The IDDIR: an informal insurance arrangement in Ethiopia

In the absence of formal insurance services, smallholder farmers are devoid of effective ways of managing numerous risks they encounter in their daily lives. One response mechanisms common among rural households is reliance on network-based collective action arrangement driven by motives of reciprocity and altruism. The indigenous financial institutions constitute a striking example of risk-sharing and risk-pooling arrangements widely practiced by the bulk of rural communities in Africa. Of these arrangements, the Ethiopian iddir can be considered as a unique and viable institution worth investigation to understand its nature and logic. Drawing on the synthesis of the available literature and household surveys, this study attempts to explain the essence and dynamism of iddir; describe its risk-pooling and risk-sharing mechanisms; investigate the principles and rules underlying its procedures and operations. It also assesses its rules using an analytical framework known as the “institutional analysis and development framework”. This study can contribute to the debate concerning the logic and potential of informal institutions in, partially, meeting the insurance needs of smallholder farmers. It is important to understand and promote the mechanisms by which indigenous arrangements attempt to bridge the gap left by the formal sector.