Micro and small enterprises played a critical role in rejuvenating and sustaining the modern economy, generating substantial employment and serving as important innovation engines for the global economy. In an attempt to find a way that CBE contributes its role for alleviating the extensive poverty of the nations, this feasibility study identifies the following issues. • Financial access to micro and small enterprises is the critical challenge despite their contribution towards economic development is quite immense. Ethiopia’s context has no any difference, micro and small enterprises encountered financial shortages and the financial inclusion level is quite minimal which testified shortage of financial access to micro and small enterprises. • Digital financial service channels allow to bridge financial access challenges through reaching out financially excluded segments and thereby enhance financial inclusion. • Micro and small enterprises are purely taken as strategic segment to the government of Ethiopia to enhance the industrial development journey of the country and considered as the heart of government strategy. • The assessment clearly divulged that there is excess financing demand that CBE should leverage and played its role towards the financial inclusion strategy of the government. • Digital saving and loan is the preferred mechanism to properly address the financing gap with minimal transaction cost and proper risk management tools. • Global and domestic experiences clearly divulged that financial constraints of financial excluded segments can be bridged through innovative products with appropriate risk management tools. • Kenyan experience is taken as a best experience to the context of CBE as it has appropriate platforms to provide digital micro saving and loan. • CBE has adequate digital channels and maintained adequate financial transactions that could be leveraged for digital lending. • The proposed products are financially viable and allow CBE to enhance its profitability. • The products help CBE to expand its customer base; enhance deposit mobilization; expand its product portfolio; diversify its credit portfolio; improve its business efficiency; and consistent and quick credit decisions. • Mobile money/banking platforms of the bank are the tools helpful to launch both digital saving and loan products. Ordinary saving, target saving and fixed saving are the saving products identified to mobilize deposit from the target group. Further, micro loan and overdraft are loan products designed to address the financial constraints of the target group. Recommendation As per the assessment made, the products found feasible and it is recommended to commence digital micro saving and loan. The following recommendations are drawn to implement digital micro saving and CBE should leverage its digital channels, mobile money/banking, as customer interface tools to avail digital saving and loan products to the identified target should.

1. Chapter 2
An Overview
of the Financial
System

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2-2
Topics include:
1. Meaning of Financial System.
2. Function of financial Markets.
3. Structure of Financial Markets
Chapter Preview

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Why Study Financial Markets?
• Financial System: is a set of Financial Markets,
Financial institutions, and Regulatory and supervisory
bodies.
• Financial markets: are markets in which funds are
transferred from people and Firms who have an excess
of available funds to people and Firms who have a
need of funds.

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2. Function of Financial Markets
• Perform the essential function of channeling funds from
economic players that have saved surplus funds to those
that have a shortage of funds.
• Promotes economic efficiency by producing an efficient
allocation of capital, which increases production.
• Directly improve the well-being of consumers by allowing
them to time purchases better.

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Figure 1 Flows of Funds Through the
Financial System

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Segments of Financial Markets
Direct Finance
• Borrowers borrow directly from lenders in financial markets
by selling financial instruments which are claims on the
borrower’s future income or assets.
Indirect Finance
• Borrowers borrow indirectly from lenders via financial
intermediaries (established to source both loanable funds and
loan opportunities) by issuing financial instruments which are
claims on the borrower’s future income or assets.

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3. Structure of Financial Markets
There are several basis for classification of Financial Markets:
3.1 Financial
instrument
• Debt instrument.
• Equity instrument.
3.2 Maturity
Date
• Capital Market.
• Money Market.
3.3 Security
Issue
• Primary Market.
• Secondary Market.

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3.1 Financial instruments consisted of:
Debt Instruments:
is a contractual agreement by the borrow to pay the holder of
instrument fixed amount (interest *principal payment) at regular
interval until a specific date, then final payment is made.
Types of Debt instruments:
─ Short-Term (maturity < 1 year)
─ Long-Term (maturity > 10 year)
─ Intermediate term (1-10).
3. Structure of Financial Markets
(cont’d)

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3.1 Financial instruments consisted of:
Equity Instruments:
•Example: common stock.
•Definition: are claims to share in the net income (income after
expenses and taxes) and the assets of a business.
•Periodic payments: (dividends).
•No maturity date.
•Adv.: Owning stock means that you own a portion of the firm
and thus have the right to vote on issues important to the firm and
to elect its directors.
3. Structure of Financial Markets
(cont’d)

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3.2 Classifying Markets by Maturity of the Securities:
 Money Market: Short-Term (<= 1 year)
Is financial market in which short –term debt instrument
are traded.
 Capital Market: Long-Term (> 1 year).
Is financial market in which long–term equity and debt
instrument are traded.
Such as stock and long-terms bonds are held by financial
intermediaries such insurance and pension funds.
3. Structure of Financial Markets
(cont’d)

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3.3 Classifying Markets by Security Issue.
Primary Markets: (New securities).
–is a financial market in which new issues of a security are sold to
initial buyers by the corporation or government agency borrowing
the funds.
–Investment Banks: underwrite securities in primary markets,
advising company about market timing, administrative functions
as in help with all legal paper and registration statements with
stock market.
3. Structure of Financial Markets
(cont’d)

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3.3 Classifying Markets by Security Issue.
Secondary Market: (Previously issued).
– is a financial market in which securities that have been
previously issued can be resold.
– Brokers and dealers work in secondary markets.
Brokers: are agents of investors who make trade on behave of
others. Dealers: are person who trade business on their own.
3. Structure of Financial Markets
(cont’d)