This material focuses on understanding the Ethiopian financial system and markets.
- It outlines what the Ethiopian financial markets are and their purpose.
- It describes the role of the National Bank of Ethiopia and its impact on the economy.
- It delves into the monetary system and key economic factors at play.
Let’s jump right into it!
<q>Summarize this content</q>
What roles do banks and financial institutions play as intermediaries in Ethiopia's financial markets?
How does the National Bank of Ethiopia influence the everyday lives of consumers?
The content of the document offers an in-depth exploration of the Ethiopian financial system and
markets, detailing the structures and functions that facilitate economic activities in the country. It begins
by defining financial markets as forums for trading financial assets, highlighting their critical roles in
mobilizing funds—allowing participants to invest surplus funds and raising necessary capital through the
issuance of securities.
The document identifies major participants in these markets, such as banks, non-banking financial
institutions, corporations, and individual investors, each playing distinct roles in financial intermediation.
It emphasizes the significance of the National Bank of Ethiopia (NBE), which functions as the central
bank, tasked with maintaining financial stability, regulating the monetary supply, and overseeing the
payment systems within the country. Additionally, it explores how the NBE's monetary policy directly
impacts economic conditions, influencing variables such as interest rates, inflation, and overall economic
growth.
Key factors that influence the Ethiopian economy are discussed, including domestic interest rates and
consumer spending behavior. Furthermore, the document addresses regulatory frameworks, detailing
how financial regulators protect consumers and foster confidence in the financial system, ultimately
contributing to a more robust economic environment in Ethiopia,,,.
Summarize this content
- This lecture note covers the unit of competence "Develop Understanding of the Ethiopian Financial
System and Markets," which includes five learning outcomes.
- The learning outcomes focus on describing Ethiopian financial markets, explaining the role of the
National Bank of Ethiopia (NBE), Ethiopia's monetary system, key factors influencing the Ethiopian
economy, and the role of regulators.
**Unit Descriptor**
- This unit involves understanding the financial systems and markets in Ethiopia, including identifying
participants, the role of the NBE, and the influence of economic factors.
- Performance criteria include describing financial markets, explaining the NBE's function, detailing
Ethiopia's monetary system, explaining key economic influences, and describing the role of regulators.
**Variable Range**
- Financial markets in Ethiopia include bond, derivatives, foreign exchange, money, and options/futures
markets.
- The NBE regulates banks, maintains financial stability, manages government debt, regulates the
payments system, and sets/implements monetary policy.
- Motivations for holding money include precautionary, speculative, and transactions demands.
- Consumer activity can include applications for home loans, purchase of private health insurance, and
retail spending.
**Evidence Guide**
- Assessment requires evidence of the candidate's ability to understand the Ethiopian financial system,
monetary system, and identify financial regulators.
- Underpinning knowledge includes awareness of roles and relationships between participants in the
financial services industry and understanding the economic environment.
- Key skills include communication, IT, literacy, and learning skills.
**Introduction (Ethiopian Financial System)**
- A financial market is a forum where financial assets are traded. it is where people trade financial
instruments at low transaction costs, reflecting supply and demand
- A financial system allows the exchange of funds between lenders, investors, and borrowers.
- Components of Ethiopian financial systems include financial institutions, markets, instruments,
services, and infrastructures.
**General Characteristics of Ethiopian Financial System**
- The Ethiopian financial system is not well-functioning due to issues like lack of intense competition,
weak financial markets, and poor management.
- Government public banks dominate the market, controlling a significant portion of deposits and loans.
**Financial Institutions in Ethiopia**
- Financial institutions are intermediaries offering services to help individuals or firms save or borrow
money.
- Based on legal formality, the financial sector in Ethiopia consists of formal, semi-formal, and informal
institutions.
- Formal financial sectors, like banks and microfinance institutions, are strictly regulated by the
government.
- Semi-formal sectors mainly consist of Saving and Credit Cooperatives, owned and controlled by their
members.
- Informal institutions include Iddirs, Iqqubs, and Mehabers, which are community-based organizations
for mutual aid and financial concerns.
**Depository and Non-Depository Financial Institutions**
- Depository institutions accept deposits and provide credit through loans and securities.
- Banks, savings institutions, and credit unions are examples of depository institutions.
- Non-depository financial institutions generate funds from sources other than deposits and include
finance companies, mutual funds, security firms, insurance companies, and pension funds [R8, R9].
**Roles/Functions of Financial Institutions**
- Primary functions include accepting deposits, providing loans, issuing securities, and acting as brokers.
- They also transform long-term funds to short-term funds, provide insurance services, and undertake
safe custody of valuables [R9, R10].
**Benefits of Financial Institutions as Intermediaries**
- Lower search costs, spreading risk, economies of scale, and convenience of amounts are benefits of
using financial institutions.
**Ethiopian Financial Markets**
- Types of financial markets include primary (new issues) and secondary (existing securities) markets.
- Liquidity is crucial in secondary markets, referring to the ease with which a security can be sold without
loss of value.
**Money Market**
- Money market deals with financial assets and securities maturing within one year.
- Instruments include bills of exchange, promissory notes, checks, certificates of deposit, commercial
bills, and treasury bills [R11, R12].
**Features and Objectives of Money Market**
- Features include short-term funds, easy convertibility to cash, and transactions via phone.
- Objectives include providing a parking place for short-term surplus funds, overcoming short-term
deficits, and enabling the central bank to regulate liquidity.
**Capital Market**
- A capital market is for financial assets with long or indefinite maturity.
- It consists of stock markets (equity) and bond markets (debt).
**Functions/Purposes/Roles of Financial Markets**
- Functions include investing funds, raising capital, intermediary functions, and fulfilling financial and
economic roles.
- Financial functions involve providing funds to borrowers and lenders with earning assets.
- Economic functions include saving mobilization, investment, and national growth.
**Major Participants in the Financial Markets**
- Participants can be on the supply side (providing excess money) or the demand side (requiring excess
money).
- Investors purchase securities for financial gain, while speculators profit from price fluctuations.
- Institutional investors are sophisticated entities like banks and hedge funds, and retail investors are
individual shareholders [R15, R16].
**Emergence of Ethiopian Financial Market**
- Stock markets involve the trading of shares of corporations, either in primary or secondary markets.
- The history of stock markets in Ethiopia dates back to the Imperial Regime.
- Currently, Ethiopia has no legally institutionalized capital market to transact stocks in secondary
markets.
- Bond markets involve trading debt instruments, but Ethiopia currently lacks a capital market for bonds.
**Justifications for Creation of Financial Markets**
- Justifications include providing long-term finance, enhancing transferability and liquidity, and enabling
the NBE to enforce monetary policies.
- A key missing institution in Ethiopia is the Ethiopian Securities Market.
**Financial Instruments, Services, and Infrastructure
s**
- Financial instruments are tradable financial assets.
- Financial services are offered by a large number of businesses that encompass the finance industry.
- Financial infrastructures include payment systems such as debit cards and mobile banking.
**LO2: Explain the Function and Role of the National Bank of Ethiopia (NBE)**
- The NBE is a central bank established by law, with specific purposes and roles.
- The purpose of the NBE is to maintain stable prices and exchange rates, foster a healthy financial
system, and enhance economic development.
**Roles of the NBE**
- Roles of the NBE include maintaining financial stability, regulating the Ethiopian Payments System, and
regulating banks and other financial institutions [R19, R20].
- The NBE facilitates financial institution operations, issues debt instruments, formulates exchange rate
policy, and manages international reserves.
- It also acts as a banker and financial advisor to the government and collects economic data.
**NBE's Monetary Policy**
- Monetary policy refers to actions and regulations by the central bank, including determining money
supply, setting interest rates, and regulating commercial banks.
- The principal objectives of the NBE's monetary policy are to maintain price and exchange rate stability
and support sustainable economic growth.
- It also aims to foster financial conditions conducive to economic growth and preserve the purchasing
power of the national currency.
**Effect of the NBE’s Monetary Policy on Ethiopian Economy
- The NBE’s monetary policy impacts the Ethiopian economy through changes in interest rates,
employment, prices, and production levels.
- It also involves managing the money supply and acting to prevent financial institution collapse.
- Monetary policy plays a role in adjusting demand and supply of money, ensuring price stability,
controlling credit, and creating financial institutions.
**LO3: EXPLAIN ETHIOPIA'S MONETARY SYSTEM**
- A monetary system is a framework of legal rules and institutions through which a government provides
money in a country's economy.
- Modern monetary systems consist of monies, central banks, commercial banks, and other financial
institutions.
**Functions of Money**
- Money acts as a medium of exchange, measure of value, store of value, and standard of deferred
payments [R22, R23].
- It also provides a measure of liquidity compared to commodities.
**Society’s Motivations for Holding Money**
- People hold money for transaction, precautionary, and speculative motives.
**Instruments Traded on the Short Term Money Market**
- Financial instruments traded in the money market include bills of exchange, promissory notes, checks,
certificates of deposit, banker’s acceptances, and commercial papers [R23, R24].
**LO4: EXPLAIN THE KEY FACTORS THAT INFLUENCE THE ETHIOPIAN ECONOMY**
- Various factors influence the Ethiopian economy, including the global market situation, government
actions, and domestic interest rates.
**Key Factors Influencing the Ethiopian Economy**
- The global market situation affects Ethiopia through trade liberalization policies, but the country's
terms of trade are generally deteriorating.
- The Federal and Regional State government’s actions, domestic interest rates and the changes in
consumer activity can affect the country’s overall economy [R24, R25].
**Consumers’ Activity that Influence Economy**
- Consumers’ activity includes applications for home loans, purchase of private health insurance, and
tourism within Ethiopia.
**LO5: DESCRIBE THE ROLE OF (FINANCIAL) REGULATORS**
- Money regulators oversee the activities and legality of money in the market.
**Main Regulators of Financial System of Ethiopia**
- The main regulators include the National Bank of Ethiopia (NBE) and the Financial Intelligence Center
(FIC).
- The NBE maintains financial stability, regulates the payment system, and oversees financial institutions
[R25, R26].
- The FIC focuses on preventing money laundering and financing of terrorism.
- Government Financial Institutions Regulatory Enterprise supervises government owned financial
institutions.
Me: Summarize this content
PDF: **Lecture Note: Occupational Standard Accounting & Finance (Level=II)**
- This lecture note focuses on developing an understanding of the Ethiopian Financial System and
Markets.
- The unit of competence covers five learning outcomes related to financial markets, the National Bank
of Ethiopia (NBE), Ethiopia's monetary system, key economic factors, and the role of regulators.
**Unit Descriptor**
- The unit aims to provide the skills and knowledge necessary to understand the Ethiopian financial
system and markets.
- Key areas include identifying participants, understanding the role of the NBE, assessing the impact of
NBE's decisions, and recognizing the role of financial regulators.
**Variable Range**
- Ethiopian financial markets encompass bond, derivatives, foreign exchange, money, and
options/futures markets.
- Participants include banks, financial institutions, investors (corporations, individuals, governments),
and speculators.
- Motivations for holding money include precautionary, speculative, and transactions demand.
- Instruments traded on the short term money market include bills of exchange, commercial bills,
government bills, promissory notes, and treasury bills.
**Evidence Guide**
- Assessment requires evidence of the candidate's ability to understand the features, roles, and
participants within the Ethiopian financial system, and to identify financial regulators.
- Underpinning knowledge includes awareness of the roles and relationships between participants, and
understanding of the economic environment.
- Communication, IT, literacy, and learning skills are essential for explaining the financial system and
interpreting relevant information.
**Introduction**
- Financial markets are platforms where financial assets/instruments are traded, playing a vital role
within the financial system.
- After completing this section, learners should understand the Ethiopian financial system and
institutions, the purpose of financial markets, and the major participants.
- A financial system facilitates the exchange of funds between lenders, investors, and borrowers.
**Ethiopian Financial System**
- The Ethiopian financial system consists of financial institutions, markets, instruments, services, and
infrastructures.
- Key characteristics include a lack of intense competition, weak financial markets, and poor
administrative/financial management.
**Financial Institutions/Sectors in Ethiopia**
- Financial institutions in Ethiopia are categorized as formal, semi-formal, and informal.
- Formal financial sectors include banks, microfinances, and insurance companies, which are strictly
regulated by the government.
- Semi-Formal Financial Sector includes saving and credit cooperatives owned, controlled and capitalized
by their members.
- Informal finance institutions include Iddirs, Iqqubs, and Mehabers, which are community-based
organizations.
**Depository and Non-Depository Financial Institutions**
- Depository institutions accept deposits and provide credit through loans and securities.
- Depository institutions include commercial banks, cooperative banks, state-managed cooperative
banks, savings institutions, and credit unions.
- Non-depository financial institutions generate funds from sources other than deposits, including
finance companies, mutual funds, securities firms, insurance companies, pension funds, and financial
advisors [R8, R9].
**Roles/Functions of Financial Institutions**
- Financial institutions accept deposits/savings, provide loans, issue securities, and act as brokers.
- They transform long-term funds to short-term funds, provide insurance services, and ensure the safe
custody of valuables.
- Financial institutions facilitate foreign exchange dealings and transfer money between accounts.
**Benefits of Financial Institutions as Intermediaries**
- Lower search costs, spreading risk, economies of scale, and convenience of amounts are key benefits of
using financial institutions as intermediaries.
**Ethiopian Financial Markets**
- A financial market is where financial instruments are traded at low transaction costs, reflecting supply
and demand.
- Financial markets provide a forum for trading financial claims under established rules.
**Components/Types of Financial Market**
- Financial markets can be classified based on market level (primary and secondary) or security types
(money and capital markets).
- Primary markets are for new issues, while secondary markets are for the resale of securities.
- Money markets deal with financial assets with maturity up to one year, including bills of exchange,
promissory notes, checks, certificates of deposit, and treasury bills.
**Features/Characteristics of Money Market**
- Money markets are purely for short-term funds, dealing with assets that can be readily converted into
cash.
- Transactions are conducted through oral communication, without brokers, and components include
the Central Bank, Commercial Banks, and Non-banking financial companies.
**Objectives/Purposes of Money Market**
- Money markets provide a place to employ short-term surplus funds, overcome short-term deficits, and
enable the Central Bank to influence liquidity.
**Capital Market**
- Capital markets are for financial assets with long or indefinite maturity, including stock and bond
markets.
- Equity markets facilitate the issuance and subscription of ownership securities, while debt markets
facilitate borrowing and lending.
**Functions/Purposes/Roles of Financial Markets**
- Financial markets facilitate investing funds, raising capital, intermediary functions, financial functions,
and economic functions.
**Investing Funds**
- Financial markets enable investors to invest surplus funds by buying securities.
- Lenders can be individuals or companies.
**Raising Capitals/Funds**
- Financial markets attract funds from investors and channel them to corporations, allowing them to
finance operations and achieve growth.
- Borrowers may include individuals, companies, and governments.
**Intermediary Functions/Roles of Financial Market**
- Financial markets transfer resources, enhance income, promote productive usage, aid capital
formation, and determine price.
- They provide a sale mechanism, generate information, and reduce transaction costs.
**Financial Functions**
- Financial markets provide borrowers with funds, provide lenders with earning assets, ensure market
liquidity, promote credit creation, and facilitate savings and investment.
**Economic Functions**
- Financial markets mobilize savings, facilitate investment, contribute to national growth, support
entrepreneurship, and promote industrial development [R14, R15].
**The Major Participants in the Financial Markets**
- Participants include those on the supply side (providing excess money) and demand side (demanding
excess money).
- Investors regularly purchase securities for financial gain, while speculators profit from price
fluctuations.
- Institutional investors are financially sophisticated entities making large investments, while retail
investors are individual investors.
**Emergence of Ethiopian Financial Market**
- The history of stock markets in Ethiopia dates back to the Imperial Regime, with the first share offered
in 1956.
- The State Bank of Ethiopia established a share exchange department in 1960.
**Trends of Stock Market Development**
- The Ethiopian stock market was moderately successful during the Imperial regime.
- With the Dergue Regime, nationalization led to the dissolution of share dealing groups.
- The post-1991 government encouraged private sector involvement, but the government remains
cautious about establishing a formal stock exchange.
**Bond Markets**
- Bond markets provide a means to sell bonds, enabling governments and companies to raise long-term
capital.
- Ethiopia currently has no Capital Market to transact bonds in the secondary markets.
**Justifications for Creation of Finical Markets**
- Creating securities markets is justified by providing long-term finance, meeting domestic resource
needs, enhancing transferability, and improving liquidity.
- It also helps in curing excess reserve, enabling monetary policy enforcement, and motivating
companies to go public.
**Financial Instruments, Services, and Infrastructures**
- Financial instruments are tradable financial assets, while financial services are offered by various
businesses in the finance industry.
- Financial infrastructures facilitate payment movement and securities trading, including debit cards and
mobile banking.
**Introduction (LO2: Explain the function and role of the National Bank of Ethiopia (NBE))**
- The NBE is established by law as the central bank, with defined purposes and roles.
- After completion of this section, trainees should know the purposes and major roles of the NBE, its
monetary policy, and the policy's effect on the Ethiopian economy.
**The Purpose of NBE**
- The purpose of the National Bank is to maintain stable price and exchange rates, foster a healthy
financial system, and enhance rapid economic development.
**The Roles of the NBE**
- The roles of the NBE include maintaining financial stability, regulating the Ethiopian Payments System,
and regulating banks and other financial institutions [R19, R20].
- The NBE facilitates the operation of financial institutions, issues debt instruments, formulates exchange
rate policy, and manages international reserves.
- It also acts as a banker, fiscal agent, and financial advisor to the government, establishes a deposit
insurance fund, and collects data for economic studies.
**NBE's Monetary Policy**
- Monetary policy refers to actions and regulatory stances taken by the central bank, including
determining the quantity and growth rate of money, setting interest rates, and setting reserve
requirements.
- Actions also include increasing or decreasing commercial bank reserves, regulatory actions, and
intervention in foreign exchange markets [R20, R21].
**Monetary Policy Objective of NBE**
- The principal objective of the NBE’s monetary policy is to maintain price and exchange rate stability
and support sustainable economic growth.
- The policy also fosters monetary, credit, and financial conditions conducive to orderly and sustained
economic growth, preserves the purchasing power of the national currency, and encourages savings.
**The Effect of the NBE’s Monetary Policy on Ethiopian Economy**
- Monetary policy has a significant impact on the Ethiopian economy, including changes in interest rates,
flow on changes to employment, prices and production levels and increases or decreases in the money
supply.
**The Role of Monetary Policy in Economic Development**
- Monetary policy helps in adjusting demand and supply of money, ensuring price stability, controlling
credit, expanding financial institutions, and managing debt.
**Introduction (LO3: EXPLAIN ETHIOPIA'S MONETARY SYSTEM)**
- A monetary system is the framework of legal rules and institutions by which a government provides
money in a country's economy.
- After this training, trainees should understand the monetary system, functions of money, motivations
for holding money, and instruments traded on the short term money market.
**Monetary System**
- A monetary system includes monies, central banks, commercial banks, and other non-banking financial
institutions.
**The Functions of Money**
- Money is anything generally acceptable as a means of exchange and acts as a measure and store of
value.
- Money includes coins, currency notes, checks, Bills of Exchange, promissory notes and other money
instruments.
**The most important functions of money**
- Money serves as a medium of exchange, measure of value, store of value, standard of deferred
payments, and measure of liquidity [R22, R23].
**Society’s Motivations for Holding Money**
- Money is held for transaction, precautionary, and speculative motives.
**Instruments traded on the short term money market**
- Financial instruments traded in the money market include bills of exchange, promissory notes, checks,
certificates of deposit, banker’s acceptance, and commercial papers [R23, R24].
**Introduction (LO4: EXPLAIN THE KEY FACTORS THAT INFLUENCE THE ETHIOPIAN ECONOMY)**
- This section aims to provide an understanding of different factors that affect the Ethiopian economy.
**Key Factors that Influence the Ethiopian Economy**
- Factors include the global market situation, Federal and Regional State government actions, domestic
interest rates, and changes in consumer activity.
- Positive effects of trade include increasing specialization, greater capacity utilization, and technology
diffusion.
- Obstacles to free-flowing markets include poor infrastructure, corruption, and civil conflicts [R24, R25].
**Consumers’ Activity that Influence Economy**
- Consumer activities include applications for home loans, purchase of health insurance, university
education, residential accommodation, retail spending, and tourism.
**Introduction (LO5: DESCRIBE THE ROLE OF (FINANCIAL) REGULATORS)**
- This section focuses on understanding the main money regulators and their roles.
**The Main Regulators of Finical System of Ethiopia**
- The main regulators of the Ethiopian financial system include the National Bank of Ethiopia (NBE) and
the Financial Intelligence Center (FIC) [R25, R26].
- The NBE maintains financial stability, regulates the Ethiopian Payments System, and regulates financial
institutions.
- The FIC aims to comply with international monetary agreements and represents Ethiopia in
international financial organizations, working to combat money laundering and financing of terrorism.
- Government Financial Institutions Regulatory Enterprise Supervises government owned financial
institutions.
Me: More Detailed Note from main and sub topics of The pdf
PDF: Certainly! Here’s a detailed outline based on the main and subtopics from the provided PDF on
developing an understanding of the Ethiopian Financial System and Markets.
### Unit Title: Develop Understanding of the Ethiopian Financial System and Markets
#### Learning Outcomes:
1. **Describe what is meant by the Ethiopian financial markets.**
- Identification and discussion of specific financial markets in Ethiopia.
- Research on the purpose of financial markets and their emergence in Ethiopia.
- Analysis of participants in financial markets and the roles of banks and financial institutions.
2. **Explain the function and role of the National Bank of Ethiopia (NBE).**
- Research on the NBE's role as the central bank and its comparison with other banking institutions.
- Discussion on the importance and effects of NBE's monetary policy.
3. **Explain Ethiopia's monetary system.**
- Explanation of the various functions of money and society's motivations for holding money.
- Description of the monetary cycle and instruments traded in the short-term money market.
- Analysis of the impact of money supply changes.
4. **Explain the key factors that influence the Ethiopian economy.**
- Exploration of global market situations and government actions impacting the economy.
- Analysis of changes in domestic interest rates and their sectoral impacts.
- Evaluation of consumer activity effects on the Ethiopian economy.
5. **Describe the role of regulators.**
- Identification of the main regulator of the financial system.
- Explanation of each regulator's role in protecting investors and promoting confidence in the financial
system.
### Detailed Outline:
#### 1. Ethiopian Financial Markets
- **Specific Financial Markets:**
- Bond Market
- Derivatives Market
- Foreign Exchange Market
- Money Market
- Options and Futures Markets
- **Purpose of Financial Markets:**
- Investment of surplus funds.
- Raising required funds through securities issuance.
- **Participants:**
- Banks and non-banking financial institutions.
- Corporations, individuals, local and international governments.
- Speculators.
#### 2. National Bank of Ethiopia (NBE)
- **Purpose of NBE:**
- Maintain stable price and exchange rates.
- Foster a healthy financial system.
- Enhance rapid economic development.
- **Roles of NBE:**
- Regulate banks and financial institutions.
- Maintain financial stability and manage government debt.
- Control the money supply and implement monetary policy.
#### 3. Ethiopia's Monetary System
- **Functions of Money:**
- Means of exchange.
- Measure of value (relative value of goods/services).
- Measure of liquidity.
- **Motivations for Holding Money:**
- Precautionary, speculative, and transaction demands.
- **Monetary Cycle and Instruments:**
- Instrument types in short-term money markets (e.g., Treasury bills, promissory notes).
- Impact of money supply changes on the economy.
#### 4. Key Factors Influencing the Ethiopian Economy
- **Global Market Situation:**
- Effects of EPRDF policies on trade liberalization.
- The impact of foreign trade policies and institutional reforms.
- **Government Action:**
- Liberal trade policies and the obstacles affecting market flow (e.g., infrastructure issues, corruption).
- **Domestic Interest Rates:**
- Sector analysis regarding interest rate changes.
- **Consumer Activity:**
- Applications for loans, purchase behaviors, retail spending dynamics.
#### 5. Role of Regulators
- **Main Financial Regulators:**
- Identification of key regulatory bodies like the Financial Intelligence Centre.
- **Regulatory Roles:**
- Protecting investors and consumers.
- Promoting confidence in the financial system via regulatory frameworks.
--
This outline synthesizes the significant themes concerning the Ethiopian financial system covered in the
PDF, providing a framework for understanding its complexity and the various components that interact
within it.
