Accounting Level II: Ethiopian Financial System

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Questions and Answers

What are the key factors that influence the Ethiopian economy?

The key factors that influence the Ethiopian economy are the supply and availability of money and credit, the country's international reserves, the licensing and supervision of banks, the supervision of loans of commercial banks and the regulation of interest rates, issuing paper money and coins, acting as an agent of the government, fixing and controlling the foreign exchange rates, and the government's overall vision of the country, which is "to see a country, wherein democracy and good governance are prevailed upon the mutual consent and involvement of its people, wherein social justice is reigned, and wherein poverty reduced and income of the citizens reach to a middle economic level".

What is the purpose of financial markets?

The purpose of financial markets is to allocate savings efficiently to ultimate users. If those economic units that saved were the same as those that engaged in capital formation, an economy could prosper without financial markets.

Which of the following is NOT a function of money?

Store of value

Medium of exchange

Standard of deferred payments

Measure of weight (correct)

Unit of account

What are the three main components of a financial system, according to the structural approach?

The three main components of a financial system, according to the structural approach, are financial markets, financial intermediaries (institutions), and financial regulators. Signup and view all the answers

What is the role of financial markets in an economy?

Financial markets facilitate the flow of funds to finance investments by corporations, governments, and individuals and they are used to match those who want capital to those who have it. Signup and view all the answers

The Ethiopian financial markets are defined by having transparent pricing, basic regulations on trading, costs and fees, and market forces determining the prices of securities.

True Signup and view all the answers

What is the role of the National Bank of Ethiopia (NBE) as Ethiopia's central bank?

The NBE regulates banks and other financial institutions, maintains financial stability, manages government debt, regulates the payments system, and sets and implements monetary policy. Signup and view all the answers

What is the role of the National Bank of Ethiopia in regulating the Ethiopian Payments System?

The NBE fulfills its regulatory responsibilities by controlling risks and promoting efficiencies, participates in the financial system as banker to the national payment system of government, and provides facilities for final settlement of transactions. Signup and view all the answers

What are the main functions of the National Bank of Ethiopia?

The main functions of the National Bank of Ethiopia are as follows: 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 agent of the Government, and to fix and control the foreign exchange rates. Signup and view all the answers

What is the role of financial regulators?

Financial regulators perform the role of monitoring and regulating the participants in the financial system. Signup and view all the answers

What are the two basic financial market participant categories?

Institutional vs. Retail Signup and view all the answers

What is meant by the "supply side" and "demand side" in financial markets?

The supply side refers to those who have aggregate savings, such as retirement funds, pension funds, and insurance funds, that can be used in favor of the demand side. The demand side consists of those in need of cash flows for daily operations, those in need of interim financing, and those in need of long-term funds for special projects. Signup and view all the answers

What are the main types of financial markets?

The main types of financial markets are capital markets, money markets, commodity markets, derivatives markets, futures markets, insurance markets, and foreign exchange markets. Signup and view all the answers

What are the three main functions of money?

The three main functions of money are medium of exchange, store of value, and unit of account. Money also functions as a standard of deferred payments. Signup and view all the answers

What are the reasons why people hold money?

People hold money for the transactions motive, precautionary motive, and assets motive. Signup and view all the answers

What are instruments traded on the short term money market?

Instruments traded on the short term money market include bills of exchange, commercial bills, government bills, promissory notes, and treasury bills. Signup and view all the answers

The formal microfinance industry began in Ethiopia in 1994/1995 with the government's Licensing and Supervision of Microfinance Institution Proclamation.

True Signup and view all the answers

What is the purpose of the Licensing and Supervision of Microfinance Institution Proclamation in Ethiopia?

The Licensing and Supervision of Microfinance Institution Proclamation was designed to encourage Microfinance Institutions (MFIs) to extend credit to both the rural and urban poor of the country. Signup and view all the answers

What is the role of the Sarbanes-Oxley Act of 2002 in the US?

The Sarbanes-Oxley Act of 2002 in the US was designed particularly to tighten companies' governance after the dotcom bust and Enron's Bankruptcy. It had direct consequences internationally, first of all through global companies. Signup and view all the answers

What is the purpose of the US Wall Street Reform and Consumer Protection Act (Dodd-Frank) of 2010?

The US Wall Street Reform and Consumer Protection Act (Dodd-Frank) of 2010 aims at imposing tighter financial regulation for the financial markets and financial intermediaries in the US, in order to ensure consumer protection. Signup and view all the answers

What is meant by the "term spread" in financial markets?

The term spread is the difference between the yields of long-term and short-term bonds. Signup and view all the answers

Study Notes

Accounting and Finance Level II Unit of Competency

Develop Understanding of the Ethiopian Financial System and Markets

Module Title

Develop Understanding of the Ethiopian Financial System and Markets

Module Code

LSA ACF2 M03 1221

Learning Objectives (LO)

LO 1: Describe Ethiopian financial markets / 9:00 hours including exam time
LO 2: Explain the function and role of the National Bank of Ethiopia (NBE) / 11:00 hours including exam time
LO 3: Explain Ethiopia's monetary system / 11:00 hours including exam time
LO 4: Explain key factors influencing the Ethiopian economy / 9:00 hours including exam time
LO 5: Describe the role of financial regulators / 9:00 hours including exam time

Introduction

This unit covers performance outcomes, skills, and knowledge required to understand Ethiopian financial systems and markets, identifying key participants, the National Bank's impact, economic influences, and regulator roles.
The Ethiopian financial system plays a key role in the economy by stimulating growth, affecting performance, and influencing economic welfare.
Effective financial infrastructure enables the efficient transfer of funds from those with funds to those with productive investment opportunities.
Information asymmetry can lead to inefficient allocation of financial resources, and financial systems attempt to mitigate this.

The Ethiopian Financial Markets

This learning guide details specific financial markets, their purposes, and participant roles in Ethiopia.
Identifying specific financial markets, understanding their emergence, differentiating market types (primary and secondary), and identifying key participants and their roles are covered.

Definition of Financial Market

Financial Market: A marketplace where buyers and sellers trade assets (equities, bonds, currencies, derivatives).
Transparency, regulations, costs, and market forces determine security prices in financial markets. Specific criteria, such as the amount held, geographical location, or profession, can be factors for participant eligibility.
A financial market facilitates the efficient transfer of funds, balancing those with funds to invest and those needing them.

Financial Markets in Ethiopia

Bond Market: A marketplace for buying and selling debt securities (bonds); provides financing through bond issuance and subsequent trading.
Derivatives Markets: Markets for financial instruments (futures, options) derived from other assets. These instruments are used for risk management.
Foreign Exchange Market: The world's largest financial market where currencies are traded; facilitating the trading of foreign currency.
Money Market: A market for short-term debt instruments (with maturities typically one year or less).
Options and Futures Markets: Provide standardized forward contracts for trading products at a future date.

Purpose of Financial Markets

Financial markets, based on capital market theory, focus on the financial system, interest-rate structure, and asset pricing.
Assets are categorized as tangible (physical properties) and intangible (legal claims to future benefits).
Financial assets (instruments) are expected to yield future cash, and examples include stocks and bonds, related to financial instrument transactions.

Financial Markets and their Role

Banks & Financial Institutions: Include banks and non-banking institutions, investors, corporations, individuals, and governments.
Insurance Companies: Provide future payment coverage, investing in securities, debts, and property.
Finance Companies: Issuance of debentures and borrowing for medium-term funding to businesses, leasing financing.
Merchant Banks: Funding by short-term borrowing and lending (foreign currency/commercial bills) to corporations.
Companies: Invest surplus assets in money markets and sometimes business equities.
Superannuation/Mutual Funds: Funds from retirement contributors invested in money markets or business equities.
Government (National Bank of Ethiopia): Ensures funding supply gaps are filled and works through authorized dealers.

Financial Market Participant Categories

Investor vs. Speculator: A market participant can be an investor or speculator. These act in the supply and demand sides, in relation to excess money or demand for money.
Institutional vs. Retail: Institutions and retail, in relation to their dealings on financial markets.

Types of Financial Markets

Capital Markets include Stock Markets (issuance of shares and subsequent trading), and Bond Markets (financing through bond issuance and subsequent trading).
Commodity Markets facilitate commodity trading.
Money Markets facilitate short-term debt financing and investment.
Derivative Markets facilitate financial risk management.
Futures Markets provide standardized forward contracts for future dates.
Insurance Markets facilitate redistributing risks.
Foreign Exchange Markets facilitate the trading of currencies.

Market Structure

Primary Market: Market for newly issued financial securities, such as initial public offerings for equity shares sold to the public for the first time. Private placement is when securities are sold directly to investors without public offer.
Secondary Market: A market where already issued securities are traded. It is a regular market for buying and selling such assets. Secondary public offerings (seasoned equity offerings, etc.) are how additional shares are issued in already-existing active markets.
Organized Stock Exchanges and Over-the-Counter Markets: Classification for Secondary Markets. Different trading procedures for stock markets.

Participants in Financial Markets

Banks
Non-banking financial institutions
Insurance companies
Finance companies
Investors (corporations, individuals, governments)
Local and international governments

National Bank of Ethiopia (NBE)

The NBE was established in 1963. Established duties include regulating the supply, availability, and cost of money and credit. Managing international reserves, lending to banks, regulating interest, issuing currency, representing the government in monetary activities, and fixing/controlling foreign exchange.
NBE has a key role in preventing financial system collapse. Monetary policy, interest rate adjustments, money supply controls, and financial institution regulation are important parts.
The NBE's various roles, in regulating the markets, influence the economy through these factors and the resulting effects.
The vision for the economy, of the NBE, comes from and reflects general government objectives (democracy, good governance, social justice, reduced poverty, and citizens' income).

National Bank and Its Role in the Economy

The NBE website provides macroeconomic metrics and resources.
The functions of the NBE include regulating interest rates, implementing the exchange rate policy, managing international reserves, licensing, and supervising financial institutions (banks and others).
Additional functions include setting limits on assets (gold, foreign exchange), setting limits on net positions, and managing external debt.
Short and long term financing facilities for banks and institutions, accepting deposits, and promoting banking services throughout the country.

Monetary System of Ethiopia

Outlining the different functions of money
Motivations for holding money
Precautionary, speculative, and transaction demands for holding money.
Money as a medium of exchange, a unit of account, a store of value, and for transferring value.
The impact of increases and decreases in the money supply.
Describing the monetary cycle within the economy and on a global scale.

Monetary Policy and its Effects

Changes in interest rates, employment, prices, and production affect the economy.
Increased or decreased money supply impacts the Ethiopian economy.
The role of the NBE in regulating payments systems.
Monetary policy's contribution to controlling risks and promoting efficiency, participating in the national payment system, and providing final settlement facilities.

Microfinance Industry in Ethiopia

Regulations and encouragement (by licensing and supervision) of microfinance institutions are described.
Foreign national restrictions on providing banking services, along with the shareholding structures for MFIs.
Interest rates and costs, along with the role and impact of NGOs, in the dissemination of microfinance services.

Goal of the Bank

Carry out extensive transformation tasks.
Maintain price and exchange rate stability.
Maintain adequate international reserves.
Improve the soundness of the financial system.
Provide policy advice to the government.
Create/improve the payment system.
Improve currency management.

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Description

This quiz assesses your understanding of the Ethiopian Financial System and Markets. It includes key concepts such as the role of the National Bank of Ethiopia, the monetary system, and factors influencing the Ethiopian economy. Test your knowledge on financial regulators and market dynamics.