Develop Understanding of The Ethiopian Financial System and Market
Develop Understanding of The Ethiopian Financial System and Market
Contents
1.1. Ethiopian Financial System
1.2. Roles of banks and financial institutions as financial intermediaries
1.3. financial markets in Ethiopia
1.4. The purpose of financial markets
1.5. The emergence of financial markets in Ethiopia
1.6. The major participants in financial markets
1.1. Ethiopian Financial System
A financial system (within the scope of finance) is a framework that allows the exchange of funds between
lenders, investors, and borrowers. That is a financial system consists of institutional units and financial markets
that interact, typically in a complex manner, for the purpose of mobilizing funds for investment and providing
facilities such as payment systems, for the financing of commercial activity.
3.2. Iqqubs
An iqqubis a traditional saving and credit association (Rotating Saving and Credit Association), of which its
1) They offer deposit accounts that can accommodate the amounts and liquidity characteristics desired by most
savers.
2) They package funds received from deposits to provide loans of the sizes and maturity desired by borrowers.
3) They accept the risks on loans provided
4) They have more expertise than most individual surplus units in assessing the credit worthiness of deficit units
5) They diversify their loans among numerous deficit units and therefore they can absorb defaulted loans better
than individual surplus units could.
The primary functions/roles of financial institutions of this nature can be summarized as follows:
Accepting Deposits/Saving
Providing loans such as Commercial Loans, Real Estate Loans, Mortgage Loans
Issuing securities/Share Certificates, because most of them are share companies
Acting as brokers
Transforming long-term funds to short-term funds-enabling liquidity
Providing insurance service and spreading threats risks among society member
1.1.3.6.Benefits of Financial Institutions as Intermediaries
1. Lower search costs.
2. Spreading risk.
3. Economies of scale
4. Convenience of Amounts.
2.Secondary market: It’s a market for secondary sale of securities. In other words, securities which have
already passed through the new issue market are traded in this market.
Secondary market is the market where the second hand securities are sold.
Liquidity is a crucial aspect of securities that are traded in secondary markets. Liquidity refers to the ease with
which a security can be sold without a loss of value.
Based on security types, financial markets are classified as
Money market
Capital market
A. Money Market
Money market is a market for dealing with financial assets and securities which have a maturity period of up to
one year. In other words, it’s a market for purely short term funds.
Some of money market includes the following.
Bills of exchange
A promissory note
Check
A certificate of deposit
Commercial bills (commercial papers.
Treasury bills (T-bills
1.3.2.Features/characteristics/ of Money Market
The following are the general features of a money market:
1. It is market purely for short-term funds or financial assets called near money.
2. It deals with financial assets having a maturity period up to one year only.
3. It deals with only those assets which can be converted into cash readily without loss and with minimum
transaction cost.
4. Generally, transactions take place through phone i.e., oral communication. Relevant documents and written
communications can be exchanged subsequently. There is no formal place like stock exchange as in the case of a
capital market.
5. Transactions have to be conducted without the help of brokers.
6. The components of a money market are the Central Bank, Commercial Banks, Non-banking financial
companies, discount houses and acceptance house. Commercial banks generally play a dominant in this market.
B. Capital market:
A capital market is a market for financial assets which have a long or indefinite maturity.
Stock markets , which provide financing through the issuance of shares or common stock, and enable the
subsequent trading thereof.
Equity markets: A market where ownership of securities are issued and subscribed is known asequity market.
Bond markets, which provide financing through the issuance of bonds, and enable the
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subsequent trading thereof.
Debt market: The market where funds are borrowed and lent is known as debt market.
1.4. General Functions/Purposes/Roles of Financial Markets (both money and capital market)
The purpose/functions/ of financial markets includes:
Investing funds
Raising Capitals/funds/
Intermediary functions
Financial Functions
Economic fictions
1. Investing funds
The investors that provide money are called lenders or surplus units. Financial markets enable the investors to
invest surplus funds by buying securities participants.
Lenders may include:
A. Individuals
Many individuals are not aware that they are lenders, but almost everybody does lend money in many ways. A
person lends money when he or she:
B. Companies
Companies tend to be lenders of capital
2. Raising Capitals/funds/
Finical markets raise required funds/capitals/ by enabling participants/borrowers/ by issuing securities. Financial
markets attract funds from investors and channel them to corporations—they thus allow corporations to finance
their operations and achieve growth.
Borrowers/Deficit Units/ may include:
Individuals borrow money via bankers' loans for short term needs or longer term mortgages to help finance a
house purchase.
Companies borrow money to aid short term or long term cash flows. They also borrow to fund modernization
or future business expansion.
Governments often find their spending requirements exceed their tax revenues.
Public Corporations typically include nationalized industries. These may include the postal services, railway
companies and utility companies.
3. Intermediary functions/roles of financial market:
Like financial institutions, financial markets also provide some sort of intermediary roles. The intermediary
functions of financial markets include the following:
a. Transfer of resources: d. Capital formation
b. Enhancing (attracting) income e. Price determination
f. Sale mechanism
c. Productive usage g. Information
4. Financial Functions-serves as means of funding raising roles
a. Providing the borrower with funds so as to enable them to carry out their investment plans.
b. Providing the lenders with earning assets(financial instruments) so as to enable them to earn wealth.
c. Providing liquidity in the market so as to facilitate trading of funds.
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d. Providing liquidity to commercial bank
e. Facilitating credit creation
f. Promoting savings
g. Promoting investment
5. Economic fictions
One of the important sustainability requisite for the accelerated development of an economy is the existence of a
dynamic financial market. A financial market helps the economy in the following manner.
The demand side consists of: those in need of cash flows (daily operational needs); those in need of interim
financing (bridge financing); those in need of long-term funds for special projects (capital funds for venture
financing).
The supply side consists of: those who have aggregate savings (retirement funds, pension funds, insurance
funds) that can be used in favor of demand side.
B. Investor vs. Speculator
An investor is any party that makes an investment. However, the term has taken on a specific meaning in
finance to describe the particular types of people and companies that regularly purchase equity or debt securities
for financial gain in exchange for funding an expanding company
Investors may be
corporations
individuals
local and international governments
C. Speculators
Speculation involves the buying, holding, and selling of stocks, bonds, commodities, currencies, collectibles,
real estate, derivatives or any valuable instrument to profit from fluctuations.
Speculators may be:
Corporations or
Individuals
Bonds
Debentures
Equity
LO2 Explain the function and role of the National Bank of Ethiopia (NBE)
Content
2.1. Purpose of NBE
2.2. Roles of NBE
2.3. The NBE’s monetary policy of Ethiopia
2.4. The NBE’s monetary policy effect on of Ethiopian Economy
Medium of exchange
Standard of deferred
Measure of value payments
. Store of value Measure of liquidity
LO4 EXPLAIN THE KEY FACTORS THAT INFLUENCE THE ETHIOPIAN ECONOMY
Introduction
The activities of different participants affect the economy of a country. After completion of this training,
the trainee is able to understand different factors that affect the Ethiopian economy.
Content
4.1. Key Factors that Influence the Ethiopian Economy
4.2. Consumers’ activity that influence economy
THANK YOU!!!!!
THE END