After the ‘Health for All’ declaration of the Alma Ata conference, many countries in the developing world have been trying to provide basic health services to their population. However, it has become increasingly clear that due to market failure, state failure, and other reasons, the conventional sources of finance could not solve the health problem of developing countries, particularly that of the rural population and the high-risk groups. As a result, there is a worldwide initiative to find additional sources of finance which are broad based, sustainable, and suitable to the socio-economic situations of the rural population. This study assesses the prospect and potential role of community health insurance schemes in the provision of basic health care services and in generating sustainable finance for the health sector of Ethiopia. It starts by investigating the costs of illness, health care demand behaviour, and the capacity of existing risk-sharing arrangements in protecting households against health shocks. Then, it thoroughly analyses the willingness of households to pay and the prospect of potential community health insurance schemes in the rural areas of Ethiopia.