Prepared By: Tewodros Endale

3.1. INTRODUCTION
 Commercial banks represent
› the most important financial intermediary,
 They perform a critical function of
› facilitating the flow of funds
› from
 surplus units
to
 deficit units.

Prepared By: Tewodros Endale

 The major sources of commercial bank funds are summarized as follows:

A. Deposit Accounts
1) Transaction Deposits

2) Savings Deposits

3) Time Deposits

4) Money Market Deposit Accounts

B. Borrowed Funds
1) Federal Funds Purchased (Borrowed)

2) Borrowing from the Federal Reserve Banks

3) Repurchase Agreements

4) Eurodollar Borrowings

C. Long-Term Sources of Funds

1) Bonds Issued by The Bank

2) Bank Capital

Prepared By: Tewodros Endale

 A. Deposit Accounts
1) Transaction Deposits
 Demand Deposit Accounts are the major source of funds
 that can be used until withdrawn by customers (as checks are written).

 Definition: Negotiable Order of Withdrawal (NOW) account

 An interest-earning bank account with which the customer is permitted to write
drafts or checking service against money held on deposit.

 Also known as a "NOW account".

 The Demand Deposit Account, or Checking Account,

 is offered to customers

 who desire to write checks against their account.

 The conventional type of Demand Deposit Account requires

 a small minimum balance &

 pays no interest.

Prepared By: Tewodros Endale

 2) Savings Deposits
 The traditional Savings Account is
 the passbook savings account,
 which does not permit check writing.

3) Time Deposits
 A common type of TIME DEPOSIT known as
 a Retail Certificate of Deposit (or retail CD)
 requires
 a specified minimum amount of funds to be
deposited
 for a specified period of time.

 CDs accounts have relatively higher interest

rates compared to the traditional savings account
Prepared By: Tewodros Endale
 4) Money Market Deposit Accounts (MMDA)
 MMDAs differs from Conventional Time Deposits in that

› it does not specify a maturity.

 Majority of Money Market Accounts

 allow to cash in checks against their funds

 but on fixed basis (on the fixed number of transactions).

 MMDAs are
 more liquid than retail CDs from the depositor’s point of view.

 Because banks normally pay a higher interest rate on CDs.

 MMDA’s differ from NOW accounts in that

 they have limited check-writing ability (they allow only a limited number of transactions
per month ),

 require a larger minimum balance, and

 offer a higher yield.

Prepared By: Tewodros Endale

1) Federal Funds Purchased
 Federal Funds Purchased (or borrowed) represent
› a liability to the Borrowing Bank and
› an asset to the Lending Bank that sells them.
 The Federal Funds Market allows depository institutions to
accommodate the short-term liquidity needs of other financial institutions.

 Loans in the federal funds market are typically for one to seven days.
 A bank may act as
 a lender of federal funds on one day and
 as a borrower shortly thereafter,
 as its fund balance changes on daily basis.

Prepared By: Tewodros Endale

2) Borrowing from the Federal Reserve Banks
 Another Temporary Source of Funds for banks is

 the Federal Reserve System

 which serves as the Ethiopian National Bank.

 This form of borrowing by banks is often referred to as
 borrowing at the discount window.

 The Interest Rate charged on these loans is known as the discount

rate.

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 A Repurchase Agreement (repo) represents
 the sale of securities by one party to another
 with an agreement
 to repurchase the securities a
 to a specified date and price.
 Banks often use
 a repo as a source of funds
 when they need funds for just a few days.
 They would simply
 sell some of their government securities (such as their Treasury bills) to a corporation and
 buy those securities back shortly thereafter.

Prepared By: Tewodros Endale

 If a U.S. bank is in need of short-term funds,
 it may borrow dollars from those banks outside the United
States
 Because
 U.S. dollars are widely used as an international medium of
exchange,
 the Eurodollar Market is very active.
 Some U.S. banks
 commonly obtain short-term funds from Euro banks.
Prepared By: Tewodros Endale
1. BONDS ISSUED BY THE BANK
 Like other corporations, BANK own some fixed assets such as
› Land,
› Buildings, and
› Equipment.
 These ASSETS often
› have an expected life of 20 years or more and
› are usually financed with LONG-TERM SOURCES OF FUNDS, such as
through the ISSUANCE OF BONDS.
 Common purchasers of such bonds are
 Households and
 various Financial Institutions, including
 Life Insurance Companies and
 Pension Funds.
Prepared By: Tewodros Endale
 Bank capital generally represents
 funds attained
 through the issuance of stock or
 through retaining earnings.
 Bank Capital represents
 the Equity or-Net Worth of the bank.

Prepared By: Tewodros Endale

Prepared By: Tewodros E.
Assignment 10%
1) Organization and Structure of Ethiopian Banking Industry
2) Ethiopian Banks’ Lending Procedures
3) Ethiopian Banks’ Sources of Funds
4) Ethiopian Banks’ Performance Evaluation and Financial
Statements
5) Ethiopian Banks’ Asset-Liability Management Techniques

Prepared By: Tewodros Endale