Madagascar - Microfinance Project

Report No. PID5929 Project Name Madagascar-Microfinance Project Region Africa Sector Financial Sector Adjustment Project ID MGPE52186 Borrower Republic of Madagascar Implementing Agency Ministere de l'Economie et des Finances Groupe de Preparation du Projet Microfinance Contact Person: Mr. Renaud Rajanoah Antananarivo, Madagascar Date this PID prepared September 22, 1997 Projected appraisal date October 1998 Projected Board date February 1999 Environment Category C Country and Sector Background: A country with promising economic prospects, Madagascar now ranks at the bottom tier of developing countries. Seventy per cent of its 13.5 million inhabitants live in poverty. The economic decline over the last decade, exemplified by declining GDP, is due to inappropriate economic policies and problems resulting from a political transition. Since 1995, implementation of a reform agenda has gained some momentum, although sustained growth remains elusive. An IDA credit of US$70 million was signed on March 14, 1997 to support Madagascar's continuing structural adjustment, including financial sector reforms, privatization, and actions to open the country to foreign investment and tourism. In the financial sector, the Government is in the process of disinvesting from the two failed public banks. Past attempts to develop credit operations to smallholders had not been successful, as the banking sector, particularly the public banks which were to lend to low-income clients, had ill-adapted products, high costs, and poor recovery rates. The IDA-supported pilot Rural Finance Technical Assistance Project (RFTAP), implemented since 1994, has been trying the new approach of delivering savings-based credit through the creation of mutualist savings and loan associations. Project Objectives: The proposed project draws on the experience of the pilot RFTAP (Rural Finance Technical Assistance Project). Its objectives are to deepen financial intermediation and help alleviate poverty by increasing the use of financial services by lower-income households in both rural and urban areas. They will be achieved through the strengthening of private, progressively self-sustainable microfinance institutions (MFIs) and capable coordinating institutions. Project Description: The project will entail three main components: first, providing an appropriate framework for developing savings and loan associations and other successful microfinance institutions; second, developing the local capacity to put in place the above  microfinance intermediaries throughout the country and increasing their linkages with the banking sector; and third, building competencies in microfinance through training of participants. Participation of beneficiaries, NGOs, Government, and other donors is expected at every stage of project preparation, implementation and follow-up. Project Financing: Detailed cost estimates for the project components will be developed during preparation. Project Implementation: Each project component will be executed by national institutions as follows: (a) for the legal and regulatory framework component, CSBF (the Banking Supervisory Commission) and microfinance coordinating institutions; (b) for the microfinance institutions development component, the regional savings and loan networks with support from institutions (including NGOs) providing technical assistance, and other MFIs; and (c) for the capacity- building component: INSCAE and regional training centers for the finance/banking training program of microfinance professionals; specialized institutions (including NGOs) for the training of staff and clients of MFI networks, and other outreach programs; and selected technical assistance for the strengthening of microfinance coordinating institutions. Activities under the project will be coordinated by a small independent unit. Project sustainability: The following factors are important to the sustainability of project benefits: -- Macroeconomic stability and banking sector reform; -- Adaptability of approach to the specificity of each locality; -- Ongoing capacity building and institutional development in MFI networks at village and regional levels; -- Clear business plans to achieve sustainability of participating institutions, such as high recovery rates and low overhead; and -- Arrangements to transfer management to nationals at the regional level. Lessons from Bank-Group Involvement: The proposed project builds upon the successful ongoing pilot project which has created 54 savings and loan associations with a membership of over 10,000 low- income people. The high repayment rate and the growing demand are incentives for preparing the expansion phase. Technical assistance will continue to be provided under the proposed project to successfully implement this critical stage for the sustainability of the established microfinance networks. The experience gained with the pilot schemes will be reflected in the design of the institution development component of the project. Poverty Category: By focusing on increased use of financial services by the low-income population, the project is consistent with the Bank's poverty reduction strategy. In addition, the project will include specific mechanisms for targeting the poor through tailored support. Environmental aspects: The project has no environmental impact. Project Objective Categories: The project will contribute to the following Bank Group objectives: (a) poverty alleviation; (b) financial system development; (c) private sector development; (d) - 2-  institution building; and (e) local capacity building. Contact Point: Mrs. Chau Duong Africa Private Sector Finance Group The World Bank 1818 H Street N.W. Washington D.C. 20433 Telephone No.: (202) 473-2939 Fax No.: (202) 477-2978 Note: This is information on an evolving project. Certain components may not necessarily be included in the final project. Processed by the InfoShop week ending January 23, 1998. - 3 -