VZCZCXYZ4649
RR RUEHWEB

DE RUEHDS #0610 0640833
ZNR UUUUU ZZH
R 040833Z MAR 08
FM AMEMBASSY ADDIS ABABA
TO RUEHC/SECSTATE WASHDC 9808
INFO RUCNIAD/IGAD COLLECTIVE

UNCLAS ADDIS ABABA 000610 
 
SIPDIS 
 
DEPT FOR EEB 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ET
 
SUBJECT: TRADITIONAL FINANCIAL STRUCTURES - IQUB AND IDIR 
 
 
¶1. SUMMARY: While Ethiopia has one of the least-developed formal 
financial sectors in the world, it is possessed of a rich tradition 
in indigenous, community-based revolving savings and credit 
associations and insurance societies.  These "iqub" and "idir" 
groups provide a source of credit and insurance outside the formal 
sector but much rooted in Ethiopian society.  The contributions of 
these groups, especially iqub, to economic growth is difficult to 
quantify but can be assumed to play an important role.  END 
SUMMARY. 
 
¶2. Iqub (also spelled iquib or equb) is a traditional means of 
saving in Ethiopia and exists completely outside the formal 
financial system.  An iqub is a form of revolving savings.  People 
voluntarily join a group and make a mandatory contribution (every 
week, pay period or month for example).  The "pot" is distributed on 
a rotating basis determined by a drawing at the beginning of the 
iqub.   Amounts contributed vary according to the means of the 
participants.   Iqub is widespread, especially in urban areas.  A 
1995 study estimated the volume of money in iqub to be in the range 
of 8-10% of GDP. 
 
¶3. Iqub offers a savings mechanism for the "unbanked" in Ethiopia, 
both urban dwellers who choose not to have an account and rural 
citizens who do not have access to a traditional bank within a 
reasonable distance from their dwelling.  Ethiopia has one of the 
lowest bank penetration rates in the world, with less than one bank 
branch for every 100,000 residents.   Currently, real interest rates 
are significantly negative -- at least negative 12%-- so iqub has 
advantages over the formal financial system for participants. 
Additionally, the social and communal aspect of iqub gives 
participants a confidence that they may not have in Ethiopia's shaky 
financial system. Most formal banks require a high level of 
collateral and/or a guarantor for loans, which discourages start-up 
borrowers and does not allow for borrowing for personal needs.  In 
the absence of loans from formal banks, Ethiopians also turn to loan 
sharks (Arata Abedari in Amharic) who require guarantors and charge 
as much as 400% per year interest. 
 
 
¶4. Iqub can be a driver of economic growth and development.  At 
lower levels, a study by Tegegne Gebre Egziabher and Mulat Demeke of 
the Institute for Development Research at Addis Ababa University 
examined small business owners in rural towns.  The study found that 
the group surveyed most frequently used their payout for expanding 
their business (41% of participants).  At higher levels, a prominent 
local businessman described iqubs in Addis Ababa with payouts in 
excess of 5 million birr (over $500,000).  He stated that much of 
the construction boom in Addis is being financed with iqub rather 
than through the formal banking system.  Given that the central bank 
governor has told Emboffs that only 5% of the country's total loan 
portfolio is in construction loans, iqub is filling a vital role in 
providing capital for physical infrastructure expansion. 
 
¶5. While iqub is a means of savings and may substitute for formal 
banking and credit, "idirs" are burial societies that provide a 
traditional form of insurance.  Idir contributions are used to pay 
for expenses in the event of the death of a family member.  Idir is 
the only means, other than personal savings, to pay for these 
expenses.  Idir contributions are generally small compared to iqub, 
usually around $1 per month. Some idirs provide additional coverage, 
for example in cases of illness, destruction of a member's house or 
death of livestock. Due to their ubiquity and influence in their 
communities, idir associations are also forming the basis for some 
foreign assistance programs, particularly those focused on HIV/AIDS 
treatment and prevention. 
 
¶6. COMMENT: Ethiopia's formal financial system is extremely 
underdeveloped and for the most part confined to cities and larger 
towns.  The traditional systems of iqub and idir are perhaps 
centuries old, yet continue to play a vital role in Ethiopia's 
finance.  Quantifying the magnitude of funds held in these systems, 
particularly in iqub, is difficult.  However, based both on formal 
studies and anecdotal information, iqub provides an alternative 
savings and loan structure rooted in tradition, practicality and 
availability that acts as an engine for a portion of Ethiopia's 
economic growth.  END COMMENT 
 
YAMAMOTO