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.