Learning Guide: Accounting Department Basic Accounting Works Level Ii

GLOBAL COLLEGE
Training, Teaching and Learning Materials
GLOBAL COLLEGE
ACCOUNTING DEPARTMENT
BASIC ACCOUNTING WORKS LEVEL II
Learning Guide
Unit of Competence: Develop Understanding of the
Ethiopian Financial System and Markets
Module Title: Developing Understanding of the
Ethiopian Financial System and Markets
LG Code: BUF BAW2 06 0812
TTLM Code: BUF BAW2 M06 1212
1
TTLM Development Manual Date: october 30,2018
Compiled by: Shelema T, Acct department
GLOBAL COLLEGE
LEARNING OUTCOMES:
At the end of the module the trainee will be able to:
LO1 Describe what is meant by the Ethiopian financial markets
LO2 Explain the function and role of the National Bank of Ethiopia (NBE)
LO3 Explain Ethiopia's monetary system
LO4 Explain the key factors that influence the Ethiopian economy
LO1 Ethiopian financial markets
Specific financial markets in

Information Sheet – 1
Ethiopia
Financial system in today’s world is perhaps the most important system among all the systems as
all the economics of the world have become interlinked it has become a very complex system.
The financial system in it includes all whether its banks or stock market or financial institutions.
Let’s see some of the important functions which are performed by the financial system –
1. The first and foremost function which financial system perform is the channelization the
savings of individuals and making it available for various borrowers which are the companies
which take loan in order to increase the production of goods and services, which in turn increases
the overall growth of the economy.
2. It is with the help of financial system that one can make payment whenever and wherever he
or she wants with the help of checks, credit card and debit card. In the absence of financial
system one has to take cash wherever he or she goes which would have been impossible.
3. Financial system also provide an individual various options when it comes to protecting
against various risks like risk arising from accidents, health related, etc… through various life
insurance options.
2
GLOBAL COLLEGE
4. Financial system also makes sure that one can liquidate his or her savings whenever he or she
wants it and therefore individuals can have both the things, which involve return on investments
as well as comfort that they can liquidate their investments whenever they want.
5. All transactions whether they involve individual buying house or a big company coming with
an initial public offer they are effected smoothly because of financial system.
Functions performed by a financial system are :
 Saving function: Public saving find their way into the hands of those in production
through the financial system. Financial claims are issued in the money and capital
markets which promise future income flows. The funds with the producers result in
production of goods and services thereby increasing society living standards.
 Liquidity function: The financial markets provide the investor with the opportunity to
liquidate investments like stocks bonds debentures whenever they need the fund.
 Payment function: The financial system offers a very convenient mode for payment of
goods and services. Cheque system, credit card system etc are the easiest methods of
payments. The cost and time of transactions are drastically reduced.
 Risk function: The financial markets provide protection against life, health and income
risks. These are accomplished through the sale of life and health insurance and property
insurance policies. The financial markets provide immense opportunities for the investor
to hedge himself against or reduce the possible risks involved in various investments.
 Policy function: The government intervenes in the financial system to influence
macroeconomic variables like interest rates or inflation so if country needs more money
government would cut rate of interest
The purpose of  enabling participants to invest surplus funds by buying

financial markets securities
includes:  enabling participants to raise required funds by issuing
securities
The Importance and Limitations of Financial Markets

I would like to begin by discussing the role of the financial system and why it is different from
other sectors of the economy. Individual entrepreneurs rarely have enough of their own capital
to undertake investments themselves. Individual savers, without pooling their money, would not
be able to take advantage of the potential increasing returns to scale of their investments, and
would face a large degree of risk with little liquidity. The financial system – including banks
and other financial intermediaries, equity markets, and debt markets – solves these problems by
agglomerating capital from many smaller savers, allocating capital to the most important uses,
and monitoring to ensure that it is being used well. At the same time, the financial system
transfers, pools, and reduces risk, increases liquidity, and conveys information.
Equity
3
GLOBAL COLLEGE
Equity has several advantages. It allows companies to share risks with their investors. There is
no fixed obligation to repay and the value of the equity investment itself varies with the
condition of the firm. Unlike debt, equity does not encourage companies to take excessive risks.
With debt, a company gets the full benefit of the upside realization of the risk, while the
marginal cost of bad realizations is limited. In contrast, the risk incentives are more aligned
with equity.
Short-term Bank Loans
With debt, the expected return incentives of suppliers and users of capital are in some respects
more closely aligned than they are with equity. Unlike with equity, an entrepreneur will not
borrow if he has secret information that his project is worthless. And the entrepreneur gets the
full marginal benefit of increased returns past the cost of repaying the loan, thus not creating
any incentive to shirk or divert revenues.
Bonds
Bonds represent a halfway house between short-term loans and equity. With a bond, a firm has
a fixed commitment. It must pay interest every year, and it must repay the principal at a fixed
date. As a result, all the problems we have discussed above with loans arise with bonds.
Bonds have one significant advantage – and disadvantage. Because the lender cannot recall the
which would allow them to pick up the same money without disrupting the lecture. This,
however, is not an equilibrium because each person worries, correctly, that their neighbor will
pick up their $100 bill. As a result, everyone makes a costly investment in getting the $100 bills
earlier – with no social benefits. The implication is that taxes on speculative activity could, in
some cases, increase the efficiency of the market by reducing transactions costs and rent
seeking.
Participants in the financial markets may include
 banks and non-banking financial institutions
 investors:
 corporations
 individuals
 local and international governments
 speculators:
 corporations
individuals.
Self Assessment
1. Briefly Discussed The Importance and Limitations of Financial
Markets?
2.Who are the Participants in the financial markets ?
3.What are the purposes of financial markets ?
Explain the function and role of the National Bank of
LO2
Ethiopia (NBE)
The role of the NBE includes:
4
GLOBAL COLLEGE
 regulating banks and other financial institutions

 maintaining financial stability and regulating the Ethiopian Payments System
 managing government debt
 regulating the payments system
setting and implementing monetary policy
Information Sheet – 1 The National Bank of Ethiopia

The National Bank of Ethiopia is the central bank of Ethiopia. Its headquarters are in the
capital city of Addis Ababa. The bank's name is abbreviated to NBE.
History.
Prior to this proclamation, the Bank carried out dual activities, i.e. commercial banking and
central banking. The proclamation raised the Bank's capital to 10 million Ethiopian dollars and
granted broad administrative autonomy and juridical personality. Following the proclamation the
National Bank of Ethiopia was entrusted with the following responsibilities:
 To regulate the supply, availability and cost of money and credit.

 To manage and administer the country's international reserves.
 To license and supervise banks and hold commercial banks reserves and lend money to them.
 To supervise loans of commercial banks and regulate interest rates.
 To issue paper money and coins.
 To act as an agent of the Government.
 To fix and control the foreign exchange rates.
However, monetary and banking proclamation No. 99 of 1976 came into force on September
1976 to shape the Bank's role according to the socialist economic Principle that the country
adopted. Hence the Bank was allowed to participate actively in national planning, specifically
financial planning, in cooperation with the concerned state organs. The Bank's supervisory area
was also increased to include other financial institutions such as insurance institutions, credit
cooperatives and investment-oriented banks. Moreover the proclamation introduced the new
'Ethiopian birr' in place of the former Ethiopian Dollar that ceased to be legal tender.
The proclamation revised the Bank's relationship with Government. It initially raised the legal
limits of outstanding government domestic borrowing to 25% of the actual ordinary revenue of
the government during the proceeding three budget years as against the proclamation 206/1963,
which set it to be 15%.
This proclamation was in force till the new proclamation issued in 1994 to reorganize the Bank
according to the market-based economic policy so that it could foster monetary stability, a sound
5
GLOBAL COLLEGE
financial system and such other credit and exchange conditions as are conductive to the balanced
growth of the economy of the country. Accordingly the following are some of the powers and
duties vested in the Bank by proclamation 83/1994.
 Regulate the supply and availability of money and credit and applicable interest and other
hanges.
 Set limits on gold and foreign exchange assets which banks and other financial institutions
authorized to deal in foreign exchange and hold in deposits.
 Set limits on the net foreign exchange position and on the terms and amount of external
indebtedness of banks and other financial institutions.
 Make short and long-term refinancing facilities available to banks and other financial
institutions.
Lastly, the proclamation has also raised the paid-up capital of the Bank from Birr 30.0 million to
Birr 50.0 million.
The effect of the NBE's monetary policy may include:
 changes in interest rates

 flow on changes to employment, prices and production levels
 increases or decreases in the supply of money in the Ethiopian economy
 acting to avoid or minimise a systemic collapse of financial institutions
 The role of the NBE in regulating the Ethiopian Payments System may include:
 fulfilling its regulatory responsibilities by controlling risks and promoting
efficiencies
 participating in the financial system as banker to the national payment system of
government
providing facilities for final settlement of transactions
Self Assessment
1. Briefly Discussed The role of the NBE?
2. National Bank of Ethiopia was entrusted with the responsibilities?
3.What are the effect of the NBE's monetary policy?
Information Sheet – 1 The National Bank of Ethiopia
LO3 Ethiopia's monetary system

The different  as a means of exchange for acquiring goods and services
functions of money  indications of relative values between goods and services
may include:  measure of liquidity
6
GLOBAL COLLEGE
This section discusses the main functions of financial intermediaries and financial markets, and
their comparative roles. Financial systems, i.e. financial intermediaries and financial markets,
channel funds from those who have savings to those who have more productive uses for them.
They perform two main types of financial service that reduce the costs of moving funds between
borrowers and lenders, leading to a more efficient allocation of resources and faster economic
growth. These are the provision of liquidity and the transformation of the risk characteristics of
assets.
Provision of liquidity
The link between liquidity and economic performance arises because many high return
investment projects require long-term commitments of capital, but risk adverse lenders (savers)
are generally unwilling to delegate control over their savings to borrowers (investors) for long
periods. Financial systems mobilise savings by agglomerating and pooling funds from disparate
sources and creating small denomination instruments. These instruments provide opportunities
for individuals to hold diversified portfolios. Without pooling individuals and households would
have to buy and sell entire firms (Levine 1997).
Diamond and Dybvig (1983) show how financial intermediaries can enhance risk sharing, which
can be a precondition of liquidity, and can thus improve welfare. In their model, without an
intermediary (such as a bank), all investors are locked into illiquid long-term investments that
yield high payoffs only to those who consume at the end of the investment. Those who must
consume early receive low payoffs because early consumption requires premature liquidation of
long-term investments. When agents need to consume at different (random) times, an
intermediary can improve risk sharing – by promising investors a higher payoff for early
consumption and a lower payoff for late consumption relative to the non-intermediated case.
Financial markets can also transform illiquid assets (long-term capital investments in illiquid
production processes) into liquid liabilities (financial instrument). With liquid financial markets
savers/lenders can hold assets like equity or bonds, which can be quickly and easily converted
into purchasing power, if they need to access their savings.
For lenders, the services performed by financial markets and intermediaries are substitutable
around the desired risk, return and liquidity provided by particular investments. Financial
intermediaries and markets make longer-term investments more attractive and facilitate
investment in higher return, longer gestation investment and technologies. They provide different
forms of finance to borrowers. Financial markets provide arms length debt or equity finance (to
those firms able to access markets), often at a lower cost than finance from financial
intermediaries.
7
GLOBAL COLLEGE
Transformation of the risk characteristics of assets
Financial systems facilitate risk-sharing by reducing information and transactions costs. If there
are costs associated with the channelling of funds between borrowers and lenders, financial
systems can reduce the costs of holding a diversified portfolio of assets. Intermediaries perform
this role by taking advantage of economies of scale, markets do so by facilitating the broad offer
and trade of assets comprising investors’ portfolios.
Definition Of Money
Whenever an article is generally acceptable in exchange in a community so that B will take it from A in
exchange for what A wants, not because B desires the article but because he knows that practically all
other persons will take it from him in exchange for the things which they have and which he wants, that
article is money; or, to put it more briefly, any commodity which is generally acceptable as a medium of
exchange is money.
The term money is sometimes used in other senses. For example, some authors mean by money what
we shall call standard money. In this sense gold coin would be the only money in the United States at the
present time. Lawyers sometimes define money as legal tender. In this sense gold coins, silver dollars,
subsidiary coins, and greenbacks are money, but not silver certificates nor gold certificates
Forms Of Money
Many different commodities have served mankind as money. In the Homeric poems oxen served as a
measure of value. Where slavery has prevailed slaves have often served as the medium of exchange and
the standard of value. The American Indian used strings of beads called wampum as money; in
Massachusetts in 1649 wampum was made legal tender among the settlers in the payment of debts to
the amount of forty shillings. In the East Indies cowry shells have been used for small change, while
among the Fijians whales' teeth have served the same purpose. Wheat, lumps of salt, cubes of tea,
cacao beans, and birds' heads are a few of the commodities which at different times and in different
places have served as money. Professor Carl Bucher in speaking of the variety of kinds of money among
primitive peoples writes, "The money of each tribe is that trading commodity which it does not itself
produce but which it regularly acquires from other tribes by way of exchange."
The Functions Of Money
Money serves as a medium of exchange. It is the intermediary third commodity which makes exchange
possible where direct barter would be impossible. This is the first and most important function of money.
In the second place, money serves as a measure of value. at less expense and with greater security than
8
GLOBAL COLLEGE
he could store it in many other forms. A fifth function of money is to serve as a basis for credit
transactions. Classification Of Money
Money may be classified as standard, token, credit, and representative. Standard money is money to the
value of which the values of other kinds of money are referred. Standard money is further classified as
commodity money and fiat money. Commodity money is subject to free coinage and its supply is
regulated automatically. Gold coin will serve as an example in the United States. There is a parity
between the value of commodity money and the value of the commodity out of which the money is made.
Fiat money is money the value of which is regulated artificially by regulating its supply. Its value is
independent of the value of the material out of which it is made. The greenbacks during and for some time
after the Civil War were fiat money. As soon as provision was made for their redemption they became
credit money. Token money, also called subsidiary money, is small change. In the United States it
includes pennies, nickels, dimes, quarter dollars, and half dollars. Credit money is money redeemable in
standard money on demand. Representative money is a sort of warehouse receipt certifying that the
money upon which it is based is withdrawn from circulation and can be had upon demand. In the United
States the gold certificate and the silver certificate are of this character. They certify that gold and silver,
respectively, have been deposited in the United States Treasury and are payable to the bearer on
demand. Representative money does not increase the quantity of money. It merely furnishes a more
convenient form for handling the money already in circulation
The Value Of Money
Value is power in exchange. The value of money is its power in exchange. The value of money just like
the value of anything else depends upon the demand for it and the supply of it. Its value depends upon its
marginal utility. If the supply of money is increased, the demand remaining the same, the marginal utility
of money is lowered and its value is lessened, and if the supply is decreased, the marginal utility rises and
with it the value. On the other hand, if the demand for money increases, the marginal utility rises and with
it the value of the money, and if the demand decreases, its marginal utility and likewise its value falls.
The Demand For Money
Simple desire for money does not constitute demand for it any more than desire for any other economic
good constitutes demand for it. Demand is effective desire. It is desire coupled with the ability to pay the
current price for the thing desired. Demand for money, then, is desire for money together with the ability
to give some other commodity which will be accepted in exchange for money. The demand for money
depends upon the amount of business which is transacted for which money payment must be made and
upon the extent to which money is required as a reserve for credit operations. It is influenced also by the
extent to which money is hoarded, and by the demand for the metal of the money for use in the arts
because of the effect of these things in reducing the supply of money in circulation. Substitutes for money,
such as checks, have the effect of lessening the demand for money.
9
GLOBAL COLLEGE
Instruments traded  bills of exchange

on the short term  commercial bills
money market  government bills
include:  promissory notes
 treasury bills.
Motivations for holding money may include:
 precautionary demand for money to pay future expenses which may not be
anticipated
 speculative demand for money to be able to take advantage of future price changes
in favour of the purchaser
transactions demand for money to pay everyday predictable expenses.
Self Assessment
1. Briefly Discussed Motivations for holding money?
2. List downThe Functions Of Money?
3.What are The Demand For Money?

4. What is meant by Money?
factors that influence the

LO4
Ethiopian economy
Consumer activity  applications for home loans

may include:  purchase of private health insurance
 purchase of university education
 purchase or building of residential accommodation
 retail spending
 tourism within Ethiopia by Ethiopians.
Information Sheet – 1 Consumer activity
10
GLOBAL COLLEGE
Sales Order Processing
A sales order application system comprises the procedures involved in accepting and shipping
customer orders and in preparing invoices that describe products; services and assessments. The
sales order is the interface between the various functions necessary to process a customer order.
These functions are sales order, credit, finished goods, shipping, billing, accounts receivable, and
general ledger.
Sales Order -- The sales order function initiates the processing of customer orders with the
preparation of a sales order. Credit- A customer’s credit standing should be verified prior to the
shipment of goods.
Finished Goods- Finished goods pick the order as described on the stock copy of the sales order
(copy 3). Stock records are updated to reflect the actual quantities to be forwarded to shipping.
Actual quantities are noted on the stock copy of the sales order, which is then forwarded along with
the goods to shipping. Shipping should sign the stock copy to acknowledge receipt of the quantities
noted there on form of finished goods.
Shipping- Shipping accepts the order for shipment after matching the packing slip copy to the
stock copy of the sales order. The bill of lading documents freight charges and the transfer of
goods from the shipping company to the transportation company. Frequently, freight charges
are paid by the shipper but billed to the customer on the sales invoice. The packing slip copy
of the sales order is usually included with the customer’s order when it is shipped.
Billing - Shipping forwards documentation of the shipment to the billing function. This
documentation is termed the shipping advice and is usually the stock copy of the sales order and
11
GLOBAL COLLEGE
a copy of the bill of lading. Billing pulls the related open order documentation, verifies the order,
then prepares the invoice by extending the charges for actual quantities shipped, freight charges
(if any), and taxes (if any). Invoices are mailed to customers. Invoices are recorded in the sales
journal and posting copies are sent to accounts receivable. Periodically, a journal voucher is
prepared and forwarded to the general ledger function for posting to the general ledger.
Accounts receivable and General Ledger- The distinction between billing and accounts
receivable is important to maintain separation of functions.
Self Check
1. List down & duscusse Consumer activity ?
2. What is the role and impact of global market situation? and Federal and Regional State
governments action on the economy?
Describe the role of

LO5
regulators
Main regulator in the financial

Information Sheet – 1
system
Policies, Procedures and Limits
Credit Policies
The foundation for effective credit risk management is the identification of existing and
potential risks in the bank’s credit products and credit activities
and controls, the basic principles of credit risk management will still apply. All new products
and activities should receive board approval before being offered by the bank.
Credit Analysis and Approval Process
Prior to entering into any new credit relationship, consideration shall be given to the integrity
and reputation of the party as well as their legal capacity to assume the liability. Banks need
to understand to whom they are granting credit. Therefore, prior to entering into any new
credit relationship, a bank shall become familiar with the borrower or counterparty and be
12
GLOBAL COLLEGE
confident that they are dealing with an individual or organization of sound repute and
creditworthiness. In particular, strict policies shall be in place to avoid association with
individuals involved in criminal activities.
Establishing sound, well-defined credit-granting criteria is essential to approving credit in a
safe and sound manner. In order to conduct an effective credit-granting program, banks
shall receive sufficient information to enable a comprehensive assessment of the risk profile
of the counterparty. Depending on the type of credit exposure and the nature of the credit
relationship with the counterparty, the factors to be considered and documented in credit
granting include:
• purpose of the credit and sources of repayment;
• borrower’s repayment history and current capacity to repay, based on historical financial
trends and future cash flow projections under various scenarios;
2 The credit risk philosophy is a statement of principles and objectives that outline a bank’s
willingness to
assume credit risk. It will vary with the nature and complexity of its business, the extent of other
risks
assumed, its ability to absorb losses and the minimum expected return acceptable for a specific
level of
risk.
Each credit proposal should be subject to careful analysis by a qualified credit analyst with
expertise commensurate with the size and complexity of the transaction. An effective
evaluation process establishes minimum requirements for the information on which the
analysis is to be based as listed above. The information received will be the basis for any
internal evaluation or rating assigned to the credit and its accuracy and adequacy is critical to
management making appropriate judgments about the acceptability of the credit.
Authority for Loan Approval
Banks must develop a corps of credit analysts who have the experience, knowledge and
background to exercise prudent judgment in assessing, approving and managing credit. A
bank’s credit approval process should establish accountability for decisions taken and
designate the individuals who have authority to approve credits or changes in credit terms.
Depending upon its size and nature, credit may be approved through individual authority,
joint authorities or through a committee. Approval authorities should be commensurate with
the expertise of the individuals involved and the delegation of authority should include, as a
minimum:
• the absolute and/or incremental credit approval authority being delegated;
• the provision or write –off authority being delegated;
• the officers, positions or committees to whom authority is being delegated;
• the ability of recipients to further delegate risk approval and write-off authority; and
• the restrictions, if any, placed on the use of delegated risk approval and write-off
authorities.
The degree of delegation of authority will depend on a number of variables, including:
• the bank’s credit risk philosophy;
• the quality of the credit portfolio;
• the degree of market responsiveness required;
13
GLOBAL COLLEGE
• the types of risks being assessed; and

• the experience of lending officers.
2.3.4 Related Party Transactions
A potential area of abuse arises from granting credit to related parties, whether companies or
individuals3. Consequently, it is important that banks grant credit to such parties on an
arm’s-length basis and that the amount of credit granted is suitably monitored. Such controls
are most easily implemented by requiring that the terms and conditions of such credits not
be more favorable than credit granted to non-related borrowers under similar circumstances
and by imposing absolute limits on such credits. The bank’s credit-granting criteria should
not be altered to accommodate related companies and individuals. Material transactions with
related parties should be subject to the prior approval of the board of directors (excluding
board members with conflicts of interest), and reported to the banking supervisory
authorities.
Lending to Connected Parties
Banks should have credit granting procedures in place that identify connected counterparties
as a single obligor which means aggregating exposures to groups of counterparties
(corporate or non-corporate) that exhibit financial interdependence by way of common
ownership, common control, or other connecting links (for example, common Management,
familiar ties). Identification of connected counterparties requires a careful analysis of the
impact of the above factors (e.g. common ownership and control) on the financial
interdependence of the parties involved.
Credit Limits and Credit Concentration
To ensure diversification, exposure limits are needed in all areas of the bank’s activities that
involve credit risk. Banks should establish credit limits for individual counterparties and
groups of connected counterparties that aggregate different types of on and off balance
sheet exposures. Such limits are frequently based on internal risk ratings that allow higher
exposure limits for counterparties with higher ratings. Under no circumstance can limits
established by banks be higher than regulatory limits set by NBE. Limits should also be
established for particular industries or economic sectors, geographic regions specific
products, a class of security, and group of associated borrowers.
Credit Concentration
3Related parties can include the bank’s subsidiaries and affiliates, its major (owning 2% and
above)
shareholders, directors and senior management, and their direct and related interests, as well as
any party
that the bank exerts control over or that exerts control over the bank.
Credit concentration can occur when a bank’s portfolio contains a high level of direct or
indirect credits to:
• a single counterparty;
• a group of related counter parties;
• an industry;
• a geographical region;
• a type of credit facility (i.e. overdrafts); and
14
GLOBAL COLLEGE
.
Credit Risk Mitigation
A number of techniques are available to banks to assist in the mitigation of credit risk.
Collateral and guarantees are the most commonly used. Notwithstanding the use of various
mitigation techniques individual credits transactions should be entered into primarily on the
strength of the borrower’s repayment capacity. Banks should also be mindful that the value
of collateral might well be impaired by the same factors that have led to the diminished
recoverability of the credit.
Measurement, Monitoring and Control
Failure to establish adequate procedures to effectively monitor and control the credit
function within established guidelines has resulted in credit problems for many banks around
the world. Compromising credit policies and procedures has been another major cause of
credit problems.
.portfolio by credit characteristics, risk rating and regular review of individual and groups of
credits within the portfolio and independent internal credit inspections or audits are integral
elements of effective and prudent portfolio monitoring and control.
Credit Administration Policies
Credit administration is a critical element in maintaining the safety and soundness of a bank.
Once a credit is granted, it is the responsibility of the bank to ensure that the credit is
properly maintained.
.in some cases where this is practically difficult, banks shall devise ways and means by which
related risks shall be minimized. In developing credit administration arrangements, banks
should ensure:
• the efficiency and effectiveness of credit administration operations, including monitoring
of credits, maintenance of adequate documentation, observance of contractual
obligations and legal covenants and maintenance of collateral, etc.;
• the accuracy and timeliness of information generated by management information
systems;
• the effectiveness of the segregation of duties;
• the adequacy of controls over all “back office” procedures; and
• compliance with prescribed management policies and procedures as well as applicable
laws and regulations.
Credit Files
The credit files of a bank should include all the information necessary to ascertain the
current financial condition of counterparties as well as sufficient information to track the
4 The NBE considers banks with total assets greater than Birr 9 billion as large, between Birr 3
billion and
Birr 9 billion as mid-size, and less than Birr 3 billion as small.
decisions made and credit history of borrowers. Each credit file needs at a minimum
information that:
• identifies the borrower by name and occupation or type of business, and identifies
guarantors and connected parties;
• provides evidence of the borrower’s legal ability to borrow, financial condition and the
ability to repay, including the timing and source of repayment;
15
GLOBAL COLLEGE
• describes the terms of the credit obligation, including the purpose of the credit;
• describes and evaluates the collateral, indicating the marketability and/or condition
thereof; and
• provides a history of the credit, including copies of the most recent credit authorization
and internal credit reviews and evidence of the level of approval.
Credit Monitoring Procedures
Banks need to develop and implement comprehensive procedures and information systems
for monitoring the condition of individual counterparties across the bank’s various
portfolios.
. An effective credit
monitoring system will include measures to:
• ensure that the bank understands the current financial condition of the counterparty;
• monitor actual exposures against established limits;
• monitor compliance with existing covenants;
• assess, where applicable, collateral coverage relative to the obligor’s current condition;
• identify contractual payment delinquencies and classify potential problem credits on a
timely basis;
• determine if payments are being made from the source that was anticipated at the time
the credit was approved; and
• direct promptly problems for remedial management.
Specific individuals should be responsible for monitoring credit quality; including ensuring
that relevant information is passed to those responsible for assigning internal risk ratings to
the credit. In addition, individuals should be made responsible for monitoring on an ongoing
basis any underlying collateral and guarantees. Such monitoring will assist the bank in
making necessary changes to contractual arrangements as well as maintaining adequate
reserves for credit losses.
Banks should develop an adequate framework for managing their exposure in off-balance
sheet products as a part of overall credit to an individual customer and subject them to the
same credit appraisal, limits and monitoring procedures. Banks should classify their offbalance
sheet exposures into three broad categories:
• full risk (credit substitutes) – e.g. standby letters of credit or money guarantees;
• medium risk (not direct credit substitutes) – e.g. bid bonds, indemnities and warranties;
and
• low risk – e.g. cash against document (CAD).
Internal Risk Rating
An important tool in monitoring the quality of individual credits, as well as the total
portfolio, is the use of an internal risk rating system. A well-structured internal risk rating
system is a good means of differentiating the degree of credit risk in the different credit
exposures of a bank. This will allow more accurate determination of the overall
characteristics of the credit portfolio, problem credits, and the adequacy of loan loss
reserves. Detailed and sophisticated internal risk rating systems can also be used to
determine internal capital allocation, pricing of credits, and profitability of transactions and
relationships.
Stress Testing
16
GLOBAL COLLEGE
An important element of sound credit risk management involves discussing what could
potentially go wrong with individual credits and within the various credit portfolios, and
considering this information in the analysis of the adequacy of capital and provisions
. Three areas that banks could usefully examine are:
(i) local or international economic or industry downturns; (ii) market-risk events; and (iii)
liquidity conditions. Stress testing can range from relatively simple alterations in
assumptions about one or more financial, structural or economic variables, to the use of
highly sophisticated financial models.
Managing Problem Loans

Banks must have a system in place for early remedial action on deteriorating credits,
managing problem credits and similar workout situations.
One reason for establishing a systematic credit review process is to identify weakened or
problem credits. A reduction in credit quality should be recognized at an early stage when
there may be more options available for improving the credit. Banks must have disciplined
and vigorous remedial management process, triggered by specific events, that are
administered through the credit administration and problem recognition systems.
A bank’s credit risk policies should clearly set out how the bank will manage problem credits.
Banks should document how various courses of actions should be applied. These include
renewal, and extension of impaired credit facilities. The procedures should clearly set out
authority limits within the organization that will have responsibility to make such decisions
and how standard credit approval practices will be enhanced in the case of impaired credit.
Management Information System and Measuring Credit Risk
Banks should establish management information systems and analytical techniques that
enable management to measure the credit risk inherent in all on- and off-balance sheet
activities
. Therefore, the quality, detail and
timeliness of information are critical. The information system should provide adequate
information on the composition of the credit portfolio, including identification of any
concentrations of risk. The measurement of risk should take into consideration:
• the specific nature of the credit (loan, guarantee, etc) as well as its contractual and
financial conditions (maturity, rate, etc.);
• the exposure to potential market movements;
• the existence of collateral or guarantees; and
• the potential for default based on internal risk rating.
Internal Controls
Banks must establish a system of independent, ongoing assessment of their credit risk
management processes and the results of such reviews should be communicated directly to
the board of directors and senior management.
The bank should have an efficient internal review and reporting system as an effective
oversight mechanism in respect of its credit function
. They
should be used to confirm that :
17
GLOBAL COLLEGE
• credits have been granted in compliance with the bank’s credit policies and procedures;
• periodic reports on all the exposures are available to senior management and are
submitted to the board;
• weaknesses in the credit risk management process are identified and reported to the
18

Learning Guide: Accounting Department Basic Accounting Works Level Ii

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Learning Guide: Accounting Department Basic Accounting Works Level Ii

Uploaded by

Copyright:

Available Formats

GLOBAL COLLEGE

Training, Teaching and Learning Materials

TTLM Code: BUF BAW2 M06 1212

At the end of the module the trainee will be able to:

LO1 Describe what is meant by the Ethiopian financial markets

LO3 Explain Ethiopia's monetary system

LO1 Ethiopian financial markets

Specific financial markets in

Functions performed by a financial system are :

The purpose of  enabling participants to invest surplus funds by buying

The Importance and Limitations of Financial Markets

 regulating banks and other financial institutions

Information Sheet – 1 The National Bank of Ethiopia

 To regulate the supply, availability and cost of money and credit.

The effect of the NBE's monetary policy may include:

 changes in interest rates

LO3 Ethiopia's monetary system

Transformation of the risk characteristics of assets

The Functions Of Money

The Value Of Money

The Demand For Money

Instruments traded  bills of exchange

Motivations for holding money may include:

3.What are The Demand For Money?

factors that influence the

Consumer activity  applications for home loans

Information Sheet – 1 Consumer activity

Sales Order Processing

noted there on form of finished goods.

receivable is important to maintain separation of functions.

1. List down & duscusse Consumer activity ?

Describe the role of

Main regulator in the financial

• the types of risks being assessed; and

Managing Problem Loans

You might also like