Accounting Level II: Ethiopian Financial System

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".

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.

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

<p>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.</p> Signup and view all the answers

<p>True (A)</p> Signup and view all the answers

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

<p>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.</p> Signup and view all the answers

<p>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.</p> Signup and view all the answers

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

<p>Institutional vs. Retail (A), Investor vs. Speculator (D)</p> Signup and view all the answers

<p>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.</p> Signup and view all the answers

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

<p>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.</p> Signup and view all the answers

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

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

<p>True (A)</p> Signup and view all the answers

<p>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.</p> Signup and view all the answers

<p>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.</p> Signup and view all the answers

<p>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.</p> Signup and view all the answers

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

A financial market is any marketplace where buyers and sellers participate in the trade of assets such as equities, bonds, currencies, and derivatives. They are characterized by transparent pricing, basic trading regulations, and market forces determining asset prices.

The Bond Market is a marketplace where debt securities, such as bonds, are bought and sold. This market allows for the issuance of bonds and facilitates their subsequent trading.

The Derivatives Market is where financial instruments like futures contracts or options are traded. These instruments are derived from other forms of assets and are used for managing financial risk.

The Foreign Exchange Market is a global marketplace where currencies are bought and sold. It's the world's largest financial market, with daily trading volumes exceeding $6 trillion. It facilitates the trading of foreign exchange.

The Money Market is where short-term debt instruments with maturities of typically one year or less are traded. It provides short-term debt financing and investment opportunities.

The Primary Market deals with the initial issuance of securities to the public. It's where companies raise capital by selling new shares or bonds for the first time.

The Secondary Market involves the trading of existing securities among investors. It provides liquidity and an opportunity for investors to buy and sell securities after they have been initially issued.

The National Bank of Ethiopia (NBE) plays a crucial role in regulating the country's financial system, controlling the money supply, setting interest rates, and overseeing commercial banks.

Monetary policy refers to the actions undertaken by the central bank to manage the money supply and credit conditions in an economy. It influences interest rates, inflation, and economic growth.

Increasing the money supply can lead to lower interest rates, increased borrowing and spending, and potentially higher inflation. It can also make imported goods relatively more expensive.

Decreasing the money supply can lead to higher interest rates, reduced borrowing and spending, and potentially lower inflation. It can also make exported goods relatively more competitive.

Money serves as a medium of exchange, a unit of account, a store of value, and a standard of deferred payment. It facilitates transactions, measures value, allows for saving, and enables borrowing and lending.

The demand for money arises from three main motives: the transactions motive (for everyday purchases), the precautionary motive (for unexpected expenses), and the asset motive (for speculative investment opportunities).

The monetary cycle describes the flow of money through an economy. It involves how money is created by banks, used for transactions, and then flows back to banks through deposits. This cycle is influenced by factors like interest rates, spending habits, and government policies.

The NBE regulates the supply of money in the Ethiopian economy through various tools, including setting interest rates, buying and selling government bonds, and managing the reserve requirements for banks.

Financial market regulation aims to protect investors, ensure fair and transparent trading practices, and promote the stability of the financial system. Regulations encompass areas like disclosure requirements, credit rating agencies, and limits on financial leverage.

The Sarbanes-Oxley Act of 2002 in the US was a major regulatory response to corporate scandals like Enron. It strengthened corporate governance and accounting oversight practices.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 in the US aimed to reform the financial industry following the 2008 financial crisis. It addressed issues like consumer protection, systemic risk, and financial stability.

A bill of exchange is a written order instructing a person to pay a specific sum of money to a designated recipient. It's a common financial instrument used in trade financing.

A promissory note is a written promise to pay a specific sum of money to a designated recipient at a certain time. It's used for short-term debt financing.

Treasury bills are short-term debt instruments issued by the government to meet its short-term financial needs. They are considered highly liquid and are a popular investment among banks and financial institutions.

Commercial paper is a short-term unsecured promissory note used by companies to meet their short-term financing needs. It's a more flexible and efficient alternative to traditional bank loans.

Certificates of deposit (CDs) are short-term instruments issued by banks and financial institutions to raise funds from depositors. They offer a fixed rate of interest for a specific period.

A trade bill is a bill of exchange used in international trade transactions. It allows the exporter to receive immediate payment for goods shipped to the importer.

The central bank plays a vital role in regulating the money supply to promote price stability and economic growth. It can use tools like interest rate adjustments and open market operations to control the amount of money in circulation.