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