SATA TECHNOLOGY AND BUSINESS COLLEGE

Ethiopian TVET System

Basic Account 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
Module Code: EIS BAW2 M06 0814
TTLM Code: EIS BAW2 06 0814

BY INSTRACTER GEBRE G WE BELIVE QUALITY EDUCATION AND CUSTOMER SATISFACTION

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Learning Out comes

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
LO4Explain the key factors that influence the Ethiopian economy
LO5 Describe the role of regulators
LO1: Describe What Is Meant By the Ethiopian Financial Markets
Introduction
Financial market is the forum in which the financial assets/instruments are traded/sold and bought/. The financial
market has several roles as part of financial system. After completing this section, the learners are able to
 Understand what is Ethiopian system
 Comprehend Ethiopian financial markets
 Know Ethiopian financial institutions and their roles as intermediaries
 Understand the purposes of financial markets
 The major participants in financial markets

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.

1.1.1. Components of Ethiopian Financial systems

They consist of complex, closely related finical services, financial markets, and financial institutions intended to
provide an efficient and regular linkage between investors and depositors.
The major components of a financial system include the following:
1. Financial institutions
2. Financial markets
3. Financial instruments

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4. Financial services
5. Financial infrastructures
1.1.2. General characteristics of Ethiopian Financial System
But the system is not well functioning because of money reasons such as:
1. Lack of intense competition- the government financial institution comprises of the largest market. Ethiopia's
financial system is small and largely dominated by the state
2. Lack of secondary capital markets- no established capital market in Ethiopia
3. Weak financial market- there is no strong established financial markets in which financial instruments are
traded.
4. poor administrative and financial management- this is in case of Credit & Saving Co- operatives

1.1.3. Financial Institutions/Sectors/in Ethiopia

Financial institutions are financial intermediaries that provide financial services for members and clients. A
financial intermediary offers a service to help an individual/firm to save or borrow money. A financial
intermediary helps to facilitate the different needs of lenders and borrowers.
Financial institution includes the following:
Based on their legal formality, the financial sector in Ethiopia consists of formal, semiformal and informal
institutions.

1.1.3.1. The Formal Financial Sectors

The formal financial system is a regulated sector which comprises of financial institutions such as banks,
insurance companies and microfinance institutions
Under this category are
 Banks
 Microfinances
 Insurance companies

1.1.3.2. Semi-Formal Financial Sector

Unlike other formal financial institutions (banks and micro finance institutions), saving and credit cooperatives
are owned, controlled and capitalized by their members. This implies that the savings and credit cooperatives are
not subjected to supervision and regulation of the National Bank of Ethiopia. Savings and credit cooperatives are
type of organizations providing financial services to the poor in rural areas of Ethiopia.
1.1.3.3. Informal Finance Institutions
In both rural and urban areas in Ethiopia, it is common that neighboring family households organize themselves
and develop their own institutions, popularly known as Community-Based Organizations (CBOs).
The three most common informal finance or traditional institutions are discussed in detail in the following
subheadings.
3.1.Iddirs
An Iddiris an informal association made up by a group of persons united by ties of family and friendship, by
living in the same district, by jobs, or by belonging to the same ethnic group.

3.2. Iqqubs
An iqqubis a traditional saving and credit association (Rotating Saving and Credit Association), of which its

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purpose is basically to pool the savings of their members in accordance with the rules established by the group.
3.3. Mehabers
Mehaberis a religious informal institution that aims to raise funds for medical and burial expenses.
It is widespread among the Orthodox Christians of Ethiopia, as it typically draws its members from the church.
Members usually meet on a monthly basis for food and drink, and commonly support each other in times of
difficulty.

1.1.3.4. Depository financial Institutions

Depository institutions accept deposits from surplus units or savers and provide credit to deficit units or
borrowers through loans and purchase of securities.
The importance of depository institutions in the financial market includes the following;

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.

A. Depository institutions include

(i) Banks
Banks are financial intermediaries that lend money to borrowers to generate revenue. They are Typically
regulated heavily, as they provide market stability and consumer protection.
Banks include:
 Commercial banks (e.g. CBE, Awash International Bank, etc.)
 Cooperative banks (e.g. Oromiya Cooperative Bank)
 State-managed cooperative banks (e.g. Development bank, CBE, etc)

(ii) Savings institutions

They include; savings and loans (S&L) and savings banks. Like commercial banks, S&L offer depository
facilities to surplus units they then channel these surplus to deficit units. S&L concentrates on residential
mortgage loans unlike commercial banks who concentrate on commercial loans
(iii)Credit unions
These institutions differ from commercial banks and savings institutions in that they are
They are none profit making organizations,
B. Non-Depository Financial Institutions
None depository financial institutions generate funds from other sources other than deposits. But also play a
major role in financial intermediation. These institutions include:
(i) Finance companies/Microfinances
Most finance companies obtain funds from issuing securities then lend the money to individuals and small
businesses. Although the functioning of finance companies overlaps those of depository institutions, each type of
institution concentrates on a particular segment of the financial market. Many large finance companies are owned

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by multinational corporations
(ii) Mutual funds/ Investment trusts
These types of companies sell shares to surplus units and use these funds to buy a portfolio of securities.
(iii) Security Firms
Securities firms use their information sources to act as brokers, executing securities transactions between two
parties. Brokers earn their profits by charging a brokerage fee by differentiating between bid and asking prices.
Securities firms also underwrite new issues for government and private companies. Securities firms also act as
dealers in which case they i.e. they can make a market for a specific security by adjusting their portfolio
inventory.

(iv) Insurance companies

They provide insurance services to individuals and other firms that reduce the financial burdens associated with
death illness and damage to properties including theft.
(v) Pension funds
The working population, know very well that their energy to work is limited.
(vi) Financial Advisers
A financial adviser doesn’t directly lend or borrow for you.
1.1.3.5. OverallRoles/functions of financial institutions as intermediaries

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.

1.3. Ethiopian Financial Markets

Financial market is another component of a financial system. A financial market is a market in which people
trade financial instrumentsat low transaction cost and at prices that reflect supply and demand.
1.3.1.Components/Types/ of Financial Market
Types of financial markets can be classified based on market level or security types.
Based on market levels, financial markets cab be classified as:
A. Primary market and
B. Secondary market
1.Primary market/ new issue Market-Primary market is a market for new issues or new financial claims.
Simply put, primary market is the market where the newly started company issued shares to the public for the first
time through IPO (initial public offering).
The transactions in primary markets exist between issuers and investors, while secondary market transactions

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exist among investors.

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.

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 Saving mobilization
 Investment
 National Growth
 Entrepreneurship growth
 Industrial development

1.5.The major participants in the financial markets

The major financial market participants include the followings:
A. Supply side vs. demand side
A market participant may either be coming from the Supply Side, hence supplying excess money (in the form of
investments) in favor of the demand side; or coming from the Demand Side, hence demanding excess money (in
the form of borrowed equity) in favor of the Supply Side.

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

D. Institutional vs. Retail

Institutional investor is an investor, such as a bank, insurance company, retirement fund, hedge fund, or
mutual fund
Retail investor is an individual investor possessing shares of a given security.

1.6. Emergence of Ethiopian Financial Market

Capital Market
A capital market is a market for financial assets which have a long or indefinite maturity. Generally, it deals
with long term securities which have a maturity period of above one year. Some of the
capital markets traded in Ethiopia are:

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 Stock markets/shares

 Bonds
 Debentures
 Equity

1.1.3. Financial Instruments

Financial instruments are tradable financial assets of any kind. They include money, instruments and capital
instruments.
1.1.4. Financial Services
Financial services are offered by a large number of businesses that encompass the finance industry.
These include credit unions, banks, credit card companies, insurance companies, stock brokerages, and
investment funds.
1.1.5. Financial infrastructures
This allows the movement of payment and the trading, clearing and settlement of securities such debit cards
(e.g. ATM Card), debit card, mobile banking, EFT, etc.

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

2.1.The Purpose of NBE

The purpose of the National Bank is
 to maintain stable rate of price and exchange,
 to foster a healthy financial system and
 to enhance rapid economic development of Ethiopia.

2.2.The Roles of the NBE

The roles of the NBE refers Powers and Duties/Responsibilities/ of the National Bank, which includes the
followings:
A. maintaining financial stability
B. To Regulating the Ethiopian Payments System
C. To regulating banks and other financial institutions
D. To Facilitating the Operation of Financial Institutions
E. To issue its own debt and payment instruments
F. To formulate and implement exchange rate policy;
G. To manages and administers the international reserves of Ethiopia;
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H. To accepts deposits of any kind from foreign sources;

2.3. NBE's Monetary Policy

2.3.1. Monetary Policy Framework of Ethiopia
Monetary policy of central banks in a simplified analysis amounts or (in a dynamic sense) the optimal rate of
growth of the money stock

2.3.3. Monetary Policy Objective of NBE

The principal objective of the monetary policy of the National Bank of Ethiopia is
1. to maintain price & exchange rate stability and support sustainable economic growth of Ethiopia.
2. Foster monetary, credit and financial conditions conducive to orderly, balanced and sustained economic
growth and development.
3. Preserve the purchasing power of the national currency
4. Encourage the mobilization of domestic and foreign savings and their efficient allocation for productive
economic activities.
2.4. The Effect of the NBE’s Monetary Policy on Ethiopian Economy
Monetary policy has significant impact on a country’s economy. NBE’s Monetary Policy on
Ethiopian Economy may include:
 to changes in interest rates

 To flow on changes to employment, prices and production levels-

 to increases or decreases in the supply of money in the Ethiopian economy

2.5. The Role of Monetary Policy in Economic Development of a Country

Role of monetary policy in the economic development of a country are as follows:
1. Appropriate Adjustment between Demand for and Supply of Money,
2. Price Stability,
3. Credit Control,
4. Creation and Expansion of Financial Institutions,
5. Suitable Interest Rate Structure,
6. Debt Management.

LO3: EXPLAIN ETHIOPIA'S MONETARY SYSTEM

Introduction
A monetary system is the set (framework) of legal (rules) and institutions by which a government Provides
money in a country's economy. Modern monetary systems usually consist of monies, central banks and
commercial banks and other non-banking financial institutions
. After completing this training, trainee is able to:
 understand the concept of monetary system
 understand various functions of money
 motivations for holding money
 instruments traded on the short term money market
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Contents
3.1. Monetary system
3.2. Functions of money
3.3. Motivations for holding money
3.4. Instruments traded on the short term money market

3.1. 3.1. Monetary System

A monetary system is the set (framework) of legal (rules) and institutions by which a government provides
money in a country's economy. Modern monetary systems usually consist of monies, central banks and
commercial banks and other non-banking financial institutions.

3.2. The Functions of Money

It has become so important that the modern economy is described as the money economy. The modern economy
cannot work without money.

3.2.1. What is money?

Money is “anything that is generally acceptable as a means of exchange (i.e., as a means of settling debts) and
that at the same time acts as a measure and as a store of value.” An important point about this definition is that
it regards anything that is generally acceptable as money. Thus, money includes coins, currency notes, cheques,
Bills of Exchange, promissory notes and other money instruments.

3.2.2. The most important functions of money

The most important functions of money are -.

 Medium of exchange
 Standard of deferred
 Measure of value payments
 . Store of value  Measure of liquidity

3.3. Society’s Motivations for Holding Money

This includes keeping money in form of cash (at home under the mattress) or held as bank deposits.
We hold money for three purposes:
 Transaction motive
 Precautionary motive
 Speculative motive
5.4. Instruments traded on the short term money market
Money market is a short term financial market where short term finical instruments are traded.
Financial instruments traded in the money market include:
 Bills of exchange  Treasury bills-for other
 Promissory notes countries
 Checks  Commercial papers
 Certificate of deposit (commercial bills)
 Banker’s acceptance

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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

4.1. Key Factors that Influence the Ethiopian Economy

1. Theglobal market situation-The post-Derg era foreign trade is characterized by relative liberalization.
EPRDF has adopted trade liberalization policies as the appropriate strategy for economic growth. The
government formulated different foreign trade policies and made institutional reforms.
Positive Effects of trade includes:
1. Increasing specialization and the spillover effects of the export sector’s growth
2. Greater capacity utilization
3. The externalities effect of exports in diffusion of modern technology across other sectors and industries.

4.2. Consumers’ Activity that Influence Economy

Consumers’ activity that influences economy may include the followings:

Applications for home loans
Purchase of private health insurance
Purchase of university education
Purchase or building of residential accommodation
Retail spending
Tourism within Ethiopia by Ethiopia


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LO5 DESCRIBE THE ROLE OF (FINANCIAL) REGULATORS

Introduction
The money regulators regulate the overall activities and the legality of money in the market. After completing this
training, the learner is able to understand the main money regulators and their roles.

5.1. The Main Regulators of Finical System of Ethiopia

The main regulators of finical system Ethiopia includes
1. The National bank of Ethiopia
The roles of NBE in regulating the finical systems includes
 maintaining financial stability and regulating the Ethiopian Payments System
 regulate and determine the supply and availability of money and credit as well as the
 applicable interest rates and other charges;
 take such steps to establish, modernize, conduct, monitor, regulate and supervise payment, clearing and
settlement systems;
 fulfilling its regulatory responsibilities by controlling risks and promoting efficiencies
 participating in the financial system as banker to the national payment system of government
 regulating banks and other financial institutions;
 formulate and implement exchange rate policy;
 manage and administer the international reserves of Ethiopia;
 establish and manage deposit insurance fund;
 collect data from any person and prepare periodic economic studies, on the balance of
2. The Financial Intelligence Center(FIC)
The purpose of the FIC is
to act in compliance with international monetary and banking agreements of Ethiopia
to represent Ethiopia in the International Monetary Fund and other international financial organizations formed
by central banks;

The roles of FIC include:

The roles of FIC are revolving around two main areas: (1) money laundering and (2) financing of terrorism
The main roles of FIC include the following:
 collect, receive, store, survey, analyze and disseminate information concerning suspected
money .laundering and financing of terrorism
 enhance public awareness and understanding of matters related to money laundering and financing of
terrorism;
 . issue guidelines to assist financial institutions and designated non-financial businesses and professions
to comply with the obligations
 . follow up the implementation and coordinate the actions of other governmental institutions combating

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money laundering and financing of terrorism;
 Establish appropriate information management systems to ensure the protection of sensitive and
confidential information disclosed to it.

2. Government Financial Institutions Regulatory Enterprise

Supervises government owned financial institutions such as CBE, DBE, EIC, etc.

THANK YOU!!!!!

THE END

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