2

KISUMU NATIONAL POLYTECHNIC

DEPARTMENT OF BUSINESS STUDIES
CERTIFICATE HUMAN RESOURCE MANAGEMENT
CERTIFICATE IN SECRETARIAL STUDIES
CERTIFICATE IN BUSINESS
MANAGEMENT CERTIFICATE IN SUPPLY
CHAIN MANAGEMENT S16
COMMERCE HANDOUT
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 3

TRADE
MEANING OF TRADE
This is the buying and selling of goods and services with the aim of making a
profit.
Importance of trade:
Trade plays a vital role in any economy. The various roles played by trade in
the economy include:
Helps people to acquire what they cannot produce
Avails a variety of goods and services thereby improving the peoples living
standards
Creates an outlet for goods thereby enabling the producers to dispose of their surplus
produce
Creates employment opportunities
Encourages specialization and division of labour
Promotes peace, social relations and understanding the parties involved since they
depend on one another
Provides revenue to the business and the government in form of taxes and fees
charged on the various trading activities
Ensures steady supply of goods and services
Exploitation of local resources as traders create goods and services using locally
available resources
Encourages economic growth and development
Classification of Trade
0 On the basis of geographical location of the portion involved,
1
2 These are:
0
1 Home trade-Also called internal, local or domestic trade.
-It refers to the buying and selling of goods and services within the
boundaries of a given country.
-It is further divided into retail trade and wholesale trade.
0
1 International trade (foreign trade)
-This is trade that is carried out beyond the boundaries of a country
-This is trade carried out between individuals or government of different countries
e.g. trade between a citizen of Kenya and a citizen of Tanzania, or trade between
the government of Kenya and the government of Southern Sudan
-International trade carried out between two countries is referred to as bilateral
trade and international trade carried out among many countries (more than two
countries) is referred to as
multilateral trade.
International trade is classified into the following;
0 Export Trade-Which is the sale of goods and services by a country to
another country or individuals in one country to another country or
individuals in one country to individuals in another country.
1 Import Trade-Which is the buying of goods and services by one country
from another country or by individuals in one country from individuals in
another country.
Forms of Home Trade
23 Retail Trade
-Retail trade involves the buying of goods and selling them to the final
consumer. A retailer is the trader who buys goods with a view of selling them to
the final consumer.
 4

Classification of Retail Traders

Retailers are classified/categorized according to the amount of capital they
need to start and operate their businesses and their sales volume. Thus
retailers can be classified as;
23 Small scale retailers
24 Large scale retailers
23
24 Small-scale Retail businesses/small scale Retailers
These are retailers whose capital requirement is low and their sales volume also
low. They form the majority of retail traders and all found in all parts of the
country.
Small scale businesses are easy to start and in most cases they are operated
as one-man’s business.
A small scale trader serves the needs of people in the immediate neighborhood and
deal mainly in fast moving goods such as foodstuffs, detergents, kerosene e.t.c

Categories and Types of small scale

These are two main categories of small-scale traders as shown below;
a) Small scale Traders without
shops
-Itinerant Traders (Hawkers and
peddlers)
-Roadside sellers -Kiosks -Mobile shops
-Open air market Traders -Mail order stores
b) Small scale retailers with
shops
-Single shops -Tied shops
-Market stalls -Canteens
a) Small scale Retailers without shops
23 Itinerant Traders
These are retailers who move from place to place selling their goods either on
foot, by bicycles or motor cycles
-They move from town to town, door to door and from village to village
selling their goods. Their goods may include clothes, utensils and foodstuffs.
Customers can buy goods without having to travel to look for them
-Examples of itinerant traders are hawkers and peddlers (Hawkers move
around on bicycles, handcarts or motorcycles while peddlers walk around)
-The itinerant traders require a licence from the local authorities in order to
sell their goods.

Characteristics of itinerant Traders

23 1.Are found mainly in densely populated areas
24 2.Move from place to place in search of customers
25 3.They are very persuasive
26 4.Their prices are not controlled.

Advantages of itinerant Traders

23 1.They require little capital to start
24 2.They are convenient because they bring goods closer to the people
25 3. The business is flexible in that they can move from place to place. They
. 4.Can also change from line of business to another
26 5.Few legal formalities are required
27 6. They usually do not suffer bad debts because they sell in cash.
28
Disadvantages of itinerant Traders
5888 1. The traders get tired because of moving from one place to another while
carrying goods.
5889 2.The business is affected by bad weather conditions
5890 3.The traders sale a limited range of goods
 5

4. It is difficult to transport goods from one place to another.

0 5.Do not offer guarantee, in case items are to be found defective
1 6. They are constantly in conflict with the local government.
0
Roadside sellers
These are traders who sell their goods at places where other people pass by and
at busy places such as along busy roads, bus stages, road junctions and
entrances to public buildings. They place their goods on trays, cardboards,
empty sacks and mails
They sell items such as fruits, utensils, sweets, clothing and some hardware.
0
Open-air market Traders
Open air markets are places set aside by the government through the local
authorities where people meet to buy and sell goods. Traders selling similar
commodities are allocated a special area. Such markets are open on particular
days of the week.
The variety of goods sold here is wide and include agricultural produce,
clothing, household items, animals, foodstuffs and even furniture.
The traders move from one market to another depending on the various
market days.

Advantages of small-scale retailers without shops

0 1. They require a small amount of capital to start and operate their
businesses.
1 2. They are convenient since they take goods to the customers within their
reach.
2 3.They incur low costs of doing business
3 4. Most of their goods are low-priced and hence more affordable to
customers.
4 5. The business is flexible. It is easy to change from one business to another
5 6.They require few legal requirements
6 7.The financial risks involved in these businesses are minimal
7 8.They do not suffer bad debts since they sell on cash bases
8 9. They interact at personal level with the customers and can convince
them to buy their goods.
Disadvantages of small-scale retailers without shops
23 1.It is tiring for traders to move from place to place especially if the goods
are heavy and the distance covered are long
24 2The traders face stiff competition from other traders with more resources
25 3.They offer a limited variety of goods
26 4.They are affected by unfavorable weather condition
27 5.Lack of permanent operating premises denies them a chance to
develop permanent customers
28 6.They face a lot of uncertainty, especially in terms of a steady flow of
income
29 7. They sometimes sell defective or low quality goods because
customers expect to pay little money for them.

b) Small scale Retailers with shops

These are small scale retailers with permanent locations to operate from. They
include;
23
24 a. Kiosks
These are small shops or structures found mostly in residential areas, busy
streets, highly populated areas or inside building where people pass by or
work
They deal in fast-moving items and groceries such as; sodas, cakes, sweets,
cigarettes, and newspapers e.t.c. some kiosks also sell food
0
1 b.Market stalls
These are permanent stands found in market places, especially those operated
by the various local authorities
They are of different designs depending on the goods they sell or
services they offer. They are rented or leased by individuals from local
authorities
They deal in fast moving household goods though some may specialize in other
products such as clothing and shoes.
Examples are stalls at Muthurwa markets, Kariokor, and most
municipal markets.

Advantages of kiosks and market stalls

1.They are small, hence easy to start and operate
2.They are conveniently located close to their customers
3They require little capital to start
4.They tend to have a loyal group of customers since they have permanent
premises
5.They incur relatively low running costs
6.They give personal attention to their customers
7. They are flexible since the owner can change from one business to another
easily.

Disadvantages of kiosks and market stalls

1.They provide a limited range of products
2.They usually do not have adequate higher capital for expansion
3.They charge relatively higher prices than the retailers without shops
4.They face stiff competition from more established retail businesses
5.They sometimes suffer from bad debts
6.Due to their size, they do not enjoy economies of scale
For market stalls the hours for operation are controlled by the local authority
concerned
0
1 Single shops (unit shops)
-Single shops are mostly located in the trading or market centres in rural
areas or in the residential areas of high towns
-They are operated from fixed premises
-They are usually run by one person who may get assistance from him/her
family or employ attendance
-Some deal in one line of commodity such as houses, clothing, groceries
or electronics

Advantages of single shops

0 1.Minimal capital is required
1 2.Running costs are usually low as the owner may use the services of family
members
2 3.They may offer credit facilities to some customers
3 4.They are easy to start because only a licence is required
4 5.They usually have a loyal group of customers
5 6. Flexibility. The owner can change his or her line of business at will
6 7.They are easy to start since the owner does not have to meet any manufactures
requirements
7 8.Products prices are fixed by the shop owners
8 9.The owner has the freedom of creativity and independence
9 10. They are convenient since they ensure goods are within easy reach of their
customers.

Disadvantages of single shops

10 Expansion is difficult due to limited funds
11 They face stiff competition from large businesses
12 The absence of the owner may result in closure and loss of business
13 May suffer bad debts
14 Provide limited variety of goods
0 The operations of the business are affected by the owner‟s commitment.

Tied shops
These are shops that mainly sell the products of one particular manufacturer or
are owned by a specific supplier of certain goods. The shops are owned or
controlled by the manufacturer, and are thus tied to the manufacture.
The manufacture/supplier designs the organization of the shop and its
appearance e.g. painting hence they look alike. The supply closely supervises
the shops.
Examples of tide shops include; Bata shops which sell shoes made by Bata
Company, petrol station like National, Kobil, and total e.t.c

Advantages of Tied shops

Availability of goods is assured at all times
The supplier carries out promotion for the goods
The manufacturer/supplier can easily give credit to the shops
Customers can return or change faulty goods at any of the shops
The shops are easily identifiable due to their similarity
Traders are financed by the manufacture
They get loyal customers who keep buying their branded products
Advertisement expenses are met by the manufacture
They get technical advice from the manufacture
Some operate from permanent premises owned by the manufacture.

Disadvantages of Tied shops

Decision making is slow because the manufacturer must be consulted
The variety of goods is limited
The shops cannot sell goods from any other manufactures even if customers
require them
Prices are fixed by the manufacture and sometimes profit margins may be low
They inhibit the retailers creativity and innovations
There is a likelihood of disagreements between the manufacture and the tied shop
owners.

Differences/Distinction between a tied shop and single shop

 Single shop Tied shop
-Owner is free to stock whatever -Dealership can be withdrawn if
he/she operators
Wishes stock competing products
-Owned by individual or a group of -The owner is normally the
people manufacturer
-Sells products from a single
-Sells products from different manufacturer
Manufacturers
-Design of shop according to owners
wish -Shops usually have the same design
-Prices of goods determined by shop -Prices of goods set by the
owner manufacturer
or different manufactures
-Operators not trained by
manufacturers -Operators are usually trained by
manufacturer

Canteens: These are retail shops found in institutions such as schools, colleges,
hospitals and army barracks.
-They stock a variety of consumable goods such as sodas, bread, tea, groceries
and other things used by the people in that institution.
-They are run by the institutions management or by individuals on retail business
-Most of them operate without a license as they are considered to be part of the
institution. Their hours of operation are sometimes regulated by the institution

Advantages of canteens
-Some do not pay any rent, thus they incur low
overhead costs -They often require low capital to
start
-Some offer credit facilities to their customers
-They are situated at ideal location which is convenient for their customers
-They are assured of a market as they cater for people in particular institution.

Disadvantages of canteens
-The market is limited to people in a particular institution
-They do not open throughout/they open for limited hours e.g. after classes in
schools
-They close down when the targeted customers are not available e.g. during
school holidays. -They may suffer from bad debts
-They are difficult to expand due to insufficient funds
iv)Automatic vending machines; These are coin or card operated machines
used to sell commodities like drinks, stamps, and snacks e.t.c. Examples are
coffee shops, ATM‟s e.t.c

Features
-They dispense goods or services once a coin or a card is inserted and
instructions keyed in.
-They operate without an attendant
-They are usually placed at strategic places such as busy streets, office
buildings, shopping centres and hospitals.

Advantages of vending machines

0Commodities can be bought anytime because no attendant is required
1They save the owner the cost of employing a shop attendant
2They can be put strategically to boost sales e.g at institutions
3They are fast and accurate
4They are not affected by weather changes
5They provide goods and services on cash basis protecting the owner from the
burden of bad debts.
Disadvantages
23 They provide a limited range of products
24 Break-downs or stock-outs may discourage customers
25 Maintenance costs are high due to regular servicing, repairs and sometimes
vandalism
26 The owner may incur losses through fraud and use of inappropriate coins
and cards by consumers.
27 Customers are forced to carry coins and cards in order to obtain goods or
services
28 Their use is limited to customers who are familiar with how the machine works
29 They are mainly found in urban areas, thereby locking out the people in rural
areas.
23
24 Mobile shops
Mobile shops, like itinerant traders move from town to town or village to
village selling their goods.
-They have vehicles that they have converted into a shop from which customers
can buy their goods
-They visit different towns at regular intervals.

Advantages of small scale Retailers

Easy to raise capital to start
Retailers are in close contact with the consumers and may give credit to
credit worthy customers.
Are able to use free or cheap labour from family members
The risks involved in their businesses are small
The business is simple to start and manage
Few legal formalities required to start and run the business
The trader can easily change from one form of business to another i.e. the business
is flexible
Disadvantages of small-scale retailers
5888 Traders have limited access to loan facilities
5889 They may not afford to hire specialists or technical staff
5890 May suffer bad debts if they give credit to customers without proper
assessment
5891 Do not enjoy economies of scale
5892 Have a low turnover because of the little capital invested

LARGE SCALE RETAILERS

Large-scale retailers have the following
features/characteristics;
0 1.Require large amounts of capital to start and maintain
1 2.They operate from larger fixed premises
2 3.They operate mainly in urban areas
3 4.They have a large labour force
4 5.Buy goods in large quantities from wholesalers or directly from producers
and are therefore allowed large trade and quantity discounts and other
favorable credit facilities
5 6.Require the services of specialists such as salespersons and accountants
6 7.May occupy one large premise or several premises in the same town or in
different towns
8. They have large stocks and large sales volumes

TYPES OF LARGE SCALE RETAILERS

Supermarkets: A supermarkets
is a large-scale self-selection/self-service store that deals mainly with household
goods such as utensils, foodstuffs and clothes. It has the following features;

Features of supermarkets
0 Requires large capital to start
1 They stock a wide variety of goods
2 Offers self service facilities
3 Goods have price tags or bar codes
4 Prices of goods are fixed
5 No credit facilities are offered
6 Sell at comparatively low prices
7 Goods are systematically arranged for easy selection
8 Shoppers are provided with baskets or trolleys for convenience
9 There is minimal interaction between buyer and seller
10 There are employees who pack goods for customers at the pay points.

Advantages of supermarkets
0 Prices may be relatively low because they buy their goods in bulk and are
given discounts
1 Saves time as customers are able to get most goods they require under one
roof
2 Self-service saves the customers time
3 Few attendants are employed thereby reducing the monthly wage bill
4 Impulse buying leads to more sales, hence high profits
5 Bad debts are avoided because there are no credit sales.
6 The price tags on goods help customers to monitor their spending.
Disadvantages of supermarkets
0 Do not offer credit facilities to customers
1 Do not deliver goods to the customer’s premises
2 Are found mainly in urban areas
3 May incur losses due to pilferage of goods
4 Impulse buying may lead the customers to buying goods they may not need.
5 They are expensive to start and operate due to the large amount of capital
required
6 Prices are fixed and bargaining is not accepted, which discourages some
customers
7 Minimal personal interaction limits chances for making more sales
b) Hypermarkets
A hypermarket is a large shopping complex/centre comprising a variety of
businesses managed by different people all housed in one building
Examples; village market, sarit centre, Tuskeys-Kisumu, Nakumatt mega city-
Kisumu e.t.c
Features/Characteristics of Hypermarkets
0 Are served with good access roads
1 They have ample parking space
2 Many businesses in one building
3 Located in the outskirts of town
4 Offer a variety of goods and services
5 Occupy a large space.
Advantages of Hypermarkets
0 Offer ample and secure parking space to customers
1 Customers can do all their shopping in one building
2 They are usually open for long hours
3 They may provide credit facilities by accepting credit cards
4 There is less traffic congestion as hypermarkets are located away from urban
centres
5 Provide a wide variety of goods and services to customers under one roof.
6 They have fair prices that are customer friendly.

Disadvantages of Hypermarkets
0 Are only convenient to customers who have cars because they are
situated away from city centres
1 They serve limited number of people due to their location
2 They require large amount of capital to establish
3 They can easily exploit their customers since their prices are not controlled
4 Require large amount of space which are not available in central business
district (CBD)
5 They spend a lot of security to safeguard properties
0 Chain stores (Multiple shops)
1 Are large scale businesses with separate branches which are managed and
organized centrally. The branch managers are accountable to the head office.
Examples; African Retail Traders (ART), White Rose dry cleaners, Nakumatt,
Tuskys, Uchumi e.t.c
Characteristics/features of chain stores
 Are managed centrally from a head office
 Prices are standard for all their products in all their branches
 All branches deal in the same type of products
 Sales are decentralized i.e. the various shops situated in different places
act as selling points or branches
 Purchases of stock are centralized i.e. buy stock in bulk centrally
and distributed to the different branches
 Goods can be transferred from one shop to another where the need for them
is higher
 The shops operate under one name and are similar in appearance and interior
layout
Advantages of chain stores/multiple shops
 They enjoy large trade discounts since they buy their goods in bulk
centrally and is passed to consumers in form of low prices
 Common costs such as those of advertising are shared
 Goods that do not have a high demand in one branch can be transferred to
another where their demand is high
 They are easily identified by their colour and design
 They have low operational costs because of the centralized buying,
storage, advertising and accounting
 They serve a large number of customers because they are spread in many
towns and cities
 The similarity of the shops in appearance and services serves as an
advertising tool
 Risks such as losses are spread among many shops
 It is possible to pay for goods in one branch and pick them up in another.
Disadvantages of chain stores/multiple shops
 Large amount of capital is required to start and maintain the business
 They cater mainly for the urban areas as they are situated in those places
 Organizational problems may occur due to their large size
 No credit facilities are offered except those operating exclusively on
hire purchase schemes
 Response to market changes is slow due to the slow decision making
 Decision making is slow as the head office must be consulted
 Lack of personal touch with customers
 Absence of personal touch between employer and employee may reduce
incentives for hard work among staff
 People tend to shy away from buying similar products such as clothes
and this may reduce sales.
d) Departmental stores
This is a group of single shops operating under one roof with a centralized
management Each shop/department specializes in a particular line of
products and is headed by its own department manager.
Characteristics of departmental stores
 Each department has its own manager
 Each department sells only one line of products
 All departmental managers are answerable to a general manger
 They offer a wide variety of goods at relatively low prices
 They sell goods strictly on cash basis
 They are usually in town centres
 Goods are not transferable from one department to another as each has its
own variety of goods.
Advantages of departmental stores
 Customers can buy/access a wide variety of goods at fair prices under one
roof.
 They can afford to hire trained qualified experienced staff who provide
quality services
 They buy goods in large trade discounts. This enables them to sell at low
prices.
 Each department is able to make independent and quick decisions
that affect its operations.
 The independence of departments ensures that the weakness of one
department does not affect each other.
 Savings can be made on some activities such as product promotion by
centralizing them.

Disadvantages of departmental stores

 A large amount of capital is required to start and maintain the stores

 They require a large number of customers to operate profitably
 It is difficult to give personal attention to customers
 They cater mainly for the urban communities in which they are located
 They strictly sell their goods on cash basis
 Operational costs are high due to the wide variety of services offered
 Their large size could encourage theft and pilferage of goods
 The independence of departments can make central control difficult.
e) Mail order stores
This is a type of retail business where business is carried out through the post
office, telephone or email
-Ordering of the goods is done through the post office telephone or email and
delivering of goods is done by post or courier
-There is no personal contact between the seller and the buyer and buyers get
information from advertisements.
-Goods are dispatched on the basis of cash with order (CWD) or cash on delivery
(COD).

Characteristics/features of Mail order stores

-They sell the goods through the post office
-They operate on cash with order (CWO) or cash on delivery
(COD) terms
-Heavy advertisement are involved
-Customers do not visit the selling premises.
-There is no personal contact between the buyer
and the seller
-All transactions are done through the post office
-They deal with goods that are less bulky, have high value, and are durable and
not too fragile
-May have large warehouses

Advantages of Mail order stores

0 They reach customers who are far for away from the shopping centres
1 Do not require the services of sales personnel or shop attendants for skilled
labour since selling is routine
2 Total control of distribution is possible
3 Payments is made with order or delivery so there is little chance of bad debts
4 Eliminates the loss associated with shop space, thus saving on rent
5 Supply of goods is based on order thus a trader requires little working capital
6 The method eliminates trips to congested stores and lengthy waits queues
7 Do not require large storage space for goods.

0 Advertising and postage costs may increases the price of goods

1 There is lack of personal contact between the seller and the buyer
2 There is limited variety of goods on offer
3 Customers do not have the opportunity of inspecting goods before buying
 13

0 There are no credit facilities

1 The method is only suitable for those who can read and write
2 Should there be a problem with the post office.e.g industrial action like
strikes, the business may be affected
3 Difficult to operate in places where post office services are poor or unavailable
4 Chances of being defrauded are high.

FUNCTIONS OF RETAILERS
These can be discussed as services rendered to consumers, wholesalers and
producers

0 Offers credit facilities: Retailers are in close contact with the consumers
and some may give them credit facilities
1 After-sales services: Retailers who sell technical goods e.g. cars,
electronics e.t.c may offer after sale services to consumers e.g. transport,
installation repair e.t.c
2 Provision of variety of goods: Retailers stock a wide variety of goods
from different wholesalers and manufactures enabling the consumers to
have a wide choice.
3 Advising consumers: Retailers may offer advice to consumers on
choice and use of products
4 Availing needed goods: Retailers make goods available to consumers at
the right time and place
5 Breaking bulk: Retailers sell goods to consumers in convenient quantities
6 Accumulating bulk
7 Stabilizing prices: By ensuring that goods are continuously available to
consumers

0 Retailers store goods and relieve the wholesalers the burden of storing
goods and the storage costs
1 They relieve the wholesalers the burden of transportation
2 Retailers advice wholesalers on market trends(on consumers demand)and
give valuable information
3 They help in distribution of goods to the consumers
4 They help in breaking bulk on behalf of the wholesaler
5 They finance wholesalers to continue with their operations through paying
for the goods
6 They relieve the wholesaler of some risks that arise from the storage of
goods such as theft, fire and accidents.

0 Through wholesalers retailers provide very vital information to

manufactures about market demand
1 They advertise goods on behalf of producers
2 They sell and market goods to consumers. This relieves the manufactures
the task and risk of retailing
3 They store goods on behalf of the producers
4 They break bulk on behalf of producers to consumers
5 They finance producers by buying and paying cash

WHOLESALE TRADE
Wholesaling involves selling goods in large quantities to traders for resale. A
wholesaler is a trader who buys goods in bulk from producers/manufactures
for resale to retailers at a profit. -There are wholesalers who carry out retailing
but that do not make them retailers.
Classification of wholesalers/Types of wholesalers
Wholesalers may be classified depending on a number of factors. These factors
include;
0 According to the range of goods they handle
1 According to the geographical area in which they operate
2 According to their method of operation.
i) According to the range of goods they handle
Under this classification, wholesalers may be any of the following;
0 General merchandise wholesalers
1 General line wholesalers
2 Specialized wholesalers
0 General merchandise
wholesalers The word
merchandise means goods.
-The general merchandise wholesalers stock and sell a wide variety of goods e.g.
hardware, clothes, cosmetics and foodstuffs. The retailers who buy from these
wholesalers are thus able to get a wide variety of goods for resale.
-They are also called general wholesalers or full-line wholesalers
1 General line wholesalers
-These are wholesalers who deal in a wide variety of goods within the same line
e.g. textbooks, duplicating papers and other types of stationary.
c) Specialized wholesalers
-These are wholesalers who deal in a particular good from a given line e.g. in the
line of grains, they may specialize in maize only.
ii)According to the geographical area in which they operate.
Under this category wholesalers may be;
0 Nationwide wholesalers
1 Regional wholesalers.
a) Nationwide wholesalers:
These are wholesalers who supply goods to traders in all parts of the country.
-They establish warehouses or depots in different areas from Kenya
National Trading Corporation (KNTC)
0 Regional Wholesalers
These are wholesalers who supply goods to certain parts of the country only.
They may cover a county, District, division e.t.c
0 According to their method of
operation Under this classification,
wholesalers can be:
0 Cash and carry wholesalers
1 Mobile wholesalers
2 Rack jobbers
0 Cash and carry wholesalers:These wholesalers sell goods on cash and self-
service basis
like supermarkets
-They neither offer transport nor credit facilities to their customers.
0 Mobile wholesalers/Track distributors:These are wholesalers who use
vehicles to move from place to place supplying goods to retailers e.g. soda
distributors, bread distributors, beer distributors e.t.c.
1 Rack jobbers
These wholesalers specialize in selling certain/particular products to
other specialized wholesalers. They buy goods from producers or from
other countries for reselling.

Prepared By Mr. Peter Ochieng Otieno

[email protected] department kisumu national
polytechnic © 2017
 15

E.g. some wholesalers buy horticultural products from producers and sell to other
wholesalers in urban areas
-Rack jobbers usually stock their goods in shelves or racks from which
customers select the goods to buy. Customers may be allowed to pay for the
goods after they have sold them.
d) Drop shippers
These are wholesalers who make orders for goods from manufactures/producers
but do not take them from the producers premises. They then look for the buyers
for the goods and supply the goods directly from the producers
Alternate classification of wholesalers
An alternative classification of wholesalers is given below:
0 Those who buy goods store them in warehouses and sell them to traders
without having added anything to them.
1 Wholesalers who act as wholesaler‟s agents or brokers. These are
middlemen who are paid a commission for their work e.g. commission
agents
2 Those who after buying the goods and storing them prepare them for
sale. They break bulk, pack, brand,sort,grade and blend the goods
These terms are explained as below:
0 Breaking bulk-Reducing a commodity into smaller quantities for the
convenience of the buyer e.g. buying sugar from the producer in sacks and
selling it in packets.
1 Packing-Putting goods in packets and boxes ready for sale.
2 Branding-Giving a product a name by which it will be sold
3 Sorting-Selecting goods to desired sizes, weight, colour and qualities
4 Grading-Putting goods in groups of similar qualities to make it easier to price
them
5 Blending-It involves mixing different grades of a product to achieve qualities
like taste and colour.

Functions of a wholesaler
These can be discussed as services rendered to producers, retailers and to
consumers.
Services of wholesalers to the producers
0 They relieve the producers the problem of distribution by buying goods
from them and selling to retailers
1 They relieve the producers of some risks they would experience e.g.
damage,theft,fall in demand e.t.c
2 Save the producers from the problem of storage by buying goods and
keeping in their warehouses
3 They prepare goods for sale on behalf of the producers
4 They get feedback from consumers on behalf of producers
5 They promote products through advertising, displays,trade fairs and
exhibitions
6 They finance producers by buying goods from them and paying in cash.

0 They stock a wide variety of goods in large quantities relieving the retailer
from buying from different producers
1 They avail goods at places convenient to retailers
2 They break bulk for the benefit of retailers
3 They offer transport facilities to retailers
4 They offer advisory services to retailers regarding market trends
5 They offer credit facilities to retailers
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 16

0 They engage in product promotion on behalf of retailers

1 They sort, blend, pack and brand goods saving retailers from having to do it.

0 They ensure a steady supply of goods to retailers hence consumers are

not faced with shortages
1 They ensure a stable supply of goods hence there will be stability in market
prices
2 They enable consumers to enjoy a wide variety of goods
3 They break the bulk of goods thus enabling the consumer through the
retailer to get the goods in convenient quantities
4 They prepare goods for sale e.g. branding, blending and packaging
5 Pass information to consumers through retailers about the goods e.g. new
products, new prices and their use.

DOCUMENTS USED IN HOME TRADE

A business document is a written record which gives evidence to a stage in the
transfer of goods or provision of services from one party or it is written record
which gives evidence that trader or a business transaction has taken place.
A business transaction is a deal between two or more people involving
exchange of goods and services in terms of money.
Business transaction may take place on cash basis; in which case goods are paid
for before or on delivery or a short while after delivery
Business transaction may also take place on credit basis; which means payment
is made after a specified period from the date of delivery of the goods or the
provision of the services
There are various business documents that are used in various stages of business
transactions as discussed below;
a) Documents used at the inquiry stage
This is the first stage in transaction. An inquiry is a request by a
prospective buyer for information on available goods and services. It is
aimed at establishing the following;
0 Whether the goods or services required are available for sale
1 The quality or nature of the products available
2 The prices at which the goods or services are being sold
3 The terms of sale in respect to payment and delivery of goods or services
Some of the documents used at this stage include;
0 Letter of inquiry;
This is a letter written by a potential buyer to the seller to find out the goods and
services offered by the seller.
A letter of inquiry can be general or specific. A specific letter of inquiry seeks
for information about a particular product.
Reply to an inquiry
The seller may reply to the letter of inquiry by sending any of the following
documents;
-Price list -A catalogue -Quotation -A tender i) A price
list

This is a list of items sold by the trader together with their prices. The information
contained in a price list is usually brief and not illustrated and may include;
-Name and address of the seller -List of the goods and services
-The recommended unit prices of the products -Any
discounts offered Price list show the prices of the commodities
at that time.
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 17

0 A catalogue; A catalogue is a basket which briefly describes the goods a

seller stocks. It is normally sent by the seller to the buyer when the buyer sends a
general letter of inquiry. It usually carries illustrations on the goods stocked, and
could be in the form of attractive and colorful pictures
The content of a catalogue includes the following;
 Name and address of the seller
 Details of the products to be sold; inform of pictures and
illustrations  The prices of the products
 After-sales services offered by the seller
 Packaging and posting expenses to be
incurred  Delivery services to be used
 Terms of sale
-Catalogues carry more information than the price list and they are more expensive
to print.
1 Quotation; This is a document sent by a seller to a buyer in response to a
specific letter of inquiry. It specifies the conditions and terms under which
the seller is willing to supply the specified goods and services to the buyer.

-Name and address of seller -Name and address of the buyer

-Description of goods to be supplied -Prices of the
commodities -Terms of sale i.e. discounts, time of supply,
delivery -Total of the goods to be supplied
Quotations are normally in form of letters, but many large-scale businesses
have pre-printed quotations forms which they readily send to the potential
customers.
0 A Tender
This is a document of offer to sell sent by a seller to a buyer in response to an
advertised request
Tenders contain the following;
-Date when the tender advertisement was made -Mode of payment
-Date of making document -Discounts given
-Name and address of prospective seller called the tenderer
-The prices at which the goods can be provided
-Period of delivery -Mode of delivery
-Tenders are delivered in sealed envelopes which are opened by the buyer on a
specified date The winning tender is usually awarded on the of the lowest
quoted price although the buyer is not obliged to accept this especially if quality
is likely to be low Tenders are not binding unless accepted by the buyer.
b) Documents used at the order stage
After receiving replies to inquiry in form of price list, catalogue or Quotation, a
prospective buyer will study the terms and conditions stated in them, and then may
decide to buy products or not.
0 An Order
If a prospective buyer decides to purchase an item(s), he or she then places an
order
An order is a document sent by a potential buyer to a seller requesting to be
provided with specified products under specified terms and conditions
-An order issued for goods is called a local purchase order (LPO)
An order issued for services is called a local service order (LSO)
Ways of making an order
0 Filling an order form. This is a pre-printed document that is used for making
orders
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 18

0 Writing an order letter

1 Sending an e-mail, faxing or sending a short text message
2 Giving a verbal order. Verbal orders have the disadvantage in that
they can be misunderstood and there would be no record of items
ordered
-Where written orders are made, the potential buyer keeps a copy of the order for
use in verifying the goods ordered when they are delivered.
-A written order may contain the following;
0 Name and address of the buyer
1 Name and address of the seller
2 The number of the order
3 Quantities ordered and total amount to be paid
4 Description of the goods ordered
5 Price per item
6 Special instructions on such matters as packaging and delivery
0 Acknowledgement note
On receiving the order, the seller sends the buyer an acknowledgement note
An acknowledgement note is a document sent by the seller to the prospective
buyer to inform him/her that the order has been received and it is being acted
upon.
After sending the acknowledgement note, the seller has to decide whether to
extend credit to the buyer or not. At this stage, the seller has the following
options;
0 If the seller is convinced that the buyer is credit worthy, arrangements are
made to deliver the ordered goods or services to the buyer.
1 If the seller is not sure of credit worthiness of the buyer, a credit status
inquiry can be issued to the buyer‟s bankers or to other suppliers who
deal with the buyer to ascertain the credit worthiness.
2 If the buyer is not credit worthy then a polite note or a pro forma invoice
can be sent to him/her

This is a document sent by the seller to the buyer requesting the buyer to make
payment for goods or services before they are delivered. It indicates that the
seller is not willing to grant the buyer credit
Functions of a proforma invoice
0 A polite way of asking for payment before the goods are delivered
1 Sent when the seller does not want to give credit
2 Used by importers to get customers clearance before goods are delivered
3 Issued to an agent who sells goods on behalf of the seller
4 Show what the buyer would have to pay if the order is approved
5 Can be used to serve as a quotation

0 If the seller does not want to give credit

1 If the seller wants to sell goods through an agent
2 If the seller wants to get clearance for imported goods
3 If the seller wants it to function as a quotation
4 If the seller wants to inform the buyer what he/she pay if the order is approved
e.t.c
Documents used at the Delivery stage

Prepared By Mr. Peter Ochieng Otieno

[email protected] department kisumu national
polytechnic © 2017
 19

After the seller has accepted the order sent an acknowledgement note and where
necessary the pro-forma invoice, the seller then prepares the goods for delivery to
the buyer. This can be done in the following ways;
0 The seller can ask the buyer to collect the goods
1 The seller can deliver the goods to the buyer using his/her own means of
transport
2 The goods can be delivered to the buyer through public transport
3 The services(s) can be rendered to the buyer at the sellers or the buyer‟s
premises or at any convenient place.

0 Packing note; Before delivery goods are packed for dispatch. This is a
document prepared by the seller showing the goods contained/packed in
every container, box or carton being delivered to the buyer
-A copy of the packing note is packed with the goods to make/help the buyer have
a spot check.
The contents of a packing note include;
-Description of goods packed
-Quantities of goods packed
-The means of delivery
NOTE: A packing not does not contain prices of goods. This ensures that those
people involved in checking and transporting goods do not know the value of
goods. This is done as a precaution against theft.
0 Advice note; This is a document sent by the seller to the buyer to inform the
buyer that
the ordered goods have been dispatched. It is usually sent through the fastest
means
possible.
-It contains the following;
-The means of delivery -A description of the goods
-The quantity dispatched -Date
-Name and address of buyer and seller
Functions of an advice note
0 Informing the buyer that the goods are on the way so that in case of any delay
in delivery, the buyer can make inquiries
1 Alerting the buyer so that necessary arrangements can be made for payments
when the goods arrive
2 Can serve as an acknowledgement note, where one is not sent/
0 Delivery note; This is a document sent by the seller to the buyer to
accompany the goods being delivered.
-A delivery note is always made in triplicate (3), one copy remains with the seller
and two sent to the buyer.
-When the goods reach the buyer, he/she confirms that the goods are the ones
ordered for and that they are in the right condition by comparing the delivery note,
the order and the goods. If the buyer is satisfied with the goods, he/she signs the
two copies, retains the original and send the copy back to the seller. This serves as
evidence that the goods have been received in the right condition and in the right
quantities.
-Some businesses keep delivery books in which the buyer signs to indicate that
goods have been received in good condition. A delivery book is used by the seller
if he/she delivers goods by himself/herself as an alternative to a delivery note
The content of a delivery note includes the following;
0 Name and address of the seller
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 20

0 Name and address of the buyer

1 Date of delivery
2 Delivery note number
3 Description of the goods delivered
4 Quantities of the goods delivered
5 Space for the buyer to sign and comment on the condition of the goods
received.
0 Consignment note
This is a document prepared by a transporter to show that he/she has been
hired to deliver specified goods to a particular buyer. This document is used
when goods are delivered to the buyer by public means of transport e.g. by
trains.
-The seller is the consignor, the buyer is the consignee and the goods the
consignment
-The transporting company prepares the consignment note and gives the seller to
complete and sign. The seller then returns the note to the transporter (carrier)
who takes it together with the goods to the buyer.
-On receiving the goods, the buyer signs the consignment note as evidence that
the goods were actually transported.
The content of a consignment note includes the following;
0 Details of the goods to the transported
1 Name address of seller (consignor)
2 Name and address of buyer (consignee)
3 Terms of carriage and conditions of transporting the goods
4 The transportation cost
5 Handling information
6 Destination of goods

0 Goods Received note; This is a document sent by the buyer to the seller to
inform him/her that goods sent have been received. It usually prepared in
duplicate, the original is sent to the seller and the copy retained by the
buyer.

0 Date of the document

1 Name and address of the buyer
2 Name and address of the seller
3 Corresponding purchase order
4 Details of goods received
5 Date the goods were received.
0 Returned goods note/Damaged goods note; If goods are damaged on
the way, the buyer may return them to the seller. The buyer may also
return goods for other reasons e.g.
0 Wrong type of goods
1 Excess goods
2 Wrong quality goods
-When the goods are returned, the buyer informs the seller of the return by
sending a goods returned note.
-A goods returned note is a document sent by a buyer to a seller to inform
him/her that certain goods are being returned to the seller.

Prepared By Mr. Peter Ochieng Otieno

[email protected] department kisumu national
polytechnic © 2017
 21

-Where the goods are returned because of damage, the note may be referred to as
the damaged goods note.
The contents of the goods returned note include;
0 Details of goods that have been returned to the seller
1 Date goods are returned
2 The number of (GRN)
3 Order number
4 Delivery number
5 Name and address of both buyer and seller
-When the seller receives the note together with the goods, he issues
a credit note d) Documents used at the invoicing stage
This stage involves the seller requesting or demanding for payment from the buyer
for the goods or services delivered.
Some of the documents used at this stage include:
0 Invoice
This is a document sent to the buyer by the seller to demand for payment for
goods delivered or services rendered.
There are two types of invoices namely:
0 Cash invoice-This is sent when payment is expected immediately after
delivery thus acting as a cash sale receipt
1 A credit invoice-This is sent when a buyer is allowed to pay at a later date.
Functions of an invoice
0 It shows the details of goods sold i.e. quantity delivered, unit price, total
value of the goods and terms and conditions of sale.
1 It is a request to the buyer to make payment
2 It serves as an evidence that the buyer owes the seller a certain amount of
money
3 It is used as a source document in recording the transaction in the book of
accounts.
The contents of an invoice include the following:
 Invoice number
 Name and address of the
seller  Name and address of
the buyer  Date document is
prepared
 Details of goods repaired
 Unit prices of goods
delivered  Total value of
goods
 Discounts offered
 E and O.E printed at the bottom
The letters E and O.E (Errors and Omissions Excepted) means the seller
reserves the right to correct any errors and omissions made in the invoice.
-On receiving the invoice, the buyer verifies the contents using the local purchase
order and the delivery note. If the invoice is in order, the buyer makes
arrangements to pay the amount stated. Businesses which offer services issue a
document called a bill, which serves the purpose of an invoice.

Prepared By Mr. Peter Ochieng Otieno

[email protected] department kisumu national polytechnic ©
2017
 22
Differences Between the invoice and pro-forma invoice
The invoice The pro-forma invoice
It is issued after goods and services 1) It is issued before goods and services
1) have have
been delivered been delivered
It shows the total value of the goods 2)Shows the total value of goods and
2) or services
services on credit to be bought
It is used to demand payment for 3)It is used to demand for payment in
3) products advance
sold on credit for products to be bought
Used as a basis for making payment 4)Used as a basis for preparing payment
4) for for
products already bought products not yet bought
Serves as a notice of payment for 5) Serves as a Quotation for products to
5) products be
bought on credit bought.
b) Credit note
This is a document sent by the seller to the buyer (credit buyer) to correct an
overcharge. It is used to inform the buyer that the amount payable by him/her
has been reduced An overcharge is an excess amount charged beyond the right
price.
Causes of overcharge may include;
0 Arithmetical errors like wrong addition
1 Price overcharges
2 Inclusion of wrong or unordered items in the invoice
3 Failure to deduct the allowable discounts
4 Return of goods (damaged goods)
5 Failure to note the return by the buyer of packing cases or containers used to
deliver goods to him/her
6 Use of wrong price list.
-The purpose of the credit note is to reduce the total invoice amount by the
amount of the overcharge.
-A credit note is usually printed in red to distinguish it from other documents.
-Contents of a credit note include;
0 Name and address of the seller and the buyer
1 Credit note number
2 Date document is prepared
3 Description and value of goods returned by buyer (in case that was done)
4 Total overcharge
Reasons why a seller would send a credit note to a buyer/circumstances
under which a credit note is sent to a buyer.
-When there is an overcharge in an invoice
-When the original invoice had indicated items that were not supplied
-When the buyer returns empty cases/crates that had been charged in
the invoice. -When the buyer returns some goods to the seller
-If the buyer was entitled to a discount which was not given or taken care of in the
invoice.
0 Debit note
This is a document sent by the seller to the buyer to correct an undercharge
on the original invoice. It is used to inform the buyer that the amount
payable by him has been increased. -A debit note acts as an additional
invoice.
-An undercharge arises when amount charged on products is less than their right
price.
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 23

Causes of undercharge include:

0 Price undercharges on items
1 Arithmetic errors/mistaken in calculation
2 Omission of items in the invoice
3 Retention of crates and containers that were not involved by the buyer
4 Deductions of more discount than what was give/intended
Circumstances under which a debit note will be sent to the buyer
1 When there is an undercharge in the invoice
2 If the buyer had been given a discount that was not due to him
3 If some items had been omitted in the original invoice
4 If the buyer decides to retain some empty containers or crates
Differences Between a debit note and a credit note
DEBIT NOTE CREDIT NOTE
Issued to correct an undercharge on
1) the 1) Issued to correct an overcharge on the
invoice. invoive.
2) Written on blue or black. 2)Usually written in red
3) Issued when containers have been
3) Issued when containers have not been returned.
returned

Documents used at the payment stage

This is the final stage of a credit business transaction. It takes place after the
invoice has been received and ascertained to be correct or where necessary,
corrections made. The documents used at the payment stage include;
0 Receipt
This is a document issued to the buyer by the seller as proof that payment
has been made. -Payment can be done in cash, cheque, other forms of
money or in kind
-The receipt also serves as a source document for making entries in books
of accounts. Contents of the receipt include;
0 Date of payment
1 Name of the person making payment
2 Name of person/institution receiving payment
3 Amount paid in words and figures
4 Means of payment
5 Receipt number
6 Signature of person issuing the receipt.
-The issuance of a receipt by the seller to the buyer after receiving payment marks
the end of the credit transaction between the seller and the buyer (where payment
has been done in full) -A receipt serves the same purpose as the cash sale slip
0 Statement of Account
This is a document prepared by the seller and sent to the buyer, giving a summary
of all the dealings/transactions between them during a particular period of time,
usually a month. It has the following details;
0 Date when it was prepared
1 Name and address of the seller
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 24

0 Name and address of the buyer

1 Account number
2 Date column-where the date of each transaction is recorded
3 Particulars (Details)column-where the explanation of each transaction is shown
4 Money column
-Debit column-increases in the amounts payable due to credit sales or under
charge correction. -Credit column-Decrease in the amounts payable due to
overcharges corrected or payments recorded.
-Balance column-Amount owing after each transaction (Balance outstanding)
0 Any discounts allowed to the buyer
1 Date when the buyer is expected to clear the balance
2 Terms of credit e.t.c.
-The statement of account enables the buyer to ascertain the correctness of the
transactions which have taken place with the seller over the stated period.
iii)IOU
An IOU (I owe you) is a document written by the buyer and sent to the seller to
acknowledge a debt.
-It does not specify date when settlement will be made.
-It acts as evidence that a debt exists.
Summary of documents used in home trade
Document sent by buyer Document sent by seller
-Letter of inquiry -Price list
-Order -Catalogue
-Goods received note -Quotation
-Goods returned note -Tender
-IOU -Acknowledgement
-Advice note
-Packaging note
-Delivery note
-Consignment note
-Invoice
-Pro forma invoice
-Credit note
-Debit note
-Receipt
-Statement of account
MEANS OF PAYMENTS
These are the methods or ways the buyer may use to settle debts arising from a
business transaction. These are various means of payments that can be used.
These means of payments can be put into the following groups;
0 Cash
1 Means of payment provided by the post office
2 Means of payments provided by the commercial banks
3 Means of payments which arise from private arrangements between sellers
and buyers
4 Other means of payment.
0 Cash
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 25

This refers to the use of notes and coins to make payments. Currency notes and
coins are issued by the central Bank of Kenya and are therefore legal tender
-Legal tender means everyone is obliged by law to accept them as a means of
payment i.e. no one can refuse to accept them as they are backed by the
law.Notes and coins are available in different denominations as follows;
Coins; 5cents, 50cents, sh.1, sh.5, sh.10 and sh.40
Notes; sh.10.sh.20,sh.50,sh.100, sh.200,sh.500 and sh.1000.
-Coins are suitable for settling small debts and are acceptable as legal tender
up to a certain maximum e.g. 50cents coins the maximum is sh20 and sh.1 the
maximum is ksh.100.
Advantages of cash as a means of payment:
0 It is the only means of payment which is a legal tender
1 Convenient for settlement of small debts
2 Convenient to people with or without bank accounts
3 Cash is readily usable
Disadvantages of cash as a means of payment
0 Not convenient to carry around
1 Cash can be lost or stolen easily as it is readily usable
2 Payment is difficult to prove unless a receipt is issued
Circumstances under which cash payment is appropriate
0 Where the amounts involved are small
1 Where the payee (receiver) does not accept other means of payment
2 Where cash is the only means available
3 Where the payee requires cash(money) urgently
4 Where there is need to avoid expenses associated with other means of
payments
0 Means of payments provided by the banks
Commercial banks are financial institutions that accept deposits to and
withdrawals from them. They also lend money to customers. Examples of
commercial banks include: Commercial bank of Kenya, National bank of
Kenya, Barclays bank, and Co-operative bank e.t.c
-There are various means of payments provided by the commercial banks. They
are:
0 Cheques
1 Bank drafts/bankers cheques
2 Credit transfers
3 Standing orders
4 Travellers cheques
5 Telegraphic transfers
6 Debit cards
7 Electronic fund Transfer(E.F.T)
a) Cheques
This is a written order by an account holder with the bank (drawer) to the bank
(drawee) to pay on demand a specified amount of money to the named person
(payee) or the bearer
Parties to a cheque
0 Drawer-This is the person or institution who writes and issues the
cheque.He is usually a current account holder with the bank
1 Payee-The person or institution to be paid
2 Drawee-The bank(where the drawer has an account)

0 Date when it is issued

Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 26

0 Name of the drawer

1 The name of the payee, except in bearer cheques
2 The name of the drawee(bank)and branch from where it is issued
3 Amount to be paid in figures and in words
4 The account number of the drawer
5 The signature of the drawer
6 The cheque number and bank code
7 The appropriate revenue stamps

0 Open cheques
1 Crossed cheques
2 Bearer cheques
3 Order cheques
0 Open cheques
This is acheque that can be presented for payment over the counter. You present
it and cash is paid to you.
0 Crossed cheques
This is acheque that bears two parallel lines on the face. This means the cheque
cannot be cashed over the counter. The cheque is deposited in an account (payee‟s
account)
The payee then withdraws the money from his/her account
A crossed cheque can be opened by the drawer signing twice on its face.
-A crossing can be general or special
-General crossing-general crossings only contains the two parallel lines. This
implies that the cheque will be paid through any bank in which it is deposited.
-Special crossings-Has other instructions included in the crossing i.e;
0 Not negotiable-Means the cheque can be transferred by the payee to a third
party, but he third cannot transfer the cheque (only the original payee can
transfer the cheque)
1 Account payee only-Means the cheque should be deposited in the account
of the payee.
2 Not transferable-Means there is no negotiation or transfer of the cheque
1 Bearer cheques-This cheque does not have the name of the payee
written on it. The person presenting it to the bank is the one who is
paid.
2 Order cheque-The cheque bears the name of the payee. The bank pays
this particular payee the amount stated in the cheque after proper
identification

A cheque is dishonored if the bank refuses to pay and returns the cheque to the
drawer.
-A cheque can be dishonored due to the following reasons:
0 Insufficient funds in the account
 1 If the signature on the cheque differs from the drawers specimen signature in
the bank.
2 If the cheque is stalc i.e. presented for payment after six months from the date
of issue.
3 If the cheque is post dated-meaning the cheque is presented for payment earlier
than the date on the cheque
4 If the amount in figures is different from the amount in words
5 If there are alterations on the cheque which are not countersigned by the drawer
6 If the cheque is torn, dirty or defauld making it illegible
7 If the account holder(drawer) is dead and the bank is aware of the fact
8 If the drawer instructs the bank not to pay the particular cheque

Prepared By Mr. Peter Ochieng Otieno

[email protected] department kisumu national
polytechnic © 2017
 27

0 If the cheque contains errors which need to be corrected

1 If the drawer becomes bankrupt or insane
2 If the drawer has closed his/her account.

0 They are more secure than notes and coins because if they are lost or
stolen, they can be traced to the person who cashed them.
1 They are convenient to carry and can be used to pay large sum of money
which would be otherwise inconvenient to pay using cash
2 They can be transferred to a third party to make payment/cheques are
negotiable
3 Payment can be made by cheque without the need to travel to make payment
4 They provide a record of payment because of the counterfaits.The
counterfaits acts as proof that payment has been made.
5 Under special circumstances, they can be cashed or discounted before
maturity.

0 Cheques can be dishonored

1 Requires the payee to go to the bank and in some cases to have an account
2 The drawer pays some charges e.g. charges for the cheque book
3 Can only be issued by an account holder/the drawer must have an account
4 They are not readily acceptable by everybody
5 They do not provide immediate cash.
Circumstances under which a cheque is appropriate as a means of payment
0 Where the amount of money involved is large
1 Where the policy of the business demands so
2 Where a cheque is the only means available
3 Where there is need to avoid other risks associated with other means
of payments b) Bank drafts/Banker‟s cheques
-This is a cheque drawn on a bank i.e. a cheque drawn by one bank to another
requesting the latter bank to pay a named person or institution a specified sum
of money and charge it to the drawing bank
-It can also be drawn by a bank on the request of a customer. The customer fills in
an application form obtained from a bank and hands it over to the bank together
with the money she wants to transfer and a commission for the service.
-The bank then prepares the cheque and gives it to the applicant who can then
send it to the payee
-A bank draft has the drawing bank‟s guarantee for payment. It is therefore
more readily acceptable than personal cheques.
-It is suitable when urgency is desired in the payment as it is more readily
acceptable.
c) Credit transfer
This is a means of payment provided by commercial banks to their current
accounts holders who want to pay many people using one cheque/at the same time
-One cheque is drawn and is usually accompanied by a list of the people to be
paid, the amount to be paid to each person and the addresses of the bank
branches where the payment is to be made.
-The bank then ensures that a credit transfer is affected to the various bank
branches and each payee is paid
-A credit transfer is usually used by employers to pay salaries to their
staff members. d) Standing order
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 28

This is an instruction to a bank by an account holder to pay a named person or an

organization a fixed amount of money at regular intervals over a specified period
of time or until stopped
-It is a very useful means of payment for business people as it enables them to
regularly pay their recurrent bills e.g. water, insurance, electricity, loan payment,
hire purchase payment e.t.c
e) Traveler‟s cheques
This is a cheque drawn by one bank to another requesting the latter to pay a
specified sum of money to a named bearer, who usually would have bought that
cheque from issuing bank. The cheque holder pays the value of the cheque plus
the charges for the services to the issuing bank. -Travellers cheques are usually
issued in fixed denominations and are very convenient for travel purposes, hence
their name. They enable a person to travel without having to carry a lot of cash.
The cheques are also readily acceptable as a means of payment.
f) Telegraphic Transfers
This is a method /means of transferring money offered by commercial banks to
anybody who wants to send money to another
The sender is required to fill an application form and provide the following
information among
others:
-His/her name -The amount of money to be remitted
-Name of the payee -The bank where the money would be paid
The applicant is charged a commission and telegraph fee. The paying bank sends
a telegram to the payee who has to identify himself/herself before the payment is
made The method is fast and safe.
g) Debit cards
These are plastic cards issued by financial institutions e.g. banks that
enables a person to purchase goods and services from any business that
accepts them.
Debit cards are used to make payments from money held in ones accounts and
are therefore an alternative to cash payments. Examples are ATM cards.
h) Electronic Fund Transfer (E.F.T)
EFT is a method of transferring money from one account to another where
computers are used. The sender is required to fill an electronic fund transfer form
provided by the bank which instructs the bank to transfer money from his/her
account to a named account.
Information is then sent to the payee‟s bank electronically and the amount in
the account is increased accordingly. The method is very fast.
0 Means of payments provided by the post office
The post office provides means of payments that can be used to transfer money
from one person to another
The means of payments provided by the post office to facilitate payments includes,
0 Money orders
1 Posta pay
2 Postal orders
3 Postage stamps
4 Premium bonds
a) Money orders
A money order facilitates the transfer of money from one person to another
through the post office (and/or bank)
A money order is usually for a specified sum of money usually purchased with
cash from the post office

Prepared By Mr. Peter Ochieng Otieno

[email protected] department kisumu national
polytechnic © 2017
 29

A person wishing to send money using this method visits a post office and
completes an application form. Some of the details contained/given in the
form include:
0 The amount of money to be remitted
1 Name of the payee
2 The name of the post office where the money order will be cashed
3 Name and address of the sender
4 Whether the money order is to be ordinary or sent by telegraph
5 Whether the sender wishes to be informed if the money has been paid
6 Whether the money is to be paid through a bank account or at the post office
counter.
The application form, money to be remitted and commission for the service is
handed to the post office cleark who prepares the money order and gives it to the
sender who may post it or send it to the payee.
-Telegraphic money orders, the post office sends a telegram to the payee informing
him/her to go to the post office and claim the money.
-Before payment is made, the payee must;
0 Identify himself/herself by producing an ID card
1 Identify the person who sent the money.
-The sender of the money is left with a counterfoil which serves as evidence that
money was sent and it can be used to reclaim the money if it did not reach the
payee
-Money order may be open or crossed. A crossed money order bears two
parallel lines drawn diagonally on its face and must be deposited in the bank
account of the payee. It cannot be cashed over the counter at the post office.
-An open money order can be presented for payment at the post
office counter. Circumstances under which money order is
appropriate
0 Where it is the only means available
1 Where other means are not acceptable
2 Where there is need to avoid inconveniences or risks associated with other
means
0 Posta pay
This is an Electronic Fund Transfer (EFT) service offered by the postal corporation
of Kenya, for sending and receiving money instantly from various destinations
both locally and internationally. -The person sending money fills in a form called
„send form‟ giving the following details;
 Name, address and telephone number of
sender  Name, address and telephone
number of receiver  Pay city, town and
location of the receiver
 Signature of the
sender  Amount to be
sent
-The sender hands over the form, the amount of money to be sent and the
commission to the post office clerk for processing
-The transfer is done via the internet through a machine that gives a twelve-digit
number for the transaction called the „Transaction control number‟(TCN).The
sender then conveys this number, amount sent and pay location to the recipient and
instructions to the recipient to visit the named post office for payment. This
message is usually conveyed through the quickest means possible such as a
telephone call
-The sender is given a copy of the processed „send form‟ as proof that money has
been sent. The post office retains the original for record purposes.

Prepared By Mr. Peter Ochieng Otieno

[email protected] department kisumu national
polytechnic © 2017
 30

-When the receiver visits the post office, he/she will fill a „receiver form‟
giving the following details;
0 The transaction number(i.e. the twelve-digit number)
1 The expected amount
2 The name, address and telephone number of the sender
3 The city town or location of the sender
4 Signature of the receiver
The receiver then identifies himself or herself by producing an ID card or
passport before receiving the money.
-The recipient/payee is then given the money, a copy of the receive form as
proof of having received the money. The paying post office retains a copy as
proof of payment.
Advantages of using Posta pay as a means of payment
0 Accessibility-Posta pay outlets (post offices) are located countrywide to
eliminate movement over long distances to get money
1 Ease of use-Sending or receiving money is easy as one only needs to fill a
form which is processed immediately
2 Speed-the transfer of money is instant (fast)
3 Security-Confidentiality in the transmission of money is provided and money
is only paid to the person intended
4 Convenience-Posta pay services are offered for long hours during the day and
pay locations are conveniently located
5 Affordability-Posta pay services are relatively affordable as large amounts
can be sent at reasonable costs.
c) Postal orders
-Postal orders are sold by the post office for the purpose of remitting money
-They are available in fixed denominations of sh.5, 10.20,40,60,80,100 and 200
-On buying a postal order, the sender pays for both the face value of the
postal order and a commission charged for the service
-Postal orders just like money orders are issued with counterfoils that the sender
will keep as evidence of remittance in case the person to whom he/she remits the
money does not receive it. The sender writes the name of the payee on the postal
order as a safety measure.
Payment to the bearer can be made in any post office with postal order
facilities Postal orders may also be crossed or open (see crossed and
ordinary money orders)
Circumstances under which postal orders are appropriate
0 Where the amounts involved are small
1 Where it is the only means available
2 Where there is need to avoid inconveniences and risks associated with the
other means of payment.
Differences between postal orders and money orders
Postal orders Money orders
a) Can only be cashed at a specific post
a) It can be cashed at any post office office
b)Varies according to the needs of the
b) Are in fixed denominations remitter
Does not require any application form c)Requires the filling of an application
c) to form in
make a remittance making remittance
d) Can be cashed by the bearer d)Can only be cashed by the payee
Value can be increased by affixing
e) revenue e)Value cannot be increased by affixing
stamps revenue stamps
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 31

d) Postage stamps
Postage stamps may be used to pay small amounts of money. The person to whom
the stamps are sent can then use them for sending mail and/or to pay someone else.
e) Premium Bonds
Premium bonds are issued by the post office in denominations of sh.10 and
sh.20.They mature after a given period, after which one can cash them.
-Bearers can also enter into draws so as to win money.
-Premium bonds can be used to settle debts, but it is not a safe method
because they can be cashed by anybody i.e. by the bearer.
Circumstances under which postage stamps and premium bonds are used
0 Where the amounts involved are small
1 Where they are the only means available.
Means and payments which arise from private arrangements between the
sellers and the buyers
There are various business documents that originate from private agreements
between buyers and sellers. The buyer acknowledges the credit and accepts to pay
at specified future dates by signing some documents. These documents include;
0 I Owe you(IOU)
1 Bill of exchange
2 Promissory note.
a) Bill of Exchange
This is unconditional order, in writing, addressed by one person to another,
requiring the person to whom it is addressed by one person to another, requiring
the person to whom it is addressed to pay on demand, or at a stated future date, the
sum of money on the bill to the drawer, or a named person or to a bearer.
0 Order-is a command not a request
1 Unconditional-Without condition i.e. no use of such words as „if‟ or „whom‟
2 The bill must be in writing
3 Amount of money must be clearly stated
4 Payee must be named. He/she can be the drawer or someone else or the bearer
5 Date of payment must be stated or can be determined e.g. „Two months
from the date of today‟ or Three days after 31st January 2012‟
-A bill of exchange is prepared by a creditor to a debtor when a creditor wants to
be assured of payment by a debtor on a given future date or when asked to do so
by the creditor
-If the buyer/debtor signs the bill “accepted” then he/she cannot deny
responsibility for the debt since he/she has acknowledged responsibility for the
date.
Procedure for preparing a bill of exchange
A bill of exchange is written by a person (creditor) to his debtor to seek assurance
that the debtor would pay the debt.
Step 1.The creditor prepares the draft and sends to the debtor.
Step 2.The draft and after accepting the conditions laid therein, he/she signs on it
and write the words “accepted”. He/she then sends it back to the creditor. At this
point the draft becomes a bill of exchange.
Step 3.The creditor receives the bill and may:
i) Keep it until maturity when he would present it to the debtor(accepted) for
payment

Prepared By Mr. Peter Ochieng Otieno

[email protected] department kisumu national
polytechnic © 2017
 32

0 Discount it with a bank. This is presenting to a bank or any financial institution

and receiving cash against it before the maturity date. One is however
charged(discounting charge) for the service
1 Negotiate it-Using it to pay someone else apart from the payee.
Parties to a bill of Exchange
0 Drawer-This is the person who gives the debtor the written order to pay the
value of the bill of exchange(the creditor)
1 Drawee-This is the person to whom the order to pay is given (Debtor).He or
she accepts the bill.
2 Payee-This is the person to whom the payment is to be made. The payee may
be the drawer, or
Essentials of a bill of Exchange
0 It must be signed by the drawer(creditor)
1 It must be accepted by the drawee(debtor)
2 It must be accepted unconditionally
3 It must bear appropriate revenue stamps
NOTE: A bill of exchange becomes a means of payment when it is presented
(discounted) to the banks or negotiated.
Advantages of using a Bill of exchange
0 The holder may pass rights on the bill to another person
1 Date of payment is determined
2 Acceptance by the debtor makes it legally binding
3 The payee may receive money before due dates by discounting

0 It may be dishonoured on maturity

1 Cash may not be readily available as banks may be reluctant to cash bills
from debtors of doubtful financial backgrounds
2 It is an expensive form of credit as the creditor may lose part of the face value
of bill in form of discount
Circumstances under which a Bill of exchange is appropriate.
-When the creditor wants to be assured that the payment would be done
-Where the creditor wants money while the debtor is not able to raise it before
the end of the credit period
-Where the creditor wants to use the debt to pay another debt.
0 Promissory note; This is a document in which a debtor promised to
pay a creditor a specified sum of money at a specified time/date.
Features of a promissory note
0 There are two parties i.e. the drawer(debtor) and the payee(creditor)
1 There is a promise to pay
2 It is written by the debtor to the creditor
3 It does not require acceptance since it is signed by the person committing to pay
the money
4 The writer/maker is liable on the note as he/she is the debtor.
-After drawing and signing the promissory note, the debtor (borrower) sends
it to the seller. (Lender)
-The seller/lender may keep it until maturity and then present it for payment or
may discount it with the banks before maturity.
Similarities between a Bill of Exchange and a promissory note:
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 33

0 Both act as evidence of the acknowledgement of a debt

1 Both may be discounted or endorsed before maturity
2 Both are negotiable i.e. can be transferred from one person to another
3 Both are legally binding
4 Both allow for adequate time within which to organize for the payment of
the value of the bill or note.
Differences between a promissory note and a bill of exchange:
Promissory note Bill of Exchange
-Drawn and signed by the
-Drawn and signed by the debtor creditor
-It must be accepted by the
-It does not need to be accepted debtor
for it to be valid
-The drawer is the creditor and
-The drawer and drawee are one the
person drawee is the debtor
c) The IOU
-IOU is an abbreviation of „I owe you‟
-It is a written acknowledgement by a buyer of a debt arising from the purchase
of goods and services on credit. It is written and signed by the buyer and sent to
the seller
-If the seller accepts it, then the buyer can receive goods and services on credit.
Though the IOU does not usually indicate the specific date of payment, the buyer
acknowledges the debt and accepts responsibility to pay at a suitable future date
NOTE: The use of IOU is restricted to commercial transactions involving parties
who have dealt with each other for a long time; hence they know each other well.
0 Other means of payment
0 Credit cards
1 Mobile money transfer services e.g. M-pesa.
a) Credit cards(plastic money)
-These are plastic cards that enable a person to purchase goods or services on
credit from any business willing to accept the card
-They are both a means of payment and a term of
payment b) Mobile money transfer services e.g.
M-pesa
-This is a means of money transfer services provided by mobile phone service
providers to their customers (subscribers)
-It can only be used to transfer money between people subscribed to the same
mobile phone network e.g. from one safaricom subscriber to another safaricom
subscriber, Airtel to Airtel e.t.c -The sender must register for the money transfer
service and is issued with a PIN (personal identification number)
-When money is sent, both the sender and the receiver will receive a message
confirming the transfer.
-A person can send money anytime anywhere so long as he/she has value in
his/her m-pesa, pesa pap account.
 -Each mobile service provider has a range of value that can be transferred
using this method. -A small transaction fee is charges for the transfer i.e. for
sending and withdrawing
Benefits of mobile money transfer services
0 Confidentiality-The secret PIN protects the value in the customer‟s account
1 Ease of use-The service is easy to use as the agents assists to carry out
transaction
2 Speed-Money transfer is an instant service conveyed to the receiver via the
short message service(SMS)
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 34

0 Convenience-The service is convenient to both the sender and the receiver, as

they only need to go to the nearest agent(money can be sent/deposited or
received anywhere)
1 Accessibility-The agents e.g. m-pesa agents are located in most parts of
towns and also in rural areas. Money can hence be sent and received
anywhere and anytime.
2 Affordability-The service charges are very low for registered users and very
affordable for non registered users
3 Security-Relatively secure when the sender uses the correct phone number of
the receiver.
TERMS OF PAYMENTS
These are the various agreements/conditions agreed upon between sellers and
buyers regarding how debts arising from their transactions should be settled.
These conditions include;
-How payment is
expected -When
payment is expected
-What is included in the quoted price e.t.c.
Terms of payments are broadly categorized into two;
0 Cash payments
1 Deferred payments(credit payments)
-This classification depends on whether the agreement is to pay for the products
immediately or at a later date.
A. Cash Terms of payments
Cash terms of payment apply when a buyer is required to pay for goods or
services immediately before or after delivery. They include the following:
0 Spot cash-This is where payment is done at the point of purchase.
-Mainly used in retail businesses where customers are required to pay as they
get the goods or receive the service.
1 Cash on Delivery (C.O.D)
-This is where the buyer pays for the goods (or services) as soon as they are
delivered to his or her premises.
0 Cash with order (C.W.O)
-This is where the buyer is required to pay for the goods when making the order
for the goods or the services.
Circumstances under which C.O.D and C.W.O are appropriate
0 When the buyer is new to the seller
1 Where the buyer‟s credit worthiness is in doubt
2 Where the seller is operating mail order stores(C.W.O only)
3 Where C.W.O or C.O.D is the policy of the business
4 If the cost of collecting debts is considered high by the seller
5 When a seller is to make goods based on unique specification provided
by a particular buyer(C.W.O only)
6 Where the seller wants to avoid tying up business capital in debts.
0 Prompt cash; This is where payment should be made within a few days
(normally seven days) after delivery.
-Prompt cash period allows them to examine the goods and check the
invoice to certify its corrections
0 Deferred payments
This means that goods or service are not paid for in full on delivery. They are
instead paid in future in a lump sum or in several instalments.

Prepared By Mr. Peter Ochieng Otieno

[email protected] department kisumu national
polytechnic © 2017
 35

The period within which a buyer is supposed to pay the seller is referred to as
credit period and is expressed in terms of days.
-Terms of payments in credit transactions are usually agreed upon by the seller
and the buyer depending on;
0 Capital base/financial stability of the seller
1 The nature of the goods supplied
2 The relationship between the buyer and the seller
3 The credit worthiness of the buyer
-In determining the credit worthiness of a buyer, the seller will consider;
0 Character-The behavior of the buyer in terms of honesty, which determines
the probability of the buyer honoring his /her debt obligations
1 Capacity-The buyer‟s ability to pay as indicated by past business performance
records or the profitability and the value of his/her assets.
2 Capital-The financial position of the buyers business or how much the
buyer‟s business is worth.
3 Collateral-These are the properties of value pledged by the buyer as security for
the credit
4 Condition-The effect of the existing economic conditions on the buyer‟s ability
to pay his/her debts.
Forms of Deferred payments (credit payments)
a) Open trade credit/open credit
-Under these forms, goods and services are sold to the buyer who is expected to
pay for them at a future date or within a given period
-The buyer may also be required to pay for goods or services on installments.
-Discounts may be allowed to encourage the buyer to pay on time.
-The ownership of the goods passes to the buyer immediately after entering the
contract. The seller should however ensure the buyer will pay by:
0 Ascertaining the credit worthiness of the buyer
1 Asking the buyer to guarantee payment by signing some documents e.g. bill of
exchange
2 Asking the buyer to have someone else to guarantee the payment
3 Asking the buyer to pledge (mortgage) some of his/her property as security

0 Credit worthiness of the buyer

1 Repayment period
2 Amount of goods the customer wants
3 Availability of adequate stock
4 Honesty i.e. reliability of the customer
5 Frequency at which the customer buys from the seller
6 Seller‟s intention to attract and retain customers
NOTE: No interest is usually charged on open trade credit.
Examples of open trade credit
i) Simple credit(prompt cash/personal credit)
-Is a form of credit extended to a trader or a customer for a very short time,
usually not more than a week
-It is a common form of credit between retailers and their customers.
-It is also referred to as prompt cash because payment is made within
a short time. ii) Monthly credit

Prepared By Mr. Peter Ochieng Otieno

[email protected] department kisumu national
polytechnic © 2017
 36

-A form of credit extended when a seller allows the buyer to pay/settle his/her
debt after one month
-The buyer can continue taking goods from the seller up to the end of the month.
-It is a form of credit usually allowed by retailers to salaried workers for goods
such as food items and newspapers
iii) Budget Accounts
-Are usually operated by large scale retailers to approved
customers -The retailer keeps an account of the customer
in his/her books -To operate budget accounts;
0 A deposit is required
1 Regular payments are to be made
2 There is a maximum amount of credit to be allowed
3 The customer may be charged for any special services given by the seller called
“after sale
services”
iv)Trade credit
-This is credit given by a trader to another trader when goods are bought for selling
-Payments for the goods is made after selling the goods or within an agreed
period of time v) Credit card facilities
-Plastic money (credit cards) enables the holder to obtain goods and services
on credit form specific suppliers (people willing to accept the cards)
-They also enable the holders to obtain money from specific banks and other
specified financial institutions
-They are available to adults of approved credit worthiness
-Some credit cards can only be used locally while others like visa cards can be
used both locally and internationally.
-When a customer makes a purchase using the card, the seller electronically
verifies the validity of the card and whether the credit-card holder/customer has
sufficient credit to cover the purchase. If all is well, the credit card customer signs
a specific form that have been filled by the trader. Such forms are usually provided
by the card company to the trader. The trader and the card holder retain a copy
each and the other copies are sent either to the credit card company or to the
trader‟s bank.
-There are therefore 3 parties to a credit card;
0 The company that issues the cards
1 The card holder
2 The trader
-At regular intervals, the credit card company sends a statement of account to each
card holder showing the outstanding balance at that time. The outstanding balance
should not be greater than the allowed credit limit.
-Examples of companies that issue credit cards include; Barclays card,
American Express, Access cards and Visa cards.

Advantages of credit card

0 They are safer to carry around than cash
1 Convenient to carry around
2 Enables the holder to get goods and services from specified sellers
without paying immediately

Prepared By Mr. Peter Ochieng Otieno

[email protected] department kisumu national
polytechnic © 2017
 37

0 Some are acceptable both locally and internationally

1 Enables the holder to get money from specified banks
2 Increases credit rating of an individual
Disadvantages of credit cards
3 To acquire the credit card, the applicant is required to have an established credit
record
4 The holder is charged high interest rate by the card company
5 It is prone to abuse through fraud
6 Interest is charged if there is delay in payment
7 Can only be used by those who are 18 years and above
8 Holder may be tempted to overspend
9 Their use is limited to only specific areas(urban areas)
10 Faces stiff competition from other means of payment such as cheques,
money orders and postal orders.
11 Only few businesses accept the cards
12 Long procedures are involved in getting the cards
13 The cards can only be affected by people with high income.
b) Hire purchase

Hire purchase: Is a method of hiring property with an option to buy.

-The term of payment for a hire purchase are;
0 The buyer pays an initial deposit(down payment)
1 The remaining amount(balanced is paid in equal monthly installment spread
over an agreed period of time
2 The installments paid include interest which usually makes the overall price
paid relatively higher than would be the case if the goods were obtained on
cash terms.
-Goods sold on higher purchase are durable and expensive such as;
vehicles, furniture, electronics e.t.c
-The buyer can only posses the commodity but not own it.Therefore‟the buyer
cannot sell the goods to another person before all installments are paid
-Ownership of the goods remains with the seller. The goods are „on hire‟ to the
buyer.
-After completing the payment (after the last installment has been made),a
certificate is issued to the buyer as proof of transfer of ownership
-Incase the buyer fails to make payment/defaults in payment; the seller can
repossess the goods. However if the buyer has paid two thirds of the total/hire
purchase price at the time of defaulting, the seller has no legal right to repossess
the goods.
-The seller can only recover the remaining amount of money through a court action
-The seller must display both the cash price and the hire-purchase price on the
items to enable the buyers to decide under what terms they want to buy the
goods.
-A written agreement has to be entered into by both the seller and the buyer. The
agreement safe-guards the intervals of all of them
-Examples of hire purchase businesses operating in Kenya include; Africa Retail
Traders (ART), Kukopesha, Singer and Amedo.
-For salaried people, the hire purchase has introduced a system where the
installments are deducted directly from the buyer‟s salary every month. This is
called the check-off system. In this system, no deposits/down payments are
required. The buyer‟s employer takes up the duty of remitting the deposits to the
seller on a monthly basis.
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 38

Advantages of Hire purchase

To the buyer
0 The buyer acquires possession and use of goods immediately after entering into
the contract
1 Installments to be paid are pre-determined, so the buyer knows and is able to
budget for this amount
2 One can acquire expensive goods/items which are difficult to get on cash terms
3 Payment is spread over a long duration of time making it convenient/suits the
buyer‟s income
4 Raises standards of living despite limited resources
To the seller
0 The goods belongs to the seller until the last installment is paid
1 He/she can repossess the goods in case the buyer defaults in payments
2 The seller is able to make more profit due to higher prices in the long run
3 The sales volume increase due to greater ability by customers to
pay/more buyers are attracted to hire purchase terms leading to more
sales
4 No refund is payable to a buyer for goods repossessed from him/her
5 Due to the check-off system, chances of non-payment are minimized.
Disadvantages of Hire purchase

0 The hire purchase price is higher than the cash price.

1 The goods belong to the seller until the last installment is made
2 Because of the easy payment terms, the buyer may be tempted to overspend
which might lead to financial problems
3 The variety of goods sold on hire purchase terms is limited to those goods that
are durable
4 If the buyer defaults in payment, the already paid ones are treated as hire
charges and are not refunded.
5 Goods may be repossessed if the buyer defaults in payment
To the seller
0 Goods repossessed can only be sold as second hand
1 There is a lot of documentation and filing of information/records
2 The cost of operating the business is usually very high
3 The risks of loss on hire purchase sales are normally high as some buyers
may default in payment
4 High amount of capital is needed to finance a hire purchase business
5 A lot of money is spent on repair of damaged goods
6 A lot of capital is tied and held in stock and debts.
c) Installment Buying/credit sale(deferred payment)
-In this form of credit selling, the buyer is not required to pay a down payment.
Payment for the goods is made in equal installments spread over a period of time.
These installments cover interest and related costs of selling.
Other features of installment buying
0 The ownership and possession of goods passes on to the buyer
immediately the first installment is paid
1 Once the goods have been sold, they cannot be repossessed by the seller
even if the buyer defaults in payment.
2 In case the buyer defaults in payment, the seller can obtain compensation
through court action.
3 There is a written agreement between the buyer and the seller(creditor)
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 39

0 The buyer may dispose of the goods before paying for them fully
1 Can be used for non-durable goods
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 40

INTERNATIONAL TRADE

A trade involving the exchange of goods and services between two or more
countries. If the exchange is between two countries only, then it is referred to
as bilateral trade, but if it is between more than two countries then it is
referred to as multilateral trade.
Advantages of International Trade
0 It enable the country to get access to wider range/variety of goods and
services from other countries
1 It enable the country to get what it does not produce
2 It helps in promoting peace among the trading countries
3 It enable the country to specialize in its production activities where they feel
they have an advantage
4 It earns the country revenue through taxes and licenses fees paid by the
importers and exporters in the country
5 It enable the country to dispose of its surplus goods and services
thereby avoiding wastage
6 It creates employment opportunities to the citizens of that country
either directly or indirectly
7 It may lead to the development of the country through importation of
capital goods in to the country
8 It encourages easy movement of factors of production across the borders of
the countries involved
9 It enable countries to earn foreign exchange which it can use to pay for its
imports
10 A country may be able to obtain goods and services cheaply than if
they have been produced locally
11 During hard times or calamities such as wars, the country is able to get
assistance from the trading partners
12 It brings about competition between the imported and locally produced
goods, leading to improvement in their quality
13 It gives the country an opportunity to exploit fully its natural resources,
due to increased market
Disadvantages of International trade
0 It may lead to collapse of the local industries, as people will tend to go for
the imported goods. The collapse may also lead to loss of employment
1 It may also lead to importation of harmful foods and services such
as drugs and pornographic materials
2 May lead to over depending on imported commodities especially the
essential ones, making the country to be a slave of the other countries,
interfering with their sovereignty
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 41
0 It may make the country to suffered during emergencies if they
mainly rely on the imported goods
1 May make the country to suffer from import inflation
2 May lead to acquisition of bad culture from other countries as a result of
their interactions
3 May lead to unfavorable balance of payment, if the import is higher than
exports
Terms of Trade
This refers to the rate at which the country‟s export exchanges with those from
other country.
That is:
Terms of trade =

It determine the value of export in relations to import so that a country can

know whether it‟s trade with the other country is favourable or unfavourable
Favourable terms of trade will make the country spent little on import and gain a
lot of foreign exchange from other countries
For example;
Then table below shows trade between Kenya and China in the year 2004 and
2005, with the Kenyan government exporting and importing to and from china,
and China also importing and Exporting from and to Kenya.
Average prices of export
Year
Kenya China
2004 1000 4000
2005 1200 6500
Calculate the Terms of trade for;
i. Kenya
ii. China
Solution:
Kenya
x
a) Export price index (E.P.I) = 100

0 x100
1 120%
Import price index (I.P.I) x
b) = 100

= x 100
= 162.5%
Terms of trade (T.O.T)
c) = x 100
0 x 100
 1 73.8%
This implies that Kenya is importing from China more than it is exporting,
leading to unfavourable terms of trade i.e. when the percentage is less than
100%, it implies unfavourable terms of trade.
China (work out)
The average prices is the various prices of the individual export or import items
divide by their number
Factors that may lead to either favourable or unfavourable terms of trade
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 42

The country is experiencing a favourable terms of trade if:

0 The prices of imports decline and those of export remains the constant
1 The prices of imports declines while those of exports increase
2 The price of imports remains constant while those of exports increase
3 The prices of import and export increases but the rate of increase in export is
higher
4 Both prices decrease but the decrease in import prices is higher
0 Prices of import increases while those of exports decline
1 Prices of import remains constant while those of export declines
2 Prices of import increase as the export remains constant
3 Both prices increase, but for imports increases at a higher rate than export
4 Both prices decrease, but for export decreases at a higher rate than import
Reasons for differences in terms of trade between
countries The terms of trade may differ due to:
1 The nature of the commodity being exported. If a country exports raw
materials, or
unprocessed agricultural products, its terms of trade will be unfavourable, as
compared to a country that exports manufactured goods
0 Nature of the commodity being imported. A country that imports
manufactured goods is likely to have unfavourable terms of trade as
compared to that which imports raw materials or agricultural produce
1 Change in demand for a country‟s export. An increase in demand for the
country‟s export at the world market will make it have favourable terms of
trade as compared to those with low demand at the world market
2 Existing of world economic order favouring the products from more
developed countries. This may make the developing countries to have
deteriorating terms of trade
3 Total quantity supplied. A country exporting what most countries are
exporting will have their products trading at a lower price, experiencing
unfavourable terms of trade as compared to a country that export what only
few countries export
4 Trade restrictions by trading partners. A country with no trading restrictions
is likely to import more products, leading to unfavourable terms of trade, as
compared to if it impose trade restrictions
Balance of trade
This is the difference between value of country‟s visible exports and visible
imports over a period of time. If the value of visible/tangible export is higher than
the value of visible/tangible imports, then the country experiences favourable
terms. If less than the invisible value, then the country is experiencing
unfavourable. The country is at equilibrium if the value of visible export and
import is the same
Balance of payments
This is the difference in the sum of visible and invisible export and the visible and
invisible imports. If positive then it means the country is having favourable terms,
while if negative, then it means unfavourable It goes beyond the balance of trade
in that it considers the following
 0 The countries visible/tangible export and import of goods (visible trade)
1 The countries invisible/services exported and imported in the country
(invisible trade)
2 The inflow and outflow of investment (capital goods)
Balance of Payment account
This is the summary showing all the transactions that have taken place
between a particular country and the rest of the world over a period of time.
The transaction may arise from
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 43

0 The export of visible goods

1 The import of visible goods
2 The export of invisible goods/services
3 The import of invisible goods/services
4 Flow of capital in and out of the country
Components of balance of payments account
The balance of payment account is made up of the
following a) Balance of payment on current
account
i) Balance of payment on capital account
iii)Official settlement account/Cash account/foreign exchange transaction
account

Balance of payment on current account

This is the account that is used to determine the difference between the value of
the country‟s visible and invisible imports and exports. That is
Balance of payment on current account = (visible export + invisible export) –
(visible import + invisible import)
In the account, the payments for the visible and invisible imports are debited
while the receipts from visible and invisible exports are credited that is

Dr current account Cr
Payments for imports Receipts from exports
(Visible and Invisible) (Visible and Invisible)
The balance of payment on current account may be;
In equilibrium i.e. if Dr = Cr
Unfavourable i.e. if Dr > Cr (-ve)
Favourable i.e. if Dr < Cr (+ve)
For example;
A given country had the following values of visible and invisible export and
import during the year 2004 and 2005
Trade 2004 (shs) 2005 (shs)
Visible export 18926 29954
Visible imports 22780 32641
Invisible exports 6568 19297
Invisible imports 5239 16129
Required
Prepare the country‟s balance of payments on current account for the years 2004
and 2005 and comment on each of them.
Dr current account year 2004 Cr
shs Shs
Visible imports 22780 Visible export 18926
Invisible imports 5239 Invisible export 6568
Total 28019 Total 25494
Deficit 2525
The country experienced unfavourable balance of payment on current account in
the year 2004, since they imported more than they exported

Prepared By Mr. Peter Ochieng Otieno

[email protected] department kisumu national
polytechnic © 2017
 44

Dr current account year 2005 Cr

shs Shs
Visible imports 32641 Visible export 29954
Invisible imports 16129 Invisible export 19297
Total 28019 Total 49251
Exces
s 481
The country experienced favourable balance of payment on current account in
the year 2005, since they exported more than they imported
Balance of payments on capital account
This account shows the summary of the difference between the receipt and
payments on the investment (capital). Receipts are income from investments in
foreign countries while payments are income on local investments by foreigners
paid out of the country.
The capital inflow includes investments, loans and grants from foreign donors,
while capital outflow includes dividends paid to the foreign investors, loan
repayments, donations and grants
to other countries.
In the account the payments are debited, while the receipts are
credited. That is;
Dr capital account Cr
Payments Receipts

The account may be;

In equilibrium i.e. if Dr = Cr
Unfavourable i.e. if Dr > Cr (-ve)
Favourable i.e. if Dr < Cr (+ve)
The combined difference on the receipts and payments on both the current and
capital accounts is known as the overall balance of payments.
The official settlement account
This account records the financial dealings with other countries through the IMF.
It is also called the foreign exchange transaction account, and is always expected
to balance which a times may not be the case. That is;
0 In case of surplus in the balance of payment, the central bank of that
country creates a reserve with the IMF and transfer the surplus to the
reserves account.
0 In case of a deficit in the balance of payment, the central banks collect the
reserves from the IMF to correct the deficit, and incase it did not have the
reserves, the IMF advances it/give loan
This occurs when there is either deficit or surplus in the balance of payments
accounts. If there is surplus, then the country would like to maintain it because it is
favourable, while if deficit, the country would like to correct it.
Causes of balance of payment disequilibrium
It may be caused by the following;
0 Fall in volume of exports, as this will reduce the earnings from exports
leading to a deficit.
1 Deteriorating in the countries terms of trade. That is when the country‟s
exports decreases in relation to the volume of imports, then her payments
will higher than what it receives.

Prepared By Mr. Peter Ochieng Otieno

[email protected] department kisumu national
polytechnic © 2017
 45
0 Increasing in the volume of import, especially if the export is not
increasing at the same rate, then it will import more than it exports,
leading to a disequilibrium
1 Restriction by trading partners. That is if the trading partners decides to
restrict what they can import from the country to a volume lower than what
the country import from them, it will lead to disequilibrium
2 Less capital inflow as compared to the out flow, as this may lead to a deficit
in the capital account, which may in turn leads to disequilibrium.
3 Over valuation of the domestic currency. This will make the country‟s
export to very expensive as compared to their import, making it to lose
market at the world market
4 Devaluation of the currency by the trading partner. This makes the value of
their imports to be lower, enticing the country to import more from them
than they can export to them.
Correcting the balance of payment disequilibrium
The measures that may be taken to correct this may include;
0 Devaluation of the country‟s currency to encourage more exports
than imports, discouraging the importers from importing more into
the country.
1 Encouraging foreign investment in the country, so that it may increase the
level of economic activities in the country, producing what can be
consumed and even exported to control imports
2 Restricting the capital outflow from the country by decreasing the
percentage of the profits that the foreigner can repatriate back to their
country to reduce the outflow
3 Decreasing the volume of imports. This will save the country from
making more payments than it receives. It can be done in the
following ways;
0 Imposing or increasing the import duty on the imported goods to
make them more expensive as compared to locally produced goods
and lose demand locally
1 Imposing quotas/total ban on imports to reduce the amount of goods
that can be imported in the country
2 Foreign exchange control. This allows the government to restrict
the amount of foreign currencies allocated for the imports, to
reduce the import rate
3 Administrative bottlenecks. The government can put a very long and
cumbersome procedures of importing goods into the country to
discourage some people from importing goods and control the amount
of imports
4 Increasing the volume of exports. This enable the country to receive more
than it gives to the trading partners, making it to have a favourable balance
of payment disequilibrium. This can be done through;
0 Export compensation scheme, which allows the exporter to claim a
certain percentage of the value of goods exported from the
government. This will make them to charge their export at a lower
price, increasing their demand internationally
1 Diversifying foreign markets, to enable not to concentrate only on one
market that may not favour them and also increase the size of the
market for their exports
 2 Offering customs drawbacks. This where the government decides to
refund in full or in part, the value of the custom duties that has been
charged on raw materials imported into the country to manufacture
goods for export
3 Lobbying for the removal of the trade restriction, by negotiating with
their trading partners to either reduce or remove the barrier put on
their exports
Terms of sales in international trade

Prepared By Mr. Peter Ochieng Otieno

[email protected] department kisumu national
polytechnic © 2017
 46

Here the cost trading which includes the cost of the product, cost of transporting,
loading, shipping, insurance, warehousing and unloading may be expensive. This
makes some of the cost to be borne by the exporter, as some being borne by the
importer. The price of the goods quoted therefore at the exporters premises should
clearly explain the part of the cost that he/she is going to bear and the ones that
the importer will bear before receiving his/her goods. This is what is referred to as
the terms of sale
Terms of sales therefore refers to the price quotation that state the expenses that are
paid for by
the exporter and those paid for by the importer.
Some of the common terms include;
0 Loco price/ex-warehouse/ex-works. This states that the price of the goods
quoted are as they are at the manufacturers premises. The rest of the
expenses of moving the good up to the importers premises will be met by the
importer
1 F.O.R (Free on Rail). This states that the price quoted includes the
expenses of transporting the goods from the seller‟s premises to the
nearest railway station. Other
railways charges are met by the importer
(iii)D.D (Delivered Docks)/Free Docks. This states that the price quoted covers
the expenses for moving the goods from the exporter‟s premises to the
dock. The importer meets all the expenses including the dock charges
0 F.A.S (Free Along Ship). States that the price quoted includes the expenses
from the exporter‟s premises to the dock, including the loading expenses.
Any other expenses are met by the importer
1 F.O.B (Free on Board). States that the price quoted includes the cost of
moving the goods up to the ship, including loading expenses. The buyer
meets the rest of the expenses
(vi) C&F (cost & freight). The price quoted includes the F.O.B as well as
the shipping expenses. The importer meets the insurance charges
0 C.I.F (Cost Insurance & freight). The price includes the C&F, including
the insurance expenses
1 Landed. The price includes all the expenses up to the port of destination as
well as unloading charges
2 In Bond. The price quoted includes the expenses incurred until the
goods reaches the bonded warehouse
3 Franco (Free of Expenses). The price quoted includes all the expenses up to
the
importer‟s premises. The importer does not incur any other expenses
other than the quoted price
(xi) O.N.O (Or Nearest Offer). This implies that the exporter is willing to
accept the quoted price or any other nearest to the quoted one
Documents used in International trade
 0 Enquiry/Inquiry. A letter sent by an importer to the exporter asking about
the supply of the goods and the terms of sale.
1 Order of Indent. This asks the supplier to supply goods. It may specify the
goods to be supplied and suggest the preferred mode of transport for them.
An indent may be open or closed
o Open Indent. Here the importer does not specify the supplier and the
goods to be bought and therefore the exporter or export agent is free
to choose the supplier
o Closed Indent. Here the importer specifies the supplier and the goods
to be bought

Prepared By Mr. Peter Ochieng Otieno

[email protected] department kisumu national
polytechnic © 2017
 47

0 Letter of Credit. A document issued by the importers bank to the

exporter‟s bank to assure the exporter of the payment for the goods
ordered. The exporter can then be paid by his bank on the basis of this
letter.
1 Import Licence. A document issued by the country to allow the importer
to buy goods from abroad.
2 Bill of Lading. A document of title to goods being exported issued by the
shipping company to the importer who should use it to have goods
released at the port of entry.
3 Freight Note. A document prepared by the shipping company to show the
transportation charges for goods.
4 Certificate of insurance. A document issued by the insurance
company or agent, undertaking to cover the risk against the loss or
damage to goods being exported.
5 Certificate of Origin. A document that shows the country from which
the goods are being imported have originated from.
6 Commercial Invoice. A document issued by the exporter to demand for the
payment for the sold on credit to the importer.
It shows the following;
0 The name and address of the exporter
1 The name and the address of the importer
2 The price charged
3 The terms of sale
4 The description of the consignment
5 The name of the ship transporting the consignment
7 Consular Invoice. A document that shows that the prices of the goods
that have been charged is fair as certified by the consul with the
embassy of the exporting country.
8 Proforma Invoice. A document sent by the exporter to the importer if he/she
is not willing to sell goods on credit. It may be used to serve the following
purposes;
0 Serve as a formal quotation
1 Serve as a polite request for payment before the goods are
released for the customer
2 To enable the importer to initiated the clearing of the custom duty
early enough to avoid delays
3 Used to by the importer to obtain permission from the Central
Bank to import goods
9 Airway Bill. Issued by the airline company to show the charges for the
goods being transported
10 Letter of Hypothecation. A letter written by the exporter to his/her bank
authorizing it to resell the goods being exported. This occurs if the bank
fails to get payment on the bill of exchange drawn on the importer that it has
discounted for the exporter. Should there be a deficit after the resale, the
exporter pays the deficit
 11 Weight note. A documents that shows the weight and other measurements
of the goods being delivered at the dock
12 Shipping advice note. A document issued by the exporter to his/her
shipping agent containing instruction for shipping goods.
International Financial Institutions
Some of the institutions that play a role in international monetary system include;
0 International Monetary Fund (I.M.F)
1 African Development Bank (A.D.B)
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 48

0 African Development Fund (A.D.F)

1 International Bank For Reconstruction and Development (World Bank)
0 International Monetary Fund (I.M.F)
This bank operates like the central bank of the central banks of the member
countries. Its objective includes the following;
Ensuring that the member country maintains a stable foreign exchange
rates for their currencies. This it does by advising the country to raise or
increase the supply of their currency to devalue them or increase their
value internationally
Provide financial support to the member country to alleviate poverty
and boost their income.
Relieving heavily indebted countries of debt repayment so that it can use
that fund to raise the living standards of its people.
Providing funds to the member countries to finance the deficits in
their balance of payment.
Provide forum through which the member country can consult and
cooperate on matters concerning trade among them
Maintaining currency reserves of the different countries, enabling member
countries to buy foreign exchange to be used to import goods and
services.
ii. African Development Bank (A.D.B)
This bank was formed to promote the economic and social progress of its regional
member
countries in Africa. It main source of finance is the members‟ contributions and
the interest
charged on the money they lend members.
Its functions include;
Providing loans for economic and social development to member countries
Provide technical advice in planning and implementation of the development
plans
Assist member country to appropriately exploit it resources
To encourage co-operation among African countries in order to bring
economic growth To co-operate with various economic institutions in
order to bring about development especially in Africa countries
iii. African Development Fund (A.D.F)
This was formed to provide long term financial assistance to the low income
countries that cannot obtain loan from other financial institutions at the
prevailing terms and condition. Their loans may recover a longer repayment
periods with no interest except the commitment fees and service charge which is
minimal. They fund activities, which includes;
0 Education and research activities
0 Offer technical advice to the member countries
 0 International Bank For Reconstruction and Development
(World Bank) The World Bank was formed to carry out the following
functions;

Giving loans to countries at very low interest rates to finance economic
development activities.

Provision of grants to finance the provision of social amenities and basic
infrastructural development in developing countries.

Fighting against corruption and poor governance which may lead to
misuse of public funds in different countries.

Advancing money to countries to finance balance of
payment deficit.  Giving advice on economic challenges that
countries may face.
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 49
0 Availing technical assistance and personnel to help countries run
their economic programmes
Economic Integration
This occurs where two or more countries enter into a mutual agreement to
cooperate with each other for their own economic benefit. They may do this by
allowing free trade or relaxing their existing trade barriers for the member
countries. Economic integration may occur in the following forms;
0 Free Trade Area
This is a case where the member countries agree to abolish or minimize
tariffs and other trade restrictions but the individual countries are free to
impose restrictions on non-member countries. They includes; Preferential
Trade Area (P.T.A), European Free Trade Area (E.F.T.A), Latin America
Free Trade Area (L.A.F.T.A), etc.
1 Custom union
This is where the members of the free trade area may agree not only to
abolish or minimize their tariffs, but also establish a common tariff for the
exchange of goods and services with the non member countries. They
include; Economic Community of West Africa States (E.C.O.W.A.S), East
Africa Custom Union (E.A.C.U), Central Africa Custom and Economic
Union (C.A.C.E.U)
2 Common Market
This is where the member countries allow for free movement of factors of
production across the borders. People are free to move and establish their
business in any member country. They include; East Africa Common
Market (E.A.C.M), European Economic Community (E.E.C), Central
American Common Market (C.A.C.M), Common Market for Eastern and
Southern Africa (COMESA)
3 Economic Union
This is where the members of the common market agree for put in place
a common currency and a common central bank for the member
countries. They even develop common infrastructures which includes
railways, communication networks, common tariffs, etc
Importance of economic integration
Economic integration will ensure the following benefits for the member countries;
0 Availability of wider market for the goods and services produced by
the member countries. This enables them to produce to their full
capacity
1 It enables the country to specialize in the goods they produce best,
making them to effectively utilize their resources
2 It leads to promotion of peace and understanding among the member
countries through interaction
3 It leads to high quality of goods and services being produced in the
country due to the competition they face
4 It allow members to get access to wider variety of goods and services
which satisfy different consumer needs
5 It leads to creation of employment for individuals living within the
region, as they can work in any of the member country
 6 It increase the economic bargaining power in trading activities by the
countries forming a trading bloc
7 Improvement of the infrastructure in the region due to increased economic
activities.

Prepared By Mr. Peter Ochieng Otieno

[email protected] department kisumu national
polytechnic © 2017
 50
0 It brings about co-ordination when developing industries, as the members
will assign the industries to each other to create balance development and
avoid unnecessary duplication

This is a situation where there is unrestricted exchange of goods and

services between the countries. It has benefits/advantages similar to those of
economic integration.
Disadvantages of free trade area
Some of the problems it is likely to bring include;
0 It may lead to importation of inferior goods and services to the country, as
the member country may not be able to produce high quality as compare
to other non-member countries
1 It may discourage the growth of the infant industries due to
competition from well developed industries in other countries
2 It may lead to reduced government revenue because no tariff may be
charged on the goods and services
3 A country may be tempted to adopt technology not suitable for its level of
development.
4 If not controlled, it may lead to unfavourable balance of payment,
where a country imports more than it export
5 It may lead to importation of harmful goods and services, that may affect
the members health such as illegal drugs
6 It may lead to lack of employment opportunities especially where more
qualified people have moved from their country to secure job opportunities
in the country
7 It may expose the country to negative cultural practices in other
countries, interfering with their morals. For example the exposure to the
pornographic materials.
8 Compromising political ideologies especially where member countries
with different ideologies wants to fit in to the bloc
9 It may lead to over exploitation of non-renewable economic resources such
as minerals
Trade Restrictions
These are deliberate measures by the government to limit the imports and
exports of a country. They are also known as protectionism and includes the
following;
 Tariffs which include taxes levied on both import and export. It can be used to
increase or decrease the level of both import and export
 Quotas which is the restriction on the quantity of goods to be either imported
or exported. It can be increased or decreased to increase or decrease the
level of import or export respectively.
 Total ban (zero quota) where the government issues a direction
illegalizing either the import or export of the products
 Complicated import procedure in order to discourage some importers from
importing  Subsidies on locally produced goods to discourage imports
 Legislation against importation of certain
goods  Setting the standards of products to
be imported
Reasons for trade restrictions
 
To prevent the inflow of harmful goods into the country, that may be harmful
to the lives of the citizens

To protect the local infant industries that may not be able to compete
favourably with well established industry

To give a country a chance to exploit its natural resources in producing
their goods  To protect strategic industry, since their collapse may make
the country to suffer
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 51
0 To minimize dependency of the country to other countries for their stability
1 To create employment opportunity to its people by establishing the
industries to produce the goods and services
2 To prevent dumping of goods in the country by the developed partners
which may create unfair competition
3 To correct balance of payment deficit by limiting import
4 To protect good cultural and social values which may be influenced by
unaccepted values they are likely to acquire from other country through
interaction
5 To expand market for locally produced goods by restricting the number of
foreign goods in the market.
6 To enable the country earn foreign exchange through imposing taxes and
other tariffs
Advantages of trade restrictions
It promotes self reliance as industries have an opportunity to engage in the
production of goods and services that were previously imported
It protects the local industries from stiff competition that they may have
faced from the well developed countries
It may help to correct the balance of payment deficit
It restrict the entry of harmful goods into the country as it controls the
inflow of imports in to the country
It enables the country to conserve their valuable social and cultural
values from the external influence
It help in creating more job opportunities through diversification in the
production
It promotes the growth of local/infant industries in the country.
Disadvantages of trade restriction

There will be availability of limited variety of goods in the country that
will limit the consumer‟s choices

May lead to production of low quality goods as there will be no
competition for the producing firms

Other countries may also retaliate, leading to reduction in export from their
country

There is likely to be high prices charged on the locally produced goods,
since the small firms which produce them may not be enjoying the
economies of scale

The country is likely to be exposed to small market, should all countries
restrict which may lead to reduction in trade.

As a result of the continued protection, some industries may develop a
tendency of remaining young to still enjoy the protection, which limits
the level of development

It may lead to emergence of monopoly as the protected industry may end up
remaining alone in the market, bringing about the problems of
monopolies
Trends in International Trade
1 Liberalization that has led to removal of many trade restriction among
the countries, increasing the levels of trade
2 Development of E-Banking which has enable the international trader to get
access to their bank accounts from wherever they are in
3 Development of export processing zones (EPZ) by the government to
allows the industries involved just concentrate in the exported goods
 only. It enable the country enjoy the following benefits (advantages of
EPZ)
0 It creates job opportunities to the citizens

Prepared By Mr. Peter Ochieng Otieno

[email protected] department kisumu national
polytechnic © 2017
 52
0 It creates market for locally produced raw materials that they
use in their production
1 It encourage the foreign investors to invest in the countries, i.e. in
the processing zones, increasing the level of investment in the
country
2 Encourages export in the country as the incentives given to
them by the government makes them to produce more and
more for export
3 It stimulates industrialization in the country in all sector
including the ones producing for local consumptions
However EPZ‟s have the following problems/disadvantages
Most of them employs foreigners in their management team,
denying the locals a chance to get employed
They do not generate revenue to the government, especially
during tax free periods
They are concentrated in few towns, bringing about
imbalance regional development
Some of them encourages social evils such as prostitution in areas
where they are developed
0 Development of e-commerce/website trading which has promoted the
selling and buying of items through the internet, with payments made
online.
E-commerce has the following benefits/advantages:
0 One is able to access the market worldwide, as the countries are
connected to the internet
1 There is no discrimination, as both the small and large industries
are able to transact through the internet
2 It is fast to transact the business through internet, as it saves on
travelling time and therefore suitable for urgent transaction
3 It is cheap especially on the cost of sending, receiving and storing
information
4 It is easy for firms to share valuable information about production
FORMS OF BUSINESS ORGANZATIONS
TOPIC OBJECTIVES
BUSINESS UNITS
A business unit is an organization formed by one or more people with a view of
engaging in a profitable activity.
Business units are generally classified into private or public sector business units‟
i.e.
Note: Private sector comprises of business organizations owned by private
individuals while the public sector comprises business organizations owned by the
government.
1. SOLE PROPRIETORSHIP
This is a business enterprise owned by one person who is called a sole trader or
a sole proprietor. It is the most common form of business unit and usually found
in retail trade e.g. in small shops, kiosks, agriculture e.t.c and for direct services
e.g. cobblers saloons e.t.c
Characteristics/Features
0 The business is owned by one person
1 The capital is contributed by the owner and is usually small. The main
source is from his savings and other sources can be from friends, bank or
getting an inheritance
2 The owner enjoys all the profits alone and also suffers the losses alone
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 53

The owner is personally responsible for the management of the business and
sometimes he is assisted by members of his family or a few employees. He
remains responsible for the success or failure of his/her business.
The sole proprietor has unlimited liability meaning that incase of failure to meet
debts, his creditor can claim his personal property
There are very few legal requirements to start the business unit.
Sole proprietorship is flexible; it is very easy to change the location or the nature of
business.
Formation
The formation of a sole proprietorship is very simple. Few legal formalities are
required i.e. to start a sole proprietorship, one need only to raise the capital
required and then apply for a trading license to operate the business small fee is
paid and the trade license issued.
Sources of capital
The amount of capital required to start a sole proprietorship is small compared to
other forms of business organizations. The main source of capital is the Owners
savings. Additional capital may however be raised from the following;
Borrowing from friends, banks and other money lending institutions such as
industries and commercial Development corporation(ICDC)and Kenya
industrial estates
Inheritance
Personal savings
Getting goods on credit
Getting goods on hire purchase
Leasing or renting out one‟s properties
Donations from friends and relatives
Ploughing back profit.

The management of this kind of a business is under one person. The owner may
however employ other people or get assistance from family members to run the
business.
Some sole proprietorship may be big business organizations with several
departments and quite a number of employees. However, the sole proprietor
remains solely responsible for the success of failure of the business
Advantages of sole proprietorship
The capital required to start the business is small hence anybody who can
spare small amounts of money can start one.
Few formal/legal procedures are required to set up this business
Decision making and implementation is fast because the proprietor does not
have to consult anybody
The trader has close and personal contact with customers. This helps them in
knowing exactly what the customers need and hence satisfying those
needs
A sole proprietor is able to assess the credit-worthiness of his or her customers
because of close personal relationship. Extending credit to a few carefully
selected customers reduce the probability of bad debts.
The trader is accountable to him/herself
A sole trader is able to keep the top secrets of the business operations
He/she enjoys all the profit
A sole proprietorship is flexible. One can change the nature or even the location
of business as need arises.

Prepared By Mr. Peter Ochieng Otieno

[email protected] department kisumu national
polytechnic © 2017
 54

Disadvantages of sole proprietorship

Has unlimited liability. This means that if the assets available in the business are
not enough to pay all the business debts the personal property of the owner
such as house will be sold to meet the debts
There is insufficient capital for expansion because of scarce resources and lack
of access to other sources
He/she is overworked and has no time for recreation.
There is lack of continuity in the sole proprietorship i.e. the business is affected
by sickness or death of the owner.
A sole proprietorship may not benefit from advantages realized by large scale
enterprises (economies of large scale) such as access to loan facilities and
large trade discounts.
Lack of specialization in the running of the business may lead to poor
performance. This is because one person cannot manage all aspects of the
business effectively. One maybe a good salesman for examples but a poor
accountant.
Due to the size of the business, sole proprietorships do not attract and retain
highly qualified and trained personnel.

Dissolution refers to the termination of the legal life of a business. The following
circumstances may lead to the dissolution of a sole proprietorship:
Death or insanity of the owner
Transfer of the business to another person- this transfers the rights and
obligations of the business to the new owner.
Bankruptcy of the owner- this means that the owner lacks the financial capability
to run the business.
The owner voluntarily decides to dissolve the business e.g due to continued loss
making.
Passing of a law which renders the activities of the business illegal.
The expiry of the period during which the business was meant to operate.

2. PARTNERSHIP:
This is a relationship between persons who engage in a business with an aim of
making profits/ an association of two or more persons who run a business as co-
owners. The owners are called

It is owned by a minimum of 2 and a maximum of 20 except for partnership

who provide professional services e.g medicine and law which have a
maximum of 50 persons.

Capital is contributed by the partners themselves

Partnership has limited life that is it may end anytime because of the death,
bankruptcy or withdrawal of partners.
Each partner acts as an agent of the firm with authority to enter into contracts.
Partners are co owners of a business, having an interest or claim in the business.
Responsibility, profit and losses are shared on an agreed basis.
All partners have equal right to participate in the management of the business.
This right arises from the interest or claim of the partner as a co owner of
the business.

Partnerships can be classified/ categorized in either of the following ways:

According to the type/liability of partners
According to the period of operation
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 55

(c) According to their activities

(a) According to the type or liability of partners
Under this classification, partnerships can either be:
General/ordinary partnership- Here all members have unlimited liability which
means in case a partnership is unable to pay its debts, the personal
properties of the partner will be sold off to pay the debts.
Limited partnerships- In limited partnership members have limited liabilities
where liability or responsibility is restricted to the capital contributed.
This means that incase the partnership cannot pay its debts; the partners only lose
the amount of capital each has contributed to the business and not their personal
property. However, there must be one partner whose liabilities are unlimited.
(b) According to the period/duration of operation
When partnerships are classified according to duration of operation, they can
either be;
Temporary partnership-These are partnerships that are formed to carry out a
specific task for a specific time after which the business automatically
dissolves.
Permanent partnerships- These are partnerships formed to operate
indefinitely. They are also called a partnership at will.
According to their Activity- Under this mode of classification, partnerships can
either be:
Trading partnerships
This is a partnership whose main activity is processing, manufacturing,
construction or purchase and sale of goods.
Non – trading partnerships
This is a partnership whose main activity is to offer services such as legal, medical
or accounting services to members of the public.
Types of partners
Partners may be classified according to;
Role played by the partners
Active partner: He is also known as acting partner as he plays an active part in
the day-to-day running of the business.
Sleeping/dormant partner: He does not participate in the management of the
partnership business.Although he invests his capital in the partnership, his
profit is lower as he is not active. He is also referred to as passive or silent
partner.
Liabilities of the partners for the business debts:
General partner: He/she has unlimited liabilities.
Limited partner: He/she has limited liabilities
Ages of partners

Major partner: This is a partner who is 18 years and above. He is responsible

for all debts of the business.
Minor partner: This is a partner who has not attained the age of 18 years but
has been admitted with the consent of other partners. Once he reaches 18
years, he then decides if he wants to be a partner or not. Before he attains the
age of 18, he takes part in the sharing of profits but does not take part in the
management of the business.
iv) Capital contribution
Nominal/Quasi partner: He does not contribute capital but allows the business
to use his/ her name as a partner; for the purpose of influencing customers or
for prestige.
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 56

-He/she can also be a person who was once a partner and has retired in form of a
loan. This loan carries interest at an agreed rate.
-The quasi partner shares the profit of the business as a reward for using his/her
name.
Real partner: He/she is one who contributes capital to the business.
-Other types of partners include secret partners, retiring partners and incoming
partners
A secret partner: is one who actively participates in the management of the
firm but is not disclosed to the public. In most cases secret partners are also
limited partners.
A retiring partner: Also known as outgoing partner is one who is leaving a
partnership
-He may retire with the consent of all the other partners or according to a previous
agreement.
Incoming partner: Is one who is admitted to an existing partnership.
Formation
-People who want to form a partnership must come together and agree on how
the proposed business will be run to avoid future misunderstanding.
-The agreement can either be oral (by use of mouth) or within down. A written
agreement is called a partnership deed.
-The contents of the partnership deed vary from one partnership to another
depending on the nature of the business, but generally it contains:
Name, location and address of the business
Name, address and occupation of the partners
The purpose of the business
Capital to be contributed by cash partner
Rate of interest on capital
Drawings by partners and rate of interest on drawings
Salaries and commissions to partners
Rate of interests on loans from partners to the business
Procedures of dissolving the partnership
Profit and loss sharing ratio
How to admit a new partner
What to do when a partner retires dies or is expelled
The rights to inspect books of accounts
Who has the authority to act on behalf of other partners.
Once the partnership deed is ready, the business may be registered with the
registrar of firms on payment of a registration fee.
In case a partnership deed is not drawn, the provisions of partnership act of 1963
(Kenya)
applies. The act contains the following rights and duties of a partner:
All partners are entitled to equal contribution of capital
No salary is to be allowed to any partner
No interest is to be allowed on capital
No interest is to be charged on drawings
All profits and losses are to be shared equally
Every partner has the right to inspect the books of accounts
Every partner has the right to take part in decision making
Interest is to paid on any loans borrowed by partners (The % rate varies from one
country to another)
During dissolution the debts from outside people are paid first then loans from
partners and lastly partners capital.
No partner should carry out a competing business
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 57

Any change in business such as admission of new partners must be

through the agreement of all existing partners.
Compensation must be given to a partner who incurs any loss when executing the
duties of the business.
Sources of capital
Partners contribution
Loans from banks and other financial institutions
Getting items on hire purchase
Trade credit
Ploughing back profit
Leasing and renting.

Advantages of partnership
Unlike sole proprietorship, partnership can raise more capital.
Work is distributed among the partners. This reduces the workload for each partner
Varied professional/skilled labour; various partners are professionals in various
different areas leading to specialization
They can undertake any form of business agreed upon by all the partners
There are few legal requirements in the formation of a partnership compared to a
limited liability company.
Losses and liabilities are shared among partners
Continuity of business is not affected by death or absence of a partner as would be
in the case of a sole proprietorship
Members of partnership enjoy more free days and are flexible than owners of a
company
A Partnership just like sole proprietorship is exempted from payment of certain
taxes paid by large business organizations.

Disadvantages of partnership
A mistake made by one of the partners may result in losses which are shared by
all the partners
Continued disagreement among the partners can lead to termination of the
partnership
Decision-making is slow since all the partners must agree
A partnership that relies heavily on one partner may be adversely affected on
retirement or death of the partner
A hard working partner may not be rewarded in proportion to his/her effort
because the profits are shared among all the partners
There is sharing of profits by the partners hence less is received by each partner
Few sources of capital, due to uncertainty in the continuity of the business few
financial institutions will be willing to give long-term loans to the firm.
Dissolution of partnership
A partnership may be dissolved under any of the following circumstances:
A mutual agreement by all the partners to dissolve the business
 Death insanity or bankrupting of a partner
A temporary partnership on completion of the intended purpose or at the end
of the agreed time.
A court order to dissolve the partnership
Written request for dissolution by a partner
If the business engages in unlawful practices
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 58

Retirement or admission of a new partner may lead to a permanent or

temporary dissolution
Continued disagreements among the partners

INCORPORATED FORMS OF BUSINESS UNITS

These are businesses that have separate legal entities from that of their owners.
They include:
CO-OPERATIVES
-A co-operative society is a form of business organization that is owned by
and run for the economic welfare of its members
-It is a body of persons who have joined together to do collectively what they
were previously doing individually for mutual benefit.
Example
In Kenya the co-operative movement was started by white settlers in 1908 to
market their agricultural produce. In this case, they knew that they could sell their
produce better if they were as a group and not alone
Principles of co-operatives
Open and voluntary membership
Membership is open and voluntary to any person who has attained the age of
18 years. No one should be denied membership due to social, political, tribal
or religious differences. A member is also free to leave the society at will
Democratic Administration
The principle is one man one vote. Each member of the co-operative has only
one vote irrespective of the number of shares held by him or how much he
buys or sells to the society
Dividend or repayment
-Any profit/surplus made at the end of every financial year should be
distributed to the members in relations to their contribution.
-Part of the profit may be retained/reserved/put in to strengthen the financial
position of the society.
Limited interest on share capital
-A little or no interest is paid on share capital contributed (co-operatives do
not encourage financial investment habits but to enhance production, to
encourage savings and serve the members)
Promotion of Education
Co-operative societies should endeavor to educate their members and staff on
the ideas of the society in order to enhance/improve quality of decisions made
by the concerned parties. Education is conducted through seminars, study tours,
open days
Co-operation with other co-operatives
C-operatives must learn from each other‟s experience since they have a lot in
common.
-Their co-operation should be extended to local national and international.
Membership is open to all persons so long as they have a common interest.
Members are also free to discontinue their membership when they desire so
Co-operative societies have a perpetual existence; death, bankruptcy or
retirement of a member does not affect its operations
They are managed in a democratic manner. Every member has one vote when
electing the managerial committee irrespective of the number of shares held.
The main aim is to serve the interest of the members where profit is not the
overriding factor.
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 59

Co-operative societies have limited liabilities

There must be a minimum of 10 people with no maximum membership.
Co-operatives have a separate legal entity from the members who formed it i.e
they can own property sue and be sued
Any profit made by the society is distributed to the members on the basis of
the services rendered by each member but not according to the capital
contributed.
Formation
-Co-operative societies can be formed by people who are over eighteen years
regardless of their economic, political or social background.
-There must be a minimum of 10 persons and no maximum no.
-The members draft rules and regulations to govern the operations of the
proposed society i.e. by-laws, which are then submitted to the commissioner of
co-operatives for approval -The registrar then approves the by-laws and issues a
certificate of registration
-If the members are unable to draw up their own by-laws, the co-operative
societies Act of 1966 can be adopted in part or whole

Management
-A co-perative society is composed/run by a committee usually of nine members
elected by the members in a general meeting
-The management committee elects the chairman, secretary and treasurer as the
executive committee members, who act on behalf of all the members and can
enter into contracts borrow money institute and depend suits and other legal
proceedings for the society
-The committee members can be voted out in an A.G.M if they don‟t
perform as expected.

TYPES OF CO-OPERATIVES SOCIETIES IN KENYA May be

grouped according to;
Nature of their activities
Producer co-operatives
Consumer co-operatives
Savings and credit co-operatives
Level of operations
0 Primary co-operatives
1 Secondary co-operatives
a) Producer co-operatives
This is an association of producers who have come together to improve the
production and marketing of their products.

Obtaining better prices for their members products

Providing better storage facilities for their products
 Providing better and reliable transport means for moving the products from the
sources to the market and building feeder roads
Providing loans to members
Providing services of grading, packing and processing to the members
Providing farm inputs e.g. fertilizers, seeds, insecticides e.t.c on credit to
members
Educating and advising members on better methods of farming through
seminars, field trips, films and demonstration

Prepared By Mr. Peter Ochieng Otieno

[email protected] department kisumu national
polytechnic © 2017
 60

-In this type of co-operative members are paid according to the quantity of
the produce a member has delivered to the society.
Examples,
KCC-Kenya Co-operative Creameries
K.P.C.U-Kenya Planters Co-operatives Union
K.G.G.C.U-Kenya Grain Growers Co-operative Union
b) Consumer Co-operatives
-These are formed by a group of consumers to buy goods on wholesome and
sell them to the members at existing market prices.
-Their aim is to eliminate the wholesalers and retailers and hence obtain goods
more cheaply -The co-operatives allow their members to buy goods on credit
or in cash
-Members of the public are also allowed to buy from the society at normal
prices thereby enabling the society to make more profits
-The profits realized is shared among the members in proportion to their
purchases i.ethe more a member buys, the buyer his/her share of profit
Examples;-Nairobi consumer co-operative union, Bee-hive consumer co-
operative society and City-chicken consumer co-operative society
Advantages
Sell goods of high quality
Sell goods to members at fair prices
Sell goods to other people at normal prices thereby making more profit
Buy goods directly from the producers thereby eliminating middlemen.
They are therefore able to make more profit
Can give credit facilities to the members
Can pay interest on capital to the members
Sell a variety of goods to the members at a place where they can easily get
them
Disadvantages
Consumer co-operatives are not popular in Kenya because of the following
They face stiff competition from large scale retailers such as supermarkets and
multiple shops who buy goods directly from the producers and sell-them to
consumers at low prices
Cannot offer to employ qualified staff
Majority of their members have low income, so raising off capital is a problem
Kenya, being an agricultural country, produces enough subsistence goods for
itself. It therefore does not require consumer co-operatives
Reluctance of non-members to buy from the shops lowers the turn-over
Mismanagement of the shops is rampant

Savings and credit co-operatives societies (SACCO‟S)

-They are usually formed by employed persons who save part of their monthly
salary with their co-operative society, through check-off system
-Their money earns goods interest and when one has a significant amount saved,
he/she become entitled to borrow money from the society for any personal project
e.g. improving their farms, constructing houses, paying school fees e.t.c
-The SACCOS charge lower interest on loans given to members than ordinary
banks and other financial institutions.
-The societies have few formalities or requirements to be completed before giving
a loan. These are:
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 61

Membership
Members salary
Members saving
Guarantee from fellow members
-Profits earned by the SACCO‟S maybe shared among the members inform of
dividends.
-Most SACCO‟S have insured their members savings and loans with co-operative
insurance services (CIS).This means if a member dies his/her beneficiaries are not
called upon to repay the loan and the members savings/shares is given to the
beneficiaries.
-They are the main institutions that provide loans to most people who do not
qualify for loans from commercial banks because they do not ask for securities
such as title deeds required by the bank.
d) Primary co-operative societies
-These are co-operative societies composed of individuals who are either actual
producers,
consumers or people who join up together to save and obtain credit most
conveniently
-Consumer co-operative societies and most SACCO‟S are primary co-operative
societies because
they are composed of individuals.
-Most primary co-operative societies operate at the village level, others at
district levels and a few at national levels.
Secondary co-operative
societies -They are usually
referred to as unions
-They are generally composed of primary co-operative societies as
their members -They are either found at district levels or at national
levels.

Advantages of co-operative societies:

Since the properties of co-operatives are owned collectively, they are able to
serve the interest of the members affectively
They have limited liability
Membership is free and voluntary
Members share profits of a co-operative through dividend that are given
They have improved the standards of living of their members through increased
income from their produce and through savings from incomes.
Co-operatives benefit their members through giving them credit facilities and
financial loans which they could not have got from local banks
They are run on a democratic basis i.e. all members have an equal chance of being
elected to the management committee.
Many co-operatives are large scale organizations hence able to get the benefits of
large scale organizations e.g low production costs leading to low prices of
products
Co-operative enjoy a lot of support from the government and when they are in
financial and managerial problems, the government steps in to assist them

Majority of the co-operatives are small in size and therefore cannot benefit from
economies of scale.
Members have a right to withdraw from the society and when they do, co-
operatives refunds the capital back which might create financial problems to
the society.
Corruption and embezzlement of funds is a problem for many co-operatives.

Prepared By Mr. Peter Ochieng Otieno

[email protected] department kisumu national
polytechnic © 2017
 62

Most co-operatives are not able to attract qualified managerial staff hence
leading to mismanagement.
Many suffer from political interference. Sometimes; the election of the
management committee is interceded with by some people with personal
interest in certain candidates hence the best person may not be elected to run
the affairs of the society. This leads to poor management and inefficiency.
Members may not take keen interest in the affairs of a co-operative society
because their capital contribution is small.
Dissolution of co-operative societies
-A co-operative society may be dissolved under any of the following circum-
stances.
Order from commissioner of co-operatives
Voluntary dissolution by members
Withdrawal of members from the society leaving less than ten members
If the society is declared bankrupt
LIMITED LIABILITY COMPANIES (JOINT STOCK COMPANIES)
Defination: A company; Is an association of persons registered under the
companies act who contribute capital in order to carry out business with a view
of making a profit.
The act of registering a company is referred to as incorporation.
Incorporation creates an organization that is separate and distinct from the
person forming it.
-A company is a legal entity that has the status of an „‟artificial person”. It
therefore has most of the rights and obligations of a human being. A company can
therefore do the following;
Own property
Enter into contracts in its own name.
Borrow money.
Hire and fire employees.
Sue and be sued on its own right.
Form subordinate agencies, ie, agencies under its authority.
Disseminate or spread information.
-The owners (members) of a company are referred to as
shareholders FEATURES OF COMPANIES (LIMITED
LIABILITY COMPANIES)
-A company in an artificial person and has the same rights as a natural person. It
can therefore sue and be sued in a court of law, own property and enter into
contracts in its own name. -The members have limited liabilities.
-Companies have perpetual life which is independent of the lives of its owners.
Death, insanity or bankruptcy of a member does not affect the existence of the
company. (this is referred to as perpetual existence or perpetual succession)
A company is created for a particular purpose or purposes.
Formation
-People who wish to form company are referred to as promoters
-The promoters submit the following documents to the registrar of
companies: i) Memorandum of Association
-This is a document that defines the relationship between the company and
the outsiders. It contains the following:
a)Name of the company/Name clause; -The name of the company must be
started and should end with the word “Limited” (Ltd).This indicates that the
liability of the company is limited.

Prepared By Mr. Peter Ochieng Otieno

[email protected] department kisumu national
polytechnic © 2017
 63

-Some companies end their names with “PLC” which stands for “Public
limited company” which makes the public aware that although it is a limited
liability company it is a public not private.
b)The objects of the company/objective clause;-This set out the activities that
the company should engage in
-The activities listed in this clause serve as a warning to outsiders that the
company is authorized in these activities only.
c)Situation clause;-Every company must have a registered office where
official notices and other communication can be received and sent
d)Capital clause;-It also states that the amount of capital which the business
can raise and the divisions of this capital into units of equal value called shares
i.e. authorized share capital also called registered or nominal share capital.
-It also specifies the types of shares and the value of each share
Declaration clause:-This is a declaration signed by the promoters stating that
they wish to form the company and undertake to buy shares in the proposed firm
-The declaration is signed by a minimum of seven promoters for public limited
company and a minimum of two for private company.
-The memorandum of association also contains the names of the promoters
-The promoters signs against the memorandum showing details of their names,
addresses, occupation and shares they intend to buy. Each signatory should agree
to take at least one share.
Articles of Association
-This is a document that governs the internal operations of the company
-It also contains rules and regulations affecting the shareholders in relation to the
company and
in relation to the shareholders themselves.
-It contains the following;
Rights of each type of shareholder e.g. voting rights
Methods of calling meeting and procedures
Rules governing election of officials such as chairman of the company, directors
and auditors
Rules regarding preparation and auditing of accounts
Powers, duties and rights of directors
Methods dealing with any alterations on the capital.
A list of directors with details of their names, addresses, occupations, shares
subscribed and statements of agreement to serve as directors
Declaration that registration requirements as laid down by law (by the companies
act) have been met. The declaration must be signed by the secretary or a
director or a lawyer.
A statement signed by the directors stating that they have agreed to act as directors.
A statement of share capital- this statement gives the amount of capital that the
company
wishes to raise and its subdivision into shares.
-Once the above documents are ready, they are submitted by the promoters to
the registrar of companies. On approval by the Registrar and on payment of a
registration fee, a certificate of incorporation (certificate of registration) is
issued
-The certificate of incorporation gives the company a separate legal entity.

Shares; The main source of capital for any company is the sale of shares.
-A share is a unit of capital in a company e.g. if a company states that
its capital is ksh.100,000 divided into equal shares of ksh.10 each.

Prepared By Mr. Peter Ochieng Otieno

[email protected] department kisumu national
polytechnic © 2017
 64

-Each shareholder is entitled to the company‟s profit proportionate to the

number of shares he/she holds in the company.
Types of shares:
Ordinary shares
Preference shares
Ordinary shares;-Ordinary shares have the following rights:
Have voting rights
Have no fixed rate of dividends. The dividends on them vary according to the
amounts of profit made
They have a claim to dividends after the preference shares
If the company is being liquidated, they are paid last after the preference shares
Preference shares;-They have the following characteristics;
Have a fixed rate of sharing profits(dividends)
Have a prior claim to dividends over the ordinary shares
Have no voting rights
Can be redeemable or irredeemable. Redeemable shares are the ones that can be
bought back by the company at a future date while irredeemable ones are ones
that cannot be bought back
Can be cumulative or non-cumulative. Cumulative shares are the ones that are
entitled to dividends whether the company makes profit or not. This means if
the company makes a loss or a profit which is not enough for dividends in a
certain year, the dividends to cumulative
shares are carried forward to the next year(s) when enough profit are made
-Non- cumulative shares are the ones whose dividends are not carried forward to
the following year(s)

This refers to loans from the public to a company or an acknowledgement

of a debt by a company
They carry fixed rate of interest which is payable whether profit are made or not.
They are issued to the public in the same way as shares.
They can be redeemable or irredeemable.
Redeemable debentures are usually secured against the company‟s assets in
which case they termed as secured debentures or mortgaged debentures.
NB: Where no security is given, the debentures are called unsecured /naked
debentures.
Loans from bank and other financial institutions;-A company can borrow
long term or short term loans from banks and other money lending
institutions such as Industrial and

Profits ploughed back;-A company may decide to set aside part of the profit
made to be used for specified or general purposes instead of sharing out all the
profit as dividends. This money is referred to as a reserve.
Bank overdraft;-A customer to a bank may make arrangements with the bank to
be allowed to withdraw more money than he/she has in the account.
Leasing and renting of property.
Goods brought on credit.
Acquiring property through hire purchase
TYPES OF COMPANIES
PRIVATE LIMITED COMPANY
 65

Private limited company has the following characteristics;

Can be formed by a minimum of 2 and a maximum of 50 shareholders,
excluding the employees,
Does not advertise its shares to the public, but sells them privately to specific
people
Restricts transfer of shares i.e. a shareholder cannot sell his/her shares freely
without the consent of other shareholders.
Can be managed by one or two directors. A big private company may however,
require a board of directors
Can start business immediately after receiving the certificate of
incorporation without necessarily having to wait for a certificate of
trading.
It does not have an authorized minimum share capital figure.
Has a separate legal entity and can own property, enter into contracts, sue or be
sued.
Has limited liability.
Has a perpetual existence.
Formation
-It must have a memorandum of association, article of association list of
directors, declaration signed by a director or lawyer and certificate of
incorporation.
Advantages of private limited company
Formation: The Company can be formed more easily than a public company.
The cost of information is less than that of a public company
Legal personality: A private company is a separate legal entity from its owners.
Like a person, it can own property, sue or be Sued and enter into contacts
Limited liability: Shareholders have limited liability meaning that they
are not responsible for the company‟s debts beyond the amount
due on the shares
Capital: They have access to a large pool of capital than sole proprietorship or
a partnership. They can borrow money more easily from financial
institutions because it owns assets which can be pledge as security
Management: A private company has a larger pool of professional managers than
a sole proprietorship or a partnership. These managers bring in professional
skills in their own areas which are of great advantage to a private company
Assured continuity of the business: Death, bankrupty or withdrawal of a
shareholder does not affect the continuity of the company
Trading: Unlike a public company a private company can commence
trading immediately upon receiving a registration certificate.

Disadvantages of a private company

Returns: A private company, unlike sole proprietorship or a partnership, must
submit annual returns on prescribed forms to the registrar of companies
immediately after the annual general meeting
Capital: A private company cannot invite the public to subscribe to its shares
like a public limited company. It therefore limited access to a wide
source of capital.
Share transfer: The law restricts the transfer of shares to its
members/shareholders are not free to transfer their shares
PUBLIC LIMITED COMPANY; -Public limited companies have the
following
characteristics:
a) Can be formed by a minimum of 7(seven) shareholders and no set maximum.

Prepared By Mr. Peter Ochieng Otieno

[email protected] department kisumu national
polytechnic © 2017
 66

Cannot start business before it is issued with a certificate of trading. This is

issued after the certificate of incorporation and after the company has raised a
minimum amount of capital
It‟s managed by a board of directors
The shares and debentures are freely transferable from one person to another.
It advertises its shares to the public/ invites the public to subscribe for/buy its
shares and debentures.
Must publish their end of year accounts and balance sheets
Must have an authorized minimum share capital figure
Has a separate legal entity and can own property, enter into contracts, sue or be
sued.
Has limited liability.
Has a perpetual existence.
Advantages of public limited company
Wide range of sources of capital :It has access to wide range of sources
of capital especially through the sale of shares and debentures
-They can also borrow money from financial institutions in large sums and have
good security to offer to the lenders.
Limited liability: Like private companies, public limited company‟s
shareholders have limited liability i.e. the shareholders are not liable for
the company‟s debts beyond the shareholders capital contribution.
Specialized management: PLC‟S are able to hire qualified and experie-nced
professional staff.
Wide choice of business opportunities: Due to large amount of capital a public
company may be suitable for any type of investment
Share transferability: Shares are freely transferable from one person to another
and affects neither the company‟s capital nor its continuity.
Continuity: PLC has a continuous life as it is not affected by the
shareholders death, insanity, bankruptcy or transfer of shares
Economies of scale: Their large size enables them to enjoy economies of scale
operations. This leads to reduced costs of production which raises the levels
of profit
Employee‟s motivation: They have schemes which enable employees to be part
owners of the company which encourages them to work harder in anticipation
of higher dividends and growth in the value of the company‟s shares.
Share of loss: Large membership and the fact that capital is divided into
different classes‟ means that the risk of loss is shared and spread.
Shareholders are safe guarded; Publicity of company accounts safeguard against
frauds.

High costs of formation: The process of registering a public company is

expensive and lengthy. Some of the costs of information are legal costs,
registration fees and taxes
Legal restrictions: A public company must comply with many legal
requirements making its operations inflexible and rigid
Alienation of owners: Shareholders non-participation in management is a
disadvantage to them
Lack of secrecy: The public limited companies are required by law to submit
annual returns and accounts to the registrar of companies denying the
company the benefit of keeping its affairs secret. They are also required to
publish their end of year accounts and balance sheets.

Prepared By Mr. Peter Ochieng Otieno

[email protected] department kisumu national
polytechnic © 2017
 67

Conflicts of interests: Directors may have personal interests that may conflict
with those of the company. This may lead to mismanagement.
Decision making; Important decision are made by the directors and
shareholders. The directors and shareholders meet after long periods
which make decision making slow/delayed and expensive.
Diseconomies of scale: The large size and nature of business operations of public
limited companies may result in high running/operation costs and
inefficiency
Double taxation: There is double taxation since the company is fixed and
dividends distributed to the shareholders are also taxed
Inflexibility: Public limited companies cannot easily change its nature of business
in response to the changing circumstances in the market. All shareholders
must be consulted and agree.
DISSOLUTION OF A COMPANY
The following are the circumstances that may lead to the dissolution of a company:
Failure to commence business within one year- If a company does not
commence business within one year from the date of registration, it may be
wound up by a court order on application of a member of the company.
Insolvency – when a company is not able to pay its debts, it can be declared
insolvent and wound up.
Ultra- vires – this means a company is acting contrary to what is in its objective
clause. In such a case, it may be wound up by a court order.
Amalgamation – two or more companies may join up to form one large company
completely different from the original ones.
Court order – the court of law can order a company to wind up especially
following complaints from creditors.
Decision by shareholders – the shareholders may decide to dissolve a company
in a general meeting.
Accomplishment of purpose or expiry of period of operation – a company may be
dissolved on accomplishment of its objects, or on expiry of period fixed for its
existence.
THE ROLE OF STOCK EXCHANGE AS A MARKET FOR
SECURITIES DEFINATIONS
(1) Stock: a group of shares in a public limited company
-Stocks are formed when all the authorized shares in a particular category have
been issued and fully paid for.
(2) Stock exchange market: is a market where stocks from Quoted companies
are bought and sold
-Stock exchange markets enable share holders in public companies to sell their
shares to other people, usually members of the public interested in buying them.
A Quoted Company: is a company that has been registered (listed) as a member
of the stock exchange market.
-Companies that are not quoted cannot have their shares traded in the stock
exchange market.
Securities: this could either refer shares or documents used in support of share
ownership.
Initial Public Offer (I. P. O): refers to situations in which a company has floated
new shares for public subscription ( Has advertised new shares and has invited
members of the public to buy them.
Secondary market: The market that deals in second hand shares i.e. the transfer
of shares from one person or organization to another.
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 68

There is only one stock exchange market in Kenya i.e. The Nairobi Stock
Exchange.
A person wishing to acquire shares will do so either at an IPO or in the
secondary market. However, an investor cannot buy or sell stocks directly in the
stock exchange market. They can only do so through stock brokers.

ROLES OF THE STOCK EXCHANGE MARKET

Facilitates buying of shares- it provides a conducive environment to investors
who want to buy shares in different companies.
Facilitates selling of shares- it creates a market for those who wish to sell their
shares.
Safeguarding investors‟ interests- it monitors the performance of the already
quoted companies and those found not meeting expectations are struck off.
Companies who want to be quoted must also attain a certain standard of
performance.
Provides useful information- it provides timely, accurate and reliable
information to investors which enable them to make decisions on the
investments to make. The information is passed on through mass media and
stock brokers.
Assist companies to raise capital- it assists companies to raise capital by creating
an environment through which companies issue new shares to members of the
public in an IPO.
Creation of employment- it creates employment for those who facilitate the
buying and selling of shares eg stock brokers, stock agents etc.
Raising revenue for the government- the government earns revenue by
collecting fees and other levies/ dues from activities carried out in the stock
exchange market.
Availing a variety of securities- it avails a variety of securities from which an
investor can choose from. The market therefore satisfies needs of various
investors eg investors who wish to buy from different companies can do so in
the market.
Fixing of prices- the stock exchange market is in a position to determine the true
market value of the securities through the forces of demand and supply. This
is of great importance to both the buyer and the seller.
Measures a country‟s economic progress- the performance of securities in the
stock exchange market may be an indicator of a country‟s economic progress
e.g a constant rise in prices and volumes of securities traded within a given
period of time would indicate that the country‟s economy is positively
growing.
Promotes the culture of saving- it provides investors with opportunities to
channel their excess funds. Such people act as role models to other members
of the society who may emulate them thereby promoting a saving culture.
PUBLIC CORPORATIONS (STATE CORPORATIONS)
These are organizations formed by and/or controlled by the government (the
government has a controlling interest). This means that the government owns
more than 50% shares in the corporation. Where the government has full
ownership, the organization is known as a parastatal
Public corporations are formed to perform certain/specific functions on
behalf of the government.
They are formed to provide essential services that are generally in the public
interest, and that may require heavy initial capital investment which few private
investors can afford
They are formed by the act of parliament.

Kenya Railways corporation- provides railway transport

Telkom Kenya-provides telecommunication services
Postal corporation of Kenya

Prepared By Mr. Peter Ochieng Otieno

[email protected] department kisumu national
polytechnic © 2017
 69

Industrial and commercial Development corporation (ICDC)- financial and

management services
Mumias and Chemelil sugar companies.
Kenya air ways- provide air transport services. etc

They are formed by the government under the existing laws i.e formed by
an act of parliament eg education act
Initial capital is provided by the government
They are jointly owned by the government and members of public/private investors
They are set up to perform certain specific functions on behalf of the government
They are managed by a board of directors appointed by the government or
appointed by the government and the joint owners
They have an entity of their own and can own property, enter contracts, sue and be
sued
They have limited liability
Some operate without a profit motive while others have a profit motive

-Some are formed by an act of parliament while others are formed under the
existing laws. -When formed by an act of parliament, the Act defines its
status obligations and areas of operation. The Act outlines the following;
Proposed name of the corporation
Aims and objectives
Goods or services to be produced and provided
Location(Area of operation)
The appointment of top executives
The powers of the Board of directors
The ministry under which it will operate
Management
-The public corporations are managed by a board of directors appointed by the
president or the relevant minister
-The chairman and the board of directors are responsible for the implementation
of the aims and objectives of the corporations.
-The chairman of the board of directors reports to the government
(president) through the relevant minister.
-The managing director who is usually the secretary of the board of
directors in the chief executive officer of the corporation
Sources of capital
-The initial capital is usually provided by the government as a vote of
expenditure for the ministry concerned
-Those corporations jointly owned by the government and the public raise
capital through the sale of shares
-financial institutions in form of loans
-Retained profits/profits ploughed
back. -Hire purchase
Advantages of public corporations
Initial capital is readily available because it is provided by the government

Prepared By Mr. Peter Ochieng Otieno

[email protected] department kisumu national
polytechnic © 2017
 70

Can afford to provide goods and services at low prices which would
otherwise be expensive if they were left to the private sector.
Most of them produce goods and services in large quantities thereby reaping
the benefits of large scale production
Some are monopolies. They hence enjoy the benefits of being a monopoly
e.g. they do not have to incur costs advertising since there is no
competition
They can be bailed out/assisted by the government when in financial problems
They have limited liability
Money for research and development can be made readily available by the
government
Through corporations the government is able to remove foreign
domination in the country
They can afford to hire qualified personnel.

They are managed by political appointees who may not have the necessary
managerial know how.
When they make losses, they are assisted by the government and this could lead
to higher taxation of individuals
Lack of competition due to monopoly leads to inefficiency and insensitivity to
customers feelings.
Political interference may hamper efficiency in the achievement of set
goals and objectives.
Decision-making is slow and difficult because the organizations are large.
They may lack close supervision because of their large sizes.
There is embezzlement of large sums of money leading to loss of public funds
The government is forced to provide goods and services to its citizens in all
parts of the country where at times its uneconomical to provide them
because the costs of providing them may surpass the returns
Public funds are wasted by keeping poorly managed public corporations.
Diseconomies of scale apply in these business units because they are usually
very large scale organizations e.g. decision making may take long.

Persistent loss making

Bankruptcy- where the corporation cannot pay its debts
Change in the act of parliament that formed the corporation
Privatization
Mismanagement, resulting in poor management of the corporation
TRENDS IN FORMS OF BUSINESS UNITS
(1) Globalizations:
This refers to the sharing of worlds resources among all regions i.e where
there are no boundaries in business transactions
Some companies referred to as multinationals, have branches in many parts of
the world e.g coca-cola company
Globalization has been made possible and effective through the development and
improvement of information and technology organization i.e

Prepared By Mr. Peter Ochieng Otieno

[email protected] department kisumu national
polytechnic © 2017
 71
World website (internet);one can acquire and order for goods through the
internet. This is referred to as Electronic Commerce (E- Commerce) and E-
Banking.
Mobile phones technology has revolutionized ways of life and business and
even remote areas have been opened up.
(2) Business Amalgamations/combinations
This occurs when two independent business enterprises combine to form one large
organization
Levels of combinations
Vertical combination; This is when businesses engaged in different but
successive levels of production combine e.g. primary(extractive) level
combines with secondary(manufacturing)level or secondary level combining
with tertiary level. Example; A company producing cotton (raw materials)
combining with a textile industry.
Horizontal combination; This is where business enterprises of the same level
combine e.g. secondary and secondary levels e.t.c

Types of Amalgamation/combination
Amalgamations whether vertical or horizontal can be achieved in these ways;
a) Holding companies
-A holding company is one that acquires 51 percent or more shares in one
or more other companies.
-The various companies entering into such a combination are brought under a
single control.
-These companies are controlled by the holding company and are called
Subsidiaries.
-The subsidiary companies are however allowed to retain their original names and
status, but the holding company appoints some members to be on the board of
directors of these subsidiaries, so as to control their activities.
-Holding companies are usually financial institutions because they are able to
buy controlling shares in subsidiary companies
b) Absorptions (takeovers)
This refers to a business taking over another business by buying all the
assets of the other business which then ceases to exist.
Example; Kenya Breweries took over the castle
company in Kenya c) Mergers( Amalgamation):
This is where two or more business organizations combine and form one
new business organizations.
-The merging companies cease to exist altogether.
d) Cartels
This is a group of related firms/ companies that agree to work together in order to
control output, prices and markets of their products – O. P. E. C (organization of
petroleum exporting countries) is an example.
Privatization: this is the process of transferring / selling state owned
corporations to public limited companies or private investors. This is done by
the Government selling their shareholding to members of the public. The main
aim is to:


Improve efficiency
Generate revenue for the
government.  Reduce government
control

To break monopolistic practices

To reduce government expenditure on corporations that relies on government
subsidy.
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 72

Check off system- this is a method of remitting money especially to SACCOS

where the employer deducts the contribution from the source and submits it to
the SACCO on behalf of the employee who is a member of the SACCO.
Burial Benevolent Funds (B. B. F): some SACCOS have started systems/
funds to assist their members financially in burials through creation of BBF.
Front Office Savings Account (FOSA); SACCOS have expanded their services
to members by introducing FOSA. The account enables members to
convinientlydeposit and withdraws money. A member may also be provided
with an ATM card which enables him/her to withdraw money at various pesa
points/ ATM‟s.
Franchising: this is where one business grants another the rights to manufacture,
distribute or produce its branded products using the name of the business that
has granted the rights eg
General motors‟ has been granted franchise to deal in Toyota, Isuzu and Nissan
vehicles.
Trusts: This is where a group of Companies work together to reduce
competition. Trusts may also be formed where a company buys more than
50% of shares in a competing company so as to reduce competition.
Performance contracts:Employees in state corporations are expected to sign
performance contracts in order to improve their efficiency. Other private
institutions are also adopting the same practice.
MONEY AND BANKING

Barter trade
This is a form of trade where goods and services are exchanged for other goods
and services.
Benefits
Satisfaction of wants: And individual is able to get what he or she needs.
Surplus disposal: an individual or country is able to dispose off its surpluses.
Social relations: it promotes social links since the communities trade together.
Specialization: some communities shall specialize in a particular commodity.
Improved living standards: this is enhanced by receiving what one is unable to
produce.
Limitations of Barter trade
(i) Lack of double coincidence of wants: - it is difficult to find two people with
the need for each other‟s product at the same time.
(ii) Lack of store of value/ perishability of some commodities: - some goods
are perishable thus their value cannot be stored for a long time for future
purposes e.g. one cannot store vegetables for exchange purposes in future.
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 73

(iii)Indivisibility of some commodities: -it is difficult to divide some products

like livestock into smaller units to be exchanged with other commodities.
Lack of standard measure of value: - It is not easy to determine how much one
commodity can be exchanged for a given quantity of another commodity.
Transportation problem: It is difficult to transport bulky goods especially when
there is no faster means of transport.
Lack of a standard deferred payment: - The exchange of goods cannot be
postponed since by the time the payment is made, there could be fluctuation in
value, demand for a commodity may not exist and the nature and quality of a
good may not be guaranteed. It may be therefore difficult what to decide what
to accept for future payment.
Lack of specialization: - Everyone strives to produce all the goods he or she
needs due to the problem of double coincidence of wants.
Lacks unit of account- it is difficult to assess the value of commodities and
keep their record.

MONEY SYSTEM
Money is anything that is generally accepted and used as a medium of exchange
for goods and services.
Features/ characteristics of Money
For anything to serve as money, it must have the following characteristics:
Acceptability: The item must be acceptable to everyone.
Durability: The material used to make money must be able to last long without
getting torn, defaced or losing its shape or texture.
Divisibility: Money should be easily divisible into smaller units
(denominations) but still maintains it value.
Cognizability: The material used to make money should be easily recognized.
This helps reduce chances of forgery. It also helps people to differentiate
between various denominations.
Homogeneity: Money should be made using a similar material so as to appear
identical. This eliminates any risk of confusion and forgeries.
Portability: - Money should be easy to carry regardless of its value.
Stability in value: The value of money should remain fairly stable over a given
time period.
Liquidity: - it should be easily convertible to other forms of wealth (assets).
Scarcity: - It should be limited in supply. If it is abundantly available its value will
reduce.
Malleability- the material used to make money should be easy to cast into various
shapes.
Not easy to forge- money should not be easy to imitate.

Medium of exchange: It is generally acceptable by everyone in exchange of

goods and services. It thus eliminates the need for double coincidence of
wants.
Store of value: It is used to keep value of assets e.g. surplus goods can be
sold and then money kept for future transactions.
(iii)Measure of value: Value of goods and services are expressed in money form.
Performance of businesses is measured in terms of money.
Unit of account: It is a unit by which the value of goods and services are
calculated and records kept.
Standard of deferred payment: it is used to settle credit transactions.
Transfer of immovable items (assets): Money is used to transfer assets such as
land from one person to another.
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 74

DEMAND FOR MONEY

This is the tendency or desire by an individual or general public to hold onto
money instead of spending it. It also refers to as liquidity preference. Money is
held by people in various forms:

Notes and coins

Securities and bonds
Demand deposits such bank current account balances.
Time deposits such as fixed account balances
REASONS (MOTIVES) FOR HOLDING MONEY
Transaction Motive: Money is held with a motive of meeting daily expenses for
both the firms and individuals. The demand for money for transaction purpose
by individuals depends on the following factors:
Size/level of individual‟s income: The higher the income of and individual,
the more the number of transactions thus high demand for transactions.
Interval between pay days/ receipt of money: if the interval is long, then high
amount of money will be held for transaction reasons.
Price of commodities: if the prices are high, the value of transactions will also
increase thus more money balances required.
Individuals spending habits-people who spend a lot of money on luxuries will
hold more money than those who only spend money on basics.
Availability of credit-people who have easy access to credit facilities hold little
amount of money for daily transactions than those who do not have easy
access to credit.

Income motive i.e. holding money to spend on personal/ family needs.

Business motive i.e. holding money to meet business recurring needs such
as paying wages, postage, raw materials. Etc
Precautionary Motive: Money is held in order to be used during
emergencies such as sicknesses.
The amount of money held for this motive will depend on the factors such as:
Level of income- the higher the income the higher the amount of money
held for precautionary motive.
Family status- high class families tend to hold more money for precautionary
motive than low class families.
Age of the individual- the aged tend to hold more money for precautionary
motive than the young since they have more uncertainties than the young.
Number of dependant- the more the dependants one has, the more the money
they are likely to hold for precautionary motive.
Individual‟s temperament- pessimists tend to hold more money for
precautionary motives than the optimists because they normally think things
will go wrong.
Duration between incomes- those who earn money after a short time are likely
to keep less money than those who earn money after a long time.
Speculative Motive: Money is held to be used in acquiring those assets whose
values are prone to fluctuations such as shares/ money is held anticipating
fall in prices of goods and services. This depends on the following:
The wealth of an individual
The rate of interest on government debt instruments
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 75

Interest on money balances held in the bank.

How optimistic or pessimistic a person is.
SUPPLY OF MONEY
This is the amount of money/ monetary items that are in circulation in the
economy at a particular period of time. They include the following;
Total currency i.e. the coins and notes issued by the central bank.
Total demand deposits: money held in current accounts in banks and are
therefore withdrawable on demand.

Factors influencing supply of money

Government policies: If there is more money in the economy, the government
will put in place measures to reduce the supply such as increasing interest
rates.
Policies of commercial banks: The more the loans offered by commercial
banks, the more the amount of money in circulation.
Increase in national income: increase in national income means that more
people will be liquid due to increase in economic activities.]
Increase in foreign exchange: The foreign exchange reserves will increase
thus supply increases.
BANKING
This is the process by which banks accept deposit from the public for safe
keeping and lending out the deposits in form of loans.
A bank is a financial institution that accepts money deposits from the public
for safe keeping and lending out in terms of loans.

COMMERCIAL BANKS
These are financial institutions that offer banking services with a profit motive.
Their activities are regulated by the Central bank.
Functions of commercial banks
Accepting deposits: They accept deposit from members of the public inform of
current accounts, savings account and fixed deposit accounts. Such accounts
help individuals to keep money safely.
Provision of safe means of payments: They provide safe and reliable means of
payment such as cheques, bank drafts, credit transfers, electronic funds
transfers etc.
Provision of loan facilities: They provide loans to members in form of short term
and long term. These loans are repayable with interests thus income to the
banks.
Facilitates foreign exchange payments: They provide foreign exchange that is
used in international trade. They also make payments on behalf of their
customers.
 Provision of safe keeping of valuables: They provide security for valuables
to their customers at a fee
Discounting bills of exchange: This is process by which a bank accepts bills of
exchange and promissory notes from its customers in exchange of cash less
than the face value of the bill or note.
Provision of financial information: - They advice their clients on financial matters
affecting their businesses such as investment option and wise use of loans.

Prepared By Mr. Peter Ochieng Otieno

[email protected] department kisumu national
polytechnic © 2017
 76

Money transfer:- They provide varied, safe and reliable means of money transfer.
Such means include cheques, standing orders, credit transfers, bank drafts,
letters of credit, credit cards, travelers cheques etc.
Act as guarantors and referees: - They act as guarantors to their customers who
want to acquire credit facilities from other financial institutions.
Act as intermediaries: - They act as a link between the savers and borrowers.
Credit creation: - This is the process of creating money from the customer deposits
through lending.
Provision of trusteeship: - They can manage a business on behalf of the client
especially if the client does not have managerial skills. They can also manage
the assets of the deceased client if there was no will.
TYPES OF ACCOUNTS OFFERED BY
COMMERCIAL BANKS 1. Current account
This is an account where money deposited can be withdrawn on demand by
the customer by means of a cheque. This means that money can be withdrawn
at any time during the official working hours so long as the account has
sufficient funds. This account is also referred to as demand deposits.
Features characteristics of current accounts
Deposits of any amount can be made at any time.
Balances in this account do not earn any interest.
The account holder is not required to maintain a minimum cash balance in this
account
Withdrawals can be at any time without giving and advance notice as long as the
customer has sufficient funds.
Cheque books are issued to the account holder to be used as a means of payment/
cheques are usually used to withdraw money from the account.
Monthly bank statements are issued to the account holder.
Overdraft facilities are offered to the account holders‟ i.e the bank can allow
customers to withdraw more money than they have in their accounts.

No minimum balance is maintained hence the account holder can access all his/her
money.
Withdrawals can be made at any time.
Transactions are made easier by use of cheques for example; one does not have
to go to the bank in order to make payment.
Overdraft facilities are available..
It is possible to deposit any amount at any time during the office hours.
Use of cheques as means of payment serves as evidence of payments made.
Payments can be done even if there are insufficient funds in the account using
post dated cheques.
The account holder can withdraw any amount at any time without notice as long
as there are sufficient funds in the account.

Lengthy procedures of opening the account.

The account holder does not earn any income since the balances in the current
account does not earn interest.
Initial deposit when opening the account is usually high hence discourages
prospective customers.

Prepared By Mr. Peter Ochieng Otieno

[email protected] department kisumu national
polytechnic © 2017
 77

Customers are not encouraged to save since they can access their money at any
time.
Ledger fees are charged on the account making the operations of the account
expensive.
2. Savings account (deposit account)
This is an account operated by individuals and firms that have money to save.
There is minimum initial deposit that varies from bank to bank.
A minimum balance is maintained at all times.
The withdrawals are up to a certain maximum within a given period. Withdrawal
above this maximum will require notice.
Account holders are issued with a pass book or a debit card (ATM card) for
deposits and withdrawals.
Overdraft facilities are not allowed.
Ordinarily, withdrawals across the counter can only be done by the account holder.
The balance on the account above a certain minimum earns some interest.

Customers are encouraged to save because of the restricted withdrawals.

There are relatively low banking charges.
Initial deposit is usually low as compared to other accounts.
The balances earn interest to account holder hence an incentive to save.
ATM facilities have made account operations very convenient to customers.
Disadvantages Savings account
A minimum balance must be maintained at all times and the customer is denied
access to that money.
For across the counter withdrawals, it is only the account holder who can withdraw
cash.
Withdrawals are restricted and sufficient notice is required before large
amounts are withdrawn.
The account holders do not enjoy services such as cheque books and overdraft
facilities like the current account holders.
Easy access to the money through ATM cards encourages overdrawals.
Anybody who knows the pin of the card (ATM card) can withdraw money from the
account.
Requirements for opening an account
The following are some of the requirements for opening either a current
account or a savings account:
Photocopies of identification documents such as National Identity Card or Passport.
Passport size photographs (number varies from bank to bank). Some banks are
nowadays taking the photographs instead of the customers providing them.
For current account holders, an introductory letter from an existing customer
from the prospective customer‟s employer.
Filling in the application form provided by the bank.
Signing of the specimen signature cards. Usually two.
NB: Once these requirements are fulfilled, the bank allocates the customer an
account number, upon payment of an initial deposit.
 3. Fixed deposit account
This account is also known as time Deposit account. It is maintained by those
who have money not meant for immediate use.
Once money is deposited, there are no withdrawals until the time expires.
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 78

Advantages of Fixed deposit account

Interest earned is relatively high as compared to savings account.
There are no bank charges to the account holder.
Money held in fixed deposit account can be used as security to acquire bank loans.
Restricted withdrawals encourage savings.
The account holder has time to plan for the deposited money.
Access to money is not allowed until the end of the agreed period.
Interest is forfeited if there is pre-mature withdrawal.
The minimum amount of money for this account is high.
The customer is not allowed to deposit more money in this account.
A notice is required if the customer wants to terminate the contract before expiry
date.
The customer is denied the use of the deposited funds before the expiry of the
period.

REQUIREMENTS TO OPEN AND OPERATE A BANK ACCOUNT

Identification documents such as National Identification Card, Passport and
Driving License.
Reference letter from employer or an existing customer.
Filling an application form giving the information about the customer.
Submission of a specimen signature to be held by the bank.
An initial deposit is paid and the account becomes operational.
NON- BANK FINANCIAL INSTITUTIONS
These are financial institutions that offer finances for development purposes to
individuals and organizations.
These institutions address themselves to the needs of specific sectors in the
economy.
They offer the finances inform of either short term or long term loans.
The following are some of the non-bank financial institutions in Kenya
Development banks
Building societies
Finance houses
Savings and Credit Co-operative Societies
Micro finance organizations
Insurance companies
Pension Funds‟ Organizations
Hire Purchase Firms

Housing Finance Companies

They are mainly formed to finance housing activities that is they either put up
houses and sell to the individuals or offer mortgage finance to those who wish to
put up their own houses. They includes Housing Finance Corporation of Kenya
(HFCK), National Housing Corporation (NHC)
Development Finance Institutions
These are development banks which are formed mainly to provide medium term
and long term finances, especially to the manufacturing sector. They perform the
following functions
Financing people who wishes to start either commercial of industrial
enterprises, as well as the existing enterprises in the above sectors for
expansion
Offering training services through seminars and workshops to equip the
entrepreneurs‟ with the relevant skill in industrial and commercial sectors

Prepared By Mr. Peter Ochieng Otieno

[email protected] department kisumu national
polytechnic © 2017
 79
Offer advisory services to those people wanting to start or expand their businesses
Acting as guarantors to people wishing to take loan from other lending
institutions to help them expand their business
They includes the following Kenya Industrial Estates (KIE), Development
Finance Company of Kenya (DFCK), Industrial Development Bank (IDB),
Industrial and Commercial Development Corporation (ICDC)
Savings and Credit Co-operative societies
These are co-operative societies that are formed to enable members save and
obtain loans at most conveniently and favorable conditions. They are formed by
those engaged in similar activities. They includes: Mwalimu Savings and Credit
Co-operative Societies; Afya Savings and Credit societies; Harambee Savings and
Credit Societies
Insurance companies
These are companies that assist in creating confidence and sense of security to
their clients as well as offering financial assistance to their clients. Their
functions include;
Enable the policy holders to save through their schemes
Provide finances to their policy holders in form of loans
Offer guarantee services to the policy holders wishing to obtain loans from
other non-bank financial institutions
Provide advisory services to the policy holders on security matters
Provide finances to meet the expenses incases of loans
They includes the following: Stallion Insurance Company; Madison insurance
company; Blue shield insurance company
Micro Finance Companies
These are financial companies formed to provide small scale and medium size
enterprises with finance. They also carry out the following functions
Offer advisory services to their clients in matters such as business opportunities
available and how to operate them.
Encourage the clients to carry out business activities by offering loans to them
They encourage the savings by advancing loans to the individual member of a
certain group
They supervise, monitor and advise those whom they have given loans
They includes the following: Kenya Women finance Trust (KWFT), Faulu
Kenya
Agricultural Finance Houses
These are institutions formed to promote the agricultural sector. They carry out the
following
Giving loans to farmers
Offering supervisory and training services to the loaned farmer
Offering technical and professional advice to loaned farmer
Carry research and come up with better ways and means of agricultural sector
Coming up with projects that would open up new areas for agriculture

Differences between commercial banks and non-bank financial institutions

Commercial Banks Non-Bank Financial Institutions
(i) Offer only two types of accounts
(i) Offer all types of accounts savings
and fixed deposit
Provide both short term and Mainly provide medium term and
(ii) medium (ii) long
term finances to their customers term finances
(iii)Their finance is not restricted to any (iii)Their finance is restricted to a
sector particular
(iv) May offer foreign exchange services sector
(v) Their finance is mainly for working
capital (iv) Do not provide foreign exchange
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 80

Participate in clearing house as they services

offer cheque They provide capital for development
Offer facilities for safe keeping Do not participate in clearing house
of valuable items such as title since they don‟t offer
deeds Do not offer facilities for safe keeping
Always in direct control of the central of valuable items
bank Not usually in direct control of the
(ix) May offer overdraft facilities central bank
to their customers Do not offer overdraft facilities to
their customers

THE CENTRAL BANK

This is a bank established by the government through the act of the parliament
to manage and control the monetary matters in the country. It was formed to
perform the following functions;
Issue currency in the country, which includes both new notes and coins to
replace the worn-out ones
Banker to the commercial banks, by ensuring that all the commercial banks in
the country operate an account with them
Being the government „s bank, by offering banking services to the
government which enables the government to operate an account with
them
Advisor to the government on financial issues in the economy
Controller of the commercial banks on how they carry out their functions in the
economy to ensure that their customers are served well
Provide links with other central banks in other countries, facilitating financial
relationships. It also provide a link between the country and other financial
institutions such as IMF
Maintain stability in the exchange rates between the local currencies and the
foreign ones.
Act as the lender of the last resort to the commercial banks to enable them
meet their financial obligations when need arise
Facilitates the clearing of cheques between different commercial banks through
its clearing house (a department in the central bank)
Administering of the public debt by facilitating the receipt and providing a
means through which the government pays back the borrowed money
Control of the monetary system in the country in order to regulate the
economy. In doing this they put in place various monetary policies that can
either expand the economic activities in the country or depress them.
Monetary policy refers to the deliberate move by the government through the
central bank to manipulate the supply and cost of money in the economy in
order to achieve a desirable economic outcome. They do this through the use of
various tools of monetary policies which includes the following: Bank rates;
Open market Operation (OMO); Cash Liquidity ratio requirement; Compulsory
deposit requirement; Selective credit control; Directives; Request.
Bank rates
They may increase or decrease the interest rate at which they lend to the
commercial banks to enable them increase or decrease the rate at which they
lend money to their customers in the economy to enable the government achieve
the desirable economic development in the country

Prepared By Mr. Peter Ochieng Otieno

[email protected] department kisumu national
polytechnic © 2017
 81

When they increase their lending interest rate, the commercial banks also raise
their lending rates to the consumers to reduce the number of people obtaining
loans, leading to a reduction of money supplied in the economy.
When they decrease their lending interest rate, the commercial banks also
decreases their lending rates to the consumers, increase the amount of money
supplied in the economy
Open Market Operations (OMO)
This is where they regulate the supply of money in the economy by either selling
or buying the government securities (treasury bills or bonds) in the open market.
That is when they want to increase the supply in the economy, they buying the
securities from the members of the public who had bought them to increase more
supply of money in the economy.
When they want to reduce the amount of money in circulation they will sell the
government security to the public in the open market, to mop up/reduce the
excess supply in the economy The payment of the securities takes money from
the individuals accounts in the commercial banks, reducing the amount that the
individual can use in the economy, while when buying the central bank pays the
security holders in their respective accounts in the commercial banks, increasing
the amount that they can use in the economy
Cash/liquidity ratio requirement
Here the central bank expect the commercial bank to keep a certain proportion of
their total deposits in form of cash to enable them meet their daily needs, while the
rest are held in liquid assets. This proportion can be reduced by the central bank to
reduces the amount of money held by the commercial banks in order to reduce the
amount of money spent by the commercial banks in cash, reducing the amount of
money in supply, or they may increase the proportion to be held by the
commercial banks to enable them increase the amount of money they spent in
cash, increasing the amount of money in supply
Cash ratio =
Compulsory deposit requirements
The commercial banks are required to maintain a certain amount of deposits
with the central bank which will be held in a special account where the money
stays frozen. This reduces the amount of money that the commercial banks
hold and are able to spend in their operation, influencing the supply of money
in the economy.
The deposit may be increase to reduce the amount of money in the commercial
banks, or reduced to increase the amount of money in the commercial banks
Selective credit control
The central bank may issue a special instruction to the commercial bank and
other financial institution only to lend more in a particular sector to control the
amount of money reaching the economy. The instruction may be removed, if the
bank feels that the supply in the economy has reduced and needs to be increased
Directives
The central bank may issue a directive to the commercial banks on the interest
rate they should charge on their lending and to increase or reduce the margin
requirement for borrowing to make it harder or easier for the customers to obtain
loan.
Margin requirement is the proportion of money expected to be raised by the client
to finance the project he/she wants to obtain the loan for, before being given a
loan to complete the project with.
Request (Moral suasion)

Prepared By Mr. Peter Ochieng Otieno

[email protected] department kisumu national
polytechnic © 2017
 82

The central bank may appeal to other financial institutions to exercise restrain
in their lending activities to the public to help in controlling the money supply
Trends in Banking
These are the positive changes that have taken place in the banking sector to
improve their service deliveries to their customers. They include;
The use of Automatic Teller Machines (ATMs), which has made it possible
for the customers to access their money any time of the day. The ATM cards
that are used for withdrawals from the ATM machines can also be used as a
debit card to make purchases.
Networking all their branches, which has enable the customers to
carry out their transactions in any of the branch.
E-Banking, which is the banking through the internet. This has made it
possible for the customers to transact their financial businesses on-line.
Relaxation of some of the conditions on opening and operating some of the
accounts to make them be more attractive to their customers.
Offering varieties of products which includes easier credit facilities to their
customers to attract more customers.
Liberalization of foreign exchange dealings by licensing forex bureaus to offer
services to the customers, improving the accessibility to the service.
Improving the customers care services, with some bank setting up a
departments known as the customer care department to offer detailed
assistance to their customers.
Allowing non bank financial institutions to offer banking services to the
members of the public, for example; KWFT, SACCOs, FOSA, Faulu Kenya,
etc
Mobile Banking services (M-Banking), which allows the customers to
carry out their financial transactions over their mobile phones. It has
brought about several benefits/ advantages to their customers which
includes;
Advantages of m-banking
Easy transfer of funds from one account to the other in the same bank (inter
account transfer)
Easy transfer of money from ones account to his mobile phone for other
transactions
Ability to check ones account balance in the bank with ease
Easy to monitor your financial transactions by checking your transaction
details over the phone
Easy payment of the bills such as electricity bill, Dstv bills, etc and other wages
Ability to transfer money from one mobile number to other in collaboration with
the service providers
Easy request for new cheque books and bank statements from the banks
Able to top up air time to your mobile phones in collaboration with the service
providers
Reduced risk of carrying large sums of money in cash or cheques that may
be stolen However this development has also come with its challenges,
which includes:

Disadvantages of m-banking
Registration to enjoy all these services must physically be done in the banking
hall, which subject the customers to stress queues of the bank
Only the registered mobile number can carry out these transactions which limits
the customer to only using one number
Users requires a mobile phone with a screen that can display the transaction
which a times some may not a ford

Prepared By Mr. Peter Ochieng Otieno

[email protected] department kisumu national
polytechnic © 2017
 83

Mobile phones can easily be lost or stolen from the owner, inconveniencing
him from carrying out the transactions
Bank transaction information may load slowly, which may makes it expensive for
the user
Possibility of transferring the funds to a wrong account, due to error in typing of
the account number
Introduction of agency banking, which has made them to make their services
to be more accessible to even areas where they may have not put up a
banking hall.
Agency banking is whereby a retail stores, supermarket, or any other commercial
businesses are authorized by the financial institutions to carry out financial
transactions on their behalf. They may offer the following services
Receiving customer deposits
Offering withdrawal services
Transfer of funds for customers
Pay bills for the customers
Balance inquiry services
Opening new accounts for the customers
Fill loan application forms for them
Advantages of agency banking
Reduction of set up and delivery cost to the banks, which in turn passes to the
customers in form of reduced cost of accessing services
Time saving as the agents are located close to the customer and the customer
may carry out other transactions as he withdraw the money
More convenient for the customer to bank with their local retailers other than the
traditional banking halls
Enable the bank to reach far places within the country

REVISION EXERCISES
Give four advantages of barter trade.
Highlight four services offered by the central bank of Kenya to the commercial
banks.
State four methods through which commercial banks can transfer money.
State any four current developments that have taken place in the banking sector.
Outline four tools of monetary policy used by the central bank to control money
supply.
Outline four factors that may have led to the downfall of barter trade.
Highlight two factors that may influence:
Transaction motive.
Speculative motive.
Mention four functions of commercial banks in an economy.
Outline three factors that influence the supply of money.
Give four characteristics of money.
The following are some of the accounts available to customers in Kenya
banking industry: Current account, Savings account and Fixed deposit
 account. Give the account that corresponds to each of the description given
below.

Description Type of
account
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 84

Account holders required to deposit a specific

initial amount as well as maintaining a
minimum balance.
Account holders may deposit and withdraw
money whenever they want without
maintaining a minimum balance.
Banks pay interest on deposit at comparatively
higher rates.
Money may be deposited at any time and
interest is earned if a specific balance is
maintained.

Outline four benefits that accrue to a customer who uses automated teller
machine (ATM) banking services.

Explain five functions of the central bank of Kenya.

Describe four measures that the government may put in place to reduce the
amount of money in circulation.
Explain five services offered by commercial banks to their customers.
Explain five ways in which commercial banks facilitate payment on
behalf of their customers.
Explain four services that the central bank of Kenya may offer as a banker to
commercial banks.
Explain five in which banks contribute to the development of Kenya
Outline five reasons why banks currently account is popular with traders
Explain service offered to commercial banks by the central bank of Kenya
In what ways of the functions of commercial bank differ with those of non- bank

Explain five ways in which central bank of Kenya may control the supply of
money in The country
Describe methods which may be used by commercial banks to advance money to
customers.
A businessman wishes to obtain a loan from a commercial bank. Highlight the
Conditions that he should satisfy before the bank can grant him the loan
13. Explain five services that the central bank of Kenya offers to commercial banks
Explain four disadvantages of using a bank overdraft as a source of finances

Describe four ways in which a non- bank financial institutions differ from the
commercial banks
Discuss five reasons why business people prefer to operate bank current accounts
16. Outline the benefits that bank customer gets from operating a current account
Explain the
5
services offered by a commercial banks to their customers
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 85

TRANSPORT
MEANING OF TRANSPORT
Transport is the physical movement of people and goods from one place to
another. It helps bridge the gap between producers and consumers hence
creating place utility.

Importance of Transport to Business

Bridging the gap between producers and consumers/ linking consumers to
producers-Transport links consumers to producers which enable the
consumers to obtain the goods they need.
Employment creation-Transport helps in solving unemployment problem by
creating job opportunities. For example, people may be employed as drivers,
pilots, mechanics and road constructors.
Promotes specialization-Transport enables people to specialize in jobs they are
best at. For example; producers would concentrate in production only while
other people carry out distribution.
Making goods and services more useful-Through transport goods are moved from a
place where they are least required to a place where they are most required
thereby making them more useful.
Improving people‟s standard of living-It enables consumers to get a variety of
goods and services thereby improving the standards of living.
Availing a wide market for products-It helps producers to widen the markets for
their products by enabling them access to areas they would otherwise not have
accessed
Increased production/ facilitates mass production-Due to the wider market
created through transport, producers are able to increase the volume of goods
produced.
Avoiding wastage-Transport makes it possible for surplus goods to be disposed of
by taking them to areas where they are required. Perishable goods such as
flowers, fruits and vegetables can also be transported fast hence minimizing/
avoiding wastage.
Promoting development of industries-Through transport, raw materials can
be taken to manufacturing industries and also finished goods to the market.
Similarly, it promotes development of service industries such as tourism.
Adds value to goods and services- creates utility in goods by moving them from
the point of production to where they are needed thereby adding their value.
Leads to the opening of new markets- Goods and services can be taken to new areas
with ease.
It facilitates the movement of labour- people can easily move from where they
stay to where they work.
 ESSENTIAL ELEMENTS OF TRANSPORT
In order for a transport system to function efficiently it should have certain basic
elements. These elements are:
Unit(S) of carriage
Methods of propulsion
Ways
Terminals(terminus)
A. Unit(S) of carriage

Prepared By Mr. Peter Ochieng Otieno

[email protected] department kisumu national
polytechnic © 2017
 86

This refers to anything i.e. vessel that is used to transport goods and people from
one place to another. Units of carriage include: ships, trains, aeroplanes, motor
vehicles, bicycles and carts. Units of carriage are also referred to as means of
transport.

Methods of propulsion
This is the driving force (source of power) that makes a unit of carriage to move.
The power for most vessels may be petroleum products, electricity, human force
or animal power.
Ways
It refers to either the route or path passes by the vessel. The route can be on land,
on water or through air. Examples of ways are roads, railways, paths, canals,
seaways and airways. The ways can be classified into either natural ways or
manmade ways.
I. Natural ways-As the name suggests, natural ways are the ways that are
provided by nature. They are therefore free to acquire. They include airways and
seaways.
II. Man-made ways-These are ways that are made available by human being.
They include roads, canals and railways. Manmade ways are usually
expensive to construct and maintain.
Terminals (terminuses)
The vessel used to carry goods and people starts from one destination and ends up
at another. At these destinations the loading and off-loading take place
respectively. The loading and off-loading places are referred to as terminals or
terminus. Examples of terminuses are bus stations, airports and seaports.
MODES OF TRANSPORT
Mode refers to the manner in which transport is carried out. There are three
modes of transport namely:
Land transport
Water transport
Air transport
Land transport
This mode of transport involves movement of goods and people using units of
carriage that move on dry land. The various means under this mode includes:
Human Porterage
This involves human beings carrying goods on their heads, shoulders or backs.
Human Porterage as a means of transport is the oldest kind of transport and is still
very common in our society. The means is suitable for transporting light luggage
over short distances. It is also appropriate where other means of transport are not
available or convenient.
Advantages of Human Porterage
Could be the only means of transport available
Compliments other means of transport
Flexible as it has no fixed time table or routes
 May be a cheap means compared to other means of transport
Readily available when required
Convenient over short distances
Disadvantages of human Porterage
I. Not suitable for long distances
They add onto congestion on roads
Not suitable for transporting heavy and bulky goods
It is relatively slow
v.Relies on human energy which is
exhaustible b) Carts
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 87

Carts are open vessels usually on two or four wheels that are pushed or pulled by
either human being or animals such as oxen and donkeys. The carts pushed or
pulled by human beings are referred to as hand carts or mikokoteni. The ones
pulled by animals, on the other hand, are called animal driven carts. Carts are used
to carry relatively large quantities compared to human porterage. Like human
porterage, they are not suitable for long distances. Types of goods that are
transported using this means include, agricultural produce, water and animal feeds.
Advantages of carts
i. Compliments other means of transport
Relatively cheap to hire
Initial buying and maintenance cost is low
Appropriate in remote areas where other means are not available
Readily available for hire
Can carry fairly heavier and bulky goods
Convenient for transporting goods over short distances
0 Disadvantages of carts
May not be suitable for transporting heavy and bulky goods
Cause traffic jams on roads leading to congestion and accidents
Not suitable for transporting goods over long distances
Vehicles
These are means (units of carriage) of transport that ferry goods and people on
roads. Vehicles are the most commonly used means of transport.
Vehicles are either passenger or goods carriers. Passenger carriers may be buses,
matatus, taxis and private cars while goods are transported using Lorries, pick-
ups, tankers and trailers. Vehicles are expensive to acquire and maintain. The
convenience of vehicles may depend on the nature of the road on which they
travel.
Some roads are impassible especially when it rains while others are usable
throughout the year (all weather roads).Of special concern in road transport is the
matatus. These are privately owned passenger vehicles which were introduced to
supplement the existing mainstream transport companies that were inadequate at
independence. They got their name from the amount of fare they used to charge
originally, that is, mapeni matatu. The operators have to obtain the relevant
documents such as insurance cover in order to be allowed to operate. Their owners
may form associations which take care of their interests along given routes or in
certain areas.
Advantages of matatus
They supplement regular bus companies, especially in remote areas where they
are the only means.
They fill up faster than buses hence save time
They are more flexible since they can change routes easily depending on demand
They reach out into the interior of rural areas where big buses cannot access
They are more flexible with the fares they charge
They are easier to hire as most of them are readily available
They are cheaper to acquire as compared to buses
Disadvantages of matatus
i. Some matatus are poorly maintained to the extent of being unroadworthy
Most drivers are reckless as they rush to compete for customers. They pick or drop
passengers anywhere
In some cases, touts use impolite language when dealing with passengers
They may cause noise pollution such as unnecessary hooting and loud music
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 88

v. They may cause congestion in towns unnecessarily because of careless driving and
parking
Uncalled for sudden increase in fares at peak hours, during the night and on public
holidays
Their operation is concentrated on peak hours, rarely operating at night.
They at times unexpectedly change their route hence causing breach of contract.
Advantages of vehicles
Most readily available means of transport
Relatively fast compared to carts and human Porterage
Relatively cheaper over short distances
Flexible as it can offer door to door service
Vehicles may be available for transporting special goods
Roads are widely spread thereby making many areas accessible.
Disadvantages of vehicles
Acquisition and maintenance costs are high
May not be suitable for transporting heavy and bulky goods over long distances
as compared to railways
Traffic jams in roads may cause delays
Vehicle transport is prone to accidents which may lead to loss of
goods and life v.Some roads may be impassible especially during the
rainy seasons.
Trains
Trains are vessels that transport goods and people on rails hence the term railways.
The terminuses of trains are the railways stations. Therefore; the goods to be
transported by trains have to be taken to the railway station. Railway transport is
suitable for heavy and bulky goods as well as passengers. There are two types of
trains: cargo and passenger train.
Advantages of Trains
-Relatively secure as cases of theft and accidents are rare
-Enables a transporter to plan for the transport of his/her goods as trains follow a
fixed timetable -Economical for transporting heavy and bulky goods over a long
distance
-Trains may have facilities for carrying special types of goods e.g. gas, petrol
and vehicles -Where shunting facilities are available trains may deliver goods
up to or from the owner‟s premises
Disadvantages of Trains
-Not flexible as trains follow a strict time table
-Railway lines are expensive to construct and to
maintain -Not all areas are served by railway
lines
-Not suitable for transporting urgently required or perishable goods
as it is slow -Unsuitable for transporting goods over short distances
-Trains are expensive to acquire and maintain
Pipeline Transport
This is the movement of liquids and gases from one place to another through a
pipe. Products transported through pipes include water, gases, petrol and diesel.
Solids that cannot be dissolved or damaged by water may also be transported
through pipes as suspension. Examples coffee berries from machines to drying
places. The pipeline is both a vessel and a way.
Products flow by the force of gravity or pressure from an original station. If the
original terminal is at a higher level than the receiving terminal, the force of
gravity is adequate to move the product. But if the receiving terminal is at a higher
level than the original than the originating terminal, then power is required to
pump the product uphill. For example, petroleum from Mombasa which is at sea
level needs pressure to pump it to all the receiving stations.
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 89

Advantages of pipeline Transport

-It is labour saving as it requires minimal manpower
-It is environmentally friendly since it is free of noise or smoke
-It may be constructed in areas where it is difficult to construct roads or
railway lines. For example, over rugged terrain
-Pipelines allow continuous flow of the goods being transported
-It ensures that road damage is reduced as the number of tankers is
reduced on roads -It helps to reduce accidents that may be caused by
tankers on roads -It reduces delays arising from congestion on roads
-Maintenance costs are reduced as it relies on gravitational force and booster
stations along the way
-It may not be affected by adverse weather
conditions Disadvantages of pipeline
Transport
-A leakage not detected in good time may lead to
high losses -Initial construction cost is high
-Accidents leakages may lead to environmental
pollution -It is unidirectional that is, travels only
in one direction -It can transport only one
product at a time
-It is not flexible since once a line is laid, it cannot be adjusted according to
transport patterns or demands
-Generates comparatively fewer job opportunities as it is
capital intensive -It is vulnerable to sabotage by enemies.
-Once laid, it is difficult to re route or re locate.
Water Transport
It is a mode of transport where the units of carriage transport goods and people on
water. Water in this case includes; navigable rivers, lakes, seas and oceans. The
means of transport which are the units of carriage or vessels using this mode
include; ships, dhows, boats, steamers and ferries. Water transport can be divided
into inland waterways and sea transport.
Inland waterways
This is transport carried out on lakes, rivers and inland canals. The Lake Victoria
facilitates transport among the three east African countries i.e. Kenya, Uganda
and Tanzania. Ferries also connect the mainland to islands such as Rusinga
Islands, found in Lake Victoria.
Water hyacinth has however been a threat to transport on the lake. Most rivers in
Kenya are not navigable due to reasons such as:
Too small
Presence of rapids and waterfalls
Too shallow
Most are seasonal
High gradient
Sea Transport
 This is where goods and people are transported in seas and oceans. All types of
water vessels may be used in sea transport. Sea transport is important as it
connects continents of the world thereby facilitating international trade.
Kilindini in Mombasa provides a good natural harbor facilitating sea transport
between Kenya and other countries of the world. Ferries also connect the island
of Mombasa and the mainland.
Types of Water vessels
a) Ships
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 90

A ship is a large vessel that transports people or goods through water. Their sizes
however vary depending on quantity of goods and passengers they carry. Ships
help in connecting countries or places which borders the sea. They load and
offload in terminals referred to as harbors found at sea ports. For example, the
Kilindini harbor is found in the port of Mombasa.
Ships that transport people are referred to as passenger ship while those that
transport goods are referred to as cargo ships. Cargo ships are c are convenient
for carrying heavy and bulky goods. Ships may also be classified as either liners
or tramps.
Liners
These are ships that are owned and operated by shipping companies called
conferences. Each conference is responsible for specifying the route on which
each liner would operate the rates to be charged and setting the rules and
regulations to be followed by the members.
Characteristics of liners
-Have fixed routes
-Follow a fixed timetable
-Charges are fixed
-Call at specified ports along the route at specified
intervals -Travel at regular intervals.
Tramps
These are ships that do not follow a regular route or time table. Their routes
therefore depend on demand. During times when demand is high, they charge
higher rates and when demand is low they lower their rates. Tramps can therefore
be likened to matatus. Tramps may be owned by either individuals or firms.
Characteristics of tramps
-Do not have a fixed rate. They therefore move to wherever there are goods or
passengers to carry.
-Have no set timetables. They therefore move according
to demand -Their fares change according to demand.
-Their travelling patterns are irregular and therefore cannot be relied upon
NB: Liners and tramps owners are in constant competition business. Traders
therefore need to choose the type of ships to hire. Liners are however more
popular than tramps among traders because of their reliability.
When a trader hires an entire ship to transport goods to a given destination,
he/she and the ship owner signs a document called a charter party. This
document shows the terms and conditions under which the goods would be
transported.
Other information included in the agreement are destination, nature of the
goods and freight charges. When the ship is hired to carry goods for a given
journey the document signed is referred to as voyage charter. On the other
hand, if the ship is hired to transport goods for a given period of time, the
document signed is called time charter.
 Ships may be specially built to carry special commodities. These may include
tankers specially built to transport petroleum products and other liquids.
Refrigerated ships may also be available to transport perishable commodities
such as meat, fish and fruits.
Boats and Ferries
These are water vessels used in transporting goods and people over short
distances. They are therefore found in both inland water transport and also the
sea transport.e.g the Likoni ferry in Mombasa carries people from and to the
island of Mombasa and the main land.
Advantages of water transport

Prepared By Mr. Peter Ochieng Otieno

[email protected] department kisumu national
polytechnic © 2017
 91

-Sea transport is economical to the owner as the number of employees to carriage

volume ratio is less compared to road transport
-Suited for transporting heavy and bulky goods
-It is cheap as the way is natural and free
-Connects countries of the world which border the sea
-Special types of ships are available for
transporting goods -Large volume can be carried
thereby reducing cost per unit -Not affected by
traffic congestion
-Some ships can be very luxurious for passengers and may even provide swimming
pools.
-At the port/dock, there are many depots for storage of goods.
Disadvantages of water transport-
Sea-sickness, sea-pirates and storms may occur
-They are slow therefore not suitable for transporting perishable and urgently
required goods -It is expensive to construct and maintain artificial harbors
-Unfavorable weather conditions may affect water transport
-Sea transport is not accessible to land locked countries
-Lack of loading and off-loading facilities may lead to delay
-Cost of acquiring and maintaining ships is high.
-Theft of cargo and other valuables may occur during loading and offloading.
Air Transport
This refers to the movement of goods, people and documents by aircrafts.
Aircrafts/ aeroplanes are the units of carriage and air the way. The terminals
include airports and airstrips. Aeroplanes are fast compared to other means of
transport i.e. they are the fastest means of transport. They are therefore suitable
for transporting urgently required goods like drugs and perishable goods Such as
flowers over long distances.
Aircrafts may be classified as either passenger planes or cargo planes. Passenger
planes transport people from one place to another. On the other hand, cargo planes
transport light cargo to the required destinations. Aeroplanes may be fitted with
special facilities for handling special goods. Aeroplanes are expensive to acquire
and to maintain. Their operations may also be affected by weather conditions.
Advantages of Air Transport
-There is less handling of goods on the way since aeroplanes may move
direct to the final destinations.
-The way does not require construction or maintenance as it is natural and free.
-Planes can move through places where other means cannot, such as over the
earth poles and across high mountains/ planes are not hampered by physical
barriers.
-Have efficient interconnections between airlines all over the world which makes
it convenient -Suitable for long distance travelers especially from one continent
to another
-Very fast therefore suitable for transporting perishable and urgently
required goods. -Chartered planes can be used to reach remote areas.
-The movement of aircrafts is smooth therefore suitable for transporting fragile
goods such as glassware and eggs.
-Passengers are given the highest degree of comfort and personal attention
making it the most comfortable means of transport.

Disadvantages of Air Transport

-Causes noise pollution
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 92

-Air fields are not available in all places

-Cannot be conveniently used to carry heavy and
bulky goods -Expensive to acquire and maintain
aircrafts
-Requires highly trained manpower e.g. air traffic controllers, pilots e. t. c
-Unfavorable weather conditions such as fog, mist and heavy rains may
cause delay -It is an expensive means of transport in terms of freight
charges
-Not suitable for transporting inflammable goods such as cooking
gas and petrol -In case of accidents results are catastrophic/
accidents are rare but fatal. -Has limited carrying capacity that
should not be exceeded.
-It is not flexible.
-Most airfields/ terminals are located some distance away from town/ city centers
and therefore require transport or railway links that are affected by jams
occasionally causing delays. -Recent hijackings by terrorists have made air
transport an insecure means especially for transporting valuables.
Containerization
This is a recent development in transport. It refers to the packaging of goods in
standardized „box like‟ containers designed for use in transporting cargo. The
containers are mainly made of metal though a few are made of wood. They can
either be hired or bought from firms that provide them. The hired containers are
returnable to the owner after the goods have been transported. Containers are
designed in a way appropriate to transport goods by ships, train, lorry or by air. To
safeguard the goods against risks such as theft and unfavorable weather conditions
the containers are sealed immediately after goods have been packed. The sealed
containers are then transported up to the final destination where they are off-
loaded. The consignee can then break the seal.
Goods can be transported in containers as Full Container Load (F.C.L) or as
Less Container Load (L.C.L).Full container load applies where the container is
filled with goods belonging to one person. In FCL, goods are delivered to the
consignee intact. On the other hand, less than container load applies where a
container is filled with goods belonging to several consignors. This may be the
case where a single consigner does not have enough goods to fill a container.
When such a container reaches the destination, it is opened and the various
consignees take their goods.
There are special handling facilities for loading and offloading containers onto and
from the units of carriage.
Apart from the container depot at Mombasa, Kenya Ports Authority (K.P.A) has
established inland container depots referred dry ports. An example of a dry port
is found at Embakasi in Nairobi. The establishment of dry ports aims at relieving
congestion at the sea port. It also aims at making handling of cargo easier and
efficient for inland importers and exporters.
When containers are off loaded from ships at Mombasa, they are loaded into
special container trains called railtainer which transports them by railway to the
inland container depot at Embakasi. Containers can also be transported by
specially designed trucks between the ports or from the port to consumer‟s
destination.
Advantages of containerization
-Minimizes the risks of loss or damage of goods as containers are
sealed at source -Containers are lifted with devices which make
movement and handling easy -Saves time and labour in loading and
off-loading due to use of machines
-Containers sealed at source in presence of customs officials may not be opened
until they reach their final destination. This reduces delay.
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 93

-Special containers are available for goods requiring special attention

like chemicals. -Insurance costs are relatively low as risks are less
-Space is saved when containers are used as opposed to when individual items are
packed in the carrier.
-Can carry large quantities of cargo if packed well.
-Containers are tough structure, which offer protection to sensitive and fragile
goods.
Disadvantages of containerization
-They are expensive and this increases the cost of
transporting goods -Contributes to unemployment since it
is capital intensive -Not suitable for transporting small
quantities of goods.
-Requires special handling equipment which may be
expensive -May not be suitable for goods with
irregular shapes. -Training labour force is long and
expensive. -They may be used to smuggle illegal
goods.
-The large trucks used on the road increase road damage and may increase
accidents.
Factors that influence the choice of appropriate means of transport
i. Cost; The cost of transporting a good should be reasonable; except where other
factors should be considered such as need for quick delivery. Otherwise should be
proportional to the value of goods transported.
Nature of goods; The nature of goods should be considered when choosing a
means of transport. For example, perishable goods require a fast means. Similarly,
heavy and bulky goods require a means of transport convenient for such goods
e.g. trains and ship.
Reliability; The means chosen should be able to deliver the goods to the required
place at the right time and in the right form.
Urgency; For goods that are urgently required, the fastest means available should
be chosen.
Safety and Security:The means chosen should ensure that the goods on
transit are secure against loss, theft or physical damages.
vi.Distance; Some means of transport are suitable for long distances while others
are suitable for short distances. If goods are to be transported for long distances,
air, sea or railway transport would be appropriate, otherwise roads would be
suitable for short distances.
vii.Availability of means; The means of transport to be selected should be based
on its availability. For example, where there is only one means of transport, it
would be the only one to be chosen.
viii.Flexibility; This is the ability of means of transport to be manipulated to suit
the convenience of the transporter. Where flexibility is required, then the means
that would provide such should be chosen. For example a matatu is usually more
flexible than an aeroplane. ix.Terminals; Some means of transport may have
 their terminals near the transporter than others. In this case, the transporter should
choose the means whose terminals are conveniently accessible to facilitate
loading and offloading of goods.
x.Value of goods to be transported- goods of high value require special
handling and high security during transportation.
Trends in transport
Pipeline and containerization
Electric trains are replacing diesel engines
Underground tunnels for trains are being used to ease congestion on the surface
Dual-carriage roads are being developed in various parts to ease congestion and
minimize accidents
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 94

Development of planes with larger carrying capacity and speed is a major feature in
the transport industry
Use of bicycles commonly known as boda boda are a common feature in towns, bus
terminals and rural areas, supplementing other means of transport to ferry people
and cargo to their destinations. The bicycles are being modified to make them
more convenient. It is not unusual to find a bicycle (boda boda) which has been
fitted with facilities such as:
Motors to increase their speed and reduce energy applied by the cyclist.
Music systems to entertain passengers and More comfortable seats.
Motor cycles are also being used as bodabodas in various areas. Similarly, the
three wheeled vehicles commonly known as „Tuk Tuk‟ is a major feature in
cities and most towns.
Private personal vehicles with less carrying capacity e.g. four-seater vehicles are
being used as matatus. The vehicles are convenient to the passengers as they:
Fill up within a shorter time compared to larger vehicles
May accommodate each of the customers interests.
Passenger vehicles are being fitted with radios, music systems and videos to
entertain customers as they travel. However, some forms of entertainment
may not be conducive to all.

REVISION QUESTIONS ON TRANSPORT

State four circumstances under which a businessman would choose to transport
goods by air?
Outline four reasons why a school in Kisumu may prefer to transport its sixty
students to a music festival in Nairobi by train rather than by bus.
Give five reasons why a manufacturing firm would be located in an area well
served by good road network
Outline four limitations of containerization.
State four reasons why road transport is popular in Kenya
State four ways in which the nature of goods would influence the choice of
transport.
Outline four reasons why a transporter of goods from Mombassa to Nairobi may
prefer rail transport to road transport.
State the unit of carriage for each of the following modes of transport.

Units of
Mode of transport carriage
Portage
Sea
Road
Cartage
Air
list four ways in which transport promotes growth of trade.
State four reasons why road transport is popular in Kenya.
Give 3 disadvantages of railway transport in Kenya.
List 4 disadvantages of using containers to transport goods.

Essay questions
Explain five reasons that may account for continued use of hand carts as a mode
of transport in Kenya. (12mks)
The oil pipeline has recently been extended from Nairobi to western Kenya.
Explain five benefits that may be accounted to the country from the extension.
(10mks).
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 95

Explain five ways in which an efficient road transport system may promote
trade within a country.(10mks).
Discuss five factors that have hindered the expansion of railway transport in
Kenya.
Explain five features of an efficient transport system (8mks).
7. Explain the advantages of pipeline as a mode of transporting oil products.
(12mks).
Outline five factors that should be considered when choosing a means of transport.
Explain six advantages of containerization as a mode of transport.(10mks)
Discuss six factors that may discourage the use of pipeline as a means of
transporting petroleum products in a country.(12mks).
Discuss 5 circumstances under which a trader may choose to transport goods by
rail.
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 96

WAREHOUSING

Warehouse: This is a building or a part of a building where goods are received

and stored until need arises for them.
-Other terms used to refer to a warehouse are depot, a godown or a silo.
Warehousing; This is the process of receiving goods into a warehouse,
protecting such goods against all types of hazards and releasing them to users
when need arises for them -There are three distinct stages in warehousing
process namely:
Receiving goods into a warehouse
Storing them
Releasing them to users
Importance of warehousing to Business
Steady/continuous flow of goods: Producers can produce and store goods
awaiting demand through warehousing e.g. agricultural products that are
produced seasonally are made available throughout the year
Stability in prices: Warehousing ensures that there is no surplus or shortage of
goods. It ensures that goods are stored when in plenty and released to the
market as their need arises. This helps to keep their prices fairly stable
Security: Warehousing ensures that goods are protected against physical
damage and adverse weather conditions. This also ensures that the quality
of the goods is maintained until they are demanded. Goods are also
protected from loss through pilferage and theft.
Bridging the time lay/difference between production and consumption: many
goods are produced in anticipation of demand. Such goods must be stored
until their demand arises e.g. gumboots, umbrellas and sports equipment are
needed seasonally but are manufactured in advance and stored in a
warehouse so as to be released to the users when need arises for them.
Continuous/uninterrupted production schedules: Manufactures are able to
buy raw materials in large quantities and store them awaiting their need
 to arise. This prevents interruption of the production process because of
lack of raw materials
Preparation of goods for sale: While in the warehouse, goods can be prepared
for sale e.g. they can be blended, packed, graded or sorted out.

Prepared By Mr. Peter Ochieng Otieno

[email protected] department kisumu national
polytechnic © 2017
 97

Sale of goods: Goods may be sold while still in the warehouse. If sold while
still in a bonded warehouse, duty passes to the buyer
Specialisation: Warehousing encourages specialization in production and
distribution. Producers concentrate on producing while distributors store
the goods for sale to the customers.
Unexpected demand can be met: The government collects agricultural
goods e.g. cereals and stores them as buffer stocks to be used in times
of disaster or serious shortages.
Clearance of goods: Warehousing helps in clearance of goods i.e. goods
entering the country can be inspected by the customs officials.
Warehousing helps to improve the quality of goods e.g. goods like tobacco
and wine mature with time.
Warehousing enables buyers to inspect the goods before they buy them.
Wholesale warehouses may also operate as showrooms for traders.

These are the features and resources a warehouse should have in order for it to
function
effectively.
These include:
Ideal location: A warehouse should be located at a suitable place to facilitate
receipt and issue of goods e.g. a manufactures warehouse should be located
near his/her factory.
Proper building: A warehouse should have proper buildings which are
suitable for different types of goods to be stored.
Equipment: A warehouse should be equipped with appropriate facilities for
handling goods such as fork-lifts conveyer belts e.t.c.It should also be
well equipped with necessary storage facilities e.g. provision of
refrigerated or cold storage for perishable goods such as meat and fruits.
Accessibility: A warehouse should be accessible to its users. It should therefore
be linked with good and appropriate transport system to facilitate movement
of goods in and out of the warehouse.
Safety and security: It should have/be fitted with safety equipment or facilities
necessary for protection of goods against damaged caused by such things
like water, fire or sunshine as well as for the protection of the personnel.
Communication: A warehouse should have a good communication network or
system for easy contact with its clients and suppliers
Qualified personnel: A warehouse should have well trained and efficient
staff/personnel for proper management and efficient functioning of the
warehouse.
Recording system: There should be a proper recording system in a warehouse to
ensure that all movement of goods is properly monitored.
A warehouse should be spacious enough to allow easy movement and
accumulation of goods and personnel.
-Warehouses can be broadly classified into three namely:
Private warehouses
Public warehouses
Bonded warehoused
Private warehouses

Prepared By Mr. Peter Ochieng Otieno

[email protected] department kisumu national
polytechnic © 2017
 98

These are warehouses that are owned by private individuals/organizations for

the purpose of storing their own goods only. They include:
Wholesalers warehouses
Producers warehouses
Retailers warehouses.
a)Wholesalers
warehouses
These are warehouses for storing the wholesalers‟ goods as they await
distribution or sale. They need warehouses because they buy goods in bulk from
producers and store them until they are needed by retailers.
-The wholesalers warehouses also act as showrooms i.e. they display their
goods in the warehouse.
-These warehouses also enable the wholesalers to prepare their goods for sale
e.g. branding, blending, packing and sorting may be carried out in the
warehouse
Producers warehouses;
-These warehouses are owned by producers and they are for storing goods prior to
their demand. -The producers may be manufactures of finished goods or farmers
-Such warehouses are built near the manufactures factories or the farmers
production points.
-Manufactures who export may locate some warehouses near ports through which
they export e.g Mumias sugar warehouse, Bamburi Portland cement warehouse
e.t.c
Retailers warehouses
Some large-retailers such as chain stores and supermarkets own warehouses
for storing their large stores
-It becomes necessary for such business to have warehousing facilities due to
their large and bulky purchases dictated by the nature of their business
-Goods are distributed from their warehouses to the retail outlets or to
the branches Advantages of private warehouses
The owner has full control over its operation and may make major decisions
without having to consult anyone.
The warehouse is designed to suit the specific needs of the organizations
It enables special handling, storage and protection of goods by having special
facilities which may not be available in a public warehouse
The owner is not tied down by procedures of receiving and issuing goods unlike
in public warehouse.
The owner does not incur the cost of hiring space unlike with a public warehouse
The operation can be easily automated because the goods to be received
stored and dispatched are already known.
Disadvantages of private warehouses
The initial construction cost of a warehouse is high
Under-utilization of personnel and facilities may occur especially in times
of low volumes
 They may not employ qualified management personnel and are
consequently disadvantaged in dealing with management
problem.
Risks arising from dangers such as fire,pests,theft or damage are not spread
Public warehouses
These are warehouses owned by individuals or organizations who do business by
renting space. To those traders who are in need of storage facilities to store goods
temporarily. They have the following characteristics;
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 99

Are owned and operated by individuals or companies who do not use them
for storing their own goods.
Are open to any member of the public who wish to rent storing space for their
goods
The customers pay on the basis of space rented and the period of time
required to store the goods.
They are often situated near terminals as airports, sea-ports and railway
station and industrial areas. This facilitates the movement of goods in
and out of the warehouse.
The rent paid includes charges for insurance and other services i.e. goods
are insured against loss or damage as a result of fire or theft while they
are still in the warehouse.
They provide other services apart from storing the goods e.g.
grading,packaging,preparing export samples, preparing market reports
and clerical documents
Imported goods can be sold while they are still in the public warehouse. If such
a transaction takes place the goods may change ownership without being
physically moved out of the warehouse. This becomes possible if the
importer has signed a document called „a warehouse-warrant‟ (which is a
negotiable instrument out of order), it is issued by the new owner after the
transaction has taken place.

A public warehouse serves a number of customers that deal with the same
product. It assembles the small orders from these customers and places
one order for all of them. This enables them to enjoy economies of large
scale buying and delivery of goods to a warehouse.
Goods stored in a public warehouse may be sold without their physical
movement from the warehouse.
Traders can rent space to store their goods
Traders do not have to construct their own warehouses/do not have to tie up
capital in storage buildings and handling equipment.
Goods are insured against risks such as damage by fire and theft
A trader may get a short term loan from the warehousing firm by using the goods
held as collateral security.
Apart from the handling, sorting and documentation of goods additional services
such as bottling, bagging and repairs of damaged goods can be offered by
public warehouses.
Sharing equipment and machinery enables the users to reduce handling costs
Inspection, re-packaging and labeling services provide users of public
warehouses the expertise they themselves may not have.

The hirer is denied the opportunity to physically handle the goods and is
forced to compete for attention with other hirers of the warehouse. If the
 hirer had his/her own warehouse, he/she would have absolute authority
on the goods and therefore enjoy individual attention.
The hirer may lose contact with his/her customers since they get goods from
a rented warehouse, away from the hirers premises
The hirer may get poor services or miss space altogether during peak seasons
due to stiff competition for the same facility.
Documentation involving receipt and release of goods in a public warehouse is
likely to be a long and complicated procedure due to the large number of
clients involved.

Prepared By Mr. Peter Ochieng Otieno

[email protected] department kisumu national
polytechnic © 2017
 100

Continued renting of space can even be more expensive than constructing

one‟s own warehouse in the long run
Public warehouses are sometimes situated far away from the hirer‟s
premises unlike private ones which are usually within the vicinity of
the owner‟s premises.
The operations of a general merchandise public warehouse are difficult to
automatic because different kinds of goods need different methods and
equipment to handle them.
Bonded warehouses
These are public warehouses for keeping imported goods until customs duties have
been paid
against them. They are mainly located at the points through which goods enter a
country
-Imported goods are kept in this type of warehouses if the owner has not paid
customs duties.
Such goods are said to be “goods under bond”or “goods in bond”
-Bonded warehouses are so called because the owners of such warehouses give a
„bond‟ to the customs authorities i.e. a sum of money as guarantee that they
will not release goods from the warehouses until customs duties have been paid.
-The importer may withdraw the goods either in part or in full after the customs
duties have been paid for the goods he/she intends to collect.
-If the goods are sold while still in a bonded warehouse, the new owner of the
goods pays the duty before taking them out of the warehouse.
-If the goods re-exported to another country while still in a bonded warehouse, the
importer does not have to pay the customs duties e.g an importer may import some
goods and further prepare them for sale inside a bonded warehouse and can then
re-export them without having paid the customs duties
-When the importer pays the duties to the customs officials, a “release warrant”
is issued. This is a document that enables the importer to have his/her goods
released from a bonded warehouse -Bonded warehouses have resident customs
officials who monitor the movement of goods in and out of a bonded warehouse.

Goods are bonded until customs duty is paid

Goods can be re-exported while in the warehouse
Storage charges are made on all goods stored in the warehouse
Goods can be sold while still under bond
Goods can be inspected and prepared for sale i.e. they can be repacked,
branded and blended while in the warehouse
Goods are released only on the production of a release warrant

While in bond, goods can be prepared for sale

The owner can look for the market for the goods before paying the duty
Some goods lose weight while in the warehouse so the duty paid becomes
lower if based on weight.
 If goods are sold while still in the bonded warehouse, the duty passes to the
buyer
The importer has more time to arrange for payment of customs duty.
Security is provided for the goods, so the importer is relived of the task of
providing security for his/her goods
Some goods improve in quality while in a warehouse for example, wine and
tobacco.
Advantages of Bonded warehouse to the Government
The government gets revenue by levying duty on the goods
The government is able to control the entry of harmful goods
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 101

The government is able to verify the documents for goods in transit

The government is able to check on the quantity, quality and the nature/type
of goods imported.
The government is able to check on illegal goods entering the country.
Disadvantages of a bonded warehouse
The importer may eventually fail to pay customs duties. This forces the
customs authorities to auction the bonded goods in order to recover
the duties.
When the importer withdraws goods from a bonded warehouse he/she ends up
paying a higher duty if he/she had paid the duty at once.
The importer incurs costs in hiring a bonded warehouse as opposed to if
he/she had a private warehouse

These are warehouses in which tax-free goods are kept awaiting sale or
collection by owners -Goods stored in these warehouses can be either locally
produced, requiring no taxation or imported goods for which customs duties
have already been paid.
NOTE: i) All warehouses apart from bonded warehouses are free warehouses
since goods held in them are not subject to control by customs authorities. This
includes all private and public warehouses
Locally produced goods are stored in free warehouses since no custom duties
are paid for them.
Advantages of free warehouses
Owners of goods stored need not to pay any taxes, thus the goods cannot be
auctioned for failure to pay customs duties
It is cheaper to store goods in free warehouses as compared to bonded
warehouses since there are no customs duties levied.
Clearence of the goods from the warehouse is simple since a “release
warrant” to prove payments of duties is necessary
These warehouses are located at places that are convenient to users

The Government does not benefit since no customs duty is levied on the goods
stored
Some unscrupulous traders might use them to store durable goods so as to
evade tax.
Checking and security of goods is more relaxed hence the possibility of
storing illegal goods.
Current trends and emerging issues in warehousing
Warehousing technology is undergoing important changes in both building design
and handling in storage equipment. These may include;
i)Warehousing design-In modern times, there is an increasing emphasis on high
ceiling warehouses to permit storage of more goods and to make it possible for the
movement of fork lift trucks and stuck-cranes
ii)Handling of goods-Handling includes the steps involved in moving of goods to
and from
storage. There is widespread use of modern machines in most warehouses such as
conveyer
belts, tracks, forklifts and stuck cranes. The use of automated stucker cranes which
more by
remote control in a fixed path on guide rails, is a new development in warehousing
-Computerization has also greatly helped in monitoring the movement of stock in
and out of
storage. This has eased the handling, especially in loading and unloading of goods.

Prepared By Mr. Peter Ochieng Otieno

[email protected] department kisumu national
polytechnic © 2017
 102

iii)Storage of goods-Storage is the condition of the goods at rest in their

assigned areas of the warehouse. Most warehouses are currently using storage
racks that permit replacement or retrieval of goods without disturbing
neighbouring goods.
Environmental pollution-Goods that expired or spoilt while in the warehouse are
sometimes discarded in a manner or in areas that may cause pollution to the
environment e.g. expired chemicals are sometimes thrown into rivers and oceans
thereby endangering the marine life. -Other times they are burned causing air
pollution with toxic gases. Some goods when thrown on land are dangerous to
human life
-To avoid the effects of improper disposal of expired or spoilt goods the warehouse
owners should come up with methods that are environmentally friendly such as
recycling of these goods. They should also be socially responsible for whatever
goes out from their warehouses.
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 103

INSURANCE
Insurance-This is an undertaking or contract between an individual or business
and an insurance an occurrence of risk(s) (i.e. against events whose occurrences
are unforeseen but causes financial losses or suffering to the affected parties.
Risks are also referred to as contingencies, hazards or perils and include:
-Fire outbreak
-Accidents
-Thefts
-Deaths
-Disabilities
-Risks are real and unforseen.Methods to eliminate such risks has achieved very
little and thus has necessitated the need for insurance.
Importance of insurance
1. Continuity of business
Every business enterprise is exposed to a variety of risks e.g. fire, theft e.t.c.The
occurrence of such risks often result in financial losses to the business. Insurance
provides adequate protection against such risks in that, if a trader suffers losses as
a result of insured risk, she/he is compensated, thus he/she is able to continue with
business operations.
2. Investment projects
Insurance enables investors to invest in profitable yet risky business
projects that would otherwise avoided.
Not all the money received as premiums (by the insurance companies) is used up
for compensation to those who have been exposed to risk and suffered losses. The
rest of the money is invested in other businesses to earn profits.
Creation of employment
Insurance does provide employment opportunities to members of the public.
4. Government policy
The profits earned are a source of revenue for the government i.e. insurance
companies are profit-making organizations which generate revenue to the
government through payments of taxes
5. Credit facilities
The insurance industry have also established credit or lending facilities which
the business community uses by borrowing. Loans are made available to the
public for different investment projects in different sectors of the economy and
also for personal requirements.
6. Development of infrastructures
The insurance industry plays a crucial role in the development of urban facilities
in major towns. Both residential and office buildings have been developed by
insurance firms. The firms also participate in development projects in the areas
where they operate. They contribute to development of a region by constructing
and infrastructural facilities
Life policies can be used as security for loans from either the insurance
company or other financial institutions.
Provision of life and general insurance policies encourages Kenyans to plan
ahead for their dependants thereby reducing the number of needy future
students.

Prepared By Mr. Peter Ochieng Otieno

[email protected] department kisumu national
polytechnic © 2017
 104

Loss prevention-The insurance companies encourage the insured not to cause

accidents thus channeling the unclaimed resources into the economy.
THE THEORY OF INSURANCE
The insurance business relies on the law of large numbers in its operations.
According to this law, there should be a large group of people faced with similar
risks and these risks spread over a certain given geographical area.
Every person in the group contributes at regular intervals, small amounts of
money called premium into a “common pool”. The pool is administered and
controlled by the insurance company.
The fact that risks are geographically spread ensures that insurance does not
have a concentration of risks in one particular area.
The law of large numbers enables the insurance to accurately estimate the
future probably losses and the number of people who are likely to apply
for insurance. This is done in order to determine the appropriate
premiums to be paid by the person taking out insurance.
Pooling of risks
The insurance operation is based on the theory that just a few people out of a
given lot may suffer a loss. There is therefore a “pooling of risks” i.e the loss of
the unfortunate few is spread over all the contributors of the group, each bearing
a small portion of the total loss. This is why the burden of loss is not felt by the
individuals because it is “shared” by a large group.
Benefits of the “pooling of Risks” to insurance company
Pooling of risks enables an insurance company to create a common pool of
funds from the regular premiums from different risks.
It enables the insurance company to compensate those who suffer loss when
the risks occur
The insurance company is able to spread risks over a large number of insured
people
Surplus funds can be invested in for example, giving out loans or buying
shares in real estates
It enables the insurance company to meet its operating costs by using the pool
funds
It enables the insurance company to calculate to be paid by each client
It enables the company to re-insure itself with another insurance company.
Terms used in Insurance
Insurance
This is a written contract that transfers to an insurer the financial responsibility for
losses arising from insured risk.
Premium
This is the specified amount of money paid at regular intervals by the insured to
the insurer for coverage against losses arising from a particular risk.
Risk
These are perils or events against which an insurance cover is taken. It is the
calamity or problem a person or business faces and results into losses.
Note: The calculation of premiums depends upon the type of risk insured against.
The higher the probability of the risk occurring, the higher the premium. The more
the risks the business or person is exposed to the more the premiums payable.
Pure risk

Prepared By Mr. Peter Ochieng Otieno

[email protected] department kisumu national
polytechnic © 2017
 105

This is a risk which results in a loss if it occurs and results in no gains if it does not
occur. For example, if a car is involved in an accident, there will be a loss and if
the accident does not occur there will be no gain or loss
Speculative risk
This is a risk which when it occurs, may result in a loss or a profit. For example, a
person may buy shares at ksh.50 each, one year later the shares may be valued at
ksh40 each meaning a loss of ksh.10
Alternatively, their value might not have changed or might have increased to
ksh.45 each.
Speculative risk lures people to venture into business in the first place.
Insured
This is the individual or the business that takes out the insurance cover and
therefore becomes the policy holder
The insured pays premiums to the insurance company to be compensated should
the risk insured against occur or cause loss.
Insurer
This is the business company that undertakes to provide cover or protection to
the people who suffer loss as a result of occurrence of risks
Actuaries
These are people employed by an insurance company to complete expected
losses and calculate the value of premiums.
Claim
This is a demand by the insured for payment from the insurer due to some loss
arising from an insured risk.
Policy
This is a document that contains the terms and conditions of the contract between
the insurer and the insured. Its issued upon payment of the first premium.
Information contained in a policy includes;
Name, address and occupation
Policy number of the insured
Details of risks insured
Value of property insured
Premiums payable
Other special conditions of the insurance, for example nominees
Actual value
This is the true value of the property insured
Sum insured
This is the value for which property is insured, as stated by the insured at the
time of taking the policy.
Surrender value
This is the amount of money that is refunded to the insured by the insurer in case
the former(i.e. the insured) terminates payment of the premiums before the
insurance contract matures. The policyholder is paid an amount less than the total
amount of the premium paid.
Grace period
This is term allowed between the date of signing the contract and the date of
payment of the first premium. During this period the insurance contract remains
valid. This period is usually a maximum of thirty (30) days.
Proposer
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 106

This is a person wishing to take out an insurance cover (prospective insured)

Cover note (Binder)
This is a document given by the insurance company to an insured on payment of
the first premium while awaiting for the policy to be processed. It is proof of
evidence that the insurer has accepted to cover a proposed risk.
Annuity
This is a fixed amount of money that an insurer agrees to pay the insured
annually until the latter‟s death. It occurs when a person saves a lumpsum
amount of money with an insurer in return for a guaranteed payment which
will continue until he/she dies.
Consequential loss
This is loss incurred by a business as a result of disruption of business in the event
of the insured risk occurring.
Assignment
This is the transfer of an insurance policy by an insured to another person. Any
claims arising from the transferred policy passes to the new policy holder called
an assignee
Beneficiaries
These are people named in a life assurance policy who are to be paid by the
insurer in the event of the insured
Nomination
This is the act of designing one or more people who would be the beneficiaries
in the event of death of the insured. These people are called nominees
Average clause
This clause is usually included in policies to discourage under-insurance. The
clause provides that the insured can only recover such proportions of the loss as
the value of the policy bears on the property insured. It is usually included in
marine or fire insurance policies. The amounts recoverable are arrived at using
the following formulae:
Compensation=value of the policy loss
Value of property
Example:
If a house worth kshs.800,000 and insured against fire for kshs.600,000 was
damaged by fire to the tune of kshs.400,000,the insured would be compensated;
Compensation= (600,000 x 400,000)
800,000 (value insured x Actual loss)

Double insurance
This is taking of insurance policies with more than one company in respect to
the same subject matter and the risk. It is significant because if one of the
insurers is insolvent at the time the claim arises the insured can enforce his/her
claim against the solvent insurer or if both insurers are solvent then they share
compensation.
(Insolvency is a state where a business is not able to pay all its liabilities from its
existing assets) Co-insurance
This is an undertaking by more than one insurance company to provide
insurance cover for the same risk for an insured. This will usually occur for
properties that have great value and face great risk exposures that an insurer
cannot successfully make compensation for e.g. value of aeroplanes, ships e.t.c
Co-insurance help spread risks to several insurers, each insurer covering only a
certain proportion of the total value. The insurance company with the largest share
is called the “leader”
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 107

and acts on behalf of all the participating insurance companies‟ e.g. in collecting
premiums from the insured and carrying out documentation work, making claim
after collecting each insurers premium contribution e.t.c
Note: Co-insurance is different from double-insurance in that in co-insurance
company approaches another insurance company to help in covering the insured
property while in double-insurance; it‟s the insured who decides to approach
different insurance companies to insure the same property against the same risk.
Re-insurance
„Re-insurance‟ means insuring again. This is a situation where an insurance
company insures itself with a bigger insurance company called le-insurer for all
or part of the risks insured with it by members of the public
Re-insurance indirectly insure an individuals risks.Re-insurance helps to reduce
the burden on an insurance company when the loss is too high for a single insurer.
When such losses occurs, the claim is met by both the insurer and re-insurer(s)
proportionately (according to agreed percentages)
Note:
Re-insurance deal with the protection of insurance companies only, while
insurance companies protect individuals and business organizations.
Factors that may make it necessary for an insurance company to Re-insure
Value of property-When the value of property is great, such as ship, the risk is
too high to be borne by a single insurer
High risk of loss-When chances of loss through the insured risks are high, it
becomes necessary to re-insure.
Number of risks covered-When the insurance company has insured many
different risks, it would be too costly to compensate many claims at once,
hence the need for re-insurance
Need to spread the risk-When the insurance company wishes to share
liability in the event of a major loss occurring
Government policy-The government may make a legal requirement for an
insurance company to re-insure
Under-insurance
This occurs when the sum insured as contained in the policy is less than the
actual value of the property e.g. A property of shs.500, 000 can be offered for
insurance as having a value of shs.400, 000

Over-insurance
This is a situation where the sum insured is more than the correct value of property
e.g. a person insures property of shs.300,000 for shs.600,000.If total loss occurs,
he is compensated the correct value of the property i.e. that which he has lost
Agents
These are people who sell insurance policies on behalf of the insurance company.
They are paid on commission that is dependent upon the total value of policies
sold
Insurance Brokers
These are professional middlemen in the insurance process. They connect the
people wishing to take insurance with the insurers. They act on behalf of many
different insurance firms, unlike agents. Their activities include:
Examination of insurance market trends
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 108

Correspondence between the insured and his clients

Advising the insured and would be policyholders on the best policies for
their property e.t.c.
He receives a commission (reward) known as brokerage.

Principles of insurance provide guidance to the insurance firms at the time they
are entering into a contract with the person taking the cover. These insurance
principles include:
Help to determine whether a valid insurance contract exists between the two
parties at the time claims are made.
Provide checks and controls to ensure successful operations of insurance for the
benefit of both the parties
It is therefore important that a prospective insured (person wishing to take
insurance policy) has basic knowledge of these principles as stated in the
insurance law. The insurance principles include;
Insurable Interest
This principle states that an insurance claim cannot be valid unless the insured
person can prove that he has directly suffered a financial loss and not just because
the insured risk has occurred. Going by this principle one cannot insure his parents
or friends or other people‟s property since he/she has no insurable interest in
them. If such properties are damaged or completely destroyed, he/she will not
suffer any financial loss.
For example, Mr.x has no insurable interest in the property of his neighbours.He
does not suffer any financial loss should they be destroyed. This principle ensures
that people are not deliberately destroying other people‟s properties/life in order
for them to receive compensation. In life insurance (life assurance) it is assumed
that a person has unlimited interest in his/her own life. Similarly it is assumed that
one has insurable in the life of spouse and children e.g. a wife may insure the life
of her husband, a father the life of his child because there is sufficient insurable
interest.
Indemnity
The essence of this principle is that the insurer will only pay the “replacement
value” of the property when the insured suffers loss as a result of an insured
risk.
This principle thus puts the insured back to the financial position he enjoyed
immediately before the loss occurred.
It is therefore not possible, then, for anybody to gain from a misfortune by getting
compensation exceeding the actual financial loss suffered as this will make him
gain from a misfortune.
This principle does not apply in life assurance since it is not possible to value
one‟s life or a part of the body in terms of money. Instead, the insurance policy
states the amount of money the insured can claim in the event of death.
Utmost good faith (uberrima fides)
In this principle the person taking out a policy is supposed to disclose the required
relevant material facts concerning the property or life to be insured with all
honesty. Failure to comply to this may render the contract null and void hence no
compensation.
e.g.
-A person suffering from a terminal illness should reveal this information to the
insurer.
-One should not under-insure or over-insure his/her property.
Subrogation
This principle compliments the principle of indemnity. It does so by ensuring that
a person does not benefit from the occurrence of loss.
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 109

According to this principle, whatever remains of the property insured after the
insured has been compensated according to the terms of the policy, becomes the
property of the insure.

Example
Assuming that Daisy‟s car is completely damaged in an accident and the
insurance compensates for the full value of the loss, whatever remains of the old
car (now scrap), belongs to the insurance company
Scrap metal can be sold for some values and should Daisy take the amount she
would end up getting more amount than the value of the car which will be
against the principle of indemnity. Note: This principle cannot be applicable to
life assurance since there is nothing to subrogate.
Proximate cause
This principle states that for the insured to be compensated there must be a very
close relationship between the loss suffered and risk insured i.e. the loss must
arise directly from the risk insured or be connected to the risk insured.
Example
If a property is insured against fire then fire occurs and looters take
advantage of the situation and steal some of the property, the insured will
suffer loss from „theft‟ which is a different risk from the one insured against,
so he/she will not be compensated.
However if the property burns down as a result of sparks from the fire-place, the
proximate cause of the loss is sparks which are directly related to fire. So the
insured is entitled for compensation.
CLASSES OF INSURANCE
Insurance covers are mainly classified into two,
Property (non-life) general insurance
Life assurance
Life Assurance
The term assurance is used in respect of life contracts. It is used to mean that life
contracts are not contracts of indemnity as life cannot be indemnified i.e. put
back to the same financial position he was in before the occurrence of loss.(life
has no money value, no amount of money can give back a lost or injured life)
Life insurance (assurance) is entered by the two parties in utmost good faith and
the premiums payable in such life contracts depend on:
Age: The higher the age the higher the premiums as the age factor
increase the chances of occurrence of death.
Health condition: A person with poor health i.e. sickly person pays higher
premiums as opposed to one in good health.
Exposure to health risks: The nature of a person‟s occupation can
make him susceptible to health problems and death.
Types of policies
 Whole life assurance-In whole life assurance, the assured pays regular
premiums until he/she dies. The sum assured is payable to the beneficiaries upon
the death of the assured. -Whole life assurance covers disabilities due to illness or
accidents i.e. if the insured is disabled during the life of the policy due to illness
or accidents, the insurer will pay him/her for the income lost.
Endownment policy/insurance

Prepared By Mr. Peter Ochieng Otieno

[email protected] department kisumu national
polytechnic © 2017
 110

This is whereby the insured pays regular premiums over a specified period of
time. The sum assured is payable either at the expiry of the period (maturity of
policy) or on death of the insured, whichever comes first.
The insured, at expiry of policy is given the total sum assured to use for
activities of his own choice.(ordinary endownment policy)
-Where the insured dies before maturity of contract, the beneficiaries are given
these amounts. Note; The assured person may be paid a certain percentage of the
sum assured at intervals until the expiry of the policy according to the terms of
contract. Such an arrangement is known as
Anticipated Endownment policy.
Advantages of Endownment policies
They are a form of saving by the insured, for future investments
Premiums are payable over a specified period of time which can be
determined to suit his/her needs e.g. retirement time
Where the assured lives and time policy matures, he receives the value of sum
assured.
Policy can be used as security for loans from financial institutions.
Differences Between a whole life policy and an Endownment policy
Whole
life Endownment
i) Compensation is paid after the i) Compensation is paid after the
death of the assured expiry of an agreed period

Premiums are paid throughout Premiums are paid only during

ii) the an
life of the assured agreed period
Benefits go to the dependants The assured benefits unless
iii) rather death
proceeds the expiry of the
than the assured agreed
period
iv) Aims at financial security of Aims at financial security of the
dependants assured and dependants
iii)Term insurance
The insured here covers his life against death for a given time period e.g. 1yr, 5yrs
e.t.c.
If the policyholder dies within this period, his/her dependants are compensated.
If the insured does not die within this specified period, there is no
compensation.However, a renewal can be taken.
IV) Education plan/policies
This policy is normally taken by parents for their children‟s future educational
needs.
The policy gives details of when the payments are due.
v) Statutory schemes
The Government offers some types of insurance schemes which are aimed
at improving/providing welfare to the members of the scheme such as
medical services and retirement benefits.
A member and the employer contribute, at regular intervals, certain amounts of
money towards the scheme.
Examples
N.S.S.F
N.H.I.F
Widows and children pension scheme (W.C.P.S)
Annuity
Characteristics of life Assurance
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 111

It is a cover for life until death or for a specified period of time

It may be a saving plan
It is normally a long term contract and does not require an annual renewal
It has a surrender value
It has a maturity date when the assured is paid the sum assured bonuses and
interests.
A life assurance policy can be assigned to beneficiaries
The policy can be any amount depending on the assureds‟ financial
ability to pay premiums
The policy can be used as security for a loan
2.General insurance (property insurance)
This type of insurance covers any form of property against the risks of loss or
damage. A person can insure any property he has an insurable interest in
General insurance is usually divided into:
Fire insurance/department
Accident insurance/department
Marine insurance/department
Accident insurance
This department covers all sorts of risks which occur by accident and includes
the following; a) Motor policies
-These provide compensation for partial or total loss to a vehicle if the loss
results from an accident.
-The policy could either be third party or comprehensive.
-Third party policies cover all damages caused by the vehicle to people and
property other than the owner and his/her vehicle. This includes pedestrians,
fare-paying passengers, cows, fences and other vehicles
In Kenya, a motor-vehicle owner is required by law to have this policy before
the vehicle is allowed on the roads. One can also take a third party, fire and
theft policy.
Comprehensive policy covers damages caused not only to the third party but also
to the vehicle itself and injuries suffered by the owner. Comprehensive policies
include full third party, fire, theft and malicious damage to the vehicle.
b) Personal accident policy
-These policies are issued by insurance companies to protect the insured
against personal accidents causing;
Injury to the person
Partial or total physical disability as a result of the injury
Loss of income as a result of death
-If death occurs due to an accident, the insured‟s beneficiaries are paid the total
sum assured. In case of a partial or total disability as a result of accident, the
insured can be paid on regular periods, e.gmonthly as stipulated in the policy.
Compensation for injuries where one loses a part of his/her body can be done
on a lumpsum basis.
The insured is also paid the value of hospital expenses incurred if hospitalized as
a result of an accident.

c) Cash and / or Goods in Transit policies

Prepared By Mr. Peter Ochieng Otieno

[email protected] department kisumu national
polytechnic © 2017
 112

These are policies that specifically provide cover for loss of cash and goods in
transit between any two locations.
E.g. Goods and cash moved from business to the markets, from suppliers to
business e.t.c
d) Burglary and Theft policies
These policies cover losses caused by robbers and thieves
Burglary policies are enforceable only if the insured has met the
specified safety and precautionary measures for protection of the
insured items. E.g.-How much money should be maintained in different
kinds of safety boxes
-Positioning of each of the cash boxes is also an important precautionary measure.
NB: The control measures are aimed at reducing both the extent and probability of
loss occurring e) Fidelity Guarantee policies
These policies cover the employers against loss of money and/or goods
caused by their employees in the cause of duty.
-The losses may be as a result of embezzlement, fraud,
arithmetical errors e.t.c -The policies may cover specified
employees or all the employees
7) Workmen‟s compensation (Employer‟s Accident liability)
These policies provide compensation for employees who suffer injuries in the
course of carrying out their duties.
The employer insures his employee against industrial injuries i.e the employer is
only liable for the compensation of workers who suffer injuries at work.
f) Public liability
This insurance covers injury, damages or losses which the business or its
employees cause to the public through accidents.
The insurer pays all claims from the public upto an agreed maximum
g) Bad debts
This policy covers firms against losses that might result from debtor‟s failure to
pay their debts.
iii)Marine Insurance
This type of insurance covers ships and cargo against the risk of damage or
destruction at the sea. The main risks sea vessels are exposed to include; fire, theft,
collision with others, stormy weather, sinking e.t.c

Types of Marine Insurance policies

The marine insurance covers are classified as Hull, cargo, freight and ship owners‟
liability.
a) Marine Hull
This policy covers the body of the ship against loss or damage that might be caused
by sea perils.
Included here are any equipment, furniture or machinery on the ship.
A special type of marine hull is the part policy, which is for a specified period
when the ship is loading, unloading or at service.
 b) Marine Cargo
This type of policy covers the cargo or goods carried by the ship
The policy is taken by the owners of the sea vessels to cover the cargo being
transported. It has the following sub-divisions.
Voyage policy-Here cargo and ship are insured for a specific voyage/journey.
The policy terminates automatically once the ship reaches the destination.
Time policy-Here insurance is taken to cover losses that may occur within a
specified period of time, irrespective of the voyage taken

Prepared By Mr. Peter Ochieng Otieno

[email protected] department kisumu national
polytechnic © 2017
 113

Fleet policy-This covers a fleet of ships,i.e several ships belonging to one

person, under one policy.
Floating policy-This policy covers losses that may occur on a particular route,
covering all the ships insured along that route for a specified period
Mixed policy-This policy provides insurance for the ship and cargo on specified
voyages and for a particular period of time. No compensation can be made
if the ship was on a voyage different from the ones specified even if time
has not expired
Composite policy-This is where several insurance companies have insured one
policy of a particular ship especially when the sum insured is too large to be
adequately covered by one insurer.
Construction policy/builders policy-This covers risks that a ship is exposed to
while it is either being constructed, tested or being delivered.
Freight policy-This is an insurance cover taken by the owner of the
ship for compensation against failure to pay hiring charges by a
hirer of the ship.
Third parties liability-This is an insurance policy taken by the owner of
the ship to cover claims that might arise from damage caused to other
people‟s property.

Total loss,
This occurs where there is complete loss or damage to the ship and cargo insured.
Total loss can be constructive or actual.
In Actual total loss, the claims are as a result of the ships and/or cargos complete
destruction. It could also occur;
-When a ship and its cargo are so damaged that what is salvaged is of no market
value to both the insurer and the insured.
-When a ship is missing for a considerable period of time enough to assume that it
has sunk.
-Constructive total loss occurs when the ship and/or cargo are totally damaged
but retrieved. It may also occur;
-Where a ship and its cargo are damaged but of market value. This could be
as a result of decision to abandon the ship and cargo as the probability of
total loss appears imminent. -If the cost of preventing total loss may be
higher than that of the ship and its cargo when retrieved e.g. many lives may
be lost in the process of trying to prevent total loss.
General average-This is a loss that occurs as a result of some of the cargo
being thrown into the sea deliberately to save the ship and the rest of the cargo
from sinking. The losses made are shared by the ship owners and the cargo
owners proportionately as the effort was in the interest of both.
Particular average-This occurs where there is a partial but accidental loss to
either the ship or the cargo. When this happens each of the affected party is soldy
responsible for the loss that has occurred to his property. A claim can, however be
made if the loss incurred amounts to more than 3% of the value insured.
Fire insurance-This type of insurance covers property damage or loss caused by
accidental fire. Cover is offered to domestic commercial and industrial premises,
plant and machinery, equipment, furniture fittings stock e.t.c
-In order to claim for compensation as a result of loss by fire, the following
conditions must be fulfilled;
Fire must be accidental
Fire must be immediate cause of loss
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 114

There must be actual fire.

There are several types of types of fire insurance policies. These include:

a) Consequential loss policy;(profit interruption policy)

This covers or compensates the insured for the loss of profit suffered when
business operations have
It is offered to protect future earnings of an enterprice after fire damage.
Sprinkler leakage policy-This provides cover against loss or damage caused
to goods or premises by accidental leakages from fire fighting sprinklers
Fire and Related perils policy-This covers buildings which include factories,
warehouses, shops, offices and their contents. The policy does not cover loss of
profit arising from fire damage.
CHARACTERISTICS OF GENERAL INSURANCE
It‟s a contract of indemnity
It cannot be assigned even to ones relatives
The insured must have an insurable interest in the property to be insured
Premiums charged depends on the degree of risk, the higher the premium
charged.
Compensation for loss can only be upto a maximum of the value of
the insured property or the sum insured in case of under insurance.
It has no surrender value
It‟s normally a short term contract which can be renewed
periodically, usually after one year.
Factors to be considered when Determining Premiums to be charged
Health of the person
Frequency of occurrence of previous losses
Extent of the previous losses
Value of the property insured
Occupation of the insured
Age of the person or of the property in question
Location of the insured(address and geographical location)
Period to be covered by the policy
Residence of the insured
Procedure for taking a policy
Filling a proposal form
Calculation of the premium to be paid
Issuing of cover note (Binder)
Issuing of the policy
Procedure of claiming compensation
Notification to the insurer-The insurer has to be notified about the
occurrence of any incident immediately.
Filling a claim form-The insurer provides the insured with a claim form which
he fills to give details of the risk that has occurred
 Investigation of the claim-The insurer arranges to investigate the cause of the
incident and to assess the extent of the loss incurred. The insurer is then
able to establish whether the insured is to be compensated and if so, for
how much.

Prepared By Mr. Peter Ochieng Otieno

[email protected] department kisumu national
polytechnic © 2017
 115

Payment of claim-On receipt of the report of the assessor, the insurer pays the
due compensation to the insured. (Payment of the compensation shows that
both the insurer and the insured have agreed on the extent of the loss and
the payment is the settlement of the claim)
INSURANCE AND GAMBLING
In most cases, insurance is erroneously taken to be the same as gambling in that
small amounts are contributed by many people into a common fund which later
benefits just a few people. They are however different and their differences
include;
Insurance Gambling
-The insured must have insurable interest -A gambler has no insurable interest
-Reinstates the insured back to the
financial -Aims at improving the winners financial
position just before loss position
-The insured is expected to pay regular -Gambling money is paid only once
premiums for the insurance cover to
remain in
force
-Insurance involves pure risks -Gambling involves speculative risks
-The event of bet must happen to
-The event of loss might never occur determine the
winner and the loser.

QUESTONS
Describe the procedures that should be followed when taking an insurance policy.
(10mks)
Explain four ways in which the insurance industry promotes the growth of business
enterprise
Explain four ways in which the insurance industry contributes to the development of
Kenya‟s economy.
Discuss various insurance policies under which an insurance company would not
compensate the insured in the event of the loss.
Discuss various insurance policies that the owner of a supermarket may find it useful for
the
business. (12mks)
Explain four benefits of the „pooling of risks‟ to an insurance company.(8mks)
Explain the factors that may make it necessary for an insurance company re-ensure.
Explain the meaning of the following terms as used in insurance
8. (10mks)
 i)Uberrimae fidei
0 Indemnity
Third party motor vehicle insurance
0 Contribution.
1 Subrogation
Discuss four circumstances under which an insurance contract may be terminated.
(8mks)
Explain five benefits that could be enjoyed by a person who decided to take out an
endowment policy. (10mks

Prepared By Mr. Peter Ochieng Otieno

[email protected] department kisumu national
polytechnic © 2017
 116

GOVERNMENT AND BUSINESS

BY THE END OF THE TOPIC, THE LEARNER SHOULD BE ABLE TO:

Explain reasons for government involvement in business.
Explain how the government gets involved in business.
Discuss the merits and demerits of government involvement in business.
Discuss the importance of consumer protection.
INTRODUCTION
Government involvement in business activities is one of the commercial duties it
owes its citizens. It is the one that provides the necessary environment for
investments to be undertaken by itself, or by the local and foreign investors.
This, the government may do in various ways, these include;
Producing goods and services
Distributing goods and services
Advising producers and traders
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 117

Promoting trade and economic development

Protecting consumers against exploitation by producers and traders
As a consumer of goods and services
Reasons for Government involvement in business
The following are the major reasons for the government‟s involvement and
participation in business activities;
To prevent exploitation of the public by private businesspersons especially in the
provision of essential goods and services such as sugar, transport,
communication etc. the Kenya Bureau of standards (KEBS) regulates the
quality of goods consumed in Kenya.
To provide essential goods and services in areas where private individuals and
organizations are unwilling to venture because of low profits/ high risks
involved.
To provide essential goods and services which private organizations and
individuals are unable to provide due to the large amount of initial capital
required b e.g. generation of electricity, establishment of airlines etc.
To attract foreign investment by initiating major business projects
To stimulate economic development in the country e.g. by providing social
services
To provide goods and services which are too sensitive to be left in the hands of
the private sector e.g. provision of firearms.
To create employment opportunities by initiating projects such as generation of
electricity.
To prevent foreign dominance of the economy by investing in areas where the
locals are not able to
To redistribute wealth where returns are very high
To prevent establishment of monopolies
METHODS OF GOVERNMENT INVOLVEMENT IN BUSINESS
The government gets involved in business activities through the following
methods:
Regulation
This refers to Rules and restrictions the government requires business units to
follow in their business activities. Through this method, the government ensures
high quality goods and services and puts in control measures to protect consumers
from exploitation. The government regulation measures include;
a) Licensing
A license is a document that shows that a business has been permitted by the
government to operate. It is usually issued upon payment of a small fee.
Licensing is the process of issuing licenses to businesses. Some of the
reasons why the government issues licenses include;
Regulating the number of businesses in a given place at any given time to avoid
unhealthy competition.
To control the type of goods entering and leaving the country.
To ensure there are no illegal businesses.
To ensure that traders engage only in trade activities that they have been licensed
for.
To ensure that those who engage in professional activities meet the
requirements of the profession.
To raise revenue for the government.
Ensuring standards/ enforcing standards; The government regulates business
activities by setting standards that businesses should and ensuring that the
standards are adhered to. To achieve this purpose, the government has
established bodies such as;

Prepared By Mr. Peter Ochieng Otieno

[email protected] department kisumu national
polytechnic © 2017
 118
Kenya bureau of standards (KEBS) whose main responsibility is to set
standards especially for the manufactured goods and see to it that the set
standards are adhered to/ met. Goods that meet such standards are given a
diamond mark of quality, to show that they are of good quality.
The ministry of public health to ensure that businesses meet certain standards
as concerning facilities before such businesses can be allowed to operate.
Such standards may include clean toilets, clean water and well aerated
buildings.
Legislation; The Government may come up with rules and regulations (laws)
that regulate business activities e.g. banning hawking in certain areas,
matatus required to carry certain number of passengers e.t.c.
Training
The government takes keen interest in training and advising people in business
about business management strategies and better ways of producing goods and
services. The government offers these services through seminars and courses. This
is mainly done by the Kenya Business
Training Institute (K.B.T.I). Reasons for government training include;
To expose businesspersons to modern developments in management
Introduce modern technology and skills in management
Educate the business people on efficient methods of operating a business e.g.,
effective methods of advertising and keeping books of accounts.
Expose business people to problems/ challenges facing them and their possible
solutions for example, problems of raising capital and identifying investment
opportunities.
Impart proper business ethics e.g. good customer relations and honesty.
Creating awareness of the available profitable business opportunities in their
environment
Expose business people to government policies regarding business activities in the
country.
Educate business people on how to use available resources to minimize costs and
maximize profits.
Expose people to other opportunities that exist in the import and export market.
Trade promotion
This is a government initiated and supported policy to encourage local business
people to enter into business. This is aimed at increasing the volume and variety of
goods and services traded in. Trade promotion is classified as either external
trade promotion or internal trade promotion.
(a) External trade promotion
The purpose of external trade promotion is to encourage local business people to
enter into the export market.
It also intended to attract foreign investors into the country.
In Kenya, external trade promotion is done through the department of external
trade in the ministry of trade and industry.
External trade promotion may also be done by Commercial attaches.
Commercial attaches are officers sent by the country‟s government to work with
the embassies in foreign countries as support staff in the field of commerce. Their
main duty is to look at the interests of their home countries‟ exports e.g. cash
crops and manufactured goods.
Duties of commercial attaches
Explore and identify new markets for more export opportunities.
Research and analyze markets for exports from their home countries.
Keep statistics of products such as volumes, packaging size and method of
manufacturing.

Prepared By Mr. Peter Ochieng Otieno

[email protected] department kisumu national
polytechnic © 2017
 119
Attend meetings, seminars and workshops on trade patterns of the countries and
keep data for new markets of exports.
Publish and advertise their country‟s exports in business journals and magazines.
Select buyers, agents and distributors of the home country‟s exports.
Inform traders in their home countries of the standards required for exports.
Assist sales missions from their home countries by organizing educational tours for
them.
Organize visits to trade fairs and exhibitions for business people from their home
country.
Make detailed reports on commercial activities that may help improve the
exports of their countries.

Keep information on prices paid for exports and terms of payments( conditions
to be filled before the payment is made)
Be aware of the rules that govern payment in international trade.
Be aware of the working of the regional organizations that operate in developing
countries such as the East African Community (E. A. C), Inter-
Governmental Authority for
Development (I.G.A.D), Common Market for Eastern and Southern Africa
(COMESA),
Economic Commission for Africa (E.C.A) and African Growth
Opportunity Act (A.G.O.A).
Internal trade promotion
This is done by the government through the ministry of trade. The ministry
carries out various activities

THE STOCK EXCHANGE MARKET

This is a market whereby the buying and selling of shares and other securities
takes place. Shares are the smallest units of capital that can be sold to persons by a
company for them to become share holders. Other securities traded in this market
includes debentures (a unit of loan sold by the companies to the members of the
public), government bonds (a long term borrowing certificate by the government
from its people) and government treasury bills ( a short term borrowing certificate
by the government from its people).
Common terms used in stock exchange
Securities:- a document certifying that one has lent money to the issuer
(the person borrowing the money)
Broker:- a person/firm registered by the capital market authority (CMA) to
buy and sell shares and other securities on behalf of their clients
Jobber:- a person/firm who buys and sell shares and other securities with
an aim of making a profit
CDSC account:- Central Depository Settlement Corporation account for
mobilizing the shares and securities to be traded on at the market
In the stock exchange market only registered/listed/quoted companies are allowed
to sell their shares. A quoted/listed company is a company that has been registered
as a member of the stock exchange market.
The quoted companies can sell their shares through the Initial Public Offer
(I.P.O) or normal trading in the market.
IPO is the initial price that the company will float its shares to the members
of the public to buy/subscribe to for the first time. These shares are said to
have been issued in the primary market. After the IPO the shares are then
accumulated as stock and traded on in the stock exchange market (secondary
market).
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
 120

All the trading of the shares is done through the company‟s agents or brokers.
Procedure of buying shares:
Opening a CDSC account through broker
Filling in the purchase order form by stating the type and the number of
shares to be bought
The broker identifies and negotiate with the willing buyer
The shares are then paid for through brokers at a commission
Shares are then transferred and credited in the buyers CDSC account
Procedure for selling shares:
Opening a CDSC account through broker
Filling in the sales order by stating the price and the number of shares to be sold
The buyer identifies and negotiate with the willing buyer
The buyer pays for the shares through the broker
Shares are transferred and credited in the buyer‟s CDSC account with the
sellers CDSC account being debited
Roles of stock exchange market
They perform the following roles:
They facilitate the buying of shares by creating a conducive environment for
the investors who wants to buy shares.
They facilitate the selling of shares by creating a ready market for those who
wish to sell their shares
They safeguard the investors‟ interest by ensuring that the companies to be
listed have met a given standard of performance. If not they will be
deregistered
Assist the company to raise capital through IPO or sales of shares in the market
Provide useful information to the investors which is always timely and
accurate to assist them in their decision making
They create employment opportunity to those who facilitate the buying and
selling of the shares such a jobbers, brokers, etc
They help the government in raising the revenues in terms of fees and
rents to the government
They avail variety of securities for the investors to choose from before
investing.
They measure the country‟s economic progress through checking the
performance of the stock, which may be an indicator of the economic
performance.

Pros and Cons of Different Methods of Parcel Shipping

No matter what kind of item you wish to ship abroad, you surely want it to arrive
to its destination as quickly as possible. But, are you ready to pay more money in
order to save some time?
The thing is that some parcel shipping methods are more affordable than others.
And in some cases, this can mean a lot, especially when long-distance shipping is
concerned. Unfortunately, cheaper shipping methods are usually not as quick as
those more-expensive ones.
Each shipping method has its own advantages and disadvantages. Deciding which
one to use depends on your budget, your time, as well as the type of cargo you
need to transport. With so many factors coming into play, it’s impossible to say
which one of them is the very best. It’s up to you to decide…
And the only way to do it is by learning more about each of these shipping
methods. So, let’s discuss each one of them more thoroughly!
Air Freight
When it comes to international shipping, air freight is, by far, the fastest method.
This isn’t a surprise, considering that a plane can fly much faster than a ship can
sail, not to mention that it can reach almost any destination on the planet, which
isn’t the case with trucks.
So, now that we’ve established that air freight is much less time consuming than
ship freight or truck freight, it’s time to talk about the downsides of this shipping
method. The biggest downside is obviously the cost.
In almost all cases, air freight is more expensive than any other shipping method. It
might not be a big deal if you’re gonna send a small item across the planet, but if
international trade is your business, the cost of air freight can take a toll on your
company’s profits.
Another problem with air freight is that the space inside a plane is limited – there’s
less space inside a plane that inside a cargo ship. Therefore, weight is a major
factor and you might not be allowed to transport your entire cargo in one go.
Pros of Air Freight:
 The fastest international shipping method
 Usually no delays
 Safe & secure shipping method
 Can be used anywhere in the world

Cons of Air Freight:

 Expensive

Sea Freight
Sea freight seems perfect for bulk shipping. Why? Because it’s really cheap. It’s
actually calculated that sea freight is about five times cheaper than air freight.
Unfortunately, it’s also much slower.
So, if you’re low on supplies from China or some other remote part of the world,
you will have to wait for weeks or even months for your shipment to arrive. With
air freight, such concern wouldn’t bother you. Shipping goods from China to
Europe via airplane usually takes only a couple of days.
Another issue with sea freight is that it’s not possible in every part of the world.
For instance, shipping items from one of the big industrial centers in mainland
China is impossible to do via sea – some of those cities are thousands of miles
away from the nearest harbor.
On the bright side, sea freight is much more eco-friendly than air shipping. The
thing is that that, on average, only 15g of CO2 is emitted par one tonne of cargo in
sea freight. We say ‘only’ because the CO2 emission air freight causes is more than
40 times bigger.
Pros of Sea Freight:
 The cheapest method of long-distance shipping
 Much more eco-friendly than air freight

Cons of Sea Freight:

 Time-consuming
 Not available everywhere on the planet
International Courier Companies
When it comes to shipping items in Europe, the most cost-effective method is road
freight, done by international courier companies. It’s much cheaper than air freight
and much faster than sea freight.
Furthermore, hiring couriers to take care of the job, means that you don’t need to
do anything apart from giving them the package (if you’re the sender) or receiving
the package at your own address (if you’re the recipient).
Another great advantage of courier services is that they’re generally considered to
be much safer than any other shipping method. So, if you need to transport your
valuables or some fragile items, international couriers are the ones you should hire
for the job.
Apart from using courier services to send/receive small packages, you can use
them for bulk shipping purposes as well. The thing is that most international
courier companies (at least those serious ones) have vehicle fleets with vans and
trucks of different sizes. What this means is that they’ll be able to deliver your
whole cargo in one go.
Speaking of their vehicle fleets, there are some courier companies that use
airplanes and ships as well, not just land-based vehicles. And some have deals with
other freight companies that allow them to use several means of transport in order
to get your package delivered at the fastest and most-affordable rate possible.
Pros of Courier Service:
 Ideal for international shipping across Europe
 Fastest shipping methodat shorter distances (up to a thousand miles)
 Way cheaper than air freight
 Very reliable, safe, and secure

Cons of Courier Service:

 Not ideal for cross-continent shipping

Which Shipping Method Should You Use?

There are so many factors that come into play when international shipping is
concerned. Sometimes, the best-possible solution would be to use several different
shipping methods to get your items delivered.
For instance, in order to get a shipment from mainland China to your place in the
UK, it would be best if you could use a combination of air freight (to get the
shipment from central China to a harbor), sea freight (to ship it from China to one
of UK’s harbors), and courier service (to get the cargo delivered to your door).
Luckily for you, there are some international freight companies that can do this for
you. Rather than deciding which shipping method is the best, you can leave
everything to them. No need for guesswork about which kind of shipping option is
the best for the item you’re sending/receiving, let Same Day Dispatch Services
decide it for you!
Tags: Courier, Courier Services, Parcel Delivery, Reliable Couriers, Sameday
Couriers
This entry was posted on Thursday, April 18th, 2019 at 6:26 am and is filed
under Parcel Delivery, Sameday Couriers, Uncategorized. You can follow any
responses to this entry through the RSS 2.0 feed. You can leave a response,
or trackback from your own site.

LEAVE A REPLY

The source of raw materials:

Some industries are called bulk- decreasing industries. This means that the finished
product is cheaper and easier to transport than the raw materials used to make it.
These industries try to get as near as possible to the place wherefrom they get their
raw materials. It is easier and cheaper to transport finished steel than iron ore
because iron ore contains much waste.

The market:
Some industries are called bulk-increasing industries. This means that the finished
product is more expensive and difficult to transport than the factors of production
used to make it. Bulk-increasing industries try to get as near as possible to their
market. The furniture industry is situated mainly in and around Calcutta because
furniture is bulky and expensive to move, and Calcutta is the main market.

ADVERTISEMENTS:

Footloose industries:
Transport costs are fairly unimportant to many industries, and these industries are
called footloose industries. A food-processing firm, for example, which produces
packaged food like Maggi noodles, cheese and butter, might receive its raw
materials from farms spread over a large area, and it may sell its goods throughout
much of the country. It could locate its factories in several different areas without
making much difference to its transport costs.

Determinant # 3. The Cost and Skills of the Labour Force:

Labour is usually the firm’s largest cost of production, and firms may move to
where wages are lowest. Areas where wages are low, however, may be expensive
areas in other ways. They might be far from the market, for example. Firms might
be more interested in the skills of the labour force than in their wages. If a car firm
sets up a new factory in Mumbai, for example, it might find many of the skilled
workers it needed already in the area. This would cut down training time and
training costs.

Determinant # 4. The Cost of Renting Land:

Compared to other costs, rents lend to be a fairly small cost for most firms. Only in
inner cities are rents and rates likely to be so high that they might put a firm off
building a factory or other place of work.

Determinant # 5. The Nearness of Power Supplies:

ADVERTISEMENTS:

Until the beginning of this century most industries relied on coal for power. This
made nearly all of them bulk-decreasing, and they had to be located on the
coalfields. Now most businesses use electricity, gas and oil for power, and power
supplies make little difference to where they locate.

Determinant # 6. The Nearness of Water Supplies:

Some industries use huge amounts of water, particularly for cooling purposes. This
is why some factories like nuclear power stations have to be near the coast.

Determinant # 7. Good Infrastructure:

Infrastructure refers to the facilities which enable industry to work efficiently for
example roads, railways, housing, schools, hospitals and water-supply. Poor or out-
dated infrastructure may deter a firm from locating in an area.

Determinant # 8. The Nearness of other Firms Working in the Same Industry:

Many industries are localised. This means that firms in the industry tend to be
found concentrated together in certain areas of the country. Industries that are
localised can benefit from external economies of scale, sometimes known as
economies of concentration. These are cost savings gained by a firm by being in an
area with other firms in the same line of business.
Prepared By Mr. Peter Ochieng Otieno
[email protected] department kisumu national
polytechnic © 2017
What Are the Types of Delivery Documents?
Four types of delivery documents are available:

Document
Type Description
Bulk Delivery This document provides the delivery instructions for the sales order or trip and
Ticket and quantities to be delivered to the customer. It can be used to record addition
was actually delivered. This document might also serve to transfer the ownersh
customer. Although the bulk delivery ticket is not intended to be an invoice, yo
information.

Bulk Invoice This document provides the delivery instructions for the sales order or trip and
and quantities to be delivered to the customer. It can be used to record addition
was actually delivered. This document also shows the product price, tax, and o
might apply. It serves to transfer the ownership of the product to the customer.

Packaged This document provides the delivery instructions for the sales order or trip and
Delivery Ticket products and quantities to be delivered to the customer. It can be used to record
what was actually delivered. This document also serves to transfer the ownersh
customer. Although the packaged delivery ticket is not intended to be an invoic
information.

Packaged This document provides the delivery instructions for the sales order or trip and
Invoice products and quantities to be delivered to the customer. It can be used to record
what was actually delivered. This document also shows the product price, tax,
that might apply. This document serves to transfer the ownership of the produc
TERMINOLOGY: THE MAIN 6 DELIVERY TERMS [ TERMS OF SALE ]
EXPLAINED
Over time, the shipment of goods has changed and altered as new technology and
forms of transport have improved. The term “shipping” in itself really refers to the
days past where everything had to be sent by ship because it was the only method
available. Now it purely refers to any method of sending goods.

If you are looking to send your items on a ship, then you would actually refer to it
as “By Sea” to be more specific. “By Air” refers to sending goods on a plane and
“By Road” is purely loading items into a truck, lorry or any road vehicle and
sending it via roads and motorways. This is usually reserved for large countries
like the US or large landmasses with groups of countries, like Europe for example.

You also don’t need to do just one method. Most fashion brands and in fact anyone
who produces and ships their products will usually do a combination of at least two
of these. The goods are shipped “By Sea” to a port, inspected by customs and then
loaded onto a truck or lorry to be delivered “By Road” to it’s final destination.

For most people the terms I’m going to list below are known as Shipping terms,
but in reality, they are actually “Terms of Sale”. They make an agreement between
the buyer and factory that states what is actually included in the price you are
paying per garment and who is responsible for various parts of the process. As
most of the terms usually cover some element of the shipping process, this is where
the confusion in terminology has come from

Below is a list of the most common terms of sale and what they actually mean. It’s
important to mention that the products do not become the property of the designer
buyer or person placing the order for the goods, until paperwork has been handed
over at the right time depending on the terms and if you’re thinking that you might
be able to get away without paying for them think again. Before the goods are even
produced, other paperwork, like a Pro Forma, is essentially a contract that you
have to sign and acts as a contract between you or company and the factory.

COST AND FREIGHT [ C&F ]

This means that the exporter or in this case, factory, price quoted to you includes
all costs of the products and freight expenses of getting each item to the destination
port stated in the agreement. This does not include insurance once the products
have passed the Ship’s Rail to the end of their journey, which means that you as the
buyer or importer is responsible for any damage or loss when the products are on
the ship and leave the factory’s starting port.

Delivery is complete when the goods reach the destination port. Anything past that
point, including unloading costs, is your responsibility and you will have to
arrange transport to your warehouse or storage address.

The technical point of transfer for insurance responsibility is what is called The
Ships Rail. This is basically a fixed point at the dock side and is used to mark a line
where the factory responsibility and your responsibility transfer legally

This term was formally known as CNF and is now also known as CFR

COST, INSURANCE AND FREIGHT [ CIF ]

CIF is the same as C&F except the cost per item will also include insurance
throughout the journey all the way to the delivery port. This is one of the more
popular terms for larger retailers who have freight forwarders.

As above, delivery is completed when the goods get to the destination port.

FREE ALONGSIDE SHIP [ FAS ]

This one can be a little tricky to distinguish from C&F and is not really used in
terms of fashion all that much, but basically the price per garment or product
includes all costs up to the destination point. Basically this means that the factory
includes all costs until the ship pulls into the destination port or loading dock as
long as the goods stay on the ship. Once they leave the ship, even still in the port,
you are now responsible for the costs.

EX FACTORY
This one is very simple as is often used with domestic or local factories where it is
easy to pick up the goods and is quite often used with a By Road shipment.

Basically the factory has no responsibility for the products outside of its own
factory gate. The cost per product only covers the manufacturing per item and any
finishing or packaging you agree on. As the buyer of the goods, you are
responsible for all delivery and insurance costs.

DELIVERED DUTY PAID [ DDP ]

If you come to a price agreement using DDP, which not many factories accept
these days, this means that all of the risk is on the factory. Any and all costs that
are involved from the products leaving the factory, to arriving at your warehouse or
delivery address is included. As the importer or buyer, you do not need to cover or
arrange anything.

FREE ON BOARD [ FOB ]

FOB is term that is widely used in large retail businesses, mainly because they
have large shipping departments that sort many of the import documents and
delivery for them. Free on board means that the item price includes the factory
being responsible for getting the goods to the ship and loading them on to that ship.
Once they are on board, you as the importer, are responsible for all further costs,
including unloading, import, duty, and any further delivery needed.

If you decide to ship By Air, regulations are a little tighter because of security so
the factory’s responsibility ends when the goods are passed to the carrier. The
carrier will then load the products onto the aeroplane, but in terms of law and cost,
you are responsible for the items when they are received by the carrier.

There are of course many others that you might come across but these are the most
commonly used. They all have their pros and cons depending on how big your
company is. I’m going to assume that it probably doesn’t have a large team that
can arrange import, documentation and freight forwarding, so I would suggest that
you try to go for Ex Factory if you are getting things made close by or somewhere
you could drive to. You do of course have the option of hiring a pick up from a
regular courier, but this could be pricey depending on the size and quantity of your
order.

If you are doing business overseas and you’re not sure about all of the paperwork,
if it’s at all possible, try to negotiate DDP. Be aware though that with DDP there
are a lot of costs involved so it will be more per garment than you expect and I’m
sure most factories will add on a little per item for the hassle.

As a last tip, you need to ask for all copies of insurance forms, duty and tax at both
ends and of course paperwork for customs clearance, just in case.

FACTORIES OVERSEAS
Now the first thing is to decide if you are going to go for a domestic based factory
or an overseas factory. For those in the western world overseas factories will seem
a lot cheaper, but you have to also look into the import duty for your country. This
can be a fairly in-depth topic and you can read more about it here LAW: Why
Fashion Brands need to know about Import Duty, but for now let’s just go with
the fact that every country combination will have a different amount of money you
have to pay to import goods. Then you have the transport cost on top of that at both
ends and any other taxes you particular country and the country you are shipping
from, has. Length of delivery time can also be an issue and can take up to 6 weeks
to ship from one side of the world to another. You have the option of flying the
garments which may take only 1 week, but then it’s a lot more expensive, and of
course customs at both ends will want to hold the items to make sure they are
genuine, non-illegal goods, so there is always another 10 days delay that should be
added in each end also.
So you might be asking what fashion brands would want to go overseas? Well
there are many reasons, but the biggest one is cost. Per item, the cost of production
is cheaper, not to mention the components and fabrics needed. This really is only
the best decision if you need something really specialist that you can’t source from
your own country or you are buying in such large volumes that it becomes cheaper
to manufacture overseas.