ST.

MARY’S UNIVERSITY
FACULTY OF BUSINESS
DEPARTMENT OF ACCOUNTING

A RESEARCH PAPER IN PARTIAL FULFILMENT OF THE

REQUIREMENT FOR BACHELOR OF ART IN ACCOUNTING

THE EFFECT OF INFLATION ON SAVING;

THE CASE OF ABYSSINIA BANK

PREPARED BY:-
SARON WOLDE
BETELHEM MITKU
EDLAM MULUNEH

ADVISOR
ALULA.H (MBA)

SMU
MAY 2014
ADDIS ABABA
Acknowledgement
A great many people have contributed in making this paper possible.

In this regard, we express our profound admiration to our advisor Ato. Alula Hailu for his great
guidance, motivation, immense knowledge and unreserved help during our study. We could not
have imagined having a better mentor like him. We attribute the level of our BA degree to his
encouragement and effort.

Secondly, we would like to forward our special gratitude to W/r Yeshiwork Wolde who is
manager of BOA at Lafto Branch, W/ro Frehiwot Abera assistant manager in Lafto Branch
including all staff members, Ato Huseen Head Department of research In national bank of
Ethiopia and Dr.Andualem Goshu.

At last, our heartfelt gratitude goes to our beloved families (Yeshiwork Wolde, Rediet Abebe
Wudnesh Wolde ,Ato Mitku Gebane ,W/r Amelework Gebre, Hewan Mitiku, Ato Muluneh
Getachew, W/Ro Abaynesh Alemu, Kassa Haile and Frehiwot Muluneh) who put the corner
stone for our success and were eager to a see our achievements.

i
Table of Content

Acknowledgement.................................................................................................................................... i
Table of Content ...................................................................................................................................... ii
List of Tables .......................................................................................................................................... vi
List of Graph .......................................................................................................................................... vii
Abbreviations ........................................................................................................................................viii
CHAPTER ONE ......................................................................................................................................... 1
INTRODUCTION ....................................................................................................................................... 1
1.1. Background of the Study .............................................................................................................. 1
1.2. Background of the Organization ................................................................................................... 3
1.3. Statement of the Problem ............................................................................................................ 3
1.4. Research Questions ..................................................................................................................... 4
1.5. Objective of the Study.................................................................................................................. 4
1.6. Scope of the Study ....................................................................................................................... 5
1.7. Limitation of the Study ................................................................................................................. 5
1.8. Significance of the Study .............................................................................................................. 5
1.9. Research Design and Methodology of the Study .......................................................................... 5
1.9.1. Research Design......................................................................................................................... 5
1.9.2. Source of Data ...................................................................................................................... 6
1.9.3. Method of Data Collection ................................................................................................... 6
1.9.4. Sample Size and Sampling Techniques........................................................................................ 6
1.9.5. Method of Analysis .................................................................................................................... 8
1.10 Organization of the paper ............................................................................................................ 8
CHAPTER TWO ........................................................................................................................................ 9
LITERATURE REVIEW................................................................................................................................ 9
2.1. Overview of Banking .................................................................................................................... 9
2.2. Definition of a Bank ................................................................................................................. 9
2.2.1. Introduction ......................................................................................................................... 9
2.2.1.1. Nature of Commercial Banks ...................................................................................... 10
2.2.1.2. Definitions of Commercial Banks ................................................................................ 10

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 2.2.3. Characteristics/Features of a Bank ........................................................................................... 10
2.2.4. Functions of Commercial Banks .......................................................................................... 11
2.2.4.1. Primary Functions of Commercial Banks ..................................................................... 12
2.2.4.2. Secondary Functions of Commercial Banks ................................................................. 12
2.2.5. Types of Bank Accounts ...................................................................................................... 13
2.3. Saving Account in Bank - Meaning, Features, Advantages....................................................... 14
2.3.1. Features of Saving Account ...................................................................................................... 15
2.3.2 Advantages of Saving Account................................................................................................... 16
2.3.3. Globalization and Savings .................................................................................................. 16
2.3.4. Some possible reasons for the decline in saving ....................................................................... 17
2.4. Meaning Characteristics and Features of Inflation .................................................................. 17
2.4.1. History of Inflation in the World ........................................................................................ 18
2.4.2. Issues in Measuring Inflation .............................................................................................. 20
2.4.4. Effects of Inflation .............................................................................................................. 22
2.4.4.1. General Effects ........................................................................................................... 22
2.4.4.2. Negative Effect of Inflation ......................................................................................... 22
2.4.4.3. Positive Effect of Inflation.................................................................................................. 24
2.4.5 Causes for Inflation ................................................................................................................... 26
2.4.6. Monetarist View on Inflation .............................................................................................. 30
2.4.7. Controlling Inflation ........................................................................................................... 30
2.5. Ethiopia Inflation Rate .................................................................................................................... 31
2.6. The Relationship Between Saving and Inflation .......................................................................... 33
CHAPTER THREE .................................................................................................................................... 36
OVERVIEW............................................................................................................................................. 36
3.1. Data Presentation, Analysis and Interpretation .......................................................................... 36
3.2. Data Presentation and Analysis of Questionnaires ..................................................................... 36
3.2.1 Background of the Respondents................................................................................................ 36
3.2.1.1. Sex Distribution of Respondents ........................................................................................ 36
Table 1. Sex Category......................................................................................................................... 36
3.2.1.2. Age Category..................................................................................................................... 37
Table 2. Age Category ........................................................................................................................ 37
3.2.1.3. Working area of the respondent ........................................................................................ 38

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 Table 3. Working area........................................................................................................................ 38
3.2.1.4. Education Level .......................................................................................................... 38
Table 4. Education Background of the Respondents ........................................................................... 39
3.2.2. Saving Account Information of Customers in BOA .................................................................... 39
3.2.2.1. Types of Saving.................................................................................................................. 39
Table 6. Types of Saving Accounts ...................................................................................................... 40
3.2.2.2. Objective of Saving ............................................................................................................ 40
Table 9. Objective of Saving ............................................................................................................... 41
3.2.2.3. Duration of being Customers in BOA ................................................................................. 41
Table 10. Durations of Being Customer Of BOA .................................................................................. 42
3.2.2.4. Attainment of Customer’s Objective.................................................................................. 42
Table 11. Attainment of Customer’s Objective ................................................................................... 42
3.2.2.6. Response of Company for Customers Comment ................................................................ 43
Table 13. Response of the Company .................................................................................................. 43
3.2.3. Customer Awareness of Inflation........................................................................................ 44
3.2.3.1. Awareness of Customer on the Current Inflation Rate ....................................................... 44
Table 14. Awareness of the Customers .............................................................................................. 44
3.2.3.2. Consideration of Customer to Open the Account............................................................... 44
Table 15. Consideration of Customer to Open the Account ................................................................ 45
3.2.3.3. Level of Awareness on the Relation on Inflation and Saving ............................................... 45
Table 16. Level of Awareness on the Relation of Inflation and Saving ................................................. 45
3.2.3.4. Saver Action during Inflation Period .................................................................................. 46
Table 17. Saver Action during Inflation Period.................................................................................... 46
3.2.3.5. Is Customer’s Savings Growing during Inflation Period?..................................................... 46
Table 18. Are Customers Savings Growing during Inflation Period? .................................................... 47
Table 19. Annual Deposit Mobilization of the Banking System ........................................................... 47
3.3. Data Presentation and Analysis of Interview .............................................................................. 47
3.3.1 Overview .................................................................................................................................. 48
3.3.2. Bankers Emphasis on Relationship between Inflation and Saving ............................................. 48
3.3.3. Bankers Recommendation when Inflation Occurs .................................................................... 48
3.3.4. Control Mechanisms of the Bank during the Occurrence of Inflation ........................................ 48
Table 20. Saving Rate and Lending Rate ............................................................................................. 49

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 Graph 1. The Relation between garanted Collected and Outstanding Loan ........................................ 49
Table 21: Tabular representation of Relation between Saving Rate and Lending Rate ........................ 50
Graph 2: The Relationship between Saving Rate and Lending Rate .................................................... 50
3.3.5. Raising questions on the issue of customers............................................................................. 51
3.3.6. Separate department of the Bank linked to Bank Service ......................................................... 51
3.3.7. Interest Rate of the Bank .................................................................................................... 51
3.4. Data Presentation and Analysis of Secondary Data ..................................................................... 52
3.4.1. The Current Inflation Rate ........................................................................................................ 52
3.4.2. Correlation between Inflation and Saving Deposits............................................................. 54
Table 23. Comparisons of Inflation and Saving Deposits ..................................................................... 54
Table 24. Shows The Relationship Between Inflation Rate And Saving Rate........................................ 55
Graph 3: The Relationship between Inflation and Saving Rate............................................................ 55
Graph 4: The Relationship between General Inflation food and Non Food Inflation Rate ................... 57
Table 25. Shows Domestic Information .............................................................................................. 58
CHAPTER FOUR ..................................................................................................................................... 59
SUMMARY AND CONCLUSION ............................................................................................................... 59
4.1. Summary ................................................................................................................................... 59
4.2. Conclusion ................................................................................................................................. 60
4.3. Recommendations and the way forwarded ................................................................................ 62
References ................................................................................................. Error! Bookmark not defined.
Appendixes ........................................................................................................................................... 67

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List of Tables
Table 1. Sex Category............................................................................................................ 36
Table 2. Age Category ........................................................................................................... 37
Table 3. Employment Status .................................................................................................. 38
Table 4. Education Background of the Respondents............................................................... 39
Table 6. Types of Saving Accounts ........................................................................................ 40
Table 9. Objective of Saving .................................................................................................. 41
Table 10. Durations of Being Customer Of BOA ................................................................... 42
Table 11. Attainment of Customer’s Objective ...................................................................... 42
Table 13. Response of the Company ...................................................................................... 43
Table 14. Awareness of the Customers .................................................................................. 44
Table 15. Consideration of Customer to Open the Account .................................................... 45
Table 16. Level of Awareness on the Relation of Inflation and Saving ................................... 45
Table 17. Saver Action during Inflation Period ...................................................................... 46
Table 18. Are Customers Savings Growing during Inflation Period? ...................................... 47
Table 19. Annual Deposit Mobilization of the Banking System ............................................. 47
Table 20. Saving Rate and Lending Rate ............................................................................... 49
Table 21: Tabular representation of Relation between Saving Rate and Lending Rate ............ 50
Table 22. Annual Average Inflation ....................................................................................... 53
Table 23. Comparisons of Inflation and Saving Deposits ....................................................... 54
Table 24. Shows The Relationship Between Inflation Rate And Saving Rate ......................... 55
Table 25. Shows Domestic Information ................................................................................. 58

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List of Graph
Graph 1. The Relation between garanted Collected and Outstanding Loan ............................. 49
Graph 2: The Relationship between Saving Rate and Lending Rate ....................................... 50
Graph 3: The Relationship between Inflation and Saving Rate ............................................... 55
Graph 4: The Relationship between General Inflation food and Non Food Inflation Rate ....... 57

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Abbreviations
BOA Bank of Abyssinian

Cdt Certificate of Deposit

ECS Electronic Clearing System

EMI Equated Monthly Transfer

ETF Electronic Fund Transfer

IRAS Individual Retirement Accounts

NBE National Bank of Ethiopia

PAN Permanent Account number

PC Personal Computer

viii
 CHAPTER ONE
INTRODUCTION

1.1. Background of the Study

Accelerated and sustained economic growth is on the top of Ethiopian Government’s policy
Agenda. The Government of Ethiopia (GoE) in its various policy and strategic papers has clearly
documented that the country’s long journey to industrialization and transformation to middle
income nation should be led by agriculture. Thus, there is a need to enhance agricultural
production and productivity (Getahun, 2008).

Financial systems mobilize scarce financial savings from the public and channel it to productive
investments. They reduce risk of investors and thus lessen the barriers to new entry. Similarly,
they lower risk of savers and help to raise financial savings. They also facilitate efficient
exchange of goods and services by operating the country’s payment and settlement systems. It is,
therefore, very difficult, if not impossible, to achieve the Government’s goal of rapid and
sustainable economic growth and development objectives without having vibrant, efficient and
strong financial system which is accessible to majority of the population, if not all (Getahun,
2008).

Financial markets and institutions interact and combine in various ways to form a county’s
financial systems. At the center of the system there are financial instruments in which financial
institutions deal in the market. Financial systems evolve over time. They reflect a county’s
political and economic history. Financial systems in many African countries, for example,
evolved from colonial times. Evolution of modern institutionalized financial system in Ethiopia
started in 1905 following the establishment of the first bank by historically reminiscent name of
Bank of Abyssinia (Belay, 2008 P.69). This Bank introduced for the first time in Ethiopian
financial systems history banking services and instruments such as deposit accounts and export
financing.

Banks provide largely traditional financial products. Their products mainly include demand;
saving and time deposits saving. This may be under taken by Households, firms and even by the

1
government. The household invest this saving in the capital market in the purchase of bonds,
shares, debentures, etc. the business sector borrows funds from the capital market for making
investment. And also the government uses the saving to facilitate economic development
activities and make away for economy’s growth. But inflation has a bad effect up on economic
growth; this is because it increases uncertainty and discourages Investment. Saving accounts are
offered by commercial banks, savings and loan associations, credit unions, building societies and
mutual savings banks. When you begin to save, you should place your money in investments that
are as safe as possible. This category includes bank saving accounts and money market mutual
funds (Getahun, 2008).

Saving may be under taken by Households, firms and even by the government. The household
invested this saving in the capital market in the purchase of bonds, shares, debentures, etc. the
business sector borrows funds from the capital market for making investment. And also the
government uses the saving to facilitate economical development activities and make away for
economy’s growth. But inflation has a bad effect up on economic growth; this is because it
increases uncertainty and discourages Investment .excess of savings over investment causes
inflation. The government can control this situation by regulating investment through its
monetary policy.

More over saving has also a vital role on the economy as well as the individual savers saving
servers in the creation a nominal capital which later turned to capital through investment this
boots the nations real productive assets which useful to achieve economic progress. (ibid)

In addition to that saving is putting away or storing money for future use. Depending on what
you want to save for, you can put money away for a short or long time, for example, saving for a
fridge can take a number of months, whereas saving for your retirement will take much longer.
(http://www.businessdictionary.com/definition/savings.html#ixzz2nYn9btOw)
Whereas, Inflation is characterized by un increase in the general level of price for goods and
services as a consequence, the purchasing power of money will fall. Most countries in the world
try to sustain on inflation rate between 2%and 3%.Inflation lowers the rate of saving and
diminish the purchasing power. Inflation takes place, when too much money is in circulation, in

2
comparison with the production of goods and services. UN inflationary movement could be b/c
of the rise in any single price or a group of prices related goods and services.

This study was tried to see the relationship between inflation pressure and saving by taking the
case of Bank of Abyssinia.

1.2. Background of the Organization

February 15, 1906 marked the beginning of banking in Ethiopia when the first Bank of Abyssinia
was inaugurated by Emperor Menelik II.

It was a private bank whose shares were sold in Addis Ababa, New York, Paris, London, and
Vienna. One of the first projects financed by the bank was the Franco-Ethiopian Railway which
reached Addis Ababa in 1917. In 1931, Emperor Haile Selassie introduced reforms into the
banking system and the Bank of Abyssinia became the Bank of Ethiopia, a fully government-
owned bank providing central and commercial banking services. With the Italian invasion in
1935 came the demise of one of the earliest initiatives in African banking.

On 15 February 1996, ninety years to the day following the establishment of the first Bank of
Abyssinia, a new privately-owned bank with this historic name, but otherwise not connected
with the older bank, came into existence. The subscribed capital of the new Bank of Abyssinia
(BOA) was Birr 25 million and its authorized capital Birr 50 million, with 131 shareholders, all
Ethiopian (Bankofabyssinia.com, 2013).

1.3. Statement of the Problem

Financial institution plays an important role for a country’s economy development. Under the
umbrella of financial institution, many governmental and private banks and other financial
intermediaries such as insurance and micro finance institutions are operating in the nation’s
economy (John, 1999).

One of the services rendered by these financial institutions is provisions of saving account for the
society with an interest rate of 4%. The loan is used for the financing of many development
activities which is supposed to contribute a lot to the economic development of the nation.

3
Hence, saving is a key instrument for the development of an economy through increasing banks’
ability of lending. Moreover, saving also benefits each and every individual through
improvement of living standard of individuals.

There are three motives of saving: transaction motive which is used for day to day expenses,
precautionary for unforeseen situations and speculation saving for a return. This showed that
saving is very necessary and compulsory for the households to have a good standard of living.
However, there are some factors which hinders on people’s ability to save. One of the big
challenges in developing countries is the rise in the food prices which decreases the real income
of the individual and decrease saving. Inflation in many developing countries is rising rapidly;
Even though until recently, Ethiopia has shown to become a low inflation country in sub-Saharan
Africa. The inflationary pressure has an adverse effect for an individual who deprive them from
enjoying basic necessity services such as health, education and sanitation (NBE, 2006/7). The
effect of the decreases in saving doesn’t only affect individuals. It also affects financial
institutions directly by decreasing their financial loan capacity and hence affects the development
of the nation. Therefore, understanding the causal relationship between saving and inflation is
very necessary. Thus, the study was tried to assess the effects of inflation on saving.

1.4. Research Questions

In order to see the causal relationship between inflation and saving, this paper was answered the
following research questions:
 What is the impact of inflation on saving?
 Does the change in saving have effect on the performance of the bank?
 What is the attitude of the society for BOA, compared to other banks?

1.5. Objective of the Study

The general objective of the study is to assess the effect of inflation on saving account
particularly by taking the case of bank of Abyssinia.

The specific objectives include;

 Investigating the trend relationship between saving and inflation for a given period of
time

4
  Assessing the attitude of the society for BOA, compared to other banks
 Assessing the effect of inflation on saving and on the loan ability of BOA.

1.6. Scope of the Study

The scope of this study is limited in assessing the effects of inflation on saving by taking
Abyssinia bank as a case study. Although Bank of Abyssinia has 42 branches in Addis Ababa
and 42 branches abroad, this study takes only one branch of BOA: which is Lafto branch. In line
with this the researcher has collected related information from NBE.

Moreover, the study was restricted to investigate the relationship between saving and inflation
only for the past five years at BOA.

1.7. Limitation of the Study

The limitation of the study was its sample size. Due to time and money the researcher was
enabled to collect information from all customers of BOA and from all its active branches.

1.8. Significance of the Study

Accordingly, the research has the following benefits. First, It helps savers and other interested
users to have abutter knowledge about the impact of inflation and its factors on their saving
account.

Second, in doing the research, the student researcher will develop research skills. Third the
recommendations given at the end will help the organization and the government to decrease its
information gap in the study area. And finally, the issues discussed contribute to filling the
literature gap on the effect of inflation on saving also it will initiate further studies to grate with
and depth.

1.9. Research Design and Methodology of the Study

1.9.1. Research Design
The researcher was used descriptive research design. in which it provides a “picture” of
phenomena as they naturally occurred. Also the researcher choose this research design because,
the study was concerned with describing the characteristics of particular individual or of a group.

5
1.9.2. Source of Data
This study was conducted to analyze the effects of inflation on saving habit of the society and on
the lending ability of the BOA. The source of data for this study was both primary and secondary
data. The primary data was gathered from interview and questioner. And the secondary data
included data from annual and quarter report of Ethiopian National Bank and BOA magazines
and books.

1.9.3. Method of Data Collection

According to primary data the researcher has used both open and closed ended questions. From
the open ended questioner the researcher has collected the qualitative information about inflation
and its effect on saving in relation with the respondents experience in that particular area. In
addition to that the researcher use closed ended questioner so as to get quantitative data that
made the answers of respondents much easier to code and analyze directly from the questioner to
save time and money.

The interview was basically prepared to gather some information from the NBE and BOA.
Information from the semi structured interview was used to investigate the effect of the change
in saving on the loan capacity of BOA and inflation and saving trends.

1.9.4. Sample Size and Sampling Techniques

Having a representative sample size is a crucial substance to obtain a proper and reliable
understanding of the savers practice towards inflation. Cost of sampling, variability of the
population and the margin of error are some of the factors for the choice of the sample size.

This study tried to analyze the effects of inflation towards saving by taking 151 respondents from
BOA customers; the sample size is calculated using the following equation:

n=N/1+Ne2
Where:
n is the required sample size
N is the target population size

6
e is the desired level of precision
n=5000/ (1+5000e2)
n=5000/ (1+5000*0.082)
n=5000/33
n=151

The target population size for the study is taken to be the total number of savers who resides in
Lafto branches of BOA for the past 5 years and the total number of those savers are estimated to
be 5000.

The desired margin of error is set equal to 8%.

This margin of error insures representativeness from the selected population, b/c the general
accepted margin of error for representative samples is 10% or less (hosking and preez 2003)
accordingly, the sample size can be established to be 151 respondents.

To make this sample more representatives the sample will be stratified to include different
segments of the society. The different strata’s are investors, import and exporters, traders, small
associations and individual savers. Two stage stratified sampling techniques is implemented for
this study. In the first stage committed major customers of BOA for the past 5years are selected
using purposive sampling in Lafto branch. And dividing this customer in to investors, import
and exporter’s, traders, small associations and to individual savers. The researcher use purposive
sampling b/c this paper only concerned about investigating the casual relation b/n inflation and
saving for the past five years. The second stage involves selection of sample respondents.
Therefore, the questioner will be distributed trough random sampling to include different amount
of deposit by the strata’s of segments and in each group of segment,30 respondents will be
selected and questioner were distributed for each of the them.

7
1.9.5. Method of Analysis
The method of analysis for this study was descriptive, exploratory and inference analysis. The
descriptive analysis includes simple statistical summary including frequency, ratio and
percentages. The aim of this descriptive analysis was to summarize the trend relationship
between inflation and saving and to illustrate some demographic and other variables.

In addition, the study tried to use exploratory analysis by which it tried to critically analyze the
existing relationship between saving and inflation rate and the effect of inflation on lending
capacity of the BOA. Moreover it also critically analyzed societies and customers attitude for
services rendered by BOA.

1.10 Organization of the paper

The paper was organized in to four chapters. The first chapter was covered general
background of the study, statement of the problem, objectives of the study, significance of
the study, delimitation, limitation, and what method applied for the development of the
study. While chapter two would cover over view of related literatures. Chapter three is
going to show the practical aspect of the paper which is conducted in bank of Abyssinia so
we are going to explain the effects of inflation on saving ,whether change in saving have
impact on the day to day activity of the bank and also the attitude of the customer relative to
other banks. Chapter four includes conclusion, and recommendation of the study regarding
the study.

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 CHAPTER TWO
LITERATURE REVIEW
2.1. Overview of Banking
What is a Bank?

2.2. Definition of a Bank

Oxford Dictionary defines a bank as "an establishment for custody of money, which it pays out
on customer's order."

2.2.1. Introduction
Finance is the life blood of trade, commerce and industry. Now-a-days, banking sector acts as the
back bone of modern business. Development of any country mainly depends upon the banking
system. (http://www.filiker.comTardiskey)

The term bank is either derived from Old Italian word banca or from a French word banque both
mean a Bench or money exchange table. In olden days, European money lenders or money
changers used to display (show) coins of different countries in big heaps (quantity) on benches or
tables for the purpose of lending or exchanging. ( http://www.filiker.comTardiskey)

A bank is a financial institution which deals with deposits and advances and other related
services. It receives money from those who want to save in the form of deposits and it lends
money to those who need it.

Banks have developed around 200 years ago. The natures of banks have changed as the time has
changed. The term bank is related to financial transactions. It is a financial establishment which
uses, money deposited by customers for investment, pays it out when required, makes loans at
interest exchanges currency etc. however to understand the concept in detail we need to see some
of its definitions. Many economists have tried to give different meanings of the term bank.

9
2.2.1.1. Nature of Commercial Banks
Commercial banks are an organization which normally performs certain financial transactions. It
performs the twin task of accepting deposits from members of public and make advances to
needy and worthy people from the society. When banks accept deposits its liabilities increase
and it becomes a debtor, but when it makes advances its assets increases and it becomes a
creditor. Banking transactions are socially and legally approved. It is responsible in maintaining
the deposits of its account holders.

2.2.1.2. Definitions of Commercial Banks

While defining the term banks it is taken into account that what type of task is performed by the
banks. Some of the famous definitions are given below:
According to Prof. Sayers, "A bank is an institution whose debts are widely accepted in
settlement of other people's debts to each other." In this definition Sayers has emphasized the
transactions from debts which are raised by a financial institution.

According to the Indian Banking Company Act 1949, "A banking company means any company
which transacts the business of banking. Banking means accepting for the purpose of lending of
investment of deposits of money from the public, payable on demand or other wise and withdraw
able by cheque, draft or otherwise."

2.2.3. Characteristics/Features of a Bank

1. Dealing in Money
Bank is a financial institution which deals with other people's money i.e. money given by
depositors.
2. Individual / Firm / Company
A bank may be a person, firm or a company. A banking company means a company which is in
the business of banking.
3. Acceptance of Deposit
A bank accepts money from the people in the form of deposits which are usually repayable on
demand or after the expiry of a fixed period. It gives safety to the deposits of its customers. It
also acts as a custodian of funds of its customers.

10
4. Giving Advances
A bank lends out money in the form of loans to those who require it for different purposes.
5. Payment and Withdrawal:-A bank provides easy payment and withdrawal facility to its
customers in the form of cheques and drafts; it also brings bank money in circulation. This
money is in the form of cheques, drafts, etc.
6. Agency and Utility Services:-A bank provides various banking facilities to its customers.
They include general utility services and agency services.
7. Profit and Service Orientation:-A bank is a profit seeking institution having service oriented
approach.
8. Ever increasing Functions:-Banking is an evolutionary concept. There is continuous
expansion and diversification as regards the functions, services and activities of a bank.
9. Connecting Link:-A bank acts as a connecting link between borrowers and lenders of money.
Banks collect money from those who have surplus money and give the same to those who are
in need of money.
10. Banking Business:-A bank's main activity should be to do business of banking which should
not be subsidiary to any other business.
11. Name Identity:- A bank should always add the word "bank" to its name to enable people to
know that it is a bank and that it is dealing in money.

2.2.4. Functions of Commercial Banks

Commercial bank being the financial institution performs diverse types of functions. It satisfies
the financial needs of the sectors such as agriculture, industry, trade, communication, etc. That
means they play very significant role in a process of economic social needs. The functions
performed by banks are changing according to change in time and recently they are becoming
customer centric and widening their functions. Generally the functions of commercial banks are
divided into two categories viz. primary functions and the secondary functions. The following
chart simplifies the functions of banks.

11
2.2.4.1. Primary Functions of Commercial Banks
Commercial Banks performs various primary functions some of them are given below
Accepting Deposits:-Commercial bank accepts various types of deposits from public especially
from its clients. It includes saving account deposits, recurring account deposits, fixed deposits,
etc. These deposits are payable after a certain time period.
Making Advances: -The commercial banks provide loans and advances of various forms. It
includes an over draft facility, cash credit, bill discounting, etc. They also give demand and
demand and term loans to all types of clients against proper security.
Credit creation: It is most significant function of the commercial banks. While sanctioning a
loan to a customer, a bank does not provide cash to the borrower Instead it opens a deposit
account from where the borrower can withdraw. In other words while sanctioning a loan, a bank
automatically creates deposits. This is known as a credit creation from commercial bank.

2.2.4.2. Secondary Functions of Commercial Banks

Along with the primary functions each commercial bank has to perform several secondary
functions too. It includes many agency functions or general utility functions. The secondary
functions of commercial banks can be divided into agency functions and utility functions.

Agency Functions: Various agency functions of commercial banks are

 To collect and clear cheque, dividends and interest warrant.
 To make payment of rent, insurance premium, etc.

12
  To deal in foreign exchange transactions.
 To purchase and sell securities.
 To act as trusty, attorney, correspondent and executor.
 To accept tax proceeds and tax returns.

General Utility Functions: The general utility functions of the commercial banks include
 To provide safety locker facility to customers.
 To provide money transfer facility.
 To issue traveler’s cheque.
 To act as referees.
 To accept various bills for payment e.g. phone bills, gas bills, water bills, etc.
 To provide merchant banking facility.
 To provide various cards such as credit cards, debit cards, Smart cards, etc.

2.2.5. Types of Bank Accounts

When you go to a bank to open a new account, you will have a variety of account types and
features to choose from. Should you choose the basic checking option or an account that earns
interest? Do you want the convenience of a bundled checking and savings account or the higher
returns of a money market savings account?

“It’s helpful to first understand the differences between the primary bank account types.”
To make these decisions, it’s helpful to first understand the differences between the most
common bank account types. Here are some definitions to help you navigate your banking needs:
Checking account: A checking account offers easy access to your money for your daily
transactional needs and helps keep your cash secure. Customers can use a debit card or checks to
make purchases or pay bills. Accounts may have different options or packages to help waive
certain monthly service fees. To determine the most economical choice, compare the benefits of
different checking packages with the services you actually need.

Savings account: A savings account allows you to accumulate interest on funds you’ve saved for
future needs. Interest rates can be compounded on a daily, weekly, monthly, or annual basis.
Savings accounts vary by monthly service fees, interest rates, method used to calculate interest,

13
and minimum opening deposit. Understanding the account’s terms and benefits will allow for a
more informed decision on the account best suited for your needs.

Certificate of Deposit (CD): Certificates of deposit, or CDs, allow you to invest your money at
a set interest rate for a pre-set period of time. CDs often have higher interest rates than traditional
savings accounts because the money you deposit is tied up for the life of the certificate – which
can range from a few months to several years. Be sure you do not need to draw on those funds
before you open a CD, as early withdrawals may have financial penalties.
Money market account: Money market accounts are similar to savings accounts, but they
require you to maintain a higher balance to avoid a monthly fee. Where savings accounts usually
have a fixed interest rate, these accounts have rates that vary regularly based on money markets.
Money market accounts can have tiered interest rates, providing more favorable rates based on
higher balances. Some money market accounts also allow you to write checks against your
funds, but on a more limited basis.
Individual Retirement Accounts (IRAs): IRAs, or individual retirement accounts, allow you to
save independently for your retirement. These plans are useful if your employer doesn’t offer
retirement benefits or you want to save more than your employer-sponsored plan allows. These
accounts come in two types: the traditional IRA and Roth IRA. The Roth IRA is popular because
the funds can be withdrawn tax-free in many situations. Others prefer traditional IRAs because
these contributions are tax-deductible. Both accounts have contribution limits and other
requirements you may need to discuss with your tax advisor before choosing your account.

Once you understand the types of accounts most banks offer, you can begin to determine which
option might be right for you.

2.3. Saving Account in Bank - Meaning, Features, Advantages

Meaning of Saving Account in Bank
Commercial banks (like ICICI, HDFC, etc.), co-operative banks and postal departments accept
deposits by way of opening saving bank account with them.
The 'saving account' is generally opened in bank by salaried persons or by the persons who have
a fixed regular income. This facility is also given to students, senior citizens, pensioners, and so
on. (http://kalian.city.blogspot.com2011’02/savingaccont meaning and features)

14
Saving accounts are opened to encourage the people to save money and collect their savings.

In Ethiopia, saving account can be opened by depositing 50 birr the saving account holder is
allowed to withdraw money from the account as and when required. The interest which is given
on saving accounts is sometime attractive, but often nominal. At present, the rate of interest
ranges between 4% to 6 per annum in Ethiopia. The interest rates vary as per the amount of
money deposited (lying) in the saving bank account, scheme opted, and its maturity range. It is
also subject to current trend of banking policies in a country.

2.3.1. Features of Saving Account

The main features of saving account in bank are as follows:
The main objective of saving account is to promote savings.

There is no restriction on the number and amount of deposits. However, in India, mandatory
PAN (Permanent Account Number) details are required to be furnished for doing cash
transactions exceeding 50, 000.
 Withdrawals are allowed subject to certain restrictions.
 The money can be withdrawn either by cheque or withdrawal slip of the respective bank.
 The rate of interest payable is very nominal on saving accounts. At present it is between
4% to 6% saving account is of continuing nature. There is no maximum period of
holding.
 A minimum amount has to be kept on saving account to keep it functioning.
 No loan facility is provided against saving account.
Electronic clearing System (ECS) or E-Banking are available to pay electricity bill, telephone
bill and other routine household expenses.

Generally, equated monthly installments (EMI) for housing loan, personal loan, car loan, etc., are
paid (routed) through saving bank account.

15
2.3.2 Advantages of Saving Account
The advantages of saving account are as follows:
 Saving account encourages savings habit among salary earners and others who have fixed
income.
 It enables the depositor to earn income by way of saving bank interest.
 Saving account helps the depositor to make payment by way of issuing cheques.
 It shows income of a salaried and other person earned during the year.
 Saving account passbook acts as an identity and residential proof of the account holder.
 It provides a facility such as Electronic fund transfer (EFT) to other people's accounts.
 It helps to do online shopping via facility like internet banking.
 It aids to keep records of all online transactions carried on by the account holder.
 It provides immediate funds as and when required through ATM.
 The bank offers number of services to the saving account holders.
Saving is a decision to postpone consumption – households, businesses and governments can all
opt to save some of their income and decisions about how much to save can have important
effects on the economy in both the short and longer term.
(http://kalian.city.blogspot.com2011’02/savingaccont meaning and features).

2.3.3. Globalization and Savings

UK companies now have access to much bigger pool of private sector savings from other
countries they can seek finance through bond markets, equity market and the retail credit market
(pre credit crunch!)

The UK very opens capital and money markets – capital can come into and out of the economy
quickly Possible inflows of 'hot money' into the economy – affects the value of the exchange rate
Sovereign wealth funds – able to inject fresh capital into businesses through their investments
The domestic economy is now less constrained by the pool of domestic savings Also makes it
easier for the government to fund the budget deficit – so less risk of a “crowding out effect” for

16
the UK (where rising government borrowing might drive up long term interest rates) Savings
ratio measured as a % of disposable income.

2.3.4. Some possible reasons for the decline in saving

(i) Lower unemployment and strong economic growth – decreased consumer uncertainty
(ii) Lower inflation rates – leading to a fall in interest rates and less fear of savings being
devalued
(iii) Strong asset price inflation – perhaps the boom in house prices has changed people’s
perceptions about how much they need to save e.g. to finance their retirement
(iv) Easier availability of credit
(v) Micro causes:- Behavioral economists might argue that consumers are suffering from
myopia – preferring current consumption to future spending and not appreciating for
example the decline in returns on pension funds and the need to save a higher percentage
of income to offset this.

2.4. Meaning Characteristics and Features of Inflation

In economics, inflation is a persistent increase in the general price level of goods and services in
an economy over a period of time. When the general price level rises, each unit of currency buys
fewer goods and services. Consequently, inflation reflects a reduction in the purchasing power
per unit of money – a loss of real value in the medium of exchange and unit of account within the
economy. (http://enwikipidia.org/wiki/inflation/

Inflation's effects on an economy are various and can be simultaneously positive and
negative.
Negative effects of inflation include an increase in the opportunity cost of holding money,
uncertainty over future inflation which may discourage investment and savings, and if inflation is
rapid enough, shortages of goods as consumers begin hoarding out of concern that prices will
increase in the future. Positive effects include ensuring that central banks can adjust real interest
rates (to mitigate recessions) and encouraging investment in non-monetary capital projects.
(http://enwikipidia.org/wiki/inflation/

17
Economists generally believe that high rates of inflation and hyperinflation are caused by an
excessive growth of the supply. However, money supply growth does not necessarily cause
inflation. Some economists maintain that under the conditions of a liquidity trap, large monetary
injections are like "pushing on a string”. Views on which factors determine low to moderate rates
of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in real
demand for goods and services, or changes in available supplies such as during scarcities, as well
as to changes in the velocity of money supply measures; in particular the MZM ("Money Zero
Maturity") supply velocity. However, the consensus view is that a long sustained period of
inflation is caused by money supply growing faster than the rate of economic growth.ibd.

Today, most economists favor a low and steady rate of inflation. Low (as opposed to zero or
negative) inflation reduces the severity of economic recessions by enabling the labor market to
adjust more quickly in a downturn, and reduces the risk that a liquidity trap prevents monetary
policy from stabilizing the economy. The task of keeping the rate of inflation low and stable is
usually given to monetary authorities. Generally, these monetary authorities are the central banks
that control monetary policy through the setting of interest rates, through open market
operations, and through the setting of banking reserve requirements.ibd

2.4.1. History of Inflation in the World

Inflation in America
Annual inflation rates in the United States from 1666 to 2004. Increases in the quantity of the
money or in the overall money supply (or debasement of the means of exchange) have occurred
in many different societies throughout history, changing with different forms of money used.For
instance, when gold was used as currency, the government could collect gold coins, melt them
down, mix them with other metals such as silver, copper or lead, and reissue them at the same
nominal value. By diluting the gold with other metals, the government could issue more coins
without also needing to increase the amount of gold used to make them. When the cost of each
coin is lowered in this way, the government profits from an increase in seigniorage.
(http://enwikipidia.org/wiki/inflation/)

This practice would increase the money supply but at the same time the relative value of each
coin would be lowered. As the relative value of the coins becomes lower, consumers would need

18
to give more coins in exchange for the same goods and services as before. These goods and
services would experience a price increase as the value of each coin is reduced.ibd

Song Dynasty China introduced the practice of printing paper money in order to create fiat
currency during the 11th century and, according to Daniel Headrick, "paper money allowed
governments to spend far more than they received in taxes... in wartime, and the Song were often
at war, such deficit spending caused runaway inflation. The problem of paper money inflation
continued after the Song Dynasty. Peter Bernholz writes that "from then on, nearly every
Chinese dynasty up to the Ming began by issuing some stable and convertible paper money and
ended with pronounced inflation caused by circulating ever increasing amounts of paper notes to
finance budget deficits.

During the Mongol Yuan Dynasty, the government spent a great deal of money fighting costly
wars, and reacted by printing more, leading to inflation. The problem of inflation became so
severe that the people stopped using paper money, which they saw as "worthless paper. Fearing
the inflation that plagued the Yuan dynasty, the Ming Dynasty initially rejected the use of paper
money, using only copper coins. The dynasty did not issue paper currency until 1375. (Daniel
Headrick)

Historically, infusions of gold or silver into an economy also led to inflation. From the second
half of the 15th century to the first half of the 17th, Western Europe experienced a major
inflationary cycle referred to as the "price revolution" with prices on average rising perhaps six
fold over 150 years. This was largely caused by the sudden influx of gold and silver from the
New World into Spain. The silver spread throughout a previously cash-starved Europe and
caused widespread inflation. Demographic factors also contributed to upward pressure on prices,
with European population growth after depopulation caused by the Black Death pandemic.ibd
By the nineteenth century, economists categorized three separate factors that cause a rise or fall
in the price of goods: a change in the value or production costs of the good, a change in the price
of money which then was usually a fluctuation in the commodity price of the metallic content in
the currency, and currency depreciation resulting from an increased supply of currency relative
to the quantity of redeemable metal backing the currency. Following the proliferation of private
banknote currency printed during the American Civil War, the term "inflation" started to appear

19
as a direct reference to the currency depreciation that occurred as the quantity of redeemable
banknotes outstripped the quantity of metal available for their redemption. At that time, the term
inflation referred to the devaluation of the currency, and not to a rise in the price of goods. Ibd

This relationship between the over-supply of banknotes and a resulting depreciation in their
value was noted by earlier classical economists such as David Hume and David Ricardo, who
would go on to examine and debate what effect a currency devaluation (later termed monetary
inflation) has on the price of goods (later termed price inflation, and eventually just inflation).

The adoption of fiat currency by many countries, from the 18th century onwards, made much
larger variations in the supply of money possible. Since then, huge increases in the supply of
paper money have taken place in a number of countries, producing hyperinflations – episodes of
extreme inflation rates much higher than those observed in earlier periods of commodity money.
The hyperinflation in the Weimar Republic of Germany is a notable example.

2.4.2. Issues in Measuring Inflation

Measuring inflation in an economy requires objective means of differentiating changes in
nominal prices on a common set of goods and services, and distinguishing them from those price
shifts resulting from changes in value such as volume, quality, or performance. For example, if
the price of a 10 oz. can of corn changes from $0.90 to $1.00 over the course of a year, with no
change in quality, then this price difference represents inflation. This single price change would
not, however, represent general inflation in an overall economy. To measure overall inflation, the
price change of a large "basket" of representative goods and services is measured. This is the
purpose of a price index, which is the combined price of a "basket" of many goods and services.
The combined price is the sum of the weighted prices of items in the "basket". A weighted price
is calculated by multiplying the unit prices of an item by the number of that item the average
consumer purchases. Weighted pricing is a necessary means to measuring the impact of
individual unit price changes on the economy's overall inflation. The Consumer Price Index, for
example, uses data collected by surveying households to determine what proportion of the
typical consumer's overall spending is spent on specific goods and services, and weights the
average prices of those items accordingly. Those weighted average prices are combined to
calculate the overall price. To better relate price changes over time, indexes typically choose a

20
"base year" price and assign it a value of 100. Index prices in subsequent years are then
expressed in relation to the base year price. While comparing inflation measures for various
periods one has to take into consideration the base effect as well.
(http://enwikipidia.org/wiki/inflation/)

Inflation measures are often modified over time, either for the relative weight of goods in the
basket, or in the way in which goods and services from the present are compared with goods and
services from the past. Over time, adjustments are made to the type of goods and services
selected in order to reflect changes in the sorts of goods and services purchased by 'typical
consumers'. New products may be introduced, older products disappear, the quality of existing
products may change, and consumer preferences can shift. Both the sorts of goods and services
which are included in the "basket" and the weighted price used in inflation measures will be
changed over time in order to keep pace with the changing marketplace.ibd

Inflation numbers are often seasonally adjusted in order to differentiate expected cyclical cost
shifts. For example, home heating costs are expected to rise in colder months, and seasonal
adjustments are often used when measuring for inflation to compensate for cyclical spikes in
energy or fuel demand. Inflation numbers may be averaged or otherwise subjected to statistical
techniques in order to remove statistical noise and volatility of individual prices.ibd

When looking at inflation, economic institutions may focus only on certain kinds of prices, or
special indices, such as the core inflation index which is used by central banks to formulate
monetary policy.ibd

Most inflation indices are calculated from weighted averages of selected price changes. This
necessarily introduces distortion, and can lead to legitimate disputes about what the true inflation
rate is. This problem can be overcome by including all available price changes in the calculation,
and then choosing the median value. In some other cases, governments may intentionally report
false inflation rates; for instance, the government of Argentina has been criticized for
manipulating economic data, such as inflation and GDP figures, for political gain and to reduce
payments on its inflation-indexed debt.ibd

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2.4.4. Effects of Inflation
2.4.4.1. General Effects
An increase in the general level of prices implies a decrease in the purchasing power of the
currency. That is, when the general level of prices rises, each monetary unit buys fewer goods
and services. The effect of inflation is not distributed evenly in the economy, and as a
consequence there are hidden costs to some and benefits to others from this decrease in the
purchasing power of money. For example, with inflation, those segments in society which own
physical assets, such as property, stock etc., benefit from the price/value of their holdings going
up, while those who seek to acquire them will need to pay more for them. Their ability to do so
will depend on the degree to which their income is fixed. For example, increases in payments to
workers and pensioners often lag behind inflation, and for some people income is fixed. Also,
individuals or institutions with cash assets will experience a decline in the purchasing power of
the cash. Increases in the price level (inflation) erode the real value of money (the functional
currency) and other items with an underlying monetary nature.

Debtors who have debts with a fixed nominal rate of interest will see a reduction in the "real"
interest rate as the inflation rate rises. The real interest on a loan is the nominal rate minus the
inflation rate. The formula R = N-I approximates the correct answer as long as both the nominal
interest rate and the inflation rate are small. The correct equation is r = n/i where r, n and i are
expressed as ratios (e.g. 1.2 for +20%, 0.8 for −20%). As an example, when the inflation rate is
3%, a loan with a nominal interest rate of 5% would have a real interest rate of approximately
2% (in fact, it's 1.94%). Any unexpected increase in the inflation rate would decrease the real
interest rate. Banks and other lenders adjust for this inflation risk either by including an inflation
risk premium to fixed interest rate loans, or lending at an adjustable rate.
(http://enwikipidia.org/wiki/inflation/)

2.4.4.2. Negative Effect of Inflation

High or unpredictable inflation rates are regarded as harmful to an overall economy. They add
inefficiencies in the market, and make it difficult for companies to budget or plan long-term.
Inflation can act as a drag on productivity as companies are forced to shift resources away from

22
products and services in order to focus on profit and losses from currency inflation. Uncertainty
about the future purchasing power of money discourages investment and saving. And inflation
can impose hidden tax increases, as inflated earnings push taxpayers into higher income tax rates
unless the tax brackets are indexed to inflation.ibd

With high inflation, purchasing power is redistributed from those on fixed nominal incomes,
such as some pensioners whose pensions are not indexed to the price level, towards those with
variable incomes whose earnings may better keep pace with the inflation. This redistribution of
purchasing power will also occur between international trading partners. Where fixed exchange
rates are imposed, higher inflation in one economy than another will cause the first economy's
exports to become more expensive and affect the balance of trade. There can also be negative
impacts to trade from an increased instability in currency exchange prices caused by
unpredictable inflation.

Inflation: High inflation can prompt employees to demand rapid wage increases, to keep up with
consumer prices. In the cost-push theory of inflation, rising wages in turn can help fuel inflation.
In the case of collective bargaining, wage growth will be set as a function of inflationary
expectations, which will be higher when inflation is high. This can cause a spiral. In a sense,
inflation begets further inflationary expectations, which beget further inflation.
Hoarding: People buy durable and/or non-perishable commodities and other goods as stores of
wealth, to avoid the losses expected from the declining purchasing power of money, creating
shortages of the hoarded goods.

Social unrest and revolts Inflation can lead to massive demonstrations and revolutions. For
example, inflation and in particular food inflation is considered as one of the main reasons that
caused the 2010–2011 Tunisian revolution and the 2011 Egyptian revolution, according to many
observers including Robert Zoellick, president of the World Bank. Tunisian president Zine El
Abidine Ben Ali was ousted, Egyptian President Hosni Mubarak was also ousted after only 18
days of demonstrations, and protests soon spread in many countries of North Africa and Middle
East.

23
Hyperinflation: If inflation gets totally out of control (in the upward direction), it can grossly
interfere with the normal workings of the economy, hurting its ability to supply goods.
Hyperinflation can lead to the abandonment of the use of the country's currency, leading to the
inefficiencies of barter.

Allocateive efficiency: A change in the supply or demand for a good will normally cause its
relative price to change, signaling to buyers and sellers that they should re-allocate resources in
response to the new market conditions. But when prices are constantly changing due to inflation,
price changes due to genuine relative price signals are difficult to distinguish from price changes
due to general inflation, so agents are slow to respond to them. The result is a loss of allocative
efficiency.

Shoe leather cost: High inflation increases the opportunity cost of holding cash balances and can
induce people to hold a greater portion of their assets in interest paying accounts. However, since
cash is still needed in order to carry out transactions this means that more "trips to the bank" are
necessary in order to make withdrawals, proverbially wearing out the "shoe leather" with each
trip.

Menu costs:-With high inflation, firms must change their prices often in order to keep up with
economy-wide changes. But often changing prices is itself a costly activity whether explicitly, as
with the need to print new menus, or implicitly, as with the extra time and effort needed to
change prices constantly.

Business cycles: - According to the Austrian Business Cycle Theory, inflation sets off the
business cycle. Austrian economists hold this to be the most damaging effect of inflation.
According to Austrian theory, artificially low interest rates and the associated increase in the
money supply lead to reckless, speculative borrowing, resulting in clusters of malinvestments,
which eventually have to be liquidated as they become unsustainable.

2.4.4.3. Positive Effect of Inflation

Labor-market adjustments:-Nominal wages are slow to adjust downwards. This can lead to
prolonged disequilibrium and high unemployment in the labor market. Since inflation allows real

24
wages to fall even if nominal wages are kept constant, moderate inflation enables labor markets
to reach equilibrium faster.

Room to maneuver:-The primary tools for controlling the money supply are the ability to set the
discount rate, the rate at which banks can borrow from the central bank, and open market
operations, which are the central bank's interventions into the bonds market with the aim of
affecting the nominal interest rate. If an economy finds itself in a recession with already low, or
even zero, nominal interest rates, then the bank cannot cut these rates further (since negative
nominal interest rates are impossible) in order to stimulate the economy – this situation is known
as a liquidity trap. A moderate level of inflation tends to ensure that nominal interest rates stay
sufficiently above zero so that if the need arises the bank can cut the nominal interest rate.
http://enwikipidia.org/wiki/inflation/)

Mundell–Tobin effect:-The Nobel laureate Robert Mundell noted that moderate inflation would
induce savers to substitute lending for some money holding as a means to finance future
spending. That substitution would cause market clearing real interest rates to fall The lower real
rate of interest would induce more borrowing to finance investment. In a similar vein, Nobel
laureate James Tobin noted that such inflation would cause businesses to substitute investment in
physical capital (plant, equipment, and inventories) for money balances in their asset portfolios.
That substitution would mean choosing the making of investments with lower rates of real
return. (The rates of return are lower because the investments with higher rates of return were
already being made before. The two related effects are known as the Mundell–Tobin effect.
Unless the economy is already overinvesting according to models of economic growth theory,
that extra investment resulting from the effect would be seen as positive.

Instability with deflation:-Economist S.C. Tsaing noted that once substantial deflation is
expected, two important effects will appear; both a result of money holding substituting for
lending as a vehicle for saving.[48] The first was that continually falling prices and the resulting
incentive to hoard money will cause instability resulting from the likely increasing fear, while
money hoards grow in value, that the value of those hoards are at risk, as people realize that a
movement to trade those money hoards for real goods and assets will quickly drive those prices
up. Any movement to spend those hoards "once started would become a tremendous avalanche,

25
which could rampage for a long time before it would spend itself." Thus, a regime of long-term
deflation is likely to be interrupted by periodic spikes of rapid inflation and consequent real
economic disruptions. Moderate and stable inflation would avoid such a seesawing of price
movements.ibd.

Financial market inefficiency with deflation:-The second effect noted by Tsaing is that when
savers have substituted money holding for lending on financial markets, the role of those markets
in channeling savings into investment is undermined. With nominal interest rates driven to zero,
or near zero, from the competition with a high return money asset, there would be no price
mechanism in whatever is left of those markets. With financial markets effectively euthanized,
the remaining goods and physical asset prices would move in perverse directions. For example,
an increased desire to save could not push interest rates further down (and thereby stimulate
investment) but would instead cause additional money hoarding, driving consumer prices further
down and making investment in consumer goods production thereby less attractive. Moderate
inflation, once its expectation is incorporated into nominal interest rates, would give those
interest rates room to go both up and down in response to shifting investment opportunities, or
savers' preferences, and thus allow financial markets to function in a more normal fashion.

2.4.5 Causes for Inflation

Historically, a great deal of economic literature was concerned with the question of what causes
inflation and what effect it has. There were different schools of thought as to the causes of
inflation. Most can be divided into two broad areas: quality theories of inflation and quantity
theories of inflation. The quality theory of inflation rests on the expectation of a seller accepting
currency to be able to exchange that currency at a later time for goods that are desirable as a
buyer. The quantity theory of inflation rests on the quantity equation of money that relates the
money supply, its velocity, and the nominal value of exchanges. Adam Smith and David Hume
proposed a quantity theory of inflation for money, and a quality theory of inflation for
production. http://enwikipidia.org/wiki/inflation/)

Currently, the quantity theory of money is widely accepted as an accurate model of inflation in
the long run. Consequently, there is now broad agreement among economists that in the long run,
the inflation rate is essentially dependent on the growth rate of money supply relative to the

26
growth of the economy. However, in the short and medium term inflation may be affected by
supply and demand pressures in the economy, and influenced by the relative elasticity of wages,
prices and interest rates. The question of whether the short-term effects last long enough to be
important is the central topic of debate between monetarist and Keynesian economists. In
monetarism prices and wages adjust quickly enough to make other factors merely marginal
behavior on a general trend-line. In the Keynesian view, prices and wages adjust at different
rates, and these differences have enough effects on real output to be "long term" in the view of
people in an economy.

Keynesian economics proposes that changes in money supply do not directly affect prices, and
that visible inflation is the result of pressures in the economy expressing themselves in prices.
There are three major types of inflation, as part of what Robert J. Gordon calls the "triangle
model"
Demand-pull inflation is caused by increases in aggregate demand due to increased private and
government spending, etc. Demand inflation encourages economic growth since the excess
demand and favorable market conditions will stimulate investment and expansion.
Cost-push inflation, also called "supply shock inflation," is caused by a drop in aggregate supply
(potential output). This may be due to natural disasters, or increased prices of inputs. For
example, a sudden decrease in the supply of oil, leading to increased oil prices, can cause cost-
push inflation. Producers for whom oil is a part of their costs could then pass this on to
consumers in the form of increased prices. Another example stems from unexpectedly high
Insured Losses, either legitimate (catastrophes) or fraudulent (which might be particularly
prevalent in times of recession).ibd
Built-in inflation: - is induced by adaptive expectations, and is often linked to the "price/wage
spiral". It involves workers trying to keep their wages up with prices (above the rate of inflation),
and firms passing these higher labor costs on to their customers as higher prices, leading to a
'vicious circle'. Built-in inflation reflects events in the past, and so might be seen as hangover
inflation.
Demand-pull theory states that inflation accelerates when aggregate demand increases beyond
the ability of the economy to produce (its potential output). Hence, any factor that increases
aggregate demand can cause inflation. However, in the long run, aggregate demand can be held

27
above productive capacity only by increasing the quantity of money in circulation faster than the
real growth rate of the economy. Another (although much less common) cause can be a rapid
decline in the demand for money, as happened in Europe during the Black Death, or in the
Japanese occupied territories just before the defeat of Japan in 1945.

The effect of money on inflation is most obvious when governments finance spending in a crisis,
such as a civil war, by printing money excessively. This sometimes leads to hyperinflation, a
condition where prices can double in a month or less. Money supply is also thought to play a
major role in determining moderate levels of inflation, although there are differences of opinion
on how important it is. For example, Monetarist economists believe that the link is very strong;
Keynesian economists, by contrast, typically emphasize the role of aggregate demand in the
economy rather than the money supply in determining inflation. That is, for Keynesians, the
money supply is only one determinant of aggregate demand.

Some Keynesian economists also disagree with the notion that central banks fully control the
money supply, arguing that central banks have little control, since the money supply adapts to
the demand for bank credit issued by commercial banks. This is known as the theory of
endogenous money, and has been advocated strongly by post-Keynesians as far back as the
1960s. It has today become a central focus of Taylor rule advocates. This position is not
universally accepted – banks create money by making loans, but the aggregate volume of these
loans diminishes as real interest rates increase. Thus, central banks can influence the money
supply by making money cheaper or more expensive, thus increasing or decreasing its
production.

A fundamental concept in inflation analysis is the relationship between inflation and

unemployment, called the Phillips curve. This model suggests that there is a trade-off between
price stability and employment. Therefore, some level of inflation could be considered desirable
in order to minimize unemployment. The Phillips curve model described the U.S. experience
well in the 1960s but failed to describe the combination of rising inflation and economic
stagnation (sometimes referred to as stagflation) experienced in the 1970s.

28
Thus, modern macroeconomics describes inflation using a Phillips curve that shifts (so the trade-
off between inflation and unemployment changes) because of such matters as supply shocks and
inflation becoming built into the normal workings of the economy. The former refers to such
events as the oil shocks of the 1970s, while the latter refers to the price/wage spiral and
inflationary expectations implying that the economy "normally" suffers from inflation. Thus, the
Phillips curve represents only the demand-pull component of the triangle model.

Another concept of note is the potential output (sometimes called the "natural gross domestic
product"), a level of GDP, where the economy is at its optimal level of production given
institutional and natural constraints. (This level of output corresponds to the Non-Accelerating
Inflation Rate of Unemployment, NAIRU, or the "natural" rate of unemployment or the full-
employment unemployment rate.) If GDP exceeds its potential (and unemployment is below the
NAIRU), the theory says that inflation will accelerate as suppliers increase their prices and built-
in inflation worsens. If GDP falls below its potential level (and unemployment is above the
NAIRU), inflation will decelerate as suppliers attempt to fill excess capacity, cutting prices and
undermining built-in inflation.

However, one problem with this theory for policy-making purposes is that the exact level of
potential output (and of the NAIRU) is generally unknown and tends to change over time.
Inflation also seems to act in an asymmetric way, rising more quickly than it falls. Worse, it can
change because of policy: for example, high unemployment under British Prime Minister
Margaret Thatcher might have led to a rise in the NAIRU (and a fall in potential) because many
of the unemployed found themselves as structurally unemployed (also see unemployment),
unable to find jobs that fit their skills. A rise in structural unemployment implies that a smaller
percentage of the labor force can find jobs at the NAIRU where the economy avoids crossing the
threshold into the realm of accelerating inflation.

Unemployment with inflation

A connection between inflation and unemployment has been drawn since the emergence of large
scale unemployment in the 19th century, and connections continue to be drawn today. However,
the unemployment rate generally only affects inflation in the short-term but not the long-term.[ibd]
In the long term, the velocity of money supply measures such as the MZM ("Money Zero

29
Maturity," representing cash and equivalent demand deposits) velocity is far more predictive of
inflation than low unemployment.( http://en.wikipidia.org/wiki/inflation/)

2.4.6. Monetarist View on Inflation

Monetarists believe the most significant factor influencing inflation or deflation is how fast the
money supply grows or shrinks. They consider fiscal policy, or government spending and
taxation, as ineffective in controlling inflation.[54] The monetarist economist Milton Friedman
famously stated, "Inflation is always and everywhere a monetary phenomenon." Some
monetarists, however, would qualify this for very short-term circumstances.ibd]

2.4.7. Controlling Inflation

A variety of methods and policies have been proposed and used to control inflation.
 Monetary policy
The U.S. effective federal funds rate charted over fifty years.

Main article: Monetary policy

Governments and central banks primarily use monetary policy to control inflation. Central banks
such as the U.S. Federal Reserve increase the interest rate, slow or stop the growth of the money
supply, and reduce the money supply. Some banks have a symmetrical inflation target while
others only control inflation when it rises above a target, whether express or implied.

Most central banks are tasked with keeping their inter-bank lending rates at low levels, normally
to a target annual rate of about 2% to 3%, and within a targeted annual inflation range of about
2% to 6%. Central bankers target a low inflation rate because they believe deflation endangers
the economy.

Higher interest rates reduce the amount of money because less people seek loans, and loans are
usually made with new money. When banks make loans, they usually first create new money,
then lend it. A central bank usually creates money lent to a national government. Therefore,
when a person pays back a loan, the bank destroys the money and the quantity of money falls. In
the early 1980s, when the federal funds rate exceeded 15 percent, the quantity of Federal Reserve
dollars fell 8.1 percent, from $8.6 trillion down to $7.9 trillion.

30
Monetarists emphasize a steady growth rate of money and use monetary policy to control
inflation by increasing interest rates and slowing the rise in the money supply. Keynesians
emphasize reducing aggregate demand during economic expansions and increasing demand
during recessions to keep inflation stable. Control of aggregate demand can be achieved using
both monetary policy and fiscal policy (increased taxation or reduced government spending to
reduce demand).

 Fixed exchange rates

Main article: Fixed exchange rate
Under a fixed exchange rate currency regime, a country's currency is tied in value to another
single currency or to a basket of other currencies (or sometimes to another measure of value,
such as gold). A fixed exchange rate is usually used to stabilize the value of a currency, vis-a-vis
the currency it is pegged to. It can also be used as a means to control inflation. However, as the
value of the reference currency rises and falls, so does the currency pegged to it. This essentially
means that the inflation rate in the fixed exchange rate country is determined by the inflation rate
of the country the currency is pegged to. In addition, a fixed exchange rate prevents a
government from using domestic monetary policy in order to achieve macroeconomic stability.

Under the Bretton Woods agreement, most countries around the world had currencies that were
fixed to the US dollar. This limited inflation in those countries, but also exposed them to the
danger of speculative attacks. After the Bretton Woods agreement broke down in the early
1970s, countries gradually turned to floating exchange rates. However, in the later part of the
20th century, some countries reverted to a fixed exchange rate as part of an attempt to control
inflation. This policy of using a fixed exchange rate to control inflation was used in many
countries in South America in the later part of the 20th century (e.g. Argentina (1991–2002),
Bolivia, Brazil, and Chile).

2.5. Ethiopia Inflation Rate

The inflation rate in Ethiopia was recorded at 7.80 percent in January of 2014. Inflation Rate in
Ethiopia is reported by the Central Statistical Agency of Ethiopia. Inflation Rate in Ethiopia
averaged 20.18 percent from 2006 until 2014, reaching an all time high of 64.20 percent in July

31
of 2008 and a record low of -4.10 percent in September of 2009. In Ethiopia, the inflation rate
measures a broad rise or fall in prices that consumers pay for a standard basket of goods. This
page provides - Ethiopia Inflation Rate - actual values, historical data, forecast, chart, statistics,
economic calendar and news. 2014-02-06

Unit Frequency
Actual Previous Highest Lowest Forecast Dates

2006
7.80 7.70 64.20 -4.10 4.89 | - Percent Monthly
2014

Inflation Rate | Notes the data given on this page shows an annual change in the Consumer Price
Index. The CPImeasures changes in the price level of consumer goods and services purchased by
households. The CPI is calculated by taking price changes for each item in the predetermined
basket of goods and services and averaging them. The items weight according to their
importance. Depending on the country, the highest weights are usually given to the food, energy,
housing, clothing, medical care, transportation and household equipment.

32
2.6. The Relationship Between Saving and Inflation
It has often been observed, especially in recent years, that high rates of inflation tend to be
associated with high rates of personal savings. As usual in economics, numerous.

Theories have been proposed to explain this phenomenon, and none of them has been
conclusively eliminated Milton Friedman (1953, p. 11) the first explanation that we shall
consider is that the observed relationship between Inflation and the savings rate is largely a
statistical mirage. The observed relationship arises because, in times of inflation, measured
income and measured savings, even when deflated by the appropriate price index, tend to
overestimate real income and Real savings, as perceived by consumers. Income, as measured in
the national accounts, Includes interest payments on financial assets. The higher the rate of
inflation, the Higher is the fraction of these payments which is not really income at all, but
simply Compensation to the asset-holder for the decline in the real value of his or her assets.

Interest and dividend income (in times of high inflation perhaps a very large part) is simply an
inflation premium, and hence cannot be used to finance consumption if asset holders Wish to
maintain the real value of their wealth. Thus measured savings, which is the difference between
measured income and consumption, will tend to rise with the Rate of inflation. This explanation
has been suggested by several economists, including Siegel (1979) and Jump (1980). Using UK
data, Hendry and von Ungern-Sternberg (1980) find evidence to support it.

Numerous macroeconomic factors affecting economic growth like inflation, savings, foreign
exchange rate, etc. have widely varying values across these nations and so also their economic
growth. However, almost all these nations are growing at relatively fast rate. Since the growth in
some of these economies is often considered resource intensive rather than technology intensive
(see, Rosegrant and Evenson, 1992; The World Bank, 2007), savings are likely to play a very
important role in promoting real growth. Several empirical studies found a positive effect of the
saving rate on the long term growth (Page, 1994; Cardenas and Escobar, 1998; Motely, 1994;
and Krieckhaus, 2002) though the neo-classical growth theory predicted only temporary positive
effect of increased saving rate on the growth rate in the economy due to corresponding negative
effect on capital productivity. The endogenous growth theory (see, Barro and Sala-i-Martin,
1995; and Romer, 2006) de-linking the capital productivity from the savings, explained such

33
positive relationship between long term growth and saving rate. Even the life cycle theory for
savings would explain the positive relationship between savings and income growth (Loayza et
al., 2000). It is, then, important for the policy makers to know what determines the saving rate in
order to formulate appropriate policies to promote economic growth. Edwards (1996) found that
the level and rates of growth of the GDP were important determinants of savings and discussed
the possibility of a bi-directional relationship. The possibility that some other factor affects both
growth and savings cannot be ruled out. Literature suggests inflation as one such factor (see,
Deaton, 1977; Chopra, 1988; Haslag, 1997; Heer and Suessmuth, 2006; etc.). Does the stability
of macroeconomic environment as reflected by inflation play a substantial role in promoting the
saving rate and the growth rate?

The effect of inflation on savings, however, is ambiguous both in theory and practice (Heer and
Suessmuth, 2006; and Deaton and Paxson, 1993). Empirical evidence about the relationship of
inflation and growth differs with some studies finding a negligible effect of inflation on growth
(e.g. Chari et al., 1996), some finding a negative effect (Chopra, 1988; Fischer, 1993; Gylfason
and Herbertsson, 2001) and some studies providing an evidence of positive effect (Dholakia,
1995; Mallik and Chowdhury, 2001). The effect of inflation on economic growth in theory is
largely through the sub-optimal use of resources and distorted investment decisions due to
inflation (Miller and Benjamin, 2008; Paul et. al., 1997). However, economic growth leading to
high inflation through overheating of the economy is also found in practice. In a supply
constrained closed economy, on the other hand, higher growth can lead to reduced inflation.
(Page No.3 W.P. No. 2008-07-01 IIMA INDIA Research and Publications)

Most of the studies examining the relationship between inflation and growth end up focusing on
the effect of inflation on savings and investments and thereby on the growth of the economy,
assuming independence of the incremental capital output ratio (ICOR) from inflation. Except
Chopra (1988), the ICOR channel of the effect of inflation on growth is not seriously examined
in the literature. Thus, if inflation leads saving rate to increase and ICOR to decrease, inflation
will definitely promote growth, but the reverse would be true if saving ratio decreases and ICOR
increases with inflation. If both these variables increase or decrease simultaneously as a result of
inflation, the magnitude of the statistical impact of inflation on these two variables would
determine the sign of the relationship between inflation and growth. Chopra (1988) argued that

34
inflation would affect the ICOR by changes in the composition of output produced as a result of
households shifting from financial savings to physical savings or consumer durables in an
economy. This would lead to shifts of investment from low capital intensive industries to high
capital intensive industries, increasing the capital output ratio in the economy. Thus, inflation is
likely to increase the ICOR.

The effect of inflation on savings depends on the way households react to increase in inflation
(Chopra, 1988). If households direct their savings from financial to physical assets and consumer
durables, then due to consumption associated with these consumer durables, present savings will
decline. Also, due to increased uncertainty, the utility from holding wealth declines leading to
increased consumption and decreased savings. On the other hand, wealth owners interested in
maintaining the real value of their wealth would increase their savings in an inflationary scenario
to maintain the desired amount. In the context of the life cycle theory of savings, if the economy
does not have a detailed and well established institutional structure or network for social
security, healthcare, etc., inflation would induce higher savings in the system (Chopra, 1988).

Most of the models analyzing the effect of inflation on savings find a considerably negative
effect (Heer and Suessmuth, 2006). If the incomes are not indexed, unanticipated inflation will
cause unanticipated cuts in the real income and hence decreased the saving rates (Deaton, 1977).
Also, high inflation can increase the opportunity cost of holding money and increase the rewards
for the search activities in shopping wasting real resources and thereby reducing savings (Miller
and Benjamin, 2008). As against this, another theory proposes that if the real income is correctly
anticipated either by indexation or wage inflation, unanticipated inflation will increase the saving
rate. Inflation is a good proxy for macroeconomic uncertainty. Higher uncertainty induces people
to save a larger portion of their money for precautionary motives.
Page No.6 W.P. No. 2008-07-01 IIMA INDIA Research and Publications

Thus rise in inflation should have a positive coefficient. Savings will also increase if there are
lifecycle factors promoting savings (Deaton and Paxson, 1993). If, however, one believes in the
super-neutrality of money in the ultimate sense, inflation cannot have any effect on savings in the
long run (Heer and Suessmuth, 2006).

35
 CHAPTER THREE
OVERVIEW
3.1. Data Presentation, Analysis and Interpretation
This chapter presents the data collected through questionnaires and interview and the analysis
made on such data .The questionnaire were utilized to collected primary data from saving
account customers of the bank. In such endeavor 151 questionnaires were distributed for 151
customers of the bank located in lafto branch.

From those 130 were dully filled and returned. The interview is made with the branch manager
and saving account pc operator of the bank .the data gathered is then presented in tables showing
frequency distribution, percents and analyzed using descriptive analysis technique. The data, the
analysis and interpretation made on the data are presented here with.

3.2. Data Presentation and Analysis of Questionnaires

One of the basic primary data gathering tools that the researchers use is a questionnaire. This
section presents and discusses the data gathered from primary source of questionnaires.

3.2.1 Background of the Respondents

3.2.1.1. Sex Distribution of Respondents

Table 1. Sex Category

Respondents
Sex
No Percentage
Male 82 63%
Female 48 37%
Total 130 100%
Table 1. Source: Primary Data
As it can be seen from the table above, the majorities (63%) of the respondents are male while
the rest 37% are female’s .In the researchers view, having male customers dominating in a

36
country, where female-male ratio is almost equal is surprising. However, this may be partially
resulted from the fact that most males are recruited and hence have relatively more earning than
females, or it may be due to fact that females be further aware about the impact of inflation on
saving and preferred to save their money in a form of jewelry made of gold or other valuable
items, or in most cases since females are more responsible in the family care specially in home
management, they spend most of their income on homemade issues. Thus they might get
shortage for extra saving.
3.2.1.2. Age Category
Saving is motivated by age. There is a difference among individuals for the custom of saving
with age .In this regard the researchers gathered the following data regarding the age category of
the respondents and summarized it in the table below:-
Table 2. Age Category
Respondents
Age
No. Percentage
18-25 20 15%
25-35 44 33%
35-45 55 43%
Above 45 11 9%
Total 130 100%
Table 2. Source: Primary Data
As it can be seen from the table 2 above 44% of the respondents are between the age categories
of 25-35,followed by 20% of them are between the age category of 18-25and the rest 9% and
55% are among the categories of above 45 and between 35-45 respectively.

In the researchers view, saving has preferential expectancy on age accordingly, this individual
set to make saving in younger age than older ones. Affording the basic necessity greatly
influenced by saving .this perfectly reflects the Ethiopian productive age as people get older their
productivity declines and so are their income and apparently their saving.

37
3.2.1.3. Working area of the respondent
With regard to the working area of the customers, the researcher gathered the following data.
Table 3. Working area
Employment Status No Percentage
Investors 6 5%
import and exporters 20 15%
Business man 31 24%
from Micro and small institution 38 29%
Employed/individuals 35 27%
Total other 130 100%
Table 3. Source: Primary Data
As it can be seen from table 3 above, the majority of the respondents 27% are employed. In the
researcher view, the employed customers and typically the business man, including the micro
finance institutions have strong intensity .hence are more or less similar significantly affected by
nations inflation .therefore, the researcher expected that they are the perfect study population to
assess the impact of inflation on their saving .furthermore all citizens whatever are their saving
capacity must acquire the necessity of saving.

3.2.1.4. Education Level

Education directs and guides through the approaches of saving through creating awareness. That
is the merits of saving are clearly comprehended through education. In this regard the researcher
gathered the following data regarding the education level of the respondents as summarized in
the table below:-

38
Table 4. Education Background of the Respondents
Respondents
Education level
No. Percentage
Less than 12 5 4
12 completed 16 12
Certificate 19. 15
Diploma 52 40
1st Degree and above 38 29
Total 130 100
Table 4. Source: Primary Data
As it can be seen from table 4 above 40% of the respondents are diploma holder, while 29% have
1st degree and above and very few number of respondents are below 12.

In the researchers view, educational back ground advocates and share critical reason for having
the customs and accomplishment of the behavior of saving .as a result it can be concluded that
the respondents are in perfect situation to address the issue regarding the impact of inflation on
their saving .

3.2.2. Saving Account Information of Customers in BOA

Knowing the saving account information of customers helps the researcher to draw useful
conclusion as to which type of account is commonly used by the customers and to address
customers preference of normal saving accounts .This knowledge of saving accounts information
also tell the level of knowledge of the customer towards the nature of the account types and the
trade of associated with saving accounts.

3.2.2.1. Types of Saving

There are 3 types of saving account in the bank. The 1 st one is special saving and the 2 nd one is
normal saving. Checking account under special saving, checking up to 3 month account and/or,
and, cooperative, individual account, current without any interest, checking Current saving
account Both time deposit, cdt. In this regard the researchers gathered the following data
regarding types of saving account a respondent has, as summarized in table 6 below:-

39
Table 6. Types of Saving Accounts
Respondents
Types
No Percentage
Special 82 37%
Normal Saving Account 48 50%
Both 17 13%
Total 130 100%
Table 6. Source: Primary Data
As it can be seen from the table 5 above, 37% of them has a special saving type only however,
13%of the respondents have both type of account at the same time .this shows that a majority of
the respondents have a normal saving account.

In the researchers view because of flexibility nature of entering and withdrawing their saving
amount most of the respondents have normal saving account .However, due to the inflexibility
nature and number of requirements in the special saving account no one has opened only this
account from our respondents.

3.2.2.2. Objective of Saving

Objective of saving may be viewed as a multi dimensional entity. Someone may save money in
the bank due to safety reasons and other may save due to return they can get from the bank
regardless of the above facts, it is true that some intellectuals may save money in the bank due to
their good reason that the money can do much return to the country if it is collectively
manipulated by the government or some larger business firms than individuals in this regard the
researchers gathered the following data as summarized in the table below:-

40
Table 9. Objective of Saving
Respondents
Objective of Saving
No. Percent
Return 28 21%
Safety 40 30%
Both 22 17%
Other 10 7%
Total 130 100%
Source: Primary Data
As it can be seen from the table 6 above, 40%of the savers deposit their money with the aim of
earning relative high return .On other hand 28%of savers have an aim of having safety. The
other 22%of the respondents have an aim of both return and safety; the remaining 10% of the
savers stated other reasons as manage their money properly when risk happens and also for
future requirement of their needs.

In the researchers view, most of savers opened on account to get return from the bank in a form
of interest and this may contradict with the above interpretation that states the customers are
aware of the inflationary effect on saving as most of them replied that they are not satisfied with
the current rate but argue that they brought their money in seek of return. The bank has to advise
an appropriate tool to maximize the return position of its customers especially in maximizing the
return that left over after inflationary effects.

3.2.2.3. Duration of being Customers in BOA

The customers experience of saving in the bank helps the researchers to analyze and investigate
the peoples habit of saving a money it also helps to develop the awareness to create local
strategies in a country accordingly ,the researchers gathered the following data regarding
durations of saving customer the respondent have with the bank ,as summarized in the table
below :-

41
Table 10. Durations of Being Customer Of BOA
Respondents
Period
No. Percentage
Less than 5 years 22 17%
Exactly 5 years 60 46%
Greater than 5 years 18 14%
Total 130 100%
Source; Primary Data
As it can be seen from the table above, most of the respondents are exactly 5 years customers.
Since BOA opened the Lafto branch in 2009G.C, from this we can say that most of the current
customer’s of BOA in Lafto branch are very committed, and this may be due to their good
service delivery system.

3.2.2.4. Attainment of Customer’s Objective

As it is stated in section 3.3.3 every customer has his own objectives in saving money in the bank
regardless of the interest of the customer the banks should carefully consider the attainment level
of the objectives of their customers. Table 9 summarizes the response of respondents up on the
issue.
Table 11. Attainment of Customer’s Objective
Respondent
Response
Number Percentage
Yes 48 37%
No 65 50%
Do not know 17 13%
Total 130 100%
Source: Primary Data
It can be seen from table 9 above; 37% of the respondents were agreed on the issue. Because
primarily, their predetermined goals was safety or getting protection from bank. In addition to
this they are satisfied by the services which are served by the bank. In other side those
50%customers are not agreed with question since their objective was not achieved due to
different reasons. As they stated, the return that added on the saving account in the form of

42
interest is very insignificant even it is discouraging. Moreover, 13% of the respondent did not
known reason if their objective attained or not.

The other reason may be due to fluctuation of inflation rate that makes them to do not save more
as they expected from the beginning, and also it may be due to the unsatisfactory interest rate
that the individual needs to earn from the bank. As they said in their comment the return that is
generated from their saving is unsatisfactory.

3.2.2.6. Response of Company for Customers Comment

Any business should accept customers comment, suggestions and ideas to exist in the business
world and to improve the existing service providing style. In this regard the company
responsibility for customer comments is summarized below:-

Table 13. Response of the Company

Respondent
Response
Number Percentage
Good 17 13%
Very good 105 81%
Poor 8 6%
Not response 0 0%
Total 130 100%
Source: primary data
As it can seen in the table 11 above 13% of the respondent said it is good, 81% of the respondent
said it is very good, 6% of the respondent said it is poor and non of the respondents said no
response is given by the company.

In the researcher view, the company’s responsibility is fantastic to the customer’s comment. The
restoration of peoples admiration originates on gratified aspiration of enhanced for future
assortments.

43
3.2.3. Customer Awareness of Inflation
Inflation affects different people differently. This is because of fall in the value of money. When
the value of money falls, some groups of the society gain, some lose and some stand in between.
Being affected or not goes in line with people’s awareness towards inflation. To know the
attitude of customers, the researchers gather the following data.

3.2.3.1. Awareness of Customer on the Current Inflation Rate

Knowing the customer awareness about the current inflation rate helps the researchers to
measure the awareness level of customer on the issue of inflation rate currently on the nation.
Customers response summarizes in a proper manner must have deep consideration. To
summarize the awareness of customers on the current inflation rate, the table below presents the
following.
Table 14. Awareness of the Customers
Respondents
Response
No Percentage
Yes 108 83%
No 22 17%
Total 130 100%
Source: - Primary Data
As it can be seen from table 13 above, 83% of the respondents have awareness, but17% of the
respondents were not aware about the current inflation rate.

In the researchers view, most of the respondents are aware of the current inflation rate of the
nation. Therefore, the bank must also be aware and able to restore the harmony of the established
relationships with its customers taking timely measures relationship.

3.2.3.2. Consideration of Customer to Open the Account

The number of account holders reached 401,816 recording an increase of 10% from the same
period the last fiscal year; 5%from the preceding quarter and 8%from that of June. The
customers consider a wide range of applications as emphasized through the data on the following
table. The data is summarized on the consideration of customers in respect of two rates (i.e
inflation rate and saving rate).

44
Table 15. Consideration of Customer to Open the Account
Respondents
Response
No Percentage
Yes 66 52%
No 64 49%
Total 130 100%
Source: - Primary Data
As it can be seen in the table 13 above52% of the respondents predetermined the inflation rate
assumed with the available interest rate before opening an account. However 49%of the
respondents insisted on not making such comparisons in opening in the account.

3.2.3.3. Level of Awareness on the Relation on Inflation and Saving

Knowing level of awareness help the researchers to identify most of customers are which
awareness. This build up awareness of respondents on the basis of inflation and saving.

The table below summarizes the level of awareness on the relation of inflation and saving.
Table 16. Level of Awareness on the Relation of Inflation and Saving
Respondent
Response
No Percentage
Poor 40 31%
Fair 70 54%
Very good 20 15%
Total 130 100%
Source: - primarily Data
As it can be seen from table 14, 31% of the respondents indicated their level of awareness to be
poor,54% of the respondents confirm it as fair, and 15% of the respondents indicated as they
have a very good awareness.

In the researchers view, BOA customers have fair awareness on the issue and this implies that
how inflation became more burning issue throughout nations as it touches each and every
individual’s life. And this leads them to be conceit on the area .in the contrary, some savers are

45
simply saves their money by not encountered the risk that happens to it; it means savers didn’t
relate saving and inflation may be due to poor awareness on the issue of inflation.

3.2.3.4. Saver Action during Inflation Period

Savers action differs with respect to the occurrence of inflation. The prescribed the value of
transaction is dependable on buying power of money. In the occurrence of inflation, saving
distort to a minimum extent, transactions capacity to facilitate business actions. In order to know
the respondents implication the table below is presented.
Table 17. Saver Action during Inflation Period
Respondent
Response
No Percentage
Withdraw 80 62%
Nothing done 20 15%
Any other 30 23%
Total 130 100%
Source: - Primary Data
As it can be seen from table 16 above, 62% of the respondents took action on withdrawing their
money, 15% of the respondents remained on keeping their saving account, and 23% of the
respondents specify alternative reasons i.e. lending for others with some additional earning,
having more stocks that are suspected to increase price within short period of time, or acquiring
some valuable goods which appreciates their value through time.

In the researchers view, savers awareness on inflation is very magnificent, they could do
anything which is best about their saving deposits during inflation happened. Developing a
technique and disclosing any relevant information about inflation and its impact on their saving
account may help savers to increase their awareness level so as to decrease impacts of inflation
beyond the customers to the nations.

3.2.3.5. Is Customer’s Savings Growing during Inflation Period?

Customers think differently based on the level of awareness about the matter. To know the
customers thinking the following table summarized below:-

46
Table 18. Are Customers Savings Growing during Inflation Period?
Respondents
Response
No Percentage
Yes 34 26%
No 96 74%
Total 130 100%
Source: - Primary Data
As it can be seen from table 17 above,26% of the respondents think that saving amount is
growing during an inflation period. However 96% of the respondent did not think the customers
saving amount grew.

In the researchers view, most of the customers have a great awareness on the impact of the
inflation consequently they are aware of their saving deposit decrease while inflation happens
and it is great for future safety to take some measures to their account. In other side, few savers
think the amount is growth during inflation period, since those savers didn’t have knowledge of
what inflation means. They simply think, the amount of their saving will grow on times of
inflation occurrence. But it decline in real term.
Table 19. Annual Deposit Mobilization of the Banking System
2008/09 2009/10 2010/11 2011/12 2013
Demand 1223.199 1219.361 1591.371 4,392.72 2,058.34
Saving 3037.853 3783.281 4422.862 4,923.71 5,896.34
Time 233.134 136.204 61.028 217.04 541.47
Total 4494.186 5138.846 6075.261 9,533.46 8,496.15
Table 19. Source: BOA Annual Report

3.3. Data Presentation and Analysis of Interview

Interview method is a direct method of collecting data. It is a verbal method of securing data in
the field of surveys. This section presents and discuses the data gathered from primary sources of
interview.

47
3.3.1 Overview
This section presents the data collected through interview during the data collection. The
researchers focused on how the bank tolerates inflation to saving and also understands the
controlling mechanism of BOA through interviewing the pc operators and managers.

The data obtained was analyzed through descriptive techniques in an attempt of filtering basic
finding which answers questions of the research data gathered and the analysis made.

3.3.2. Bankers Emphasis on Relationship between Inflation and Saving

The PC operator of the bank handles all saving activities of the bank and mainly their focus on
saving accounts transaction it doesn’t focus on the relationship of them.
In the researcher view, most of the banker’s i.e. the operators function on routine account
transaction. It doesn’t relate and doesn’t emphasize deeply on the issue.

3.3.3. Bankers Recommendation when Inflation Occurs

The banker cannot give recommendation for issues as well as raise an idea.
In the researcher view, because of the bank cannot emphasize the relationship of inflation and
saving. It has an example of recommending savers at the occurrence of inflation. This is to mean
the bank must assign professional to recommend upon raising such issue.

3.3.4. Control Mechanisms of the Bank during the Occurrence of Inflation

The bank didn’t have any control mechanism upon inflations. As the bankers it doesn’t have an
adverse effect on the banks saving account service. There is no control mechanism in the bank
system.

In the researcher’s view, for developing controlling mechanisms of such problem, first the
problem must be identified and research must be carried out. Since the relationship of inflation
and saving are not identified on the bank, the organization doesn’t have a controlling mechanism
in the future this may affect the banks good will. Thus, it must emphasize and device control
mechanism.

48
Since one of the specific aim of this paper is Assessing the effect of inflation on saving and on
the loan ability of BOA, The researchers provide the following table to investigate the effect of
inflation on the day to day performance of the bank.

Table 20. Saving Rate and Lending Rate

June June June June June June June June
Particulars
2005 2006 2007 2008 2009 2010 2011 2012
Minimum Saving Deposit 3 3 3 4 4 4 5 5
Time Deposit
Average 3.5 3.6 3.7 4.1 5.2 5.0 5.5 5.6
upto 1 Year 3.4 3.4 3.4 4.5 4.8 4.8 5.4 5.4
1 - 2 Year 3.7 3.8 3.7 4.2 5.3 5.1 5.5 5.6
over 2 Year 3.4 3.5 4.0 3.8 5.4 5.2 5.6 5.7
Demand Deposits (Simple
Average) 0.4 0.4 0.4 0.4 0.1 0.1 0.3 0.3
Lending Rate
Average lending 10.50 10.50 10.50 11.50 12.25 12.25 11.88 11.88
Minimum 7 7 7 8 8 8 7.5 7.5
Maximum 14 14 14 15 16.5 16.5 16.25 16.25
Source: NBE

As it can be shown in the above table:- saving rate is too much small as it compared to the
lending rate ,this implies to most investors are discouraged by the loan rate which is provided by
the bank. Since they incur high interest expense, they are fear of lending and investing

Graph 1. The Relation between garanted Collected and Outstanding Loan

120000

100000

80000

60000 Granted
Collected
40000
O/S
20000

0 49
1979/80
1981/82
1983/84
1985/86
1987/88
1989/90
1991/92
1993/94
1995/96
1997/98
1999/00
2001/02
2003/04
2005/06
2007/08
2009/10
2011/12
The above graph shows that the relationship of guaranteed, collected and outstanding loan rate
In the researchers view inflation has its own impact on the above mentioned amounts especially
on the collected once, since investors may have problems in repaying the lent amount from the
bank on time. This may be due to the decline on the purchasing power of the money; additionally
the appreciation of the loan rate over time plus the increment of labor wage and also the high
cost of living may lay impact on the repaid amount which is on the collected amount.

Table 21: Tabular representation of Relation between Saving Rate and

Lending Rate
Interest Rate in Percentages
Year Saving Rate Lending Rate
2007/1999 3 10.5
2008/2000 4 11.5
2009/2001 4 12.25
2010/2002 4 12.25
2011/2003 5 11.875
2012/2004 5 11.875
2013/2005 5 11.875

Graph 2: The Relationship between Saving Rate and Lending Rate

16

14

12

10 Interest Rate in
Percentages Saving
8
Rate
6 Interest Rate in
Percentages Lending
4
Rate
2

0
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
2012

50
The above Graph shows the relationship between saving rate and lending rate. Even if the two
lines Shares similar trend, there is a high difference in distance .this implies that the lending rate
is much greater that the saving rate.

3.3.5. Raising questions on the issue of customers

Most customers raise questions about the issue of inflation. and they said that it is too hard to
achieve their desired goals because all the time there is change in price in every items starting
from very small house consumable items up to large machines, especially those import exporters
mentioned that the current inflation effect is even beyond their capacity it is creating problems in
each and every transaction because since there is no sufficient currency in the country at all it
disables them to do not perform to their fullest capacity. As a result their income shrinking over
time and this lay impact on their day to day activity up to decreasing their number of employees
and taking any measures which is best for them to survive in business.

In the researchers view; most of the savers aware of what inflation means and its impact. They
rise it all the times to the respective bodies even the bank itself at least to increase the interest
rate on their saving to contribute something in compensating it .

3.3.6. Separate department of the Bank linked to Bank Service

The banks have separate departments to assess the bank service and associated problem. This
termed as “operation department” the bank also has a corporate planning research and business
development to analyze such things like, market conditions, environmental condition and the
like.

In the researcher view, the bank did not identified inflation as a problem of savers on their saving
account, so that it doesn’t raise it in the department as an important issue.

3.3.7. Interest Rate of the Bank

51
The bank has an interest rate of 4% for normal saving account. But also pays above for a time
period of certificate of deposit for special saving on 6 month, 6 - 9 month, 9 - 12 month, 12 - 18
month an 18 - 24 month fixed deposits. There also, the interest rate increase when the deposit are
higher i.e. 25000 - 1000000, 1 - 2 million and above 2 million. The bank pays above 4% i.e. 4%
up to 5%.

In researcher view, the banks different interest rate consider some criteria, like duration and
deposits amount of savers

3.4. Data Presentation and Analysis of Secondary Data

3.4.1. The Current Inflation Rate
As Ethiopians is a small opus economy, it faces so many risks at the international market
condition and pass through the effect of current high inflationary pressure the general inflation of
the country is composed of food and non-food inflation. The four years general inflation rate of
the nation is as follow:-

52
Table 22. Annual Average Inflation

Addis Ababa
Year General Food Non-food
1982 7.3 4.8 13.4
1983 3.9 6.8 -0.6
1984 -0.3 -1.1 -1.5
1985 16.4 23.4 4.4
1986 6.5 8.4 4.8
1987 -9.6 15.9 5.7
1988 2.3 -1.3 6.1
1989 9.6 10.8 6.1
1990 5.2 4.4 8.6
1991 20.0 17.9 12.2
1992 21.9 31.0 17.2
1993 7.7 9.2 10.1
1994 3.3 0.02 4.7
1995 13.4 16.8 2.6
1996 0.9 2.3 5.0
1997 -6.4 -8.1 -3.9
1997/98* 1.0 -0.1 1.7
1998/99** 1.1 4.3 -3.5
1999/00** 4.2 7.2 0.6
2000/01** -1.4 -7.8 5.6
2001/02** -5.5 -10.7 -0.8
2002/03** 4.6 9.4 0.9
2003/04** 5.6 8.6 3.0
2004/05** 7.2 5.7 7.6
2005/06** 8.4 13.0 4.6
2006/07** 19.2 25.4 14.0
2007/08 20.8 32.1 12.7
2008/09 29.4 41.5 19.2
2009/10 10.1 4.1 16
2010/11 19.4 14.8 23.5
2011/12 24.8 29.6 21.4
Source: Central Statistical Agency, NBE

53
As shown in the above table in the inflation rate is increased as the year increased

3.4.2. Correlation between Inflation and Saving Deposits

Correlation uses the correlation coefficient to determine the relationship between two properties.
To show the relationship of general inflation and national gross saving of the country. The
following table is presented bellow:-
Table 23. Comparisons of Inflation and Saving Deposits
Correlation Coefficient
General Inflation Rate National Gross Saving
0.70895818
1999/00** 4.2 13,209
2000/01** -1.4 14,980
2001/02** -5.5 12,555
2002/03** 4.6 14,672
2003/04** 5.6 22,062
2004/05** 7.2 25,441
2005/06** 8.4 28,934
2006/07** 19.2 46,748
2007/08 20.8 57,103
2008/09 29.4 76,376
2009/10 10.1 93,973
2010/11 19.4 137,510
2011/12 24.8 196,013
Source: NBE

Table and graph of inflation and saving interest rate. As shown is the Table 19 above, the
correlation coefficient of inflation and interest rate is approximately 0.7 This shown the two i.e.
the general inflation rate and saving deposits are similar and positively correlated. That indicates
both are increasing throughout the researchers time taking period of data.

54
Table 24. Shows The Relationship Between Inflation Rate And Saving Rate
Years Inflation Rate Saving Rate
2000 4.2 6
2001 -1.2 6
2002 -5.5 3
2003 4.6 3
2004 5.6 3
2005 7.2 3
2006 8.4 3
2007 19.2 4
2008 20.8 4
2009 29.4 4
2010 10.1 4
2011 19.4 5
2012 24.8 5
Graph shows the relationship between general inflation rate saving rate which is provide
commercial banks with in the country for the past 13years.by basing the above table the
following graph try to show the relationship between the general inflation rate and saving rate.
Graph 3: The Relationship between Inflation and Saving Rate

35

30

25

20

15 inflation rate
10 saving rate

-5

-10

55
As it can be seen from the graph above; the saving rate line found far from inflation rate and
looks stable where as the inflation rate line looks very unstable and fluctuating over time. From
this the researcher’s observe that even if the two lines have direct relation (positively correlated)
the amount that increase through period to period very different for example if calculate the
range for this sample is;
Range =max-min
Rang of saving rate =3
Range of inflation rate =34.9
From this we can say that the return that is paid in the form of interest to the customers is
unrecompensed.

In the researchers view, having cross sectional line graph implies that the one can affect the other
and it implies that during the researchers taking period of data’s the one that affects saving
deposit i.e. inflation did affect the saving deposits of the bank. This arises due to the following
reasons;-
A. Due to awareness of customers (BOA) about inflation
As shown in the table 21and22 above, awareness of customers about the relationship of inflation
and saving is much matured and most customers think their saving amount is affected by the
fluctuation of inflation rate at the inflation period. These lead customers to decide right and to
action which is best for them. I.e. having knowledge of inflation, customers with draw his/her
money from the bank by remind the inflation decreases its real interest rate. While the interest
rate is arrived at by subtracting the rate of inflation from the rate of interest. To elaborate the
above idea, the following depicts below:-

For example: A customer has birr 100 to his saving account on the bank, the current inflation rate
on that period is 10% and the current interest rate of saving is 5% to calculate the real interest
rate.
Real interest rate= Rate of interest – rate of inflation
5%-10%
= (5%)

56
This shown the customer losses 5% from his saving deposits rather than getting return. If the
customers have knowledge about the relationships may he, she decide other alternatives rather it
deposits. Therefore BOA’S customer awareness about inflation is very appreciable.

The following graph shows that the relationship between general inflation rate food inflation and
None -food inflation rate that exists though out in country.
Graph 4: The Relationship between General Inflation food and Non Food
Inflation Rate

50

40

30

20 General
Food
10 Non-food

0
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996

2007/08
2009/10
2011/12
1997/98*
1999/00**
2001/02**
2003/04**
2005/06**

-10

-20

B. Economical Development of the country

Since Ethiopia is under developing country, mostly the country is dependent on developed
countries. This leads the domestic economy not to grow faster and it is barrier to face their
problems. in addition the inflation has an adverse effect on economic growth. So that it increases
uncertainty and discouragement of investment. Hence people have not a choice to invest; they
put their money to bank and this may contributes to increase a saving deposit in the BOA.

57
C. Due to an increasing of a saving habit on the people
Table 25. Shows Domestic Information
1999 2000 2001 2002 2003 2004
2008 2010 2011
2006/07 2007/08 /09 2009 /10 /11 /12
Gross National Savings 57,103 76,376 93,973 137,510 196,013
Rate of gross Saving (as % of
GDP) 23.2 23.0 24.8 27.2 26.5
Rate of Investment (as % of
GDP) 24.5 24.9 27.0 27.9 33.1
Mid-year Population (in
Million) 74.9 76.8 78.8 80.7 82.7

Per Capita GDP (Birr) (Nominal) 3,282 4,318 4,803 6,267 8,926
Per Capita GDP (Birr) (Real) 4,597 4,934 5,317 5,761 6,088
Average Exchange Rate
(Birr/USD) 9.24 10 13 16.12 17.50
Per Capita GDP (USD)
(Nominal) 355 414 373 389 510
Per Capita GDP (USD) (Real) 204 217 238 357 353
Percentage Change in GDP
Deflator 30.3 24 2 20.2 34.2
803.2 1,075.0 1,299.5 1,746.0 2,954.3
Source; national bank of Ethiopia
D. Branch Expansion of the bank
The opening of number of branches during the years, has contributed towards the growth of
saving deposits of the bank. Currently BOA has 44 branches in the city and 46 out laying
branches.

58
 CHAPTER FOUR
SUMMARY AND CONCLUSION
4.1. Summary
This research paper summarizes the main topic of the major findings. To search out such
findings, the researcher use both primary and secondary source of data collecting mechanisms
for primary data questioner and interview are used. Questioners provide to customer to know
their saving habits, their saving information and to level their awareness about inflation on the
other hand interviews are conducted to know the bankers attitude towards inflation. Secondary
data are used to know the effect of inflation over saving deposit in bank of Abyssinia .based on
this collected data the following findings are reached.

In regard to customer back ground information majority of respondents are male and ages b/n
25-35 about employment status most of them are employers and business man and they are
diploma holders and above.

BOA as a bank provides a saving service .The bank has normal/regular, special, current
/checking and deposit /cdt account. Furthermore the bank classify saving account in to individual
saving account ,cooperative saving account ,saving account for plc and for associations
additionally under special saving account:- and ,and/or minor for less than 18 years children’s.
And other titled accounts are also found in this special account. For the normal saving account
it provide a 4 % interest rate but for this interest most of savers are not satisfied however the
bank provide different interest rate to the special saving accounts holders based on the duration
that they put the amount in the bank without withdrawing.

Inflation affects the trend of saving deposit and the habits of savers by deducting the interest rate
of saving. However its effect could not show in the bank savings deposit of BOA at the
researchers time taking period of this data.

59
4.2. Conclusion
The researcher aimed to identify the impact of inflation on saving trend of commercial banks in
order to accomplish the researcher’s objectives by using primary and secondary data source and
reached in to the following conclusion.

Hence the deposit mobilization activity is performed by engaging the executive management,
branches; and head office deposits mobilization committee with day to day and bi-weekly follow
up in a coordinated manner. The market share of the bank in the industry is somehow
competitive in terms of the total deposits loan and advances and branch expansion activities. The
current coordinated effort should further be enhanced to attain the target set for the fiscal year.
The remaining task of core banking solution and the implementation card and mobile banking
system is under way with the concerted effort of the top management and all work units to
expand the banks service delivery channel. Also during the inflation happens, the bank also
amplify its saving deposit. From this we conclude that both saving deposit and inflation rate are
increasing on the study period. Also they are positively correlated. Their trend is similar.

As we have discussed, the trend in the above paragraph, both the inflation rate and saving deposit
are increasing. The two are directly related, i.e. they are positively Cole related this means they
are in similar direction.

The majority of respondents are aware about inflation but they didn’t relate and compare the
saving interest rate with the current inflation rate except entering and withdrawing the saving
amount. But they are sure that their saving amount decreased while inflation occurs.

From this we conclude that most of savers are aware of inflation which affects their saving
deposit.

The bank did not emphasize on the relationship of inflation and saving; also the pc operator is
not emphasized such things. Simultaneously the bank done nothing to cope with the effect of
inflation to their customer’s .This means the bank does not contribute anything to decrease its
effect for the entire nation..

60
In addition the bank does not have professionals to analyze and recommend savers on such issue.

The researchers found that any change in saving account affects the entire activity of the bank
including its loan capacity, since deposited is the back bone of any financial sector.

The customers provide different reasons for their selection to be committed customer in BOA
specially those5and greater than 5years customers, But the bank is not assessing the special need
of its customers and tried to satisfy their special needs.

61
4.3. Recommendations and the way forwarded
 As the researchers found that inflation and saving has similar trend, the bank also has to
think about this. Also find and take remedial measures so as to minimize the effect of
inflation from the entire nation beyond its customers. like
 Motivating peoples to deposit their excess cash
 Increasing interest rate
 cultivating and encouraging the society to buy long term bonds and securities
 Taking more effort in strengthening our local currency.

 The bank has to invite all interested customers to deposit their requirements of special
saving account so as to benefit themselves from different interest rates which are
provided by the banks plus reviewing appreciable interest rate policy so as satisfy
customer’s interest,at the same time to contribute something in controlling inflation from
the nation.

 Despite the prevailing challenges facing the banking industry, BOA in its parts should try
to exert unreserved efforts to accelerate the growth momentum of the expanding the non-
wide network of branches justified by the demand of the public and business to support
the deposit mobilization activity.

 Integrating credit and foreign currency allocations is needed to optimize the bank deposit
mobilization effort.

 Endorsement of better plan policies of interest restores the ultimate responses from all
interested respondents. So the bank as to device appreciable interest policies.

 The bank have ample experience about the service of the bank ,however the number of
its customers who stay as a customer more than five years are very few as compared to
total customers .Therefore the bank must review the test of customers and its provision
of services.

62
 The restoration of people administration originates on the gratified aspiration of enhance
for the future assortments.

63
 BIBLIOGRAPHY

1. A. N Mosich GE. Jobn Larson, “Intermediate Accounting” (1982) University of Southern

California.
2. Chopra, 1988, effect of inflation, Plenum press, New York
3. Dalton, h.1920.themesurment of the inequality of economics, economic jornal,pp.348-
461
4. Deaton, 1977; The relationship b/n inflation and saving. Plenum press, New York.
5. Donald E. kieso, Jerry J. Waygandt, Jerry D. Warfield “Intermediate Accounting” (2005)
11th Edition. FASB updated printed by von Hoofmark press
6. FEDERAL NEGARITY GAZETA.
7. Fees Warren. “Accounting principles” (16 th ed), Fees Warren Hall
8. Nelkin,D.,and M.pollack1980.problems and procedures in the regulation of
technological risk.inR.schwing and W.alberts(eds.)societal risk management.p.136-
67.plenum press, New York.
9. NBE annual report 2006/07, P.58
10. Thomas p.ofcansky and laverre berry .2005.ethiopia country study, U.S .government
printing office, Washington, D.C
11. Wsp and Scott Wilson “Joint Venture Study on Capacity Building Project” (2002,
August) ERA Version 1.0
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( http://www.filiker.comTardiskey) (ritrived@5:00pm, on feb13, 2014)
(http://www.tradingeconomocs.com/Ethiopia / (march12, 2014)
( http://en.wikipidia.org/wiki/inflation/)(march12, 2014)
.(http://kalian.city.blogspot.com2011’02/savingaccon (March, 2014)
( http://enwikipidia.org/wiki/inflation/)(March, 2014)
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64
65
12.

66
Appendixes
St. Mary’s University
Faculty of Business
Department of Accounting
Questionnaire For Customer Of Saving Accounts On Bank Of Abyssinia
ON
Effect of inflation on Saving Accounts in the case of Bank of Abyssinia for partial fulfillment of
the Bachelor of Arts Degree in Accounting.
March, 2014
TO RESPONDENTS: The Effect of Inflation on Saving Accounts study is being conducted in
financial institution in Ethiopia taking bank of Abyssinia as a case considering the strategic
importance of the study to the country’s development endeavor, the significance of this particular
study cannot be over emphasized. However, the effect of this questionnaire study is highly
dependent upon your cooperation to the enumerators who visit your institution to go through the
questionnaire with you. Therefore, we kindly request your kind cooperation in filling out of the
questionnaire. We confirm you that all the data gathered will be held confidential. We would like
to express our esteemed gratitude in advance for your cooperation.
Questionnaire
Part I demographic characteristics of the customer
1. Sex
Male Female
2. Age
18-25 25-35
35-45 Above 45
3. Employment States
Employed In employed
Businessman Other
4. Educational Level
Less than 12 Grade 12 Grades Complete
Certificate Degree and Above Diploma
Part II
5. What kind of saving is opted by you?
Saving Type Yes No
Special Saving
Normal Saving
Both
Other
6. Do you believe that the interest that you earn on your saving account satisfactory?
Yes  No
7. If your answer for the above question is yes, will you please tell us the reason?
___________________________________________________________________________
___________________________________________________________________________
8. If your answer for above question is no, will you please tell us the reason?
________________________________________________________________________
________________________________________________________________________
9. Why do you save money?
Return Safety Other (specify)________________
10. How long have it been since you open your account?
Less than 5 years  above 5Years
Exactly 5 years
11. Did you meet your objective as a result of opening an account and saving?
Yes Do not know
No Other (Specify)_________
12. Do you think any problem would arouse on your saving account?
 Yes  No
13. Response of the company when problem arises?
 Good Very Good
 Poor No Response
14. Are you aware about the current inflation rate of the nation?
Yes  No
15. Have you ever compared the inflation rate with the available interest rate when you make a
decision to open in bank of Abyssinia?
 Yes No
16. How do you rate the level of awareness on the relation of inflation and saving?
 Poor  Fair Very good
17. How do you manage your money when inflation happens?
 Withdraw Nothing done Any other (Specify)__________
18. Your saving deposit for the past five years?
<5000  50000≤10000  100000≤1000000 ≥1000000
19. Do you think your saving amount is growing during inflation period?
 Yes No
Is there any potential reason that affects your saving practice? If there, please explain?
______________________________________________________________________________
______________________________________________________________________________
____________________________________________________________________________.
20. Do you think that BOAs loan capacity is satisfactory? Why?
__________________________________________________________________________
_________________________________________________________________________.
21. Why you prefer BOA compared to other banks?
__________________________________________________________________________
__________________________________________________________________________
_______________________________________________________________________.
22. Do you have any more opinion relevant for this study? Please explain
______________________________________________________________________________
____________________________________________________________
Thank you!
 ቅድስት ማርያም ዩኒቨርስቲ
ቢዝነስ ፋካለቲ
አካውንቲንግ ዲፓርትመንት
በደንበኞች የሚሞላ መጠይቅ
ውድ መላሻችን
ይህ መጠይቅ በቅድስት ማርያም ዩኒቨርስቲ ለመጀመሪያ ዲግሪ መሟያነት የሚውል ጥናት ነው፡፡
የጥናቱ አጠቃላይ አላማ የዋጋ ንረት /Inflation/ ወይም የኑሮ ውድነት በቁጠባ ባህል ላይ
የሚያመጣውን ተፅኖ ማጥናት ነው፡፡ ይህን መጠይቅ በመሙላት እና በወቅቱ ለመመለስ
የሚያደርጉልኝ ድጋፍና ትብብር በከፍተኛ ሁኔታ የሚደነቅ ነው፡፡ እርስዎ የሚሰጡኝ ምላሽ የኑሮ
ውድነት በቁጠባ ባህል ላይ ያመጣውን ተፅዕኖ ለማወቅ እና የሚያስፈልጉ ማሻሻያዎች ለመረዳት
ከፍተኛ አሰተዋፅኦ ያለው ሲሆን እንዲሁም ጥናቱን ለማጠናቀቅ ከፍተኛ ፋይዳ አለው፡፡

በዚህ መጠይቅ ውስጥ ምላሽ የሚያስፈልጋቸው በርካታ ጥያቄዎች የተካተቱበት ሲሆን ለሁሉም
ጥያቄዎች ምላሽ እንዲሠጡን በአክብሮት እንጠይቃለን፡፡ በመጨረሻም ጊዜዎን ስለሰጡን
ምስጋናችንን እያቀረብን እርስዎ የሚሠጡኝ ምላሽ በሚስጥር የሚያዝ መሆኑን ላረጋግጥልዎ
እንወዳለሁ፡፡

በቅድሚያ የከበረ ምስጋናችንን አናቀርባለን፡፡

አጠቃላይ መመሪያ
1. ስምዎን መፃፍ አያስፈልግም፡፡
2. በሚመረጡት የምላሽ ሳጥን ውስጥ የ ምልክት ያስገቡ፡፡

1. ፆታ
ሀ. ሴት ለ. ወንድ
2. እድሜ
ሀ. 18 – 25  ለ. 26 – 35
ሐ. 36 – 45  መ. ከ46 በላይ
3. የስራ ሁኔታ
ሀ. ቅጥረኛ  ለ. የግል
ሐ. ነጋዴ  መ. ሌላ
4. የትምህርት ደረጃ
ሀ. ከ12ኛ ክፍል በታች  ለ. 12ኛን ያጠናቀቀ
ሐ. የሰርተፊኬት ተመራቂ  መ. ዲኘሎማ ሠ. ዲግሪ እና ከዛ በላይ
5. ምን አይነት የቁጠባ ዘዴ ይጠቀማሉ
ሀ. ልዩ የቁጠባ ሂሳብ  ለ. መደበኛ የቁጠባ ሂሳብ
ሐ. ሁለቱንም መ. ሌላ ከሆነ ይጥቀሱ
6. በመቆጠቡዎ የሚያገኙት ወለድ አመርቂ ነው ይላሉ
ሀ. አዎ ለ. አይደለም
ሐ. ብዙም አይደለም መ. ሌላ ካለ ይጥቀሱ
7. ከላይ በተጠየቀው ጥያቄ መልስዎን አዎ ከሆነ እባክዎ ቢያብራሩት

8. ከላይ በተገለፀው ጥያቄ መልስዎ አይደለም ከሆነ እባክዎ ለምን እንዳሉ ቢያብራሩልን

9. ለምንድነው የምቆጥበው ብለው ያስባሉ ወይም ለምን አላማ ነው የሚቆጥቡት

ሀ. ከወለዱ ተጠቃሚ ለመሆን ለ. ለጥንቃቄ
ሐ. ሌላ ካለ ይግለፁ
10. በአቢሲኒያ ባንክ ይህንን የቁጠባ ሂሳብ ከከፈቱ ምን ያህል ጊዜ ሆኖታል
ሀ. ከ5 አመት በታች  ለ. ከ5 አመት በላይ ነኝ
ሐ. በትክክል 5 አመቴ ነው
11. ይህንን የቁጠባ ሂሳብ በመጠቀምዎ ለመቆጠብ የተነሳሱበትን አብይ አላማ ያሳኩ
ይመስሎታል
ሀ. አሳክቻለሁ  ለ. አላሳካሁም
 ከላይ በተጠቀሰው ጥያቄ ላይ መልስዎ አላሳካሁም ከሆነ እባክዎን ምክንያቶን ቢገልፁልን

12. የቁጠባ ሂሳብዎን ችግር ያጋጥመዋል ብለው ያሰጋሉ

ሀ. አዎ ለ. አላሰብም ሐ. ሌላ ካለ ይግለፁ
13. የተለያዩ ችግሮች በባንኩ ውስጥ ሲያጋጥምዎ የባንኩ ችግሩን የመፍታት አቅም እንዴት
ይገመግሙታል
ሀ. በጣም ጠንካራ ለ. ጠንካራ
ሐ. ደካማ መ. በጣም ደካማ
ሠ. ጭራሽ ለችግሩ ምላሽ አይሰጥም
14. አሁን በአገሪቱዋ ውስጥ ስላለው የዋጋ ንረት የሚያውቁት ነገር አለ
ሀ. አዎ  ለ. የለም
15. እስከዛሬ ድረስ ባንክ ውስጥ ለመቆጠብ ሲያስቡ በቅድሚያ ያለው የሀገሪቱ የዋጋ ንረት
በፐርሰንት ሲሰላ እና ባንኮች የሚሰጡት ወለድ በፐርሰንት አወዳድረው ያውቃሉ

16. የእርስዎን እውቀት ባለው የሀገሪቱ የዋጋ ንረት ላይ እና የቁጠባ ባህል ላይ እንዴት
ይገመግሙታል
ሀ. በጣም ጥሩ  ለ. ጥሩ
ሐ. ብዙም እውቀት የለኝም  መ. በፍፁም አወዳድሬ አላውቅም
17. በሀገሪቱ ውስጥ ከፍተኛ የዋጋ ንረት በተከሰተ ጊዜ ባንክ ውስጥ የቆጠቡት ገንዘብዎ ምን
ያደርጉታል
ሀ. ከባንክ አውጥቼ እጠቀማበታለሁ ለ. ለሌላ ሰው በወለድ አበድራለሁ
ሐ. ምንም አላደርግም መ. ሌላ ካለ ይግለፁ
18. ባለፉት 5 አመታት እቆጥባለው ብለው ያስቡትን የገንዘብ መጠን ቆጥበዋል
ሀ. ቆጥቤአለሁ ለ. አልቆጠበኩም
19. ቀደም ብለው በተጠቀሰው ጥያቄ መልስዎ አልቆጠበኩም ከሆነ ለምን እንዳልቆጠቡ
ቢገልፁልኝ

20. በሀገሪቱ ውስጥ የዋጋ ንረት በተከሰተ ጊዜ የቁጠባ ሂሳብዎን አሳድጋለሁ ብለው ያስባሉ
እባክዎትን ለመልስዎ ማብራሪያ ቢሰጡን

21. የቁጠባ አቅሜን ያሳንሰዋል የወይም እንዳልቆጥብ ያደርገኛል የሚሉት ምክንያት ካለ

ቢጠቅሱልን

22. አቢሲኒያ ባንክ የተጠየቀውን ብድር /Loan/ ይሰጣል ብለው ያስባሉ ለምን

23. አቢሲኒያን ከሌሎች ባንኮች በምን ይመርጡታል

24. እባክትን ሌላ ለጥናቱ ይጠቅማል የሚሉትን ሃሳብ ካለ ቢጠቁሙን

ስለደረጉልን ትብብር ከልብ እናመሰግናለን!

 Table 1: Performance in outstanding deposit by type at the end of December 2013
(inmillions 0f birr)
Types
Dec. Sept. Dec.
of Variation
2013 2012 2012
deposit
Actual %Share Budget Actual Absolute %age
A B C A-B A-C A/B A/C
Demand 1691.72 20.7 2367.46 1774.73 1667.96 (675.74) 23.76 (28.54) 1.42
Saving 5868.29 71.1 6105.56 5824.20 5230.63 (237.27) 637.66 (3.89) 12.19
Time 630.00 7.7 653.99 630.64 378.31 (23.99) 251.69 (3.67) 66.55
Total 8190.01 100 9127.01 8229.58 7276.90 (937.00) 913.11 (10.27) 12.55
Source: financeand Accounts Department
Table 2: Number of account holder
Type of Dec. Sep. Dec. Absolute %
deposit 2013(A) 2013 2012(B) (A-B) Change
Demand 25,159 24,486 23,872 1,287 5.39
Saving 376,219 358,532 340,489 35,730 10.49
Time 203 383 158 45 28.48
Total 401,581 383,401 364,519 37,062 10.17
Table 4: outstanding loans and advances as at end of December 2013
(in million of birr)
Types of Dec. Sept. Dec. Variation
deposit 2013 2013 2012
Actual Budget Actual Absolute %age
A B C A-B A-C A/B A/C
Term loan 4188.37 4116.49 4200.79 3616.03 71.88 572.34 1.75 15.83
Overdraft 784.75 1041.51 664.92 713.39 (256.76) 71.36 (24.65) 10.00
Advances 174.10 386.00 220.19 137.04 (211.90) 37.06 (54.90) 27.05
Total 5147.23 5544.01 5085.89 4466.46 (396.78) 680. 77 (7.16() 15.24
Source: Credit review, workout and profit Mgt. department andCPMD
Table 13: 10 branches registered highest deposit balance as at December 2013 (in birr)
1 BOLE 1,320,318,273
2 FILUHA 680,980,268
3 URAEL 353,769,688
4 ABA MELA 325,641,988
5 GUENET 313,324,890
6 NEGADRES 292,488,553
7 RAGUEL 222,474,168
8 ARADA 206,548,807
9 BAHIR DAR 206,091,693
10 GOFFA 189,896,136
Total 4,111,534,464
Total deposit 8,190,011,647
% age out of the total deposits 50%
Top ten branches registered the highest profit at the end of December 2013 are depicted as
follow:
Table 14: 10 branches on profitability as at end of December 2013 (in birr)
1 FILUHA 26,466,015
2 NEGADRAS 18,495,780
3 HAWASSA 18,201,535
4 NAZARETH 12,376,217
5 TEMENJA YAJ 10,006,403
6 GUENET 9,824,083
7 BOLE 6,516,497
8 GERJI 6,019,924
9 AIR PORT 5,577,576
10 BULLE HORRA 5,537,119
TOTAL 119,021,149
Total Profit 172,021,149
% age out of the total Profit 69%
Birr 119 million constituting about 70% of the total profit generated is registered by top 10
performing branches enumerated above.
Correlation Coefficient Between General inflation rate and outstanding loan
0.69626103 General inflation rate outstanding loan
1999/00** 4.2 15,101.8

2000/01** -1.4 15,968

2001/02** -5.5 15,748

2002/03** 4.6 15,543

2003/04** 5.6 17,750

2004/05** 7.2 21,749

2005/06** 8.4 26,751

2006/07** 19.2 31,103

2007/08 20.8 41,340

2008/09 29.4 46,005

2009/10 10.1 54,692

2010/11 19.4 73,971

2011/12 24.8 110,201