 5 percent. This low access to financial services could be largely explained by the high informality rate of the economy, which is between 30–40 percent of the GDP.

  • High credit costs. In 2018, the nominal interest rates revolve on average around 15 percent, up to 60 percent for banks providing microfinance services. Due to more risks exposure and higher operating costs, interest rates charged by MFIs are even higher.

  • Incapacity to satisfy collateral requirement either because of the value of the requested collateral largely exceeds the value of the loan itself, or because there are no formalized property rights on the collateral which makes it unusable.

  • Weak consumers protection. Current practices do not always allow customers to have complete information on their credit final conditions until the end of the process. The latitude to compare across institutions to get the best credit conditions is almost inexistent as well as customers possible recourse.

  • Other factors linked to borrowers’ specificities. Due to the structuration of SMEs, they are the most affected by the credit access issue, with difficulties in presenting bankable projects and low managerial capacities. As a result, only 4 percent of SMEs have a line of credit against 33 and 30 percent for medium and large enterprises, respectively. Consequently, as low as 1 percent of SMEs investments are financed by banks against 7 percent for the other type of enterprises.

  • Lack of credit culture. Despite a relatively high literacy rate among the adults, 70 percent of this population do not have any credit neither from formal nor informal sources. Further to above-mentioned factors, additional statistics seem to reinforce the idea that Malagasy are in general reluctant to get into debt. Indeed, even in case of emergency, only 1 percent of the adult population uses credit to address the emergency.

D. Conclusion and Policy Recommendations

25. The financial sector is expanding but its contribution to the economy remains modest due to low access to the credit. The banking system appears overall healthy, with limited exposure to risks, although the situation needs to be closely monitored, especially in light of the authorities’ ambitious plan of development. Microfinance institutions have boosted access to financial services by deserving traditionally excluded actors and areas of the economy. The insurance sector remains profitable, but concentration of investments could be a source of vulnerability. PAOMA and the Caisse d’Epargne de Madagascar have a significant room to boost financial inclusion due to their comparative advantage, even though their financial situation warrants careful supervision to preserve the savings of millions of small depositors. Both the public and private pension system need to be revamped based on Fund TA recommendations for an efficient use of public funds and to avoid burdening the budget.

26. The adoption of the new banking and financial stability laws by the Parliament should remain a priority to secure financial stability and credit expansion. The new banking law strengthens the independence of the financial supervisor (CSBF, Commission de Supervision Bancaire et Financière), improves the bank resolution framework, introduces risk-based supervision, and reinforces the framework for corrective bank supervisory measures. It also includes innovative measures favoring access to credit, namely: the possibility to outsource banking services to selected providers, options to diversify banking services, higher transparency requirements, and some reinforced consumer protection.

27. Efforts to improve the availability of credit information should be pursued to support lending. Madagascar currently has an operational credit registry and is about to operationalize its first private credit bureau. In addition to improving the quality of loans review processes, the availability of credit information is expected to lower associated costs, improving credit risk monitoring by the regulator, and disciplining borrowers.

28. Promoting financial inclusion activities is likely to be bolstered by investment in digital finance. The expansion of banks and MFIs activities are limited due to the cost of brick and mortar investment. Digital finance, through mobile banking services, allows to bypass such costs and reduce geographical constraints. Last year, Madagascar adopted its national strategy to promote financial inclusion for the period 2018–2022. The strategy identifies three focus areas including financial education and consumers protection, access and use of financial service, and legal and regulatory framework.

29. Reforms to improve the macroeconomic, business and judicial environment continue. A sound business and judicial environment are key to developing credit activities by reducing uncertainties and by guaranteeing the property rights. Pursuing the ongoing monetary policy reforms is also important to introduce more predictability in the interest rates determination.

Annex I. List of Banking Institutions

Table 1.

Madagascar: Overview of the Banking Institutions

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Prepared by Ialy Rasoamanana. This paper has benefited from valuable guidance from Marc Gérard. The author would also like to thank the authorities for their valuable assistance in data collection as well as for comments received during the presentations and discussions of this work.


The development of this capital adequacy ratio, aimed at measuring the capacity of bank capital to withstand losses from non performing loans, is subject to some cyclical factors associated mainly with the period of distribution of dividend by banks which generally takes place at the end of the 1st semester of the year.

Republic of Madagascar: Selected Issues
Author: International Monetary Fund. African Dept.