MODULE NAME: COMMERCIAL

KNOWLEDGE
MODULE CODE: BAT 05103

1
 TOPIC 1:
OVERVIEW OF COMMERCE
• Commerce refers to the exchange of goods,
services, (i.e. buying and selling) between
businesses or entities within the country or
outside the country but also all those activities,
which are necessary to bring goods and services
from the place of their origin to the place of their
consumption.
• Commerce includes trade and aids to trade. The
aids to trade consist of services such as transport,
banking, insurance, warehousing, advertising and
communication

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 PRODUCTION
• Production is a process by which inputs or factors of
production (land, labour, capital, etc) are transformed
into more useful goods and services. Or is a process of
converting or transforming inputs into outputs.
• Is any activity which results into the creation of goods
and services in order to satisfy human wants.

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 TYPES OF PRODUCTION

• There are two types of production

namely; Direct and Indirect
production.
• Direct production is the provision of
goods and services on a small scale
and meant for one’s own use only.

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 Cont..
• Indirect production

Is the provision of goods and services on
a large scale and meant for sale. Indirect
production calls for specialization.

In this type of production an individual
produces goods or services in order to
satisfy the needs of other people.

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 Stages of Production

• Production takes place in three main stages

namely; Primary, Secondary and Tertiary stages.
 Primary Production:

The extraction of raw materials directly from the
earth or the sea. Examples include; mining of
minerals from the ground, fishing in rivers, lakes,
and seas, cutting of trees in the forest for
lumbering purposes, quarrying, etc.

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 Cont…
 Secondary Production

This involves the changing/processing of raw
materials into finished or semi-finished
goods.

It involves the manufacturing and
construction industry. Examples include;
baking of bread using wheat as a raw
material, process trees into timber and later
furniture.
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 Cont….
 Tertiary Production

This is the distribution of goods and
services to areas where they are needed
with the help of Commerce (Trade and Aids
to Trade).

It also involves the direct services provided
by personnel such as Doctors, Nurses,
Teachers, Lawyers, the Police, etc.

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 Factors/Agents of Production
 These are the economic resources, which assist the process of
production. They are known as inputs, tools of production and
agents of production.
 These are essential resources or inputs that must be available
before any provision or production of goods and services can take
place. These are; Land, Labor, Capital and Enterprise/Organization
1. Land:

It is the basic factor of production because it is essential to
production. Each productive resource must utilize it either in the
form of dry surface of the earth or in form of other natural
resources. Land includes all natural resources on or under the earth
surface, such as waters and living organisms in it, wild animals,
mineral wealth, etc.

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 Cont…
• Characteristics or Features of Land

It is a gift of nature

Land is limited in quantity or fixed in supply

Its location is fixed

Each plot of land has unique natural features

Demand for land is a derived demand

Land provides place/site where production can
take place

The reward to land is rent.

It lacks geographical mobility
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 Cont…
2. Labor:

Labor means any mental or physical efforts made by
human being in the process of production

Includes all form of human effort expended in the
production of goods and services. That is the manual
(physical) and mental (skilled) effort. Those who
provide labor are called Workers. Workers receive a
salary or wages as their reward.

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 Cont…
Features of Labor

Labor is the most mobile factor of production in
both geographical and occupational sense.

Any labor must be aimed for production

Without labor, other factors can not produce

Demand for labor is a derived demand

Labor differ in efficiency

Payment for labor is wage/ salary

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 Division/Specialization of labor
• This refers to the division of work into a number of
separate processes. Each process is performed by a
single person or groups of persons.
• Example, a making of a pin may be divided into
various stages and each stage is given a particular
worker to perform. One worker draw up a wire, a
second worker straightens the wire, the third cut it,
fourth grinds the top to receive head, the fifth make
pin heads, sixth polish them and the seventh sharpen
the points and so on.
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 Advantage of Division of labor
• Time and energy serving. Division of labor
reduces the wastage of time which occurs when a
worker have to change from one process to
another. Also less time is required to learn how to
perform a single task/ operation than to learn
many tasks.
• Degree of choice. People have different interests.
Specialization enables individuals to pursue those
occupation for which they are most suited

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 Cont…
• Increased labor productivity. Expertise and
efficiency resulting from doing similar task
every day, results into increased production,
less cost per unit produced, this further will
lead to consumers to pay less.

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 Disadvantages of Division of labor
• Boredom. Doing a similar task over and over
again can make a worker tired and bored.
• Over specialization. There is a possibility of a
person over specializing and in the event of lack
of vacancies in that field of employment, fail to
find an alternative job.
• Unemployment. It may happen that too many
persons opt to specialize in a certain field of work
and that field may not be able to absorb all of
them.
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 cont,…
• Loss of flexibility . If workers specialize too much
it may be difficult for them to performing other
tasks when there is a need to cover for workers
who are not present
• Loss of skills. Some claim that by breaking
production into a series of separate, simple and
often mechanized tasks, workers are not
challenged and are not able to gain sufficient job
satisfaction.

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 Cont…
• Interdependence. A specialized system of production
increases the extent to which different sectors of the
economy depend upon another. It is not simply the
question of workers specializing, factories, firms and
even whole industries specialize. A problem in
production in one company may cause hold-ups
throughout that said company, industries and related
industries. For example a break-down in temperature
control in a food processing company may disrupt
supplies to a number of super market chain and other
retail

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 Cont…
3. Capital:

Is an asset that is used to produce other goods and services.
Capital includes all types of producer goods like machinery,
buildings, raw materials, equipments, etc

When using the word capital as a factor of production care
must be taken to distinguish it from capital as money
contributed by owners to start business. After contributing
money to start the business it is used to acquire things like
land, buildings, stocks, labour and other things required to set
business in operation; These are the already produced things
and are the ones being referred to as capital.

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 Cont…
Features of Capital

It is the factor of production which increases
the efficiency of other factors because it
simplifies work

Capital is made by human beings. It is not
provided freely by nature

Interests are the reward to usage of capital in
production.

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 Cont….
4. Organization (management)/entrepreneur.

Is the owner of the business. It is a factor of production
which organizes other factors of production in the
production process, and establishes the business.

They are people who have the ability to conceive ideas and
transform them into business capable of producing goods
and services. What is produced is the property of the
entrepreneurs. They sell goods or services so far produced
and pay land, labour and capital from the proceeds, what
remains from proceeds constitutes profit which is the
reward to them.

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 DIVISION OF COMMERCE
• Commerce can be broadly divided into two
main commercial activities, those concerned
with actual selling and buying of goods and
services (trade) and those activities which
facilitates selling and buying of goods and
services (aid to trade).
• See the diagram in your notes

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 Importance of Commerce in the
framework of production:

Commerce tries to satisfy increasing human wants.
Human wants are never ending. Today we can buy
anything produced anywhere in the world. This has in
turn enabled man to satisfy his countless wants and
thereby promoting social welfare.

Commerce helps to increase our standard of living.
Standard of living refers to quality of life enjoyed by the
members of a society. Commerce helps us to get what we
want at right time, right place and at right price and thus
helps in improving our standard of living.

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 Cont…

Commerce links producers and consumers:
Commerce makes possible to link producers
and consumers through retailers and
wholesalers and also through the aids to
trade. Consumers get information about
different goods through advertisements and
salesmanship.

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 Cont…

Commerce generates employment
opportunities. The growth of commerce,
industry and trade bring about the growth of
agencies of trade such as banking, transport,
warehousing, advertising, etc. Thus
development of commerce generates more
and more employment opportunities for
millions of people in a country.

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 Cont…

Commerce increases national income and
wealth: In a developed country,
manufacturing industries and commerce
together accounts for nearly 80% of total
national income. It also helps to earn foreign
exchange by way of exports and duties levied
on imports. Thus, commerce increases the
national income and wealth of a nation.

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 Cont…

Commerce helps in expansion of aids to
trade: With the growth in trade and
commerce there is growing need for
expansion and modernization of aids to trade.
Aids to trade such as banking, communication,
advertising and publicity, transport, insurance,
etc., are expanded and modernized for the
smooth conduct of commerce.

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 Cont…

Commerce helps in growth of industrial
development: Commerce looks after the smooth
distribution of goods and services made available
by the industry. Without commerce, industry will
find it difficult to keep the pace of production. It
helps to increase demand for goods on one hand
and on the other hand it helps industries by
getting them the necessary raw materials and
other services. Hence, commerce helps in
attaining better division of labor and industrial
progress.

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 Cont…

Commerce encourages international trade:
Through commerce we can secure a fair and
equitable distribution of goods throughout the
world. With the help of transport and
communication development, countries can
exchange their surplus commodities and earn
foreign exchange, which is very useful for
importing machinery and sophisticated
technology. It ensures faster economic growth of
the country.

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 Cont…

Commerce benefits underdeveloped
countries: Underdeveloped countries can
import skilled labor and technical know-how
from developed countries. While the
advanced countries can import raw materials
from underdeveloped countries, this helps in
laying down the seeds of industrialization in
the underdeveloped countries.

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 Cont….

Commerce helps during emergencies: During
emergencies like floods, earthquakes and
wars, commerce helps in reaching the
essential requirements like foodstuff,
medicines and relief measures to the affected
areas.

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 TOPIC 2:
HOME AND FOREIGN TRADE
Trade may be classified as;
a) Internal/Home/Domestic Trade
b) Foreign/External/International Trade

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 Division of Trade
. TRADE

HOME FOREIGN

WHOLESALE RETAIL EXPORT IMPORT ENTREPOT

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 Home Trade

Home trade is the trade which is carried on
within the boundaries of a particular country, for
instance fruits grown in Rushoto are sold at
Kariakoo market in Dar es Salaam. Maize grown
in Rukwa is sold in Mwanza

Home trade consists of two main subdivisions
namely
i. Retail trade
ii. Wholesale trade
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 Cont…
RETAIL TRADE

It involves buying in smaller quantities from the wholesalers
and selling in very small quantities to the consumers for
personal use.

The person involved in retail trade is called a retailer
TYPES OF RETAILERS
1. Small scale retailer. This includes the following:
a) Itinerant/Roaming retailers. These are mobile traders who
sell their goods on door to door basis.

They deal in low priced articles like fruits, vegetables, fish,
glassware, clothing, books etc.

Their major means of transport is their feet or bicycles.

They have very little stock and limited capital.

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 Cont…
b) Hawkers & Peddlers

Hawkers are small-scale petty retailers moving
from door to door in residential areas to sell their
goods.

Hawkers generally use a convenient vehicle to
carry goods from door to door.

Peddlers are also persons who trade on foot, but
carry their goods on their head or shoulders.
Peddlers go from house to house and providing
personal services directly at the door of the
customer.
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 Cont…
c) Street Traders.

In big cities likes Dar es Salaam, Mwanza, Arusha e.t.c. It
is common to find small bookshops, shoe-repairers,
leather bag repairers and other household goods
located in front of railway stations or near road
crossing.
d) Market Traders

These are traders displaying the goods in different
localities at the weekend or the end of month. Most of
the big villages and small towns in Tanzania have regular
market days. E.g. Sunday markets

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 Cont…
2. Large scale retail. This includes the following;
a) Chain stores (or multiple shops). These are number
of shops (at least ten or more) owned and managed
by one organization and selling similar type of
products.
b) Departmental stores. This is the collection of shops
under one roof and one management. It is divided
into departments, each department buys
merchandise separately, control its own stocks, and
makes its own polices but all are under one unified
control and management.
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 Cont….
c) Supermarkets. A supermarket is a self-
service retail outlet with a minimum three
hundred square meter (300M2) of sale floor,
having three or more check points offering
full range of foodstuffs, and household
requirements.

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 Functions of a Retailer

Buying: A retailer buys a wide variety of goods from
different wholesalers after estimating customer demand.

Storage: A retailer maintains a ready stock of goods and
displays them in his shop.

Selling: The retailer sells goods in small quantities
according to the demand and choice of consumers. He
employs efficient methods of selling to increase his sales
turnover.

Grading and Packing: The retailer grades the goods which
are not graded by manufacturers and wholesalers. He packs
goods in small lots for the convenience of consumers

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 Cont…

Risk-bearing: A retailer always keeps stock of goods
in anticipation of demand. He bears the risk of loss
due to fire, theft, spoilage, price fluctuations, etc.

Transportation: Retailers often carry goods from
wholesalers to their shops.

Sales promotion: A retailer displays goods. He
persuades consumers to buy goods through personal
selling.

Information: Retailers provide knowledge to
consumers about new products. They also provide
market information to wholesalers and
manufacturers.
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 WHOLESALE TRADE

It involves buying in large quantities from producers
or manufacturers and selling in lots to retailers for
resale to consumers.

The word ‘Wholesaler’ has been derived from the
word ‘Wholesale’, which means to sell goods in
relatively large quantities or in bulk.

According to Evelyn Thomas “A true wholesaler is
himself neither a manufacturer nor a retailer but
acts as a link between the two.

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 Cont….
Figure: A wholesaler act as a link between
manufacturers and retailers

MANUFACTURERS WHOLESALER RETAILERS

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 Characteristics of Wholesaler

Procurement in bulk quantity. He buys in bulk quantities
from producers and sells in small lots. It is the important
characteristics of the wholesaler.

Sale to other dealers.The wholesaler sells goods to retailers.
He does not come into direct contact with the ultimate
consumers.

Buying directly from manufacturer. Usually the wholesaler
buys directly from the manufacturers or producers.

Restriction to one or few goods. He usually deals in a few
types of products or a particular line of products.

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 Classification Of Wholesale Traders

• Wholesalers can be classified according to various features:

a) According to the range of product they sale

General merchandise wholesalers.These are wholesalers who
buy and sale different types of goods. They stock various goods
like hardware, groceries, clothing, etc. according to the needs of
retailers they serve.

General line wholesalers.These are wholesalers who deal with a
wide variety of goods within a given line of products. A general
line wholesaler may sale all sorts of groceries only.

Specialized wholesalers.These are wholesalers who trade in only
one type of goods in a given line of product. A specialized
wholesaler may deal with only green vegetables.

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 Cont…
b) According to geographical location of operation

Nationwide wholesalers. These are large scale
traders. They have depots in all major towns and
cities in the country in which they operate.
Retailers are supplied from depots located in
towns nearest to them.

Regional wholesalers. As their name suggests,
regional wholesalers concentrates their
operations on a particular area.

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 Cont…
c) According to methods of operation

Truck wholesalers. These are mobile wholesalers using trucks to sell and
deliver goods to their customers (retailers). E.g. Oryx Gas Company

Rack jobbers. These are wholesalers who specialize on marketing of a
particular product/ good to other specialized wholesalers. E.g. those
wholesalers who buy agricultural foodstuffs from rural areas and resale
them to wholesalers in urban areas.

Cash and delivery wholesalers. These wholesalers do not transport their
products to retailer premises. But retailers come to buy goods and pay
cash over the counter.

Auctions. These are wholesale markets where buyers are in free
competition among themselves. Goods are sold in large lots and usually to
the highest bidder.

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 Cont…
d) According to agents

An agent is a person who is appointed by a
businessman (principle) to act on his behalf in
business matters.

An agent has authority to buy or sell goods on
behalf of his principal.

He is remunerated in the form of commission
on sales.

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 Cont…
Types of Agents:
I. Brokers. Is one who bargains for another and receives
commission for doing so. His payment is known as
‘brokerage’.

He brings buyer and the seller together
II. Factors. A factor is a mercantile agent to whom goods are
entrusted for sale by a principal. He takes physical
possession of the goods, though he does not obtain
ownership of the goods.

A factor sells goods in his own name without revealing the
name of his principal.

He is entitled to receive payment for the goods sold and give
valid receipts.

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 Differences between Factor and Brokers

Factor
Takes possession of goods
Deals in his own name
Right to receive payments
Personally liable for his actions
Remuneration is called is commission
Brokers
Does not takes possession of goods
Deals on behalf of the principal
Cannot receive repayments
Principal is liable for his actions
Remuneration is called brokerage

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 Cont…
III. Commission agent. A commission agent buys and sells
goods in return for a commission.

He serves as a middleman between his principal (Employer)
and the consumers.

He gets a fixed commission for all his transactions.

He does not take the risk of the trade and all the risks
involved in his transactions are borne by his employer
IV. Del credere agent. A Del credere agent is a mercantile agent
who guarantees his principal for the collection of dues from
the customer to whom credit sales are made.

If they do not pay, the agent would bear the loss himself.

In return for his guarantee, he is given an extra commission
known as ‘Del Credere commission.

It is paid to the agent in addition to the usual commission 51
 Cont…
V. Auctioneers. Auctioneers are agents who sell goods by auction on
behalf of their principals. It clearly mentions the date, time, place
and details of goods through newspapers, posters and
announcements
VI. Warehouse–keepers. A Warehouse keeper accepts goods for the
purpose of storage in his warehouses. He must exercise
reasonable care and diligence in the storage of goods. He is
entitled for payment for his services

The warehouse keeper gives to the owner of the goods a receipt
known as warehouse keeper’s receipt or certificate. It is an
acknowledgement meant for the receipt of goods by him for the
purpose of storage. It is not a document of title to goods

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 Functions of wholesalers
• Wholesalers perform a number of functions in the marketing
of goods;

Linking the manufacturer and the retailer, Wholesales stock
large number of products from various manufacturers and by
doing so, they enable retailers to obtain variety of goods

Bulk buying. Wholesalers order large quantities of goods from
manufacturers. By doing this they carry part of production
risks for the manufacturers. For instance, if the demand for
goods stocked by wholesaler falls, the manufacturer does not
suffer the loss.

Providing credit facilities to retailers . Wholesalers often sale
on credit to retailers by allowing them to pay after they have
sold their goods

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 Cont…

Storage. Wholesaler, as we have already noted, buy in large
quantities from the manufacturers. They, therefore, must have
storage facilities to enable them to keep goods safely until the
retailers need them

Risk bearing . A Wholesaler bears all the trade risk arising out of
a sudden fall in prices of goods or by way of damage / spoilage or
destruction of goods in his warehouse. The risk of bad debts as a
result of non-payment by retailers, who have purchased on credit,
also falls on the wholesalers.

Breaking bulk. When wholesalers buy in bulk from the
manufacturers and sell smaller quantities to retailers they are said
to breaking bulk.

Transportation. Wholesalers purchase in bulk from
manufacturer and transport these goods to their own warehouses.
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 Cont…

Providing market information . Wholesalers
provide valuable market information to
retailers and producers. The retailers are
informed about the quality and type of
products available in the market for sale,
whereas the producers are informed about
the changes in taste and fashions of
consumers so that they may produce the
goods of the desired level of taste and fashion

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 International/ Foreign Trade

• Meaning: Trade between two or more nations is

called international trade or foreign trade. For
example, Tanzania’s trade with Uganda, Burundi,
Japan, France, China etc., is called foreign trade
or external trade.
Forms of International Trade

Foreign trade may be bilateral or multilateral.
Trade between two countries is called as bilateral
trade while trade among many countries is called
multilateral trade
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 Reasons for International Trade
• Trade among nations exists due to the following reasons;

Differences in natural resources such as minerals, oil
reserves, etc

Different in human skills. Citizens of different countries
have different skills such as Tanzania has people who are
very skillful in making carvings while Japan, USA and
European countries have people with skills in industrial
manufacturing. So Tanzania can export carvings and
import manufactured goods from these countries.

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 Cont….

Uneven distribution of capital and
technology. Countries without enough
capital and technology are forced to
import goods from the countries capital
and the technical capacity of producing
goods.

Gain from trade. Countries earn revenue
and profits by engaging in IT

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 Division Of International Trade
. International
Trade

Import Trade Entrepot Trade

Export Trade

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 Types Of International Trade

• Import Trade. Import trade means buying goods from a

foreign country for domestic use. E.g. Tanzania imports
Petroleum from Libya.
• Export Trade. Export trade means sale of domestic goods to
foreign countries. E.g. selling of Gold from Tanzania to Japan.
• Entrepot Trade. Entrepot trade means importing of goods
from one country and exporting the same to other foreign
countries. The country which carries on this trade is acting as
collecting and distributing centre for certain special facilities
like large bonded ware houses, assembling and value addition
facilities. E.g. Singapore

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 Basic Theories of International trade
1. Mercantilism Theory.

Mercantilism theory developed between 16th,
and 18th century, based on the premise that
national wealth was seen as source of power and
greatness. The theory states that the world only
contained a fixed amount of wealth and that to
increase a country wealth; one country had to
take some wealth from another.

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 Cont…
2. Absolute advantages theory (Adam Smith model)

According to this theory, the country will specialize in
production of and export commodity in which it has
absolute advantage and imports the commodity in
which it has absolute disadvantage

A country enjoys an absolute advantage over
another country in the production of a product when
it uses fewer resources to produce that product than
the other country does.

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 Cont…
Assumptions of the Absolute advantages
theory

The world is made up of two countries
A&B

Only two products are produced, X & Y

Labor and land are only factors of
production

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 Example
 Consider the following example of the two countries, say
Tanzania and England and two commodities say cloth and
wine.
Labor cost per unit output (man-hours)

COUNTRY UNITS OF CLOTH UNITS OF WINE

TANZANIA 1unit /30 hours 1 unit / 60 hours
ENGLAND 1 unit / 50 hours 1 unit / 20 hours

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 Cont…
 The table shows that,

Tanzania has an absolute advantage in the production of cloth because
only 30 man-hours are required to produce one unit of cloth while in
England, 50 man-hours are required to produce the same quantity of
cloth.

On the other hand, England as an absolute advantage in the production of
wine because only 20 man-hours are required to produce one unit of wine
while in Tanzania, 60 man-hours are required to produce the same
quantity of wine.

Therefore, Tanzania will specialize in the production of cloth and import
wine from England while England would specialize in the production of
wine and import cloth from Tanzania.

Thus, the trade between the two countries will provide benefit/
advantages to both countries as proposed by Adam Smith

65
 Cont..
3. Theory of comparative cost advantage. This theory was introduced by
the economist known as David Ricardo. According to him, IT can take
place even if one country has got absolute advantage in both
commodities (say X and Y) provided that opportunity costs are different.

The theory states that; A country is said to have a comparative
advantage in the production of a commodity if the opportunity cost of
producing it is less than the opportunity cost of producing the same
commodity in another neighboring country. So, a country will specialize
in the production of a commodity in which it has a comparative
advantages and export that to other nations.

A person or nation will specialize in the production of a product for
which it has a lower opportunity cost and trade to obtain those
products for which its opportunity cost is higher.

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 Cont..
 Consider the following example of the two countries, say
Tanzania and England and two commodities say cloth
and wine.
Labor cost per unit output (man-hours)
Country Unit of cloth Unit of wine
Tanzania 1 unit/ 30 hrs 1 unit / 60 hrs
England 1 unit / 50 hrs 1 unit / 75 hrs

 From the table, Tanzania has an absolute advantage in

producing both goods while England has absolute
disadvantage in producing both goods. Is it possible for
Tanzania and England to trade? Explain why
 Cont..

The answer is, according to absolute advantage theory of IT,
it is not possible for Tanzania and England to trade because
Tanzania has absolute advantage in producing both
commodities while England has absolute disadvantage in
producing both products. According to absolute advantage
theory, trade between nations will take place if each nation
has at least absolute advantage in producing one product.

But according to comparative theory, international trade
can still take place even if one country (Tanzania) has got
absolute advantage in producing both products as opposed
to absolute advantage theory provided that opportunity
costs are different.
 Cont..

Opportunity cost of cloth and wine (per unit labor)

Country Opportunity cost of Opportunity cost of
cloth wine
Tanzania 30/60 = 0.5 60/30 = 2.0
England 50/75 = 0.67 75/50 = 1.5

By comparing the opportunity costs of Tanzania and England,
trade may take place by each country specializing in the
production of good in which its opportunity cost is lower.

Therefore, Tanzania has a comparative advantage in
producing cloth because the opportunity cost (30/60=0.5) is
lower than that of England (50/75=0.67)
 Cont…

England has a comparative advantage in
producing wine because the opportunity cost
(75/50=1.5) is lower than that of Tanzania
(60/30=2.0)

Therefore, Tanzania would specialize in cloth
production and England in wine production. This
means, Tanzania will export cloth and import
wine from England while England will export wine
and import cloth from Tanzania.

70
 Advantages Of International Trade

Efficient allocation and better utilization of resources since
countries tend to produce goods in which they have a
comparative advantage.

Wider Range of Commodities: International trade makes it
possible for each country to enjoy wider range of
commodities. (Enables a country to consume things which
either cannot be produced within its borders or production
may cost very high).

Utilization of surplus produce: International trade enables
different countries to sell their surplus products to other
countries and earn foreign exchange

71
 Cont..

A remedy for the Scarcity of Commodities: If at any time there
is shortage of food or scarcity of other essential commodities
in the country, they can be easily imported from other
countries and thus the country can be saved from shortage of
commodities.

Promotes Competition: International trade promotes
competition among different countries. The producers in
home country, being afraid of the foreign competition, keep
the prices of their products at reasonable level.

Promotes efficiency in production as countries will try to
adopt better methods of production to keep costs down in
order to remain competitive.

Source of government revenue through tariffs imposed
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 Cont…

Speeds Industrialization process: International trade enables
developing countries to acquire skill, machinery; and other
capital equipment from industrialized countries for speeding
up industrialization.

Facilitates specialization: International trade enables
countries to specialize in producing goods in which they have
a comparative advantage.

Facilitates better international understanding: International
trade helps in building better relationship among various
countries.

Creation of more employment opportunities

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Disadvantages Of International Trade

Economic dependence: Too much dependency on the other
nations in the form of increases imports may seriously affect
the economic sovereignty of that nation

Import of harmful goods: Foreign trade may lead to import of
harmful goods like cigarettes, drugs etc. Which may ruin the
health of the residents of the country

Exhaustion of Resources: In order to earn present export
advantages a country may exploit her limited natural
resources beyond proper limits. This may lead to exhaustion
of essential material resources like iron, coal, oil, etc. The
future generation thus stands at a disadvantage

74
 Cont…

Effect on Domestic Industries: If no restrictions placed on the
foreign trade, it may ruin the domestic industries and cause
widespread distress among the people.

Times of Emergency: If each country specializes in the production of
those commodities in which it has comparative advantage over
other countries, it may prove very dangerous during times of
emergency like war.

It may lead to war: Foreign trade may lead to war between different
countries compete with each other in finding out new markets and
sources of raw material for their industries and frequently come
into crash. This was one of the causes of first and second world war.

It may cause cultural distortion.

75
 Problems of International Trade

 International trade is characterised by the following special

problems or difficulties.

Distance: There is a great time lag between placement of order and
receipt of goods from foreign countries. Distance creates higher
costs of transportation and greater risks

Different languages: Price lists and Advertisements are to be done
in foreign languages. A trader must know the foreign language or
employ somebody who knows that language.

Risk in transit: Goods have to be transported over long distances
and they are exposed to perils of the sea. Many of these risks can
be covered through marine insurance but increases the cost of
goods.

76
 Cont…

Lack of information about foreign businessmen: It is difficult to
obtain reliable information concerning the financial position and
business standing of the foreign traders. Therefore, credit risk is
high.

Documentation: Both exporters and importers have to prepare
several documents which involve expenditure of time and money.

Study of foreign markets: Every foreign market has its own
characteristics. An extensive study of foreign markets is essential for
success in foreign trade. It is very difficult to collect accurate and up
to date information about foreign markets.

Frequent market changes: This is due to free forces of DD& SS, new
compititors and fluctuations in exchange rates

77
 Cont…

Intense competition: Traders who want to sell goods abroad
have to face severe competition from different countries.

Difficulty in transportation and communication: Dispatch and
receipt of goods takes a longer time and involves considerable
expenses. During the war and natural calamities,
transpor-tation of goods becomes even more difficult.
Similarly, the costs of sending or receiving informa-tion are
very high.

Import and export restrictions: Every country charges
customs duties on imports to protect its home industries.
Similarly, tariff rates are put on exports of raw materials.
Importers and exporters have to face tariff restrictions.

78
 Terms of payment, documents and intercoms
used in International trade
 Discuss the terms of payment, documents and term of sales
(intercoms/term of trade) used in International Trade.

This part will be covered through group assignment

Make sure you fully participate in your respective group.

Make sure you print your work

Each group should write the names and registration numbers
of each group member.

Submission Date: 16th October, 2014.

Any delays will lead to penalty

Group members should NOT exceed 10

79
 Import Restriction
 Governments are keen on import trade because of its effects
on the economy. The following are methods used to restrict
imports.

Total ban: This is the policy of prohibiting the importation of
certain commodities which have some negative cultural or
economic impact such as second-hand clothes, cocaine,
pornography etc

Import Quota: Is the maximum amount of certain
commodities to be imported at a certain period of time. For
instance for 2013/2014 financial year importers will allowed
to import only 800 Mercedes Benz cars

80
 Cont…

Custom duties. This are taxes on goods imported. They lead to
an increase in the prices of imports in relation to locally
produced goods. This influences the local consumers to opt for
locally produced goods, and thus leads to a fall in imports.
Figure: Price rise due to imposition of custom duties

Price D
The price and quantity demanded before
P1 + t Imposition of taxes is P1 and Q1 respectively.

After tax imposition, prices increases to P1 + t

P1 Leading to a fall in the quantity of import
demanded from Q1 to Q2

Q2 Q1 Quantity Demanded 81
 Cont…

Change in exchange rate. This can be done
through devaluation policy (reduction of the
value of the domestic currency in terms of
foreign currency. Currency devaluation makes
imports expensive and export cheaper.

82
 TOPIC 3:
FORMS OF BUSINESS ORGANIZATION
 A business organization is an entity that is formed in
accordance with the law in order to engage in business
activities, usually the sale of a product or a service.
 Businesses organization can be divided into private
business organizations and public business organizations.
Private business organizations
• These are those owned privately by people either as
individual or as groups. These are;

Sole proprietor, Partnership, Joint stock companies, and
Co-operatives

83
 Cont…
Public business entity
• These are business entities which comprise
the public sector of the economy.
• They are either owned by the central
government or local authorities like cities and
municipals.
• They comprise both non-profit and profit
making organizations.

84
 Sole proprietorship

A sole proprietorship, also known as the sole trader or simply
a proprietorship, is a type of business entity that is owned
and run by one individual or one legal person and in which
there is no legal distinction between the owner and the
business.

Every asset of the business is owned by the proprietor and all
debts of the business are the proprietor's.
Advantages Sole proprietorship

Simplicity. Starting a sole proprietorship is simple. The only
legal formalities are applying for permits or licenses.

Autonomy/freedom of action. There no boss to challenge the
work of the sole proprietor. There is no partner who must be
consulted on decisions

85
 Cont…

Sole gain. Just as all responsibilities of the
business fall to the owner, so do all the
benefits, since there is no partner to share the
proceeds from the business (All profits
belongs to the sole owner).

Single tax. The sole proprietor and the
proprietorship business are taxed as a single
unit since all profits of the business are
personal to the sole proprietor.

86
 Cont…
Disadvantages Sole proprietorship

Liability. The business owner will be held directly responsible
for any losses, debts, or violations coming from the
business. For example if the business must pay any debts,
these will be satisfied from the owner’s own personal
funds. The owner could be sued for any unlawful acts
committed by the employees.

Lack of “continuity”. The business does not continue if the
owner dies or incapacitated, since they are treated as one and
the same

Difficulty in raising capital. Since the initial funds are usually
provided by the owner, it can be difficult to generate
capital. Sole proprietorships do not issue stocks or other
money-generating investments like corporations do
87
 Cont…

Responsibilities and decision making. All responsibilities and
business decisions fall on the shoulders of the sole proprietor.

Limited Expertise and Growth Potential. Sole proprietors are
in charge of every aspect of the business but have limited
knowledge or experience in the other areas. This lack of
expertise can slow and even limit growth.

Difficult in retaining employees. This is because sole
proprietors cannot afford to offer employees benefits
comparable to those of larger business entities, according to
Business government.

88
 Partnerships

A business organization in which two or more individuals
manage and operate the business. Both owners are equally
and personally liable for the debts from the business.

No formality is required to form a partnership, however there
should be an agreement between the parties on how to carry
out business and to divide the profit. Agreement can be either
written (is termed as partnership deed) or article of
partnership or oral.

The document containing the written agreement between the
partners is called ‘Partnership Deed’ or 'Articles of
Partnership‘.

89
 Cont..
 Contents of partnership deed includes;
a) Names of partners
b) Nature of the business to be conducted
c) Capital and property of the firm
d) Capital contribution for each partner
e) Share of each partner in profit and loss
f) Provision of settling differences etc.

90
 Cont…
Type of partnership
• There two basic partnership, which are general and limited
partnership.

General partnership: General partners share equal rights and
responsibilities in the management of the business. Each
individual partner assumes full responsibility for all of the
business's debts and obligations.

Limited partnership: A limited partner is not legally liable for
all financial obligations of the business; instead his or her
liabilities are limited to his or her investment in the firm.

91
 Cont…
Other types are;

Temporary partnership: This is a partnership formed by two
or more persons to perform a particular task only or for
specific period of time. It is dissolved as soon as its purpose
has been achieved or when the period of its existence expires.

Syndicate: This is a temporary partnership carried out to
achieve a certain financial objective.

92
 Cont..(skip)
• Various terms used to differentiate partners

Active partner; is fully active in the firm, with voice in the
management of the business, has authority over the firm, liable for the
debts of the business and shares profits and loss of the business.

Limited partner; A limited partner is not legally liable for all financial
obligations of the business; instead his or her liabilities are limited to
his or her investment in the firm.

Sleeping/dormant partner; is one who contributes capital, share in the
profits and liabilities of the business but does not actively participate
in its daily management.

Nominal partner; is a person who lend his name to a business to
enhance its prestige, standing and reputation. He neither contributes
capital nor takes part in management of the business but liable for the
business obligations on unlimited basis.

Minor partner; this is the partner who is below the age of 18 years,
when he is still a minor his liabilities are limited to the capital has
contributed to the business.
93
 Cont..
Advantages of Partnership

Easy formation: Simply an agreement among the partners in oral or
written words can bring a partnership into existence. It includes
very less legal formalities and expenses.

Large resources: A partnership is in a position to accumulate large
resources as more than one contributes capital. New partners can
be admitted to meet the additional requirement of fund.

Diverse skills and expertise: Partnership provides a scope for
association of persons with diverse skills and expertise.

Flexibility of operations: The partnership can bring changes in its
operation easily and quickly looking at the changing circumstances.

Sharing of risk The losses of the firm and other associated risk in
business are shared by the partners.

94
 Cont…

Benefits of unlimited liability: Since the partners are liable for any loss,
partners shall not be careless in managing the business.

Promptness in decision making: Since the partners meet quite frequently,
they can arrive at decisions promptly. Thus, business opportunities
requiring quick decision shall not be lost.

Close supervision: Partners take active part in the management of the
business. The close supervision of partners eliminates wastage and leads
to greater efficiency.

Reduced management cost: Since different functional areas are managed
by the partners themselves, the huge managerial expenses can be saved
to a great extent.

Secrecy: There is no statutory obligation on the part of partnership to
publish the accounts of the firm. Hence, the business secrecy can be
maintained to a certain extent.

95
 Cont..
Disadvantages of Partnership

Limited capital: There is a limit to the maximum number of partners in a
partnership. Therefore; the capital that can be raised from the partners is
limited.

Unlimited liability: The liability of the partners for the debts of the business is
unlimited

Instability: This is because a successful firm can be dissolved on the death,
insolvency or madness of a partner. The difference of opinion may also bring
about closure of the business.

Risk of implied authority: A partner acts as an agent of the firm and his acts
bind the firm and other partners. A dishonest or incompetent partner may
lead the firm in difficulties because the other partners shall have to pay for the
dishonesty or inefficiency a partner.

Lack of harmony: Difference of opinion is the natural consequence in
partnership. The conflicts and lack of harmony among the partners may not be
beneficial for the business and sometimes even that lead to dissolution of the
firm.

96
 Cont…

Lack of public confidence: There is no legal
binding on the firm to publish accounts. The
public may suspect that the firm is earning huge
profit at the cost of the consumers. Thus, the firm
lacks confidence of the public.

Cautious approach: The very approach of
unlimited liability makes the partners over
cautious. This restricts the partners in taking up
any risky ventures and thus misses many business
opportunities

97
 Cont…
Dissolution of partnership

Is that change in the partnership relation which ultimately culminates in
its termination.

The partnership can be dissolved under the following circumstances
a) Expiry of the period or completion of the tasks for which the partnership
was formed
b) Notice of one of partners of his intention to dissolve the partnership
c) If one partner become insane, bankrupt, or dies
d) If the partnership business become unlawful due to changes in law
e) On court order resulting from application by partners or other interested
parties. E.g. when the partnership no longer make profits etc.

98
 Joint Stock Companies

Joint Stock Company is corporate association of
persons formed to carry out a commercial activity.
This definition is similar to that of a partnership
except that a joint stock is a corporate body, that is,
it is formed under the law and has entity of its own,
separate from its owners.

Joint stock companies comprise private limited
companies and public limited companies.

99
 Cont…
Characteristics of joint stock companies

Incorporated association A company is created when it is
registered under the Companies Act. It comes into being from the
date mentioned in the certificate of incorporation.

Artificial legal person A company is an artificial person. It is not a
natural person. It has the right to acquire and dispose of the
property, to enter into contract with third parties in its own name,
and can sue and be sued in its own name.

Delegated Management: A joint stock company is an independent,
self governing and self-controlling organization. The management
of the affairs of the company is vested to shareholders elected
representatives, known as directors. They look after the day-to-day
working of the company.

100
 Cont…

Perpetual Existence A company is a stable form of business
organization. Its life does not depend upon the death,
insolvency or retirement of any or all shareholder (s) or
director (s). Law creates it and law alone can dissolve it.
Members may come and go but the company can go on
forever.

Limited Liability: A company may be company limited by
shares. In company limited by shares, the liability of members
is limited to the unpaid value of the shares.

Transferable Shares In a public company, the shares are freely
transferable. The right to transfer shares is a statutory right
and it cannot be taken away by a provision.

101
 Cont…

Separate Legal Entity: A company has a
legal distinct entity and is independent of
its members. The creditors of the
company can recover their money only
from the company and the property of
the company. They cannot sue individual
members.

102
 Cont….
Types of Companies

Statutory or parliamentary companies. These companies are
created by an Act of the parliament. In east Africa most statutory
companies are owned by the government. The power and functions
of these companies are defined by the Act created them. Good
example is TANESCO, CDA etc.

Registered /Incorporated companies. These are those that are
formed and registered under the company Act, 2002. Such
companies come into existence only when they are registered
under the Act and a certificate of incorporation has been issued by
the Registrar of Companies.

103
 Cont…
Types of registered companies
a) Public or private limited companies
b) Limited or unlimited liabilities

104
 Cont…
• Private ltd companies These are formed when there is
no immediate intention of going to the public for funds,
it must have at least two members and the maximum
number is fifty. Conditions of being private company as
per S.27 are;

Share transfer is restricted

Number of members (Shareholders) is limited to fifty.

Any invitation to the public to subscribe for shares is
prohibited.

It is not compulsory for the company to present
prospectus or audited accounts.

105
 Cont…
• Public limited companies These are formed when it
is desired to go to the public to raise funds to expand
an existing business. Public company can be formed
by either registering as public company or converting
private company into public company.
• Are associations of minimum seven members and
unlimited maximum number of members; this
association has to be registered by registrar of
companies. Its characteristics are;

106
 Cont…

The membership has to be seven persons while the
maximum number of share holders is unlimited

There is no restriction of transfer of shares, and
traded in a stock exchange market.

The shares are offered openly for public
subscriptions.

Is a must for a public company to submit audited
financial statements

107
 Cont…
• Limited or unlimited liabilities companies A
limited liability company is one in which the
liabilities of the owner are limited to capital
contributed to the business, while the
liabilities of unlimited company are unlimited.

Note: there is no unlimited company in East
Africa.

108
 Cont…
Advantages / Merits of a Joint Stock Company

Large Capital: Huge capital for the business is collected mainly through
shares

Limited Liability: The members are liable only to the extent of unpaid
value of share. If the shares are fully paid up then the member is not liable
for any debts of the company.

Continuity and Stability: A company has a long and stable life. Its
existence is not affected by death, insolvency or insanity of its members.

Professional Management: The company appoints experienced,
competent and experts to manage the business. Their services lead to
managerial and administrative efficiency and accuracy.

Economies of scale: As the company operates on a large scale it enjoys
economies in production, distribution, management and financing.

109
 Cont…

Bargaining Power: A joint stock company has strong
bargaining power in buying as well as in selling of goods
because of its large scale production.

Large Membership: A joint stock company (especially a public
company) has large number of members. Large membership
brings in large amount of funds which can be invested in
company’s expansion and diversification.

Transferability of shares: Shares of a Joint Stock Company
(especially public companies) are freely transferable. A
member who wants to sell his shares can easily do so in the
stock market. This encourages the public and others to invest
in shares.

110
 Cont…

Employment: Joint Stock Company provides
employment to a large number of people directly and
indirectly. This leads to higher national income for the
country and higher standard of living for the people.

Government Revenue: Joint Stock Companies provides
revenue to the government in the form of taxes
charged directly and indirectly.

Research and Development: Joint Stock Companies
undertake R & D continuously thus bringing about new
and improved products which benefits people.

111
 Cont…
Disadvantages / Demerits of a Joint Stock Company:

Difficult Formation: A number of legal formalities have to be
undertaken in order to register a joint stock company.

Lacks Flexibility For every small thing they either have to follow a
detailed procedure or obtain sanctions from various authorities.
This results in lack of flexibility.

No Business secrecy: This is because it is compulsory for the
company to publish accounts and other records.

Excessive government regulation: The Company has to follow the
numerous provision of the Tanzanian Companies Act. This makes
working difficult.

Delay in Decision Making: Due to excessive government control
and a democratic set up all decisions are taken in meetings and
some decisions require shareholder’s approval. All this leads to
delay in decision making.

112
 Cont..

Lack of contact with customers: Due to large scale
operations a company finds it difficult to maintain direct
contact with its customers. This may lead to poor sales
promotion.

Lack of contact with employees: The top management may
not have personal contact with their employees. This may
cause friction and disputes amongst the management and
workers.

Conflicts of Interest: There may raise conflict of interest
amongst the various parties (shareholders, management,
workers etc.) in a joint stock company. This conflicting
interest undoubtedly harms the company’s interest.

113
 Co-operatives
• Co-operative is a co-operation aimed at participants doing
certain thing collectively which they were previously doing
individually.
• The co-operative policy of Tanzania (2002) Defines a co-
operative as a group of people who work together
voluntarily to meet their common economic, social, and
cultural needs through a jointly owned and democratically
controlled enterprise.
• Co-operatives are based on the values of self-help, self-
responsibility, democracy, equality and solidarity. Co-
operative members believe in honesty, openness, social
responsibility and caring for others

114
 Cont..
Principles Of Co-operatives

Co-operative membership is voluntary and open to all. Co-operatives are
open to all persons willing to accept the responsibilities of membership
without any type of discrimination

Co-operatives are democratic organizations. All members have equal
voting rights (one member, one vote.)

Surplus or savings, if any, arising out of their operations of the
organization belong to all members and should distributed equally.

Co-operation with other co-operatives at local, national, international
levels One co-operative must co-operate with other co-operatives as they
have a lot in common and thus can learn from others’ experience

Cooperatives provide education, training and information Cooperatives
must provide education and training for their members and employees,
officers, and the general public in the principles and techniques of co-
operatives, so they can help the development of their co-operatives.

115
 Cont…
Types of co-operatives
 Producer co-operatives These societies are formed to protect the
interest of producers who are basically small in size, by making
available items of their needs for production like raw materials,
tools and equipments and machinery.

These are owned by people who produce the same type of goods.
Such Co-operatives are formed either to negotiate better prices
with buyers also or offer better storage facilities, transportation
etc to members. e.g. Kilimanjaro Native Planters Union (1925) was
formed by small-scale coffee producers. (Now Kilimanjaro Native
Cooperative Union, KNCU), Turiani Cane Out growers

116
 Cont…
 Consumer co-operativesThese societies are formed to protect
the interest of general consumers by making consumer goods
available at a reasonable price. They buy goods directly from
the producers or manufacturers and thereby eliminate the
middlemen in the process of distribution.
 Housing Co-operative Society: These societies are formed to
provide residential houses to members. They purchase land,
develop it and construct houses to members. Some societies
also provide loans at low rate of interest to members to
construct their own houses. KIJICO (Kijitonyama Development
Community) and Mwenge Housing Cooperative Society are
good examples.

117
 Cont…
 Saving and Credit Society/ Co-operatives (SACCOs) These
societies are formed to provide financial support to the
members. The society accepts deposits from members and
grants them loans at reasonable rates of interest in times of
need. Kilimanjaro community bank, Dar es Salaam community
bank are good examples.
 Co-operative Marketing Society: These societies are formed
by small producers and manufacturers who find it difficult to
sell their products individually. The society collects the
products from the individual members and takes the
responsibility of selling those products in the market.Tanga
Diaries Cooperative Union (TDCU) is an example.

118
 Discussion Questions
1. What are the functions of and problems facing
housing co-operatives in Tanzania
2. What are the functions of and problems facing
Saving and Credit Society/ Co-operative
(SACCOS) in Tanzania
3. What are the merits, demerits and problems of
Cooperative Societies in Tanzania

Answers for above three questions are available
in your notes.
119
 TOPIC 4:
MONEY AND BANKING
 Money is anything which is generally acceptable by a society
as a medium of exchange and means of settling debts
Origin and Evolution of Money
 Before the discovery of money, trade was carried out by
barter, i.e. exchange of goods for goods, for instance a bag of
rice for a bag of beans. However this system encountered the
following problems;

Lack of double coincidence of wants.

Lack of store of value. It was difficult to store perishable goods
like vegetables for exchange with other commodities in
future.

120
 Cont…

Lack of measure of value. It was very difficult to decide how
much quantity of one commodity should be exchanged for
another commodity. E.g. it was very difficult to decide how
much quantity of rice should be exchanged for cow

Indivisibility of some items. It was not possible to divide some
commodities (such as cow) into smaller units in order to
exchange with units of other commodities

Difficult of transporting some commodities. Due to poor
means of transport and immobility of some items, it was
difficult to transport some items from one place to another
for exchange

121
 Cont…
 To solve these problems, people started to look for a
“universal equivalent” good against which the value of all
other goods is measured, thus money was developed.
 At present times, notes and coins are the popular forms of
money, and they have solved all the problems of barter
system.

122
 Types Of Money
 Commodity money. Is money whose value comes from a
commodity of which it is made

Examples of commodities that have been used as mediums of
exchange include gold, silver, copper, salt, seashells, etc
Advantage of commodity money

There was no need for the government to guarantee its value.
Demerits of commodity money

Commodity money is not divisible into small change/units.

Because resources are scarce, they can be exhausted or consumed

It might become abundant simply because of accidental discoveries
of ore deposits

It is perishable money

123
 Cont…
 Fiat money. Is money that gains its value from government
command (decree). The governments declare certain pieces of
paper that they print to be money. Good examples of fiat money
are coins and notes
Advantages of Fiat Money

It is easy to print, easy to transport, divisibility.

Convenience. Paper money comes in many denominations, which
allows you to carry large amounts of legal tender without having to
move large, bulky forms of money.

Economical. Not only is paper money small and transportable and
divisible, but it also is much cheaper to produce than the value it
may represent.

124
 Cont…
Disadvantages of Fiat Money

Inflation. The irresponsible government may print
too much paper money which leads to high rates of
inflation.

Fragility/delicateness. Paper money is subject to
accidental tearing, burning, etc

125
 Characteristics/ Qualities of Money

Acceptability. Good money must be acceptable by everyone in the
economy

Relative scarcity. Money derives its value from its scarcity.

Legal tender

Portability.

Durability. Money must have long life span.

Divisibility. Money can be broken down into small units of measure
to allow small purchases

Hard to Counterfeit. A good money must be difficult to copy by
unauthorized moneymakers

Stability of value

126
 Functions of Money
I. A medium of exchange.
II. A store of wealth/ value. Money is used to store values of
goods and services for future use.
III. Transfer of items. Money can be used to transfer assets
from one area to another area especially immovable
materials like buildings and land
IV. Unit of account/ money is a measure of value. It is a
common denominator by which we can measure and
compare the values of different goods and services
V. Money also serves as a standard of deferred payment. In
the absence of money, borrowing and lending were difficult
or borrowed and lending amount could be returned only in
terms of goods and services, but the modern money
economy has greatly facilitated the borrowing and lending
process in terms of money.

127
 Why people hold money? (Motives
for holding Money)

The transactions motive: People need to
make day-to-day transactions

Precautionary motive: To meet
unexpected expenditures

Speculative motive: The amount of
money held to take advantages of
profitable opportunities that may arise in
financial markets
128
 BANKING
• A bank is a lawful organization, which accepts deposits that
can be withdrawn on demand. It also lends money to
individuals and business houses that need it.
Roles of Banking

Banks promote capital formation: Amount deposited is
further given to investors as loans

Promotion of trade: They promote trade development
through various transactions

Monetization of the economy: The commercial banks by
opening branches in the rural and backward areas are
reducing the exchange of goods through barter

129
 Cont…

Development of agricultural sector. This is through the
provision of credits for development of agriculture in rural
areas.

Development of Industrial sector

Help in achieving balanced development in different regions
of the country. They help in transferring surplus capital from
developed regions to the less developed regions. The traders,
industrialists etc. of less developed regions are able to get
adequate capital for meeting their business needs.

130
 Characteristics of bank
• Dealing in Money Bank is a financial institution which deals with
other people's money i.e. money given by depositors.
• Acceptance of Deposit A bank accepts money from the people in
the form of deposits and gives safety to the deposits of its
customers.
• Giving Advances A bank lends out money in the form of loans to
those who require it for different purposes.
• Payment and Withdrawal A bank provides easy payment and
withdrawal facility to its customers in the forms of cheques.
• Name Identity A bank should always add the word "bank" to its
name to enable people to know that it is a bank and that it is
dealing in money.

131
 Types of Banks:
 Savings Banks These banks are mainly intended to provide
safe place for keeping money and promote the habit of saving
among individual. They are limited in the provision of banking
services such as accepting small deposits, pay interest on such
deposits and offer limited withdraw facilities, e.g. VICOBA.
 Merchant banks these are banks which specialize in Banking
and consultancy services. Consultancy means to provide
advice, guidance and service for a fee in different commercial
issues.

They advise their clients about which shares to buy, when to
buy, how much to buy and when to sell. Investment Banks
offer merchant banking services.
The functions of merchant banking

Refer to your notes for these functions
132
 Cont…
 Commercial Banks. These are profit making financial
institutions that lend money at higher interest rates than it
pays on deposits. E.g. CRDB, NMB, Stanbic Bank, etc
Functions of commercial banks

Storing money. They accept money from their customers and
safely keep them in saving accounts, fixed deposit accounts
etc.

Collecting money Banks usually receive cash, cheques,
dividends, etc on behalf of their customers. Then credited to
their accounts and latter inform them that their accounts has
been credited.

133
 Cont…

Transferring money. A customer can transfer his
money from say bank A to bank B. The accounts of
customers are debited with the amount transferred.

Currency supply Provision of legal cash requirements
and foreign exchange for customers subject to
central bank control

Advancing of Loans The commercial banks provide
loans in various forms, such as Overdraft, Cash
Credit to individual borrowers and corporations.

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 Cont…
 Central Bank. This is the government’s institution established to
regulate the overall performance of the economy.

In Tanzania, the central bank is called Bank of Tanzania (BOT) which
was established by an act of parliament in 1965 to replace the East
African Currency Board. BOT started its operations in 1966 and
issued its own currency in the same year.
Functions of the Bank of Tanzania

Fiduciary issue. Printing notes and coins and issuing them into the
economy

It is the Banker’s Bank. All banks must keep the minimum reserve
with the central bank.

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 Cont…

The Governments' Bank. it keeps the government money

It is a lender of last resort. If commercial banks are in short of
money and can not get them from other sources, then it is the
responsibility of BOT to advance loans to them.

The Advisor to the Governments The Bank may advise the
Government on all monetary issues such as inflation and MS

Supervision of Banks and Financial Institutions In general, this
activity involves ensuring that commercial banks and other financial
institutions conduct their business according to the various laws
and regulations in force.

Advisor to the minister The central bank recommends to the
minister of finance, on issues related to issuance of licenses to
commercial banks and other non bank financial institutions

Research and statistical data This function makes central bank an
ideal place to inquire economic data
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 TOPIC 5:
INSURANCE
 Simply speaking, insurance is the means by which risks of
loss or damage can be shifted to another party (the
insurers) on payment of a charge known as premium.
 Insurance is a contract between the insurer and insured
whereby the insurer undertakes to pay the insured a
fixed amount, in exchange for a fixed sum (premium), on
the happening of a certain event
 Obviously insurer is generally an organization (Insurance
Company), which is willing to share the loss or damage
and it is also qualified to do so.

137
 Discussion Question
Types Of Insurance
 The insurance can be divided from two angles,
that is, from business point of view and from
the risk point of view. Discuss

138
 Nature of Insurance

Sharing of risk Insurance is a device to share the financial
losses which might be fall on an individual or his family on the
happening of a specified event. The event may be death in
case of life insurance, fire in fire insurance etc.

Co-operative device Ensure as many persons as possible. An
insurer would be unable to compensate all losses from his
capital. So, by insuring a large number of persons, he is able to
pay the amount of loss.

Value of risk The risk is evaluated before charging premium. If
there is expectation of more risk, higher premium may be
charged. So, the probability of loss is calculated at the time of
insurance.

139
 Cont…

Payment at contingency The payment is made at
a certain contingency insured. So, if the
contingency occurs, payment is made, otherwise
no amount is given.

Insurance is not charity. Charity is given without
consideration but insurance is not possible
without premium. it is a kind of business because
in consideration of premium it guarantees the
payment of loss.

140
 Principles of Insurance

Indemnity The insured, shall be paid the actual amount of
loss not exceeding the amount of the policy. The purpose of
this principle is that the insured is not allowed to make any
profit from the insurance contract on the happening of the
event.

Uberrimae Fides (Utmost Good Faith) This principle of argues
that it is a voluntarily duty of the two parties to disclose (
accurately and fully) all facts material to the risk being
proposed, whether requested or not. For example, while
entering into a contract of life insurance, the insured must
declare to the insurance company if he is suffering from any
disease that may be life threatening.

141
 Cont…

Subrogation According to this principle, after the insurer has
fully compensated the insured, the insurer gets all the rights
of the insured with regard to the subject matter of the
insurance. For example, suppose a car worth Tshs 50,000,000
is partially destroyed by fire and the insurance company pays
the compensation to the insured, then the insurance
company can take even the partially destroyed car and sell it
in the market. Objective of the principle is to prevent insured
from profiting from damage

142
 Cont..

Contribution. The same subject matter may be insured with
more than one insurer. In such a case, the insurance claim to
be paid to the insured must be shared or contributed by all
insurers. The aim of contribution is to distribute the actual
amount of loss among the different insurers who are liable for
the same risk

Mitigation In case of a disaster the insured must take all
possible steps to reduce or mitigate the loss or damage to the
subject matter of insurance. The insured is expected to act in
a manner as if the subject matter has not been insured.

143
 Cont…

Principle of Proximate Cause Literally means nearest cause
or direct cause. According to this principle the insured can
claim compensation for a loss only if it caused by the risk
insured against. The risk insured should be nearest cause
(not a remote cause) for the loss. Then only the insurance
company is liable to pay the compensation. For example a
ship carrying orange was insured against losses arising from
accident. The ship reached the port safely and there was a
delay in unloading the oranges from the ship. As a result
the oranges got spoilt. The insurer did not pay any
compensation for the loss because the proximate cause of
loss was delay in unloading and not any accident during
voyage

144
 Purpose/ Importance of Insurance

Cover the loss - Insurance restores people to their former
financial position as if no loss had occurred. It helps them to
remain financially secure without running into debt after a
loss

Reduces worry and fear - Insurance helps in reducing anxiety
and fear before and after the loss occurs

Makes available funds for investment - An insurance
company is a major instrument for the mobilization of the
savings of people, which are thereafter channeled into
investment for economic growth.

Provides employment to a large number of people

Educates people about loss prevention

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 TOPIC 6:
WAREHOUSING
• Warehouse- Is a large building where raw materials or
manufactured goods may be stored prior to their distribution, use
or sale
• Warehousing- Refers to the activities involving storage of goods in
huge quantities from the time of their purchase or production till
their actual use or sale.
Types Of Warehouses
 Private Warehouses This refers to those warehouses which are
owned and managed by the manufacturers or traders to store their
own stock of goods. Generally these warehouses are constructed by
the farmers near their fields, by wholesalers near their business
centers and by manufacturers near their factories.

146
 Cont…
 Public Warehouses These are those which are run to store
goods of the general public. Anyone can store his goods in
these warehouses on payment of rent. An individual, a
partnership firm or a company may own these warehouses. To
start such warehouses a license from the government is
required. The government also regulates the functions and
operations of these warehouses.
 Government Warehouses These warehouses are owned,
managed and controlled by central or state governments or
public corporations or local authorities. Both government and
private enterprises may use these warehouses to store their
goods.

147
 Cont…
 Bonded Warehouses These warehouses are owned, managed and
controlled by government as well as private agencies. Private
bonded warehouses have to obtain license from the government.
Bonded warehouses are used to store imported goods for which
import duty is yet to be paid. In case of imported goods the
importers are not allowed to take away the goods from the ports
till such duty is paid. These warehouses are generally owned by
port authorities.
 Co-operative Warehouses These warehouses are owned, managed
and controlled by co-operative societies. They provide warehousing
facilities at the most economical rates to the members of their
society.

148
 Characteristics of Ideal Warehouses

Warehouse should be located at a convenient place
near highways, railway stations, airports and
seaports where goods can be loaded and unloaded
easily.

Mechanical appliances should be there to loading
and unloading the goods. This reduces the wastages
in handling and also minimizes handling costs.

Adequate space should be available inside the
building to keep the goods in proper order.

149
 Cont…

Warehouses meant for preservation of perishable items like
fruits, vegetables, eggs and butter etc. should have cold
storage facilities.

Proper arrangement should be there to protect the goods
from sunlight, rain, wind, dust, moisture and pests

Sufficient parking space should be there inside the premises
to facilitate easy and quick loading and unloading of goods.

Security instruments should be there to avoid theft of goods.

The building should be fitted with latest fire-fighting
equipments to avoid loss of goods due to fire.

150
 Functions of Warehouse

Storage of Goods

Protection of goods A warehouse provides protection to
goods from loss or damage due to heat, dust, wind and
moisture, etc.

Financing When goods are deposited in any Warehouse, the
depositor gets a receipt, which acts as a proof about the
deposit of goods. The Warehouses can also issue a document
in favor of the owner of the goods, which is called
warehouse-keeper’s warrant. The businessmen can obtain
loans from banks and other financial institutions keeping this
warrant as security.

151
 Cont…

Processing Certain Commodities are not consumed in the form
they are produced. Processing is required to make them
consumable. For example, paddy is polished etc. Sometimes
warehouses also undertake these activities on behalf of the owners.

Grading and branding On request warehouses also perform the
functions of grading and branding of goods on behalf of the
manufacturer, wholesaler or the importer of goods.

Transportation/Transshipment In some cases warehouses provide
transport arrangement to the bulk depositors.

Price stabilization For instance when there is a shortage of goods,
prices rise, thus goods stored in a warehouse will be released as the
result prices will go down again.

152
 Discussion Question
 Discuss the advantages and disadvantages of
Warehouses

153
 TOPIC 7:
ELECTRONIC COMMERCE
• E-commerce, in the popular sense, can be
defined as: The use of the Internet and the Web
to conduct business transactions
• E-commerce refers wide range of online business
activities for products and services, OR
• Any form of business transaction in which the
parties interact electronically rather than by
physical exchanges or direct physical contact

154
 Role of E-commerce

Facilitates Electronic shopping (E-shopping).Many business
organizations have their websites on the Internet. These
websites are used to sell goods and services. Customers place
their orders through websites and make payments using
credit cards.

Electronic Banking A service that allows an account holder to
obtain account information and manage certain banking
transactions through computer network. The customers do
not need to go to the bank. They can connect to the bank
through network/Internet and see their bank account status
at home. They can also pay their utility bills through their
bank accounts using this facility.

155
 Advantages of E-commerce

E-commerce helps to expands the market place to national and
international markets.

E-commerce decreases the cost of creating, processing, distributing,
storing, and retrieving paper-based information.

E-commerce enables customers to shop or do other transactions 24
hours a day, all year round, from almost any location.

E-commerce reduces telecommunication costs- Internet is cheaper
than other form of communication.

Consumers can locate relevant and detailed product information in
seconds, rather than days or weeks.

Facilitates placing of order. Due to the E-commerce there is no need to
go to the commercial places to place an order.

Disintermediation. Through e-commerce, suppliers are able to interact
and transact directly with buyers, thereby eliminating intermediaries
and distributors.
156
 Disadvantages of E-commerce

The Fraud- In the lack of a direct contact a client may cheat
the trader regarding his identity or his real payment
possibilities.

Lack of Security- The problem of Hacking:-Hacking means
unauthorized intrusion into others’ business transactions.
Hackers enter into others’ e-mails, bank accounts and
business transactions

Launch costs are high- Initial investment for the computer,
the Internet and human capital, i.e. employment of skilled
profession persons, is quite high, and only a small section of
the people can afford it.

Rapidly evolving and changing technology - some of the
computers may become out of date even before full
utilization.
157
 Discussion Question

Discuss the challenges facing E-
Commerce in Tanzania

158
 TOPIC 8:
ADVERTISEMENT

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