Part I: Multiple Choices: Choose the best answer from the given alternatives.

(1.5*26= 39 pts.)
1. ______are types of commercial banks with no intension to lend their funds for a long
period of time.
A) Industrial banks C) Deposit banks
B) Saving banks D) Agricultural banks E) None
2. Commercial banks use_______ as third line defense to accept the claim of depositor.
A) Money at call and short notice C) Cash with other commercial banks
B) Money with central bank D) Cash on hand E) All.
3. All of the followings are true about demand deposit except________.
A) These deposits can be withdrawn at any time.
B) These deposits are kept by businessmen and industrialists who receive and make large
payments through banks.
C) There is a restriction on the amount that can be withdrawn at a particular time.
D) Cheques are used to withdraw the amount. E) None
4. _____ is a type of primary function of commercial banks in which it is repayable by
installment basis.
A) Consumer credit C) Term loan
B) Overdraft facility D) Cash credit E) All
5. Of the following one is not possible way to create derivative deposit.
A) Discounting bills of exchange. C) Granting loans to customers
B) Purchase of government securities. D) All E) None
6. Assume that Mr. John has only Br.4000 on his saving account with Commercial Bank of
Ethiopia and he agreed to with draw Br.8000 since he is active customer. Assume that
interest rate of commercial bank on lending activity is 5%. What is the amount of
principal and interest that Mr. John has submitted at the due date?
A) Br. 8400 C) Br. 4600
B) Br. 4200 D) Br. 8600 E) None
7. All of the following bank’s functions can be listed under agency services except ____.
A) Collection and payment of cheques, bills of exchange and promissory notes on behalf
of their customers.
B) Purchase and sell shares, stocks, bonds, debentures on behalf of their name.
C) Acting as representative and correspondents of their customers. D) All E) None
8. All are sources of commercial banks income except__________.
A) Underwriting of joint companies shares. C) Interest on loans
B) Discount on bills of exchange D) Interest on investments E) None

Banking Principles and Practices 1 2017, June, 21

 9. Identify the odd statement (s) about agricultural banks.
A) They do not work on the principle of maximum profit for the shareholders.
B) They organized on co-operative lines.
C) They meet the credit requirements of the farmers through term loans.
D) They established to encourage thrift among small savers. E) None
10. Which one is incorrect about industrial banks?
A) They buy shares and debentures of companies
B) They underwrite the debentures and shares of big industrial concerns.
C) They accept long term deposits. D) All E) None
11. Which one is odd regarding with banks balance sheet items?
A) Bills payable C) Acceptances and endorsements
B) Bills discount D) Money at call and short notice E) None
12. Which banks investment policies have controversial consequences?
A) Liquidity and Security C) Liquidity and Profitability
B) Profitability and Security D) Diversity and Profitability. E) None.
13. “The bank should not keep all its eggs in the same basket”. This sentence best explain
_________ investment policy of commercial banks.
A) Safety or Security C) Profitability
B) Diversity D) Salability
14. Assume that Mr. X deposits Br. 250,000 with Awash International Bank and according to
NBE all banks should keep 5% as reserve from deposit. There are number of commercial
banks in Ethiopia to create derivative deposit. Based on the above information, what the
amount of credit multiplier that banks can create together?
A) 2 B) 5 C) 20 D) 10 E) None
15. When the customer pledges certain movable or non-movable property or assets with the
banker in order to get a loan he/she become:
A) Hypothecator C) Trustee
B) Hypothecatee D) Licensee E) None.
16. Among the following one is not true about Derivative Deposit.
A) It arise when a loan is granted or when a bank discounts a bill or purchase
government securities
B) It can be easily managed by the bank
C) Do not create money rather convert currency money into deposit money
D) It also known as “active deposits” E) None
17. While advancing loans, it is necessary that the bank should consider the three ‘C’s of
customer. This principle reflects:
A) Security C) Liquidity
B) Diversity D) Stability in price E) None

Banking Principles and Practices 2 2017, June, 21

 18. The following items are found only under the liability section of banks’ balance sheet
except_______.
A) Loans C) Profit and Loss Account
B) Reserve funds D) Capital E) None
19. Which is/ are true about passive deposit?
A) Can be created when customers deposit checks.
B) Merely convert currency money into deposit money.
C) Customer is free to withdraw the amount whenever he/she wants by checks. D) All
20. If Awash International Bank and Dashen Bank grant loan jointly against common
collateral it is termed as:
A) Money at call C) Overdraft facility
B) Term loan D) Cash credit E) None
21. Identify the odd statement(s).
A) If banks receive more cash, they can create more credit.
B) There is a proportion relationship between cash reserve ratio and credit creation.
C) When the economy is at a boom stage, credit creation will increase.
D) If people eager to hold cash in their wallet, credit creation will fall.
22. All of the followings are factors that can differentiate debtor creditor relationship of
banker and customer from other commercial debts except____________.
A) The creditor must demand the payment at the right time and place.
B) The creditor must make the demand for payment in a proper manner.
C) The creditor (the customer) must demand payment. D) All E) None.
23. When banks pay insurance premium on behalf of their customers its termed as:
A) Trustee and Beneficiary relationship C) Advisor and Client relationship.
B) Agent and Principal relationship D) All E) None
24. All are cases in which bank can refuse to accept customers check except_______.
A) When there is garnishee order C) When customer’ account has accredit balance
B) When customers lost check D) All E) None
25. Assume that economic development of “X” country increased from 12% to 15 % within
two fiscal years according to published journals of “X” country’s commercial bank.
Based on this statement one can conclude that:
A) Commercial banks can participate in collection of statistics.
B) Commercial banks provide locker facility.
C) Commercial banks issue letter of credits.
D) Commercial banks highly participate in underwriting of securities.
26. All are primary functions of commercial banks except_______.
A) Agency services C) Remittance of funds
B) Advancing loans D) Financing foreign trade E) All F) None

Banking Principles and Practices 3 2017, June, 21

Part two: Matching: Match the correct answer from column “B” to column “A”
[1 each (6*1=) marks]

Column “A”
1. Banker is a debtor
2. Licenser and licensee relationship
3. Trustee and beneficiary relationship
4. Banker is a creditor
5. Bailor and Bailee relationship
6. Garnishee order

Column “B”
A) Agreement to deliver property to another.
B) When current account of customer has been debited.
C) When customer owes money to banker.
D) When banker holds property on behalf of its customer.
E) Case in which the banker can refuse to honour check.
F) When deposit account of customers has a credit balance.
G) When the banker gives a sale deposit locker to customers.
H) Order in which the banker has an obligation to pay for customers.

Part Three: Short Answer [5*1= 5 marks]

(Write a proper answer for each questions and your answer should be brief and precise)
1. List at least five roles of commercial banks in a developing economy.

GOOD LUCK!

Banking Principles and Practices 4 2017, June, 21

 Answer Sheet
Name: ________________________________ID No. ________________Group________

Part I: Multiple Choices(39%)

1. 7. 13. 19. 25.

2. 8. 14. 20. 26.

3. 9. 15. 21.

4. 10. 16. 22.

5. 11. 17. 23.

6. 12. 18. 24.

Part Two: Matching(6%)

1. 4.

2. 5.

3. 6.

Part Three: Short Answer (5%)

1) _____________________________________________________
2) _____________________________________________________
3) _____________________________________________________
4) _____________________________________________________
5) _____________________________________________________
6) _____________________________________________________

Banking Principles and Practices 5 2017, June, 21