TRADITIONAL FINANCIAL STRUCTURES - IQUB AND IDIR

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