People and organizations wanting to borrow money are

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People and organizations wanting to borrow money are brought together with those having surplus funds in the financial markets. A financial market is therefore an arrangement where financial assets such as stocks and bonds can be purchased and sold. Financial markets facilitate the flow of funds and thereby allow financing and investing by households, firms, and government agencies (Madura, 2012). Financial market provide long term finance of two types: (i) loans with periodic payments of interest with principal usually repaid at maturity, and (ii) equity shares for which there is no commitment to repay funds but a right to share in the profits of the venture paid as dividends. Thus, the providers of funds in the financial market deal essentially with the long term risk related to payments of interest and principal on the debt or dividends on equity shares (Elias, 1995). Does Ethiopia need to have financial market now?
JBAS Vol. 4 No. 1 June 2012 7 stock markets for economic growth. The popular researchers in the area, Levine and Zervos (1996) conducted an empirical study and found out that there is a strong positive correlation between stock market development and long-term economic growth. In countries like Ethiopia, bank loans are the most important source of capital, but are limited by the amount of deposits banks are able to mobilize. As a result, banks tend to be very conservative in their lending policies, thereby penalizing younger or emerging companies whose business risk is higher than those faced by established firms, and yet contribute to the dynamism and future growth potential of the economy through innovations. Thus, the role of the private sector is limited due to the banks unwillingness in granting loans to risky investments on long term basis. Since banks in emerging economies are also mostly owned and run by governments, they extend loans to priority sectors in response to government directives without due regard to quality, and o ften at interest rates below the bank‘s cost of funds. This leads to inefficient resource allocation and widespread loan delinquencies. The prevalence of these problems reduces the level of private investments, productivity of capital and the volume of savings (Asrat, 2003). Excessive dependence on bank loan limits the growth of private investment which is considered as the engine of economic growth . But if securities markets are established, they promote economic efficiency by channeling money from those who do not have an immediate productive use for it to those who do. A well-functioning financial market, coupled with a

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