3.

1 Definition of financial institution

A financial institution (FI) is a company engaged in the business of dealing with financial and
monetary transactions such as deposits, loans, investments, and currency exchange. Financial
institutions encompass a broad range of business operations within the financial services sector
including banks, insurance companies, brokerage firms, and investment dealers. They are also
known as intermediary institutions that mediate between those who increase their income
from spending, And between those who wish to spend more of their income by transferring
money from one user to another. Financial institutions are important because they provide a
marketplace for money and assets, so that capital can be efficiently allocated to where it is
most useful. For example, a bank takes in deposits from customers and lends the money to
borrowers. Without the bank as an intermediary, any one individual is unlikely to find a
qualified borrower or know how to service the loan. Via the bank, the depositor is able to earn
interest as a result. Likewise, investment banks find investors to market a company's shares or
bonds to.

3.2 Advantages of financial institutions:

Financial institutions provide many advantages that can be summarized as follows

 Creating the stock market issued by economic units and various institutions.
 Risk distribution.
 Reducing the cost of conducting financial transactions.
 Compilation of small savings

3.3 Types of financial institution

3.3.1 Bank

Bank is a financial institution that is licensed to accept checking and savings deposits and make
loans. Banks also provide related services such as individual retirement accounts (IRAs),
certificates of deposit (CDs), currency exchange, and safe deposit boxes. Banks have existed
since at least the 14th century. They provide a safe place for consumers and business owners to
stow their cash and a source of loans for personal purchases and business ventures. In turn, the
banks use the cash that is deposited to make loans and collect interest on them.

The Ethiopian banking sector is currently comprised of a central bank (The National Bank of
Ethiopia or NBE), one state owned development bank, a government owned commercial bank
and sixteen private banks. Under the Growth and Transformation Plan II (GTP II), NBE planned
to increase the minimum capital for banks to operate to 2 billion Birr ($90 million) and
instructed all commercial banks to increase their capital to that amount by 2020. Foreign banks
are not permitted to provide financial services in Ethiopia, but the sector may open up in the
medium term as the government of Prime Minister Abiy Ahmed pursues broad economic
reforms. Currently, Ethiopia has allowed small number foreign banks to open liaison offices in
Addis Ababa to facilitate credit to companies from their countries of origins. Chinese, German,
Kenyan, Turkish, and South African banks have opened liaison offices in Ethiopia.

Based on the most recently released data, the Commercial Bank of Ethiopia (CBE) holds more
than 60 percent of total bank deposits, bank loans and foreign exchange. NBE controls the
bank’s minimum deposit rate, which now stands at 7 percent, while loan interest rates are
allowed to float. Real deposit interest rates have been negative in recent years due to inflation,
which stood at 11 percent in mid-2019.

The state-owned Commercial Bank of Ethiopia (CBE) dominates the market in terms of assets,
deposits, bank branches, and total banking workforce. The other government-owned bank is
the Development Bank of Ethiopia (DBE), which provides loans to investors operating in priority
sectors. DBE extends short, medium, and long-term loans for viable development projects,
including industrial and agricultural projects. DBE also provides other banking services such as
checking and saving accounts to its clients. The DBE has been plagued for years by a portfolio
with a high percentage of non-performing loans (NPL’s), inefficient capital allocation, and
corruption.

NBE aims to foster monetary stability and a sound financial system, maintaining credit and
exchange conditions conducive to the balanced growth of the economy. NBE may engage with
banks and other financial institutions in the discount, rediscount, purchase, or sale of duly
signed and endorsed bills of exchange, promissory notes, acceptances, and other credit
instruments with maturity periods not exceeding 180 days from the date of their discount,
rediscount, or acquisition by the bank. The bank may buy, sell, and hold foreign currency notes
and coins and such documents and instruments, including telegraphic transfers, as they are
customarily employed in international payments or transfers of funds. Lack of access to finance
is a significant constraint for local businesses. In 2015, NBE allowed commercial banks to
provide mobile banking service and agent banking. Pursuant to NBE’s permit, many of the
commercial banks added mobile and agent banking in their line of services.
3.3.2 Financial brokers
A broker is an individual or firm that acts as an intermediary between an investor and a
securities exchange. Because securities exchanges only accept orders from individuals or firms
who are members of that exchange, individual traders and investors need the services of
exchange members. Brokers provide that service and are compensated in various ways, either
through commissions, fees, or through being paid by the exchange itself. As well as executing
client orders, brokers may provide investors with research, investment plans, and market
intelligence. They may also cross-sell other financial products and services their brokerage firm
offers, such as access to a private client offering that provides tailored solutions to high net
worth clients. In the past, only the wealthy could afford a broker and access the stock market.