The endemic species richness on Madagascar, relative to landmass area, is unparalleled in the world. Many organisms on the island have restricted geographical ranges. A comprehensive hypothesis explaining the evolution of this microendemism has yet to be developed. Using an analysis of watersheds in the context of Quaternary climatic shifts, we provide a new mechanistic model to explain the process of explosive speciation on the island. River catchments with sources at relatively low elevations were zones of isolation and hence led to the speciation of locally endemic taxa, whereas those at higher elevations were zones of retreat and dispersion and hence contain proportionately lower levels of microendemism. These results provide a framework for biogeographic and phylogeographic studies, as well as a basis for prioritizing conservation actions of the remaining natural forest habitats on the island.