BUSTAZ LSK - COMMERCE A SUPPLEMENTARY STUDY TEXT Madam

Commerce 7100 Supplementary Study Notes 0
MINISTRY OF EDUCATION
LUSAKA PROVINCE
COMMERCE 7100
SUPPLEMENTARY STUDY TEXT

FOR GCE/‘O’ LEVEL
2nd Edition
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Business Studies Teachers Association of Zambia – Lusaka Province
COMMERCE7100
SUPPLEMENTARY STUDY TEXT FOR GCE/ ‘O’ LEVEL
SECOND EDITION
Authors
Richard Fisonga, MBA Fin., ZiCATech, BBA Ed., Dip. Ed.
Head of Business Studies Department – Highland Secondary School,
Winner of the 2018 Outstanding Educator Initiative National Award in Financial Literacy,
Past Chairperson of the Business Studies Teachers Association of Zambia, Lusaka Province
James Gwenani, MBA Fin., ZiCATech, BBA Ed., Dip. Ed.

Deputy Headteacher - Arakan Boys Secondary School,
Formerly Head of Business Studies Department - Nelson Mandela Secondary School,
Past Chairperson of the Business Studies Teachers Association of Zambia, Lusaka Province
Past National Treasurer General for the Business Studies Teachers Association of Zambia.
Edgar Shiluwe, BBA Ed., Group Dip. Marketing, Dip. Ed.

Deputy Headteacher, Roma Girls Secondary School,
Formerly Head of Business Studies Department - Roma Girls Secondary School,
Winner of the 2018 Outstanding Educator Initiative National Award in Financial Literacy,
John Kaputula, MBA Fin., ZiCALic, BBA Ed., Dip. Ed.

Head Teacher, Mahatma Gandhi Combined School,
Formerly Head of Business Studies Department - Chilenje South Secondary School,
Past Vice Secretary General for the Business Studies Teachers Association of Zambia,
Lusaka Province
BUSINESS STUDIES TEACHERS ASSOCIATION OF ZAMBIA

LUSAKA PROVINCE
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©2022 BUSTAZ Lusaka Province

Commerce7100 - A Supplementary Study Text for GCE/’O’ Level 2nd Edition
The right of Richard Fisonga, James Gwenani, Edgar Shiluwe and John Kaputula as authors
of this work under the umbrella of the Business Studies Teachers Association of Zambia has
been asserted by them. This supplementary book is not for sale, however express permission
for free distribution and education purposes has been granted.
Disclaimer
Although the authors have made every reasonable effort to ensure that the information in this
book was correct at press time, they make no express or implied representation, with regard
to the accuracy of the content herein and hereby disclaim any legal responsibility or liability to
any party caused by errors or omissions. Note that some pictures of products and services
that are referred to may be either trademarks and/or registered trademarks of their respective
owners. The authors make no claim to these trademarks.
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PROVINCIAL EDUCATION OFFICER’S STATEMENT
The Ministry of Education envisions to achieve access to high quality education across the
nation and Lusaka province is no exception. One of the main indicators of quality education is
Examination results to which the availability of quality books is irrefutably one of the main
contributing factors. There is therefore a need at all times to have material written with the
teacher and learner in mind and which adheres to the official syllabus and the associated
learner outcomes.
The production of this supplementary book by the BUSTAZ is one of the provincial initiatives
to improve teacher and learner performance in class assessments and National
Examinations. The book has been written in such a way as to meet these needs and ensure
that teachers and learners have access to up to date subject content. The association and
authors deserve commendation for the job well done.
This initiative started in 2018 when the first edition of this book was produced. The province
would therefore like to express sincere thanks to the then, Provincial Education Officer, Mr.
Paul Ngoma, the Principal Education Standards Officer Mrs. Grace Sinkolongo and the Senior
Education Standards Officer – Business Studies, Dr. John S. Chola, for the administrative
support given to the association.
I sincerely believe that this supplementary material will go a long way in achieving the goals of
the Ministry of Education and improve learner performance in Lusaka Province and beyond.
School administrators are therefore encouraged to distribute the material to teachers and
learners in hard and soft copy at no cost to the recipients.
Allan Lingambe PhD

Provincial Education Officer
LUSAKA PROVINCE
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FOREWORD
The compilation of this supplementary book was necessitated by the need to provide
comprehensive material in the subject area to cover all aspects of the syllabus in order to
improve examination results. The authors ensured that the contents of the book conformed
to the requirements of the official Curriculum Development Centre (CDC) Syllabus as well as
the Examination Syllabus for the Examinations Council of Zambia.
The information contained in this supplementary book is professionally written by qualified and
experienced teachers of the subject. Teachers and learners are therefore assured that the
information is well researched and relevant to the current curriculum and lesson outcomes as
contained in the syllabus.
The book has been developed with the teacher and learner in mind. The teacher will be
equipped with a well summarised all-in-one resource that will enhance their preparedness for
effective delivery of lessons in class, thus improving teacher performance. The learner, on the
other hand will find this book easy to use with its well summarised notes and easy to
understand illustrations which will aid their understanding of concepts. This will equip them
with knowledge, values and skills necessary for the business environment and in turn help to
improve learner performance in the final examinations.
This book will prove to be a helpful resource for both teachers and learners in their quest to
achieve the intended syllabus outcomes and improve results in Commerce.
Lenny N. Longwe (Mrs.)

Senior Education Standards Officer – Business Studies
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ACKNOWLEDGEMENTS
The authors would like to acknowledge the help and support received from the Provincial
Education Officer, Dr. Allan Linganbe for the encouragement to have this material edited and
the permission to have it distributed in soft copy to teachers and learners. We also
acknolwedge the professional help and advise received from the Senior Education Standards
officer, Mrs. Lenny Longwe in the preparation of the Second edition of this book.
We appreciate the efforts of many teachers who provided reviews and advice on a number of
topics, chief among them, Mrs. Joyce Kalala Mulimbika of Highland Secondary School.
Special thanks to key stakeholders in Business and Financial Education such as the
Curriculum Development Centre (CDC), Examinations Council of Zambia (ECZ), Securities
and Exchange Commission (SEC), Pensions and Insurance Authority (PIA), Competition and
Consumer Protection Commission (CCPC), the Zambia Institute of Chartered Accountants
(ZICA) and the Bankers Association of Zambia (BAZ). These organisations availed valuable
information through seminars, workshops and electronic means without which some topics in
this book could not have been updated.
This book is a result of many years of the authors’ practical teaching experiences in the
classroom. The bigger part of the book is a compilation of the authors’ self-generated notes.
Other resources used are here acknowledged which have been used particularly for
education purposes as provided for under Fair Use. They include:
Abbott K. et al, (2007), Business Law, South Western Cengage learning EMEA
Anderson L - (1972), Commerce around us, Longman, Harare, Zimbabwe
Hamakoko R., (2015), Senior Secondary Commerce, Grade 10, MK Publishers, Zambia
Kotler P. et al, (1996), Principles of Marketing, Prentice Hall, UK
Lobley D., (1993), Success in Commerce, Holder Education, UK
Matimba A., (2009), Distinction in Commerce, Matimba A, Zambia
Matindike G., (2000), Focus on Commerce, College Press Publishers (Pvt) Ltd, Zimbabwe
Whitehead G. (1969), Commerce Made Simple, W.h Allen & Co.ltd, UK.
Wokarochi J. B., (2016), Commerce A Complete Course, Salama Publishers, Botswana
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CONTENTS
INTRODUCTION TO COMMERCE ....................................................................................... 9

What is Commerce? ........................................................................................................ 10
Importance of Commerce ................................................................................................ 10
The Branches of Commerce ............................................................................................ 10
Career Prospects in Commerce....................................................................................... 12
PRODUCTION .................................................................................................................... 12
The Meaning of Production.............................................................................................. 13
Human Needs and Wants ............................................................................................ 13
Goods and Services ..................................................................................................... 13
Branches of Production ................................................................................................... 13
Methods of Production..................................................................................................... 14
Factors of Production ...................................................................................................... 15
Types of Goods ............................................................................................................... 15
Production and the Chain of Distribution.......................................................................... 16
Production and Commerce versus Environment .............................................................. 16
Effects of Production on the Environment ........................................................................ 16
Possible Solutions to the Effects of Commerce on the Environment ................................ 17
CONTRACTS...................................................................................................................... 18
Importance of Contracts .................................................................................................. 18
Parties to a Valid Contract ............................................................................................... 18
Elements of a Valid Contract ........................................................................................... 18
HOME TRADE .................................................................................................................... 20
Retail Trade ..................................................................................................................... 20
Functions of a Retailer ................................................................................................. 20
Factors to consider when establishing a Retail Outlet .................................................. 20
Types of Retailers ........................................................................................................ 21
Wholesale Trade ............................................................................................................. 25
Functions of a Wholesaler ............................................................................................ 25
Types of Wholesalers................................................................................................... 26
DOCUMENTS USED IN HOME TRADE ............................................................................. 28
Business Documents used in Home trade ....................................................................... 28
Trade Discount and Cash Discounts ............................................................................... 32
BUYING AND SELLING ON CREDIT ................................................................................. 34
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Reasons why Businesses Purchase on Credit................................................................. 34

Methods of buying and selling on credit ........................................................................... 34
Credit Sale Agreement or Deferred Payment ............................................................... 34
Hire Purchase .............................................................................................................. 35
The differences between Hire Purchase and Deferred Payment under Credit Sales .... 36
Consumer Protection ....................................................................................................... 36
Reasons for Consumer Protection ............................................................................... 37
Consumers Rights ....................................................................................................... 37
Organisations that protect Consumers ......................................................................... 37
FOREIGN TRADE .............................................................................................................. 39
Meaning of Foreign Trade ............................................................................................... 39
Importance of Foreign Trade ........................................................................................... 39
Difficulties/Barriers/Problems faced by traders in Foreign Trade...................................... 40
Distinctions between Home and Foreign Trade ............................................................... 40
Documents used in Foreign Trade................................................................................... 41
Zambia Revenue Authority (ZRA) .................................................................................... 42
Functions of ZRA, Port Authority and Customs Authority ............................................. 43
Why Countries impose Tariffs and Trade Restrictions? ................................................ 44
Requirements for a Good Harbour or Seaport .............................................................. 44
Bonded Warehouse ..................................................................................................... 44
Means of payment in Foreign Trade ................................................................................ 45
Balance Of Trade ............................................................................................................ 47
Balance of Payment ........................................................................................................ 47
BUSINESS UNITS .............................................................................................................. 50
The Private Sector ........................................................................................................... 51
Sole Proprietor ............................................................................................................. 51
Partnership .................................................................................................................. 51
Companies................................................................................................................... 54
Registration Process in the Formation of Companies ................................................... 59
Other Company Matters ............................................................................................... 61
The Public Sector ............................................................................................................ 62
Public Corporations...................................................................................................... 62
Differences between a public limited company and a public corporation ...................... 63
THE STOCK EXCHANGE................................................................................................... 64
Purpose of the Stock Exchange....................................................................................... 64
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Primary and Secondary Trading on the Stock Exchange ................................................. 65

Types of Securities on the Securities Exchange .............................................................. 65
Equity Securities .......................................................................................................... 65
Debt Securities ............................................................................................................ 67
THE LUSAKA SECURITIES EXCHANGE........................................................................... 70
Purpose/Functions of the Lusaka Securities Exchange ................................................... 70
The Main Players on the Stock Exchange ....................................................................... 70
The Securities and Exchange Commission of Zambia ..................................................... 71
The roles of the Securities and Exchange Commission is to: ....................................... 71
BANKING............................................................................................................................ 73
Banking Financial Institutions .......................................................................................... 73
Non-Banking Financial Institutions................................................................................... 73
Services provided by Banking Institutions........................................................................ 73
Types of Accounts offered by Financial Institutions ......................................................... 80
Documents used in Banking ............................................................................................ 82
Means of Payment........................................................................................................... 82
The Central Bank ............................................................................................................ 85
Functions of the Central Bank ...................................................................................... 85
The Bank – Cheque Clearing System .......................................................................... 85
INSURANCE ....................................................................................................................... 88
How Insurance works ...................................................................................................... 88
Importance/Purpose/Functions of Insurance.................................................................... 88
The Principles of Insurance ............................................................................................. 89
Insurable and Non Insurable Risks .................................................................................. 92
Types of Insurance Cover................................................................................................ 92
Insurance Brokers ........................................................................................................... 97
COMMUNICATION ............................................................................................................. 98
Reasons for Communication ........................................................................................... 98
Postal Services................................................................................................................ 98
Telecommunication Services ......................................................................................... 101
TRANSPORT .................................................................................................................... 106
The importance of transport to an individual .................................................................. 106
Factors affecting the choice of Method of Transport ...................................................... 106
Methods of Transport .................................................................................................... 107
Road Transport .......................................................................................................... 107
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Rail Transport ............................................................................................................ 108

Sea Transport ............................................................................................................ 109
Air Transport .............................................................................................................. 110
Pipelines .................................................................................................................... 111
Documents used in Transport ........................................................................................ 111
WAREHOUSING .............................................................................................................. 113
The Importance of Warehousing.................................................................................... 113
Types of Warehouses.................................................................................................... 113
Manufacturer’s Warehouses ...................................................................................... 113
Wholesaler’s Warehouses ......................................................................................... 113
Retailer’s Warehouses ............................................................................................... 114
Bonded Warehouses ................................................................................................. 114
ADVERTISING.................................................................................................................. 115
Features of Advertising .................................................................................................. 115
Modes of Advertising/Advertising Media ........................................................................ 115
Factors Considered When Choosing Advertising Media ................................................ 119
Methods of Appeal......................................................................................................... 119
Types of Advertising ...................................................................................................... 120
Informative Advertising............................................................................................... 120
Persuasive Advertising............................................................................................... 120
Generic/Collective Advertising ................................................................................... 121
Competitive Advertising ............................................................................................. 121
Advantages of Advertising ............................................................................................. 122
Disadvantages of Advertising ........................................................................................ 123
Advertising Agencies ..................................................................................................... 123
Control of Advertising .................................................................................................... 124
INTRODUCTION TO COMMERCE
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What is Commerce?
Commerce is concerned with the distribution and actual exchange of goods and services and
also the commercial services that play a role in the distribution of goods and services to
satisfy consumers’ needs and wants. Commerce involves Trade and Aids to trade. It is
concerned with the distribution of goods and services to satisfy human needs and wants.
Trade is the buying and selling of goods and services with a view of making profit. Aids to
trade (commercial activities/services) are activities that help trade to take place such as;
Warehousing, Advertising, Banking, Transport, Insurance and communication.
Importance of Commerce
To an individual
 Commerce helps individuals to access goods and services which they use in satisfying
their needs and wants.
 Commerce is a source of employment to those employed in various commercial activities.
 Commerce is a source of income to people that engage in businesses (commercial
activities).
 Commerce improves peoples’ standards of living by enabling them to acquire improved
goods, tools, machinery and technology.
To a nation
 Commerce helps nations to grow their economics, it is a source of income and foreign
exchange.
 Commerce promotes industrial development.
 It helps a nation to develop good relations with other countries.
 It enables nations to obtain advanced technologies from other countries.
 Commerce helps nations to specialize and sell surplus goods to other countries profitably.
 Commerce enables countries to overcome shortages of seasonal goods during the off-
season time as they are able to buy these from other countries.
To the world
 Commerce promotes interconnections among nations through transport, communications
and other commercial services.
 Commerce encourages international trade.
 Commerce promotes globalization and international relations.
The Branches of Commerce
Commerce
Trade Aids to Trade
Home Foreign Advertising

Banking
Communication
Insurance
Transport
Retail Wholesale Export Import
Warehousing
Trade
Trade is the buying and selling of goods and services with the intention of making profit. There
are two types of trade namely; home and foreign trade. Home trade – Also known as
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Domestic Trade is the buying and selling of goods and services within a country. It consists
of Wholesalers and Retailers. Wholesalers buy goods in bulk from manufacturers and sell
them to retailers or directly to consumers. Retailers in turn sell the goods in small quantities
to consumers. Foreign trade – Also Known as International Trade is the buying and selling
of goods and services across the geographical boundaries of a country. It is divided into
import trade and export trade. Import trade is the buying of goods and services from other
countries while export trade is the selling of goods and services to other countries.
Aids to Trade or Commercial Services
Aids to trade are the activities/services that help to make trade possible. Without them, the
work of manufacturers would be futile as it would be almost impossible to distribute goods and
services to the consumers. Aids to trade include: Warehousing, Banking, Advertising,
Insurance, Communication, and Transport. These services are also known as Commercial
Services. The following are the ways in which the Aids to Trade help trade to take place:
Advertising - involves the use of the art of persuasion to educate and inform the public on
goods and services available. It also persuades customers to buy goods and services through
various techniques. Advertising helps:
 to obtain information on sources of goods and services.
 to persuade potential customers to buy goods and services available on the market
 to increase sales
 to announce job vacancies
 to give information to customers on the various goods in stock, price and location.
 Advertising is done through different media such as: Radio, Television, Newspaper,
Magazines, Business Journals, Billboards, internet, exhibitions and trade fairs, cinema etc.
Banking – is an Aid to trade that helps to safeguard funds through various accounts offered
and the provision of finance. Banking is an important aid to trade because:
 It is essential for depositing income from sales for safekeeping.
 It aids in receiving and making payments through credit transfer, standing orders, bills of
exchange, cheques and direct debit.
 It provides finance for the traders through loans and overdrafts
 It provides advice to traders on business investment
 Banking services are offered by financial institutions such as Commercial banks, Micro-
finances, Bureau de changes, Building Societies etc.
Communication – is a service which enables individuals and organisations to contact each
other and exchange information. Communication is important because:
 It helps in contacting suppliers of raw materials and customers
 It helps in settling queries
 It allows customers to place orders
 It helps in making arrangements for the transportation of goods
 it helps in organising and carrying out surveys such as market research
 It helps in making contracts and other sale agreements
 Communication is carried out through telephone, Electronic-mail, telex, fax, internet, letter,
data post, cellular phone.
Insurance – is an aid to trade which provides cover to individuals, businesses and their
property against risks like fire, accidents, theft etc. Insurance is important because:
 It provides cover and compensation against activities that may cause financial loss.
 It helps in spreading risks among the many insured persons.
 It provides cover for claims from third parties such as employers’ liability and public liability
 It provides compensation for loss of business activity and profits as a result of calamities
such as fire.
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 Insurance services are offered by Insurance companies through insurance policies such
as: Fire insurance, Motor Insurance, Marine Insurance and Life assurance.
Transport - Transport is an aid to trade concerned with the moving of goods and people
from one place to another. Transport is important because:
 It helps in the delivery of raw materials and equipment to the industry.
 Facilitates the movement of employees to and from work
 Helps in carrying finished products to the market
 It helps in the movement of traders, company executives, and agents to home and
overseas markets to meet their customers.
 It can be by road, rail, sea or air.
Warehousing - This is an aid to trade concerned with storage of goods from the time they
are produced to the time they are consumed or used. Warehousing is important because:
 It is essential for the storage of raw materials awaiting to be processed.
 It helps in the storage of finished goods awaiting orders from the customers.
 It helps in the storage of seasonal goods such as: Jerseys, raincoats and umbrellas.
 It protects goods from adverse weather conditions, theft and damage.
 It allows production to take place in anticipation of demand
 It helps in keeping prices of goods stable and prevent shortages
 It helps in keeping imported goods before payment of customs duties.
 The different types of warehouses include: Manufacturers warehouse, Public warehouse,
Bonded warehouse, Wholesalers warehouse etc.
Career Prospects in Commerce
A career is a job or occupation that one does to earn a living. A career is usually as a result of
training. After studying Commerce, one is able to fit into a number of career prospects or
occupations. Below are a number of career prospects for Commerce learners:
 Marketer/Sales Person – Marketing jobs involve finding customers and encouraging them
to buy goods in order to satisfy their needs.
 Advertising/ Promotions Officer- This involves working for media houses offering
advertising space or as a Freelancer involved in creating adverts or as an advertising
officer making decisions what adverts to run and which medium to use on behalf of the
business.
 Banker – This involves work in a commercial bank, at the central bank or with Micro
finance houses.
 Customs Officer- This involves working as a Customs Officer for the Revenue Authority
for in the collection of duty and clearing imported and exported goods.
 Entrepreneur – This involves setting up a business and running it. You can run your own
business as a Retailer, a Wholesaler, a Producer or even as a Service provider.
 Warehouse/Stores Officer- This deals with receiving, storage, issuing and keeping track
of goods for sale, Stationery, Machinery spare parts, tools, raw materials etc.
 Insurance Staff/ Insurance Broker- This involves helping various businesses and
individuals to obtain insurance cover either as an insurance company employee or an
independent insurance agent known as a Broker.
 Transport officer- This involves working as a logistics and transport officer facilitating the
movement of goods and people from place to place using various types of transport such
as road, rail, air, sea and other forms of transport.
PRODUCTION
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The Meaning of Production

Production is the process by which goods and services are provided to satisfy human needs
and wants. It is the creation of utility. It includes: Industry, Direct Services and Commerce.
Human Needs and Wants

Human needs are the basic things that we require in order to survive. They include food,
clothes and shelter.
Human wants are things that we require to improve our quality of life and not necessarily for
survival. Wants include: cars, refrigerators, furniture, television sets, etc.
Goods and Services

Goods - are tangible or physical things we need to satisfy our needs and wants. Goods
include things such as food staffs, houses (shelter), furniture, cars, computers, cell phones
etc.
Services - are intangible utilities of benefit to the public, such as entertainment, medical care,
education, security, commercial services etc.
Branches of Production
Production is divided into three branches namely Industry, Commerce and Direct services
PRODUCTION
INDUSTRY COMMERCE DIRECT

SERVICES
Trade
Aids to
Trade
Primary Seconda
Medication
ry
Education
Legal aid
Advertising Security
Banking Hair
Home Foreign dressing
Comm.
Insurance Recreation
Transport
Warehousi
Exhau Non- Manuf Const ng
stive Exhau acturi ructio
stive ng n
Ret. Wh. Exp Imp
.
Industry
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This is a branch of production concerned with the actual making of goods by extracting raw
materials from nature (primary industries) and then processing them into finished goods
(secondary industries) which people are able to use in satisfying their needs and wants.
Primary and Secondary stages of Production make up the industry branch of production. The
Primary industry is also sub divided into: Exhaustive (Non -Renewable) and Non-Exhaustive
(Renewable) Extractive Primary Industries. Exhaustive Extractive Primary industries are those
engaged in non-renewable resources e.g. Mining and Quarries while Non-Exhaustive
Extractive industries are involved in the extraction of renewable resources e.g. Farming and
Fishing.
Commerce
Commerce is a branch of production involving the distribution and actual exchange of goods
and services and also the commercial services that play a role in the distribution of goods and
services to the consumers through retailers, wholesalers, exporters and importers. Commerce
therefore, makes the second branch of production. Commerce completes the process of
production by delivering goods to the consumers at the right time, right place, in right
conditions and at the right price.
Direct Services
These are personal and public services provided for the direct benefit of individual citizens.
Examples include: Education, health care, legal advice, entertainment, security services etc.
These contribute to the satisfaction of human needs and wants by providing a variety of public
and personal services, increasing the efficiency of productivity of workers engaged in industry
and commerce, e.g. sick workers get medication and get back to work.
How the three Branches of Production are interlinked

 All branches contribute to production either indirectly or directly.
 Although they are interdependent in their roles, they all bring about the provision of goods
and services needed to satisfying human needs and wants
 For example, industry produces goods and services.
 Commerce distributes the produce of Industry and also helps Industry to acquire the
machinery and raw materials, necessary for production to take place.
 Direct Services also play an important role in the process. For example, the police are
needed to maintain law and order, lawyers to uphold justice, nurses and doctors to provide
medical facilities needed by producers and manufacturers to keep the workforce healthy.
Methods of Production
There are two methods of production namely, direct production and indirect production.
Direct Production
This is the production of goods for one’s own use. For example, a farmer who grows only
enough crops or keeps enough livestock for his family’s need is involved in direct production.
If people were to produce all that they needed by themselves, there would be little or no need
for trade. Direct production also entails that each person has to be a master or jack of all
trades i.e. build own house, tame a flock of goats, hunt, fish, farm, make clay pots, etc. to
meet one’s daily needs. Because of these features, direct production is a primitive and
inefficient method of production.
Indirect production
Indirect production is the production of goods for sale. It is the most common type of
production in modern society, where few people satisfy their needs directly. Instead people
co-operate with others to indirectly produce to satisfy the needs or wants of everyone.
Indirect production depends on trade. People usually engage in only one or two particular
occupation/s, which they are best at and sell their products to earn money. With this money
they can then buy the other goods/services they want but which they do not produce. For
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example, a farmer who specialises in food production needs to sell some of his food to get
money to buy clothes, salt, sugar, tools etc., while a manufacturer of clothes needs to sell his
clothes to get money to buy food, machinery, etc.
Factors of Production
Factors of production are things needed for production to take place. They include land,
labour, capital and enterprise.
Land
 The term land refers to all resources provided by nature.
 It includes land for farming and building, mines, oceans, rivers, lakes, etc.
 A person who provides land is referred to as a landlord.
 The benefit or reward to land is Rent or Rates.
Labour
 This is the human effort that is applied in production.
 It may be Manual (unskilled) or professional (Skilled).
 The providers of labour are labourers or workers.
 The benefit or reward of labour is salary or wage.
Capital
 This includes money and assets used in the production of goods and services.
 Capital is provided by capitalists or investors.
 The reward for providing capital is interest or dividends.
Enterprise
 This is the skill to organise, direct and control other factors of production in order to
produce goods and services.
 The person who takes the effort and initiative to organise the other factors of production is
known as an entrepreneur.
 The reward for providing enterprise is profit if the enterprise is successful, or a loss if not
successful.
Types of Goods
A good is a physical object which can be purchased and consumed or used to satisfy human
needs or be used to produce other goods.
Classification of goods
 Original goods- these are goods manufactured by the brand owner or the business that is
legally the owner of the brand name or the business that has the right to produce goods under
a specific brand name.
 Counterfeit goods – these are goods illegally produced using an existing brand name as
though they have been produced by the brand owner. Counterfeit goods are imitations of the
original goods by illegal manufacturers who want to take advantage of popular brand names
and sell to unsuspecting customers.
 Substandard Goods - these are goods that fail to perform to the expected standard.
Substandard goods may easily break down or simply fail to meet the customer’s needs. E.g. a
pair of shoes that get tone within one month of wearing.
 Quality Goods – quality goods are goods that meet the customer’s needs or expectations.
Such goods give the customer the desired value for their money. They are usually produced
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under stringent quality control by reputable manufacturers and seldom disappoint customers.
Such goods may be durable, stronger, high performing etc.
NB: All goods may be classified as either:

 Consumer Goods – Also known as Consumption are goods made for consumer use or
consumption. These are further classified into Durable consumers (e.g. House Furniture and
cooking stove) and non-durable consumer goods (e.g. a bar chocolate); or
 Industrial goods – Also known as Capital Goods or Producer Goods are goods used in
the production of other goods. They are goods which allow business to produce goods. These
include industrial consumables like raw materials, fuel or grease for machines.
Production and the Chain of Distribution
The Chain of distribution refers to the various routes that goods may take to reach the final
consumer once they have been produced. Below is a diagram on the different routes available
for the producers of goods and services.
Chains of Distribution
PRODUCE PRODUCER PRODUCER PRODUCER PRODUCE

R R
MARKETING
BOARDS/MIDDLEME
WHOLESALE N
R
WHOLESALE
WHOLESALE
R
R
RETAILER
RETAILE
R
RETAILER
CONSUMER CONSUMER CONSUME CONSUME CONSUMER

ROUTE 1 ROUTE 2 ROUTE
R 3 ROUTE
R 4 ROUTE 5
Production and Commerce versus Environment
Effects of Production on the Environment

 Soil acidity and infertility which leads poor crop production
 Littering which brings about diseases such as cholera, typhoid etc.
 Unplanned settlement which leads to slums and poor sanitation
 Degradation of land surfaces causing soil erosion and damages to roads
 Pollution of air and water which leads to various airborne and Water borne diseases.
 Occupational health hazards (radiation) which results into various illnesses such as
Cancer.
 Displacement of animals, birds, people and other species and even extinction of some
species
 Climate change and global warming which leads to poor weather patterns.
 Deforestation which leads to desert conditions.
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Possible Solutions to the Effects of Commerce on the Environment
 Government policy – e.g. policies guiding the location of industries and what can and
cannot be produced.
 Civic education- Through community sensitizations such as the formation of CCPC and
Environmental Protection Clubs in Schools.
 Provision of public utilities- Government may take a leading role in the provision of
essential services through parastatals or Public Corporations to ensure both the protection of
people and the environment.
 Provision of dust bins- Putting bins along streets, markets, shopping malls etc. to reduce
littering.
 Provision of posters in the industrial area- To warn or caution members of the general
public e.g. posters warning people not to get near to a factory producing toxic chemicals.
 Introduction of Prohibitive Taxes -Using taxes to discourage production or consumption
of certain goods that are harmful to health, e.g. high taxes on tobacco products and Carbon
Emission tax on cars.
 Legal redress – people can take court actions against industries and organisations whose
operations create an environmental hazard.
 Using regulatory bodies - Use of regulatory bodies such as ZEMA (Zambia Environment
Management Agency) and ERB (Energy Regulations Board) and other statutory bodies that
can help monitor the practices of industries and businesses in general.
 Mass movements and demonstrations – people can peacefully demonstrate against
industries whose operations has a negative effect on the environment. This can lead to
concern businesses taking corrective measures or attract government intervention.
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CONTRACTS
A contract is a legal agreement that creates an obligation binding upon the parties to the
agreement. It is an agreement between two or more parties that is intended to be legally
binding.
Importance of Contracts
Contracts are very important for businesses because:
 They act as a reminder to parties on what is expected of them to do as stipulated in the
contract.
 Contracts act as evidence in courts of law in case of breaches and legal litigation
 They help is specifying the terms and specific actions to be performed by the parties
 Contracts reduce the risk of non-compliance as parties would of aware of the
consequences of non-performance.
 Contracts give title of ownership to parties e.g. contract of sale.
 Contracts act as a permanent of record of transaction or agreed terms.
 Contracts may be used in accessing funds or borrowing e.g. a title deed.
Parties to a Valid Contract

The parties to a valid contract are the people or entities that are bound by the terms of a
contract. A valid contract has two parties. These are:
 The Offeror - the person who first expresses the intention to another person to enter into a
contract. The one who makes an offer or shows willingness to be bound by the terms of a
contract if the other person accepts.
 The Offeree – this is the person or party to whom the offer is made and has to accept this
offer for the contract to be in effect.
Elements of a Valid Contract

For a contract to be valid or legally binding, the following elements must exist:
 An Offer – an offer is simply a proposal made by one person (the Offeror) to another
(Offeree) which has to be accepted. It is an expression of intention and willingness to be
bound by the terms contained in the contract once accepted. An offer can be made to an
individual, a group or even to the whole world.
 Acceptance – this is the expression of agreement to the proposal from the Offeror by the
Offeree. It is an expression of intention to fulfil the agreement by the Offeree. Once the offer
is accepted by the offeree, the contract is formed and the offer comes to an end. Acceptance
may be orally, in writing, or by the implication of conduct (performance).
 Consideration – this is something of value that each of the parties to a contract gives to
the other. It is the sacrifice that each party gives in return for what they receive from the other
party. This has to be sufficient but need not be adequate.
 Capacity to contract – All parties to a contract must have the ability to be contracted. All
contracts entered into by people or entities deemed not to have capacity are null and void.
The following have no capacity (do not qualify to be contracted):
o A minor (a person who has not yet reached his/ her 18th birthday.
o An insane person (a person with mental disorder).
o A person that is intoxicated or acting under the influence of a drug
o An un registered business
 Certainty – the terms of the contract must be clear and specific. It must be clear as to what
the parties have agreed on. All the essential terms to be settled between the parties must be
settled. Misrepresentation, mistake, duress and undue influence may invalidate the contract.
 Consent – the parties to a contract must freely agree to be bound by the terms of the
contract and not be forced to enter into the contract.
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 Legality – the contract must be lawful. A contract is void if it is based on an illegal purpose
or contrary to public policy. E.g. a contract to kill someone.
 Possibility of performance – the terms of the contract should be practicable or attainable
and realistic. E.g. a contract to bring back to life someone who died many years ago is
unrealistic, unattainable with no possibility of performance.
 It is common to confuse an offer with an invitation to treat. The two items are distinguished
as follows:
 An invitation to treat is merely a supply of information to influence or persuade people to
make offers. An offer on the other hand is made when the one making it is willing to enter into
a legally binding contract when accepted.
 An invitation to treat is a request or a call for offers. E.g. An invitation for tenders, general
advertisements, Auction, display of goods on a Shop Window (without price tags), Auctioneer
request for bids, a company prospectus etc.
 An invitation to treat does not solicit for acceptance but for people to make offers while an
offer solicits for acceptance.
 Price tags on goods in a Supermarket are an offer to members of the general public unless
there is a provision for price negotiations. Price tags on goods with room for negotiation would
amount to an invitation to treat.
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HOME TRADE
Home Trade, also known as Domestic Trade is the buying and selling of goods and services
within a country. It consists of Wholesale trade and Retail trade. It involves Wholesale trade
and Retail trade.
Retail Trade
Retail Trade involves the buying of goods in large quantities and selling them in small
quantities to the final users or consumers. Traders involved in retail trade are known as
Retailers.
Functions of a Retailer
 Breaking the bulk- retailers buy in large quantities but resell in smaller or affordable
quantities to consumers.
 A retailer provides a variety of goods to his or her customers to meet their various needs.
 Provides goods to customers at convenient times.
 Acts as a link or middlemen between the consumer and the manufacturer.
 They help in advertising goods through their attractive displays or merchandising skills.
 Provides transport or delivery services to customers who buy bulky and expensive goods.
 Locates the retail shop near the customers so as to satisfy their local needs.
 May offer personal attention (advice) to customers on the goods they intend to buy.
 They assemble some goods which they buy as components but sell them as a unit e.g.
Bicycles, display units, Fancy beds etc.
 The retailer may offer goods on credit to trusted customers.
 Provides pre-sales and after-sales services to customers.
 Retailers such as supermarkets and Hypermarkets offer self-service where customers are
allowed to walk around the shop and free to select the goods that they want.
What is Pre-sales service?

These are services provided to customers before they buy a product. This Allows customers
to check the goods, especially the electrical appliances, so as to prove whether they are in a
workable condition before being sold to the customers.
What is After-sales service?

This is a service provided to customers after goods have been purchased. It includes the
maintenance and repair service offered to customers after the transaction has already taken
place. Goods that develop faults are taken back to the retailers for repair, for free or at a cost,
depending on whether the fault is within the guarantee period or not.
Factors to consider when establishing a Retail Outlet

Factors considered when one wants to start a retail business are:
 Experience or know how – One needs some basic ideas and experience of how a
business is run and some financial management skills.
 Capital or Money – One needs to know the minimum capital outflow needed to start the
business. the size of the capital will also determine the size of the business
 The range of goods to sell – One needs to decide on whether they will deal in a variety of
goods or specialize.
 Method of sales – One needs to decide on the method to use in selling products. The two
common methods being; Across the counter and Self Service.
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 Level and type of competition- one needs to do an assessment of the level and nature of
competition that the retail shop is going to face as this has a direct effect on the shop’s
survival.
 Legal requirements- one needs to ensure that the retail shop complies with all legal
requirements. This include laws regarding acquisition of trading certificates, clearance from
the council and obtaining of a Tax clearance certificate and TPIN from the Zambia Revenue
Authority (ZRA).
 Security – the rate of crime in the area preferred is an important factor to consider before
opening the shop. Locating a shop in a High crime area would mean spending on additional
security installations.
 Types of customers - one needs to consider or analyse the needs and buying patterns of
potential customers, including their economic status.
 Location or site –one needs to consider the location of the shop in relation to expected
profits or turnover.
 Profitability – One has to estimate the profits that the business is likely to make over a
given period of time. This is necessary in ascertaining the viability of the business.
Types of Retailers
There are basically two types of retailers classified on the basis of size. These are; Small-
Scale Retailers and Large-Scale Retailers.
Small Scale Retailers

These are retailers who sell a limited range of goods/services, invest a smaller amount of
capital in the business and whose business premises are relatively smaller.
There are many small-scale retailers, some trading formally while others are involved in
informal trade usually without licenses.
Characteristics of Small Scale Retailers

Small scale retailers share the following characteristics:
 Small capital – the amount of capital needed to start a small-scale retail business is
usually small.
 Unlimited liability- small scale retail businesses have no legal protection over the owner’s
property outside the business in an event that he/she fails to pay debts.
 Flexible operating hours- their operating hours are usually flexible, giving convenience to
customers
 Over the counter selling- most small-scale retailers that sell from fixed premises offer
counter services and are not in a position to offer self-service due to limited space and
resources.
 Deal in Fast Moving Consumer Goods (FMCGs) - Most small-scale retailers deal in
FMCGs. These consist of low value frequently bought consumer goods such as groceries like
sugar, salt, soap, tea leaves, cooking oil, sweets etc.
 Location- they are mostly located in residential areas for easy reach while others are
located in markets and along streets.
 Narrow range of goods- due to small capital, small scale retailers deal in a narrow range
of goods.
 Privately owned- most of the small-scale retail shops are privately owned by private
individuals most of whom have very little business knowledge.
 Fewer registration requirements – usually, small scale retail businesses do not require a
lot of registration procedures. A Council Trading License plus a Tax Registration Certificate
from ZRA could be enough.
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Advantages of Small Scale Retailers

Below are some of the advantages enjoyed by small scale retailers
 Independent management – the owners enjoy independence in terms of decision making
and control over the business as opposed to large retail outlets owned and run by many
people that have to first consult and agree before making any decisions.
 Easy to set up- they are easy to set up in terms of the amount of capital required, the
number of workers needed, the legal procedures to be followed and the infrastructure
required.
 Personal contact – the owners enjoy high personal contact with both the customers and
the workers. This is good for quick feedback and for effective business management.
 Low cost location- most small-scale retail outlets are located in residential areas where
rates and rent are low.
 Convenient location – most small-scale retail shops are located near the customers’ and
owner’s home making them more accessible.
 Flexible operating hours – Small scale retail shops have flexible opening and closing time
enabling them to take advantage of the fluctuations in demand levels.
 Easy to sell goods – small scale retailers deal in Fast Moving Consumer Goods (FMCGs)
which are frequently bought by customers are easy to sell.
Disadvantages of Small Scale Retailers

Small scale retailers have the following disadvantages:
 Low competitive power – they are unable to buy in bulk at factory prices straight from
manufacturers. This makes them less competitive.
 Limited capital and slow expansion – because of the small amount of capital injected
into the business, expansion of the business is usually slow and difficult.
 High prices – because of their inability to buy straight from manufacturers at discounted
factory prices, their prices are usually high,
 Low borrowing capacity – in most cases, banks and other lending institutions are
unwilling to lend money to small scale retailers due to high risk of defaulting.
 Unlimited liability- small scale retailers’ assets outside the business may be taken over by
lenders (creditors) if the business is unable to pay its debts (insolvent).
 Location- small scale retailers may not afford sites for location along main streets or in
town centres where business is good.
Small scale retailers can be divided into two groups namely, small retailers without
shops and small retailers with fixed shops.
Small Retailers without Shops

Mobile shops
A mobile shop is a van that has been converted into a shop and moves around people’s
homes, streets, and work places. They usually sell perishables like milk, fresh vegetables etc.
and have the advantage of reaching isolated places. They offer door to door delivery services
and their operation costs are low.
Hawkers
Hawkers are small scale traders who sell goods by moving from one place to another carrying
their merchandise in boxes and baskets. Hawkers obtain their licences from local authorities
i.e. local councils.
Itinerant traders
Itinerant traders are small scale traders that carry a handful of merchandise in their hands and
move from place to place to sell. Some maybe agents of large organisations. They usually
have no trading licenses and may use large boards on which they stick their merchandise
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Roadside Traders
Roadside traders are small scale retailers who usually sit under trees along the main roads
selling their merchandise. They operate without licences from local authorities.
Street Markets or Vendors

Street vendors are small scale retailers who sell their merchandise along busy streets. Their
merchandise range from foodstuff to household goods. They operate without licences from
local authorities.
Automatic Vending Machine

These are automated retail machines used for selling items such as ice cream, canned drinks
etc. They are normally placed in convenient places, e.g. offices, airports, bus stations,
hospitals, etc. They have the advantage of cost saving because they need no attendants. All
that a customer needs is a coin or bank note of a particular denomination which they slot in for
the machine to produce the needed commodity.
Small Retailers with Shops
Tied Shops
These are shops that sell products made by only one manufacturer. Filling stations are a
typical example of tied shops Caltex, B.P. They may provide fast foods or mini marts for the
convenience of motorists.
Discount Shops
These are retail outlets which work on the principle of low mark up, but large turnover. They
specialise in durable items that are branded such as furniture and electrical appliances. They
are located in the outskirts where overheads are low
Franchising
This is an arrangement that allows a retailer to trade in another company’s name They
sometimes look like multiple stores with interior and exterior decorations being the same. The
retailer who operates a retail shop in another company’s name is called a franchisee. The
mother company allowing its name to be used is called the franchiser. The amount paid for
using another company’s name is called royalty
Large Scale Retailers

These are retailers that operate on a large scale.
Features of Large Scale Retailers

 Large capital- the have large capital, giving them room for expansion in their business and
enables them to buy their goods in large quantities straight from the manufacturers. They are
also able to purchase machines and hire expert services in their businesses.
 Wide range of goods – most large-scale retailers offer a wide range of goods to their
customers.
 Self Service – most large-scale retailers offer self-service to the customers i.e. display
goods on shelves and allow the customers to freely select the goods they want all by
themselves.
 Pre- sale and after sale services – most large -scale retailers provide presale services
such as: Consumer Education, Product assembling, product testing, show rooms,
demonstrations, shopping baskets and trolleys etc. After sale services on the other hand
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include: Carrier bags, delivery services, guarantees, free repair services, free installation
service etc.
 Central location- most large-scale retail shops (except a few) are located in the central
business town areas for easy access by customers.
 Limited liability – most large-scale retailers are registered as companies which gives them
separate legal existence and limited liability.
 Bulk buying- most large-scale retailers buy in large quantities straight from the
manufacturers.
Advantages of Large Scale Retailing

Large scale retailers enjoy the following advantages:
 Ability to employ experts – large scale retailers are able to employ experts or specialists
and likely to grow the business.
 Use technology – large scale retailers have the capacity to acquire and use new
technologies in their businesses such as: online systems, barcode readers, computerized
checkout points, security cameras etc.
 High buying power- large scale retailers are able to buy large quantities of goods straight
from the manufacturers at factory prices.
 Ability to borrow from banks- Banks and other lending institutions are willing to lend
money to large scale retailers due to their good financial position and capacity to pay back.
 Economies of scale- economies of scale are all the advantages that a business may
enjoy due to operating on a large scale which reduces the average costs. E.g. discounts
received for buying in bulk, negotiated or reduced interest rates charged to large businesses
due to low risk factor, reduction in advertising rates due to size of adverts.
 Accessibility- most large-scale retail outlets are located in town centres which makes
them highly accessible to customers.
Disadvantages of Large Scale Retailers

Large scale retailers have the following disadvantages:
 Pilferage and Shoplifting – large scale retailers suffer from increased cases of pilferage
and shoplifting.
 Low personal service- the use of Self Service by most large-scale retailers means that
customers cannot deal directly with the owners of the business or even the manager.
 High location cost- because of their location which is mainly in town centres, large scale
retailers are faced with high cost of rentals and rates.
 High competition – large scale retailers face increased competition from among
themselves and from Wholesalers that also sell directly to consumers. This increases their
cost of doing business.
 Fixed operating hours- most large-scale retailers have fixed operating hours which
reduces the retailers’ ability to take advantage of the changes in the demand levels.
 High staffing expenses – most large-scale retailer employ experts who usually demand
high pay. Even if there are fewer employees working on the sales floor, there are many more
employees needed to carryout routine work with little or no contact with the customers.
Types of Large Scale Retailers
Supermarket
Supermarkets are large scale retail outlets with large sales space located in town centres and
mostly operate on self-service. They practice loss leaders pricing where selected goods are
sold at a very cheap price to attract customers. They mainly deal in fast moving consumer
goods.
NOT FOR SALE

Hypermarkets
These are very large retail outlets located in the outskirts of towns with large selling space and
operate on self-service. They deal in a wide range of goods and provide additional amenities
such as: restaurants, swimming pools, Carparks, entertainment etc.
Departmental Stores
These are retail outlets with many shops (departments) under one roof and are located in
town centres or busy shopping areas. Each store specializes in one type or line of goods e.g.
clothing, hardware, furniture, auto spares, cosmetics, butchery etc. Each department is
headed by a departmental manager who reports to the general manager.
Mail Order Shops

Mail Order Shops are retail businesses that sell goods through the Post Office or the internet.
The retailer may have a shop where customers can visit and do their shopping and also a
warehouse specifically meant for storage of mail order merchandise awaiting orders from
customers. This form of retail business is common in countries with an effective postal
system.
Multiple Shops/Chain Stores

These are large scale retail outlets run as a group of shops with the same name, appearance
and prices owned by the same company. These come in two types according to the range of
goods that they deal in; Speciality Chain stores/Multiple shops and Variety Chain Stores/
Multiple shops.
Co-Operative Retail Outlets

These are large scale retail outlets formed and run by a group of customers on the
cooperative principles of ownership, operation, and distribution of profits. The shops are
owned and financed by the members who are also the main customers. The cooperative sells
goods to both members and non-members. Membership is open to anyone willing to buy
shares. All members have limited liability. There is democratic control and profits are
distributed to members in accordance with the purchases they make as determined by the
number and value of dividend stamps issued at every purchase.
Wholesale Trade
Wholesale trade is the buying of goods in large quantities from producers and selling them in
relatively smaller quantities to retailers. A person engaged in wholesale trade is known as a
wholesaler. A wholesaler is a connecting link between the manufacturer and the retailer.
Functions of a Wholesaler
 Warehousing – The wholesaler stores goods and keeps them safe until the retailer
requires them. This role relieves the manufacturer of the cost of storage and enables them to
specialise only on production. At the same time, retailers are provided with a ready supply of
goods whenever they want it.
 Risk bearing – By storing goods in large quantities, the wholesalers take a lot of risks.
Sometimes the goods kept in the warehouse may not be wanted by customers, or they may
become obsolete or out of fashion
 Keeping prices stable – Wholesalers keep prices steady by holding goods in store in
order to prevent either shortage or excess developing in the market. They always keep
enough supplies on hand to be able to meet any rising demand for goods and avoid prices
rising. A rise in price is usually caused by shortage and having surplus causes fall in price.
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 Breaking the bulk – Wholesalers buy goods from the producers in large quantities and sell
them to retailer’s in relatively smaller quantities.
 Providing a variety – Wholesalers provide the retailers with a wide variety of goods from
which to choose. They usually order goods from various producers from all over the world and
stock them under one roof. The retailer therefore finds almost all they need in one store.
 Information – In the chain of distribution, the wholesaler is located in between the
producer and the retailers, a position that enables them to provide the vital bridge linking the
producers to the retailers. Information flows up and down the chain through the wholesaler.
 Financier – Wholesalers usually pay cash for the goods they buy from the manufacturer
instead of asking for credit. This keeps the manufacturer sup0plied with sufficient working
capital. At the same time, they give credit to retailers thereby increasing their working capital.
 Transport – Most wholesalers operate their own fleet of trucks; they send their truck to
collect the goods from the factories. At times they also deliver the goods to the retailers’
premises, in their own trucks.
 Preparing goods for sale – Wholesalers prepare goods for sale by branding, packaging,
labelling or bottling them. The manufacturers normally sell goods such as wines and tea in
large bulk without packaging. It is the wholesaler who bottle the wines and packaging the tea
in tea bags.
 Marketing – Wholesalers buy goods from manufacturers as soon as they are produced.
They then advertise and market them on behalf of the manufacturer. As a result, the
manufacturers would only need to worry about production.
Types of Wholesalers
Cash and Carry Wholesalers

These sell their goods strictly on cash and do not provide transport or delivery.
Features of cash and carry wholesalers

 They sell mainly groceries
 They do not offer credit facilities
 They do not offer delivery or transport facilities
 They buy in large quantities and sell in relatively small quantities
 They may sell to retailers as well as customers
 They tend to be cheaper as they do not offer credit and transport
 Their premises are usually large and sparsely decorated
 They usually serve local market since they do not offer transport
General Wholesaler
 These are wholesalers who sell a wide range of goods and are usually very large with
branches in many regions. Their main features are as follows
 They are run by large companies who have huge capital
 They are usually very large and may operate on a regional or national basis
 They often send their salesmen around to obtain orders from retailers
 They normally offer regular customers short term credit facilities
Specialist Wholesalers
 These are wholesalers who specialise on a limited range of goods
 but who provide a wide variety of goods within that range.
 For example, Hardware shops that sell only Building related materials. However, they
provide many different variety of building materials and equipment. Wholesaler fruit and
vegetable stores and Book Sellers like Book World and others are examples of specialist
wholesalers.
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Co-Operative Wholesale Societies

This is the wholesale business formed by the co-operative retail societies
The Main Features of Co-Operative Wholesale Society

 membership is open to all co-operative retail society wishing to become members
 they are controlled by Board of Director elected from representatives of the co-operative
retail society
 they break the bulk for the members
 they supply members with the variety of goods
 to reduce dependence on other wholesalers, they carry out manufacturing goods, farming
and obtaining own labels
 capital is provided by co-operative retail society in direct proportion to the number of
members they have
 profits are shared as dividends amongst members according to the purchases made
 they are located on the outskirts of town for the following reasons; land is cheap and readily
available, the members have to provide their own transport to move the goods.
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DOCUMENTS USED IN HOME TRADE
Business transactions between buyers and sellers are normally required in written form to
allow both sellers and buyers to have records not only for the sake of evidence but also to
enable them keep track of their transactions. Before a transaction is completed, a number of
documents may be exchanged between the Seller and the Buyer. Below is a sequence of how
these documents may be exchanged. For each, the party that prepares the document is
stated.
(1) Letter (2) (3) Purchase (4) Advice
of Inquiry Quotation Order Note
(Buyer) (Seller) (Buyer) (Seller)
(5) Delivery
(10) Statement Note /
of Account Consignment
(Seller) Note
(Seller)
(6) Goods
(9) Receipt (8) Debit Note/ (7) Invoice Received Note
(Seller) Credit Note (GRN)
(Seller) (Buyer)
(Seller)
Business Documents used in Home trade

Letter of Inquiry
This is a letter from the buyer to the seller finding out on the availability of goods, their sizes,
prices, delivery dates (period) and other terms of sale.
LETTER OF INQUIRY
Roma Girls Secondary School
P.O. Box 30437,
LUSAKA
16th January, 2017
Zam Paper Limited

P.O Box 50075
LUSAKA
Dear Sir/Madam
Kindly send us information on the availability, units, prices and other

Terms of sale and delivery conditions for the following stationery:
1. Reams of plain papers
2. A4 hard cover books (192 pages)
3. Board rubbers
4. Class registers
5. Manila paper
Your reply must be delivered at Roma Girls Secondary School before 22 nd January, 2017. For any
clarification or additional information do
Not hesitate to contact the undersigned on 0211292295.
Yours faithfully,
Edshils
E. SHILUWE
PROCUREMENT OFFICER
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Quotation
This is a seller’s reply to the letter of inquiry. It contains the necessary details and description
of the goods asked for in the letter of inquiry. To enable the Purchasing Officer make a good
choice, a minimum of three suppliers would be asked to provide quotations.
QUOTATION
NO. 112
Zam Paper Limited
P.O. Box 50075
LUSAKA.
20th January 2017

P.O. Box 30437
LUSAKA
In reply to your letter of inquiry dated 16th January 2017

REF. DESCRIPTION UNIT PRICE (K)
R002 Reams of plain papers 37.00
B005 A4 hard cover books (192 pages) 17.00
D001 Board rubbers 15.00
C003 Chalk 18.00
MP01 Manila paper 4.00
ST05 Staples 15.00
Delivery : 2 days on receipt of order
Trade discount: 5%
Cash Discount: 10% 1 Wk, 5% 2Wks, 2% 3 Wks and Net after 3 Wks.
Rfisonga
R. FISONGA
SALES & MARKETING MANAGER
Other documents that may be used as quotations include:

 The Catalogue – This a colourful booklet that has detailed information on goods held in
stock in form of pictures, brief description and prices.
 Price List- A statement showing a list of goods on offer for sale with their prices.
 Price Current- Similar to a Price List but is used for quoting goods or services whose
prices fluctuate. The prices are subject to change within a day or week. Examples of
commodities were the price current may be used include: Currency exchange rates and Share
prices.
 Proforma Invoice – mainly used when the prospective buyer has included the quantities. It
bears a list of items, their quantities, unit prices and their totals showing exactly how an
invoice would appear should the buyer decides to buy the goods.
 Estimate- a special kind of quotation sent in reply to a letter of inquiry for a certain work or
task to be done according to specific instructions e.g. building a classroom block or a painting
some offices. It shows the materials needed, the time the task would take to be completed
and the labour cost for the work.
 Tender – a Tender is a document sent by the seller to the buyer in response to the buyer’s
request for sellers to compete to supply goods and services for a particular period of time.
The Purchase Order
Also known as Order or Order Note is an instruction from the buyer to the seller particular
goods. An Order is sent by the customer when he/she is satisfied with the information
received from the supplier. The order contains: description of the goods required, the quantity
ordered, the price, the delivery date and terms of sale. The order is the only document with
the words “please supply the following”.
NOT FOR SALE

ORDER
P.O. Box 30437
LUSAKA
NO. 303
27th January 2017
Zam Paper Limited
P.O. Box 50075
LUSAKA
Please supply the following items
Quantity Description REF Unit Price Total
20 reams Plain Papers R002 37.00 740.00
40 A4 Hard cover books (192 pages) B005 17.00 680.00
10 Board Rubbers D001 15.00 150.00
30 boxes White Chalk C003 18.00 540.00
100 Manila MP01 4.00 400.00
10 boxes Staples ST05 15.00 150.00
TOTAL 2 660.00
Edshils
E. SHILUWE
PROCUREMENT OFFICER
Advice Note
The Advice Note is sent by the seller to the buyer to inform the buyer that the goods will be
dispatched or have been dispatched. It also states the mode of transport to be used and when
to expect the goods. The document alerts the buyer in advance of the goods so that he/she
can prepare his/her warehouse to receive them.
Delivery Note/Consignment Note

 A Delivery Note is document sent to the buyer through the driver of the vehicle delivering
the goods. The buyer checks the delivery note against the purchase order when the goods
are received to find out whether the goods sent are the ordered. The delivery note is only
used when the seller has used his own transport to deliver the goods to the buyer’s premises.
 The Consignment Note on the other hand is used when the seller has used hired
transport to deliver goods to the buyer. The document is made out in triplicate (three copies)
which when signed by the buyer, one copy goes to the transporter, another to the seller and
the last one remains with the buyer.
Goods Received Note (GRN)

This is an internal document completed by the buyer’s Receiving or Purchasing department to
be used as an internal control as proof that the goods have been received as per order. The
copies of the GRN are shared by the Stores, Purchasing and Accounts Departments showing
the goods that have been received by the organization. The document shows the quantity of
goods received and the condition in which they were received.
The Invoice
An invoice is a bill for the goods that were ordered and delivered sent by the seller to the
buyer. An invoice contains information such as: description of the goods, quantity supplied,
unit and total prices, terms of sale, discounts offered and terms of payment. It is a request for
payment. The buyer may check the invoice information against the Purchase Order, the
Delivery Note and the GRN to ensure that they pay for what they ordered and received.
NOT FOR SALE

INVOICE
Zam Paper Limited
P.O. Box 50075
LUSAKA
NO. 105
30th January 2017
P.O. Box 30437
LUSAKA
For Order no.303 of 27th January 2017
Quantity Description REF Unit Price Total
20 reams Plain Papers R002 37.00 740.00
40 A4 Hard cover books (192 pages) B005 17.00 680.00
10 Board Rubbers D001 15.00 150.00
30 boxes White Chalk C003 18.00 540.00
100 Manila MP01 4.00 400.00
10 boxes Staples ST05 15.00 150.00
GROSS INVOICE PRICE 2 660.00
Less Trade Discount 5% 133.00
NET INVOICE PRICE 2 527.00
Cash Discount: 10% 1 Wk, 5% 2Wks, 2% 3 Wks and Net after 3 Wks
JKalala
J. KALALA E&OE
ACCOUNTS DEPARTMENT
The Invoice also has the abbreviations E&OE which stands for: Errors and Omissions
Excepted. This entails that the seller is willing to correct any errors that may appear.
Debit Note/ Credit Note

The Debit Note (DN) is a document prepared by the seller to the buyer if he/she has been
undercharged or over supplied. The Debit Note is issued to claim extra money from the buyer,
it is like an additional invoice.
The Credit Note on the other hand is prepared by the seller and sent to the buyer when the
buyer has returned of the goods, has been overcharged. It is usually printed in red to
distinguish it the invoice. The main purpose of using the credit note is to reduce the amount
indicated on the invoice when the buyer is overcharged and also to recognize the return of
some of the goods by the buyer.
Receipt
This is issued by the seller to the buyer as an acknowledgement for the payment made by the
buyer. To the buyer, the receipt acts as proof of payment made to the seller.
Statement of Account
The statement of account is a summary of all the transactions between the buyer and the
seller during a period of time e.g. one month. It is important because it shows the series of
transactions i.e. purchases, returns, payments and the balance remaining at the end of the
month. It shows the amount owing at the beginning and end of a given period. It is also used
as a reminder or request for payment by the seller to the buyer.
NOT FOR SALE

STATEMENT OF ACCOUNT
Zam Paper Limited
P.O. Box 50075
LUSAKA
NO. 014
31st January 2017
P.O. Box 30437
LUSAKA
For the month of February 2017
Date Details Debit (K) Credit (K) Balance (K)
01.02.17 Balance b/f 20 000.00
05.02.17 Cheque no. 000252 10 000.00 10 000.00
13.02.17 Invoice no. 349 15 000.00 25 000.00
20.0217 Credit Note no. 111 3 000.00 22 000.00
22.02.17 Cheque no. 000262 17 000.00 5 000.00
25.02.17 Invoice no. 372 18 500.00 23 500.00
27.02.17 Debit Note no. 0022 300.00 23 800.00
28.02.17 Cheque no. 000273 20 000.00 3 800.00
JKalala
J. KALALA
ACCOUNTS DEPARTMENT
The last amount in the balance column is the amount outstanding or owing. The buyer can
use the statement to verify all transactions notify the seller if there are any anomalies.
Trade Discount and Cash Discounts

 Trade discount (TD) is a reduction on the gross invoice price of goods given to the buyer
by the seller for buying in bulk. It is also meant to enable the buyer make some profit if the
purchased goods were for reselling. It encourages repeat purchases from buyers.
 Cash discount (CD) is a reduction on the net invoice price of goods. It is given to a debtor
for paying promptly for the goods bought on credit. The purpose of Cash discount is to
encourage buyers (debtors) to settle their bills promptly. It improves the cash-flow of the
business.
Differences between Trade Discount and Cash Discount

 Trade discount is given for buying goods in large quantities while cash discount is given for
prompt payment.
 Trade discount is given out regardless of whether goods are bought for cash or on credit
while cash discount is only given out for goods bought on credit.
 Trade discount is calculated on the gross or total invoice price while cash discount is
calculated on the net invoice price (on the amount after subtracting trade discount).
 Trade discount is mainly given to traders or dealers (they are the ones who mostly buy in
large quantities) while cash discount is given to all who buy goods on credit.
 Trade discount is given out even before the goods are paid for while cash discount is only
given when goods are paid for (this should happen within the period considered prompt
payment period).
 The actual amount deducted as trade discount appears on the invoice while the actual
figure deducted for cash discount does not appear on the invoice as it is only given when
payments are done.
NOT FOR SALE

 Trade discount encourages repeat purchases while cash discounts reduces bad debts and
improves cash flow.
Calculations of Trade and Cash Discount

Masheta Musamai bought goods for a total invoice price of K10 000.00 given a trade discount
of 10%. The other conditions of sale were that Masheta Musamai would be given 10% cash
discount if he paid within 1 week, 5% if he paid with 2 weeks, 2% if he paid in 3 weeks’ time
and to pay the net invoice price if he paid after 3 weeks. Calculate:
(a) Trade discount and how much he would pay if he was not given any cash discount.
i) Trade discount = 10/100 X 10 000.00 = K1 000.00
ii) Net invoice amount = Gross invoice amount less Trade Discount.
= K10 000.00 - K1 000.00 = K9 000.00
(b) Cash discount and how much he would pay if he paid within 1 week
i) CD within 1 Week= 10/100 X K9 000.00= K900.00
ii) Amount paid within 1 Week= Net Invoice amount less Cash discount.
= K9 000.00 – 900.00 = K8 100.00
(c) Cash discount and how much he would pay if he paid in 2 week’s time.
i) CD Within 2 weeks= 5/100 X K9 000.00= K450.00
ii) Amount paid within 2 weeks= Net Invoice amount less Cash discount.
= K9 000.00 - K450.00= K8 550.00
(d) Cash discount and how much he would pay if he paid in 3 week’s time.
i) CD Within 3 weeks = 2/100X K9 000.00 = K180.00
ii) Amount paid within 3 weeks= Net invoice amount less cash discount.
= K9 000.00 – K180.00 = K8 820.00
(e) How much he would pay if he paid after 3 weeks

i) No cash discount given
ii) Amount paid is the net invoice amount= K9 000.00
NOT FOR SALE

BUYING AND SELLING ON CREDIT
Credit buying refers to a transaction where the payment for the goods or services is
postponed or not made immediately. The transaction is based on trust between the seller and
buyer and represents the transfer of purchasing power from the seller to his/her customer
against a legally binding understanding to pay to the seller over a stated period of time. The
document used in credit trading is the invoice.
Reasons why Businesses Purchase on Credit

 the trader may not have the capital to pay immediately
 it is common practice and businesses are encouraged to do so
 the buyer enjoys using the product which has not been fully paid for.
 may sell the goods bought before payment is due and use the money to pay for the debt
 it is a short-term form of financing the business
 to overcome cash flow problems/liquidity problems
 The spreading of payments over a period of time can enable a customer to save money for
other unplanned for expenses.
Methods of buying and selling on credit

The two main methods of buying and selling on credit are:
 Credit sale agreement
 Hire purchase.
Credit Sale Agreement or Deferred Payment

Credit sale agreement is the buying of non-durable goods on credit by which the customer
becomes the legal owner of the product immediately the first instalment is made.
Main Features of Credit Sale Agreement

 the buyer takes possession and ownership of the goods of the product immediately the first
instalment is paid
 repayment of the product is made in regular instalments
 the goods cannot be repossessed if the buyer defaults in payment
 however, s/he can be sued for the remaining balance
 is suitable for buying non-durable goods whose value depreciates quickly
 where the credit sale agreement is signed away from the trader’s premises, the buyer may
cancel the agreement within the cooling off period.
 A cooling off period is a period of five days from the date of signing the credit sale
agreement in which the agreement may be cancelled, goods returned and customer’s
deposit refunded, thus returning the parties to their original positions
Advantages of Deferred payment to the retailer

 Enables business sales to increase
 May avoid wastage of perishables and the risk of goods going out of fashion
 Has closer personal contact with the customers for possible future deals
 The method creates impulse buying
 He may sue the if payments are not completed
Advantages of deferred payment to the consumer

 Takes possession and ownership of the goods immediately the first payment is made
 The retailer cannot repossess the goods if the buyer defaults in payment
 Enjoys the use of the goods while still paying for them
 Usually there is no deposit needed before taking possession of the product.
 The buyer is free to sell the goods before completing his/her payments
NOT FOR SALE

Disadvantages of deferred payment to the retailer

 May suffer bad debts
 Goods may not be repossessed
 Where court proceedings are initiated, they may take too long and are too costly
 He loses the right of ownership to the goods immediately the buyer makes the first
payment
 May require extra capital to finance goods taken on credit
Disadvantages of deferred payment to the customer

 May be forced to live beyond his means by getting a lot of goods on credit
 Thus burdening himself/herself with instalment payments
 Prices may be higher than the cash price
 The method is not used for expensive or high value goods but for low value and second
hard goods.
Hire Purchase
This is the buying of durable goods by initially paying a deposit followed by equal monthly
instalments over a given period of time
Main Features of Hire Purchase

 Initially a deposit is paid followed by equal monthly instalments paid over a period of time
until the total price is paid which includes interest
 Interest is usually expressed as a percentage of the market price of the item
 The buyer only becomes the legal owner of the goods after paying the last instalment,
 hence the item purchased cannot be sold until the last instalment is paid
 The buyer has the use of the goods whilst paying for them
 It usually deals with durable goods such as machinery, vehicles, stereos, refrigerators,
buildings and furniture.
 In the event of the buyer failing to pay the instalments, the goods may be repossessed,
 however, it is subjected to certain legal limitations,
 for example, if 1/3 of the purchase price has been paid, then a court order is required
 There is usually a maximum value of transactions
Advantages of Hire Purchase to the consumer (buyer)

 It enables low income people to buy expensive consumer durables like fridges furniture etc.
with significantly improved standard of living
 Hire purchase is a convenient way of buying items which would otherwise be unaffordable
to many.
 The customer can take advantage of ‘sale’ or price cuts
 By spreading payment over a period of time, a customer can save money for other needs.
 It is a convenient way of credit buying for the working class who get little but regular income
 It is a form of saving to the buyer. After finishing payment, the item can be sold for cash
which might be difficult to accumulate by saving
 The customer has full use of item and practically treats it as his/hers own as soon as the
deposit is paid.
 It helps to keep those working in industries producing the consumer durables in
employment
 Without hire purchase there would not be enough customers to sustain a high level of
output and people in those industries would have to be retrenched
 it enables the buyer to acquire the goods which s/he cannot afford on cash basis
 the buyer has the use of the goods whilst paying for it
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 some goods may pay for themselves such as tractors /vehicles, stereos, machinery,
cookers and refrigerators
 the buyer may obtain the goods on current price to beat inflation
 by spreading payments over a period of time, he can save money for other needs
 it may improve the standard of living of the buyer
 it is an indirect way of saving though not in form of cash but property
Disadvantages of Hire Purchase to the Buyer

 Hire purchases is costly compared to cash purchases. This is because the amount payable
is a combination of the basic cost of the item plus insurance, finance charges (interest),
transport (optional) and of course profit on the seller
 It tempts people into buying what they cannot afford and they will suffer with the
instalments for a long time
 It can only be used to buy items with resale value such as furniture, fridges, cars and
television sets. If someone wants to buy other items they still have to pay cash.
 The buyer is not allowed to sell the goods until he/she has finished paying for it.
 Only a few shops offer hire purchase so the customer is limited in the choice of shops
Disadvantages of Hire Purchase to the Retailer

 Although the seller can repossess the goods, some may be in such a condition that it is
difficult to resell them at a price equal to the outstanding instalment.
 It involves a lot of paperwork for the seller.
 Much of the trader’s capital is tied up in debts so it requires large amount of capital.
 Court action against defaulting customers is very unpopular and may tarnish the image of
the trader and scare away customers.
 It requires trained staff to keep a record of customers, and details of their transactions.
 Some customers may defraud the higher purchase traders.
The differences between Hire Purchase and Deferred Payment under Credit Sales
 In Hire Purchase, the buyer becomes the legal owner of the item after paying the last
instalment while in deferred the buyer becomes the legal owner of the item immediately
the deposit is paid
 Hire purchase deals with durable goods while credit sales deals with non-durable
 Under Hire Purchase, the goods may be repossessed in case the buyer defaults in
payment while in deferred payment the goods may not be repossessed but the buyer will
only sue for the remaining balance
 Hire Purchase may be financed by the finance company while credit sales may not be
financed by the finance company
 Under Hire Purchase, the buyer cannot sell the goods until all the payments are completed
but under deferred payment the buyer can sell the good any time as she becomes the
legal owner of the goods as soon as the deposit is paid.
Consumer Protection
The Consumer being the last person in the chain of distribution is affected by the conduct of
producers, wholesalers and retailers. The consumer is an important player in the economic
system, the consumer provides the producer with the impetus to produce more. The
consumer happens to be the key target of all the other economic players. Therefore, the
consumer is very vulnerable and needs protection.
NOT FOR SALE

Reasons for Consumer Protection

 Unfair trading practices of businessman.
 Inability of consumers to assess claims of advertisers.
 Ignorance of consumers that products may endanger their health or life.
 Safeguarding the religious beliefs of consumers.
 Ignorance of customers of their rights.
Consumers Rights
The following are some of the rights of consumers:
 To get right quantity and quality against the price paid.
 Not to be charged extra amounts.
 Should be given goods in proper measurement.
 There should be no adulteration of goods.
 Should not get expired items.
 Should not get unhygienic items.
 Should not be treated rudely.
 Should not get items with haram ingredients.
 Seller should not make misleading statements during time of selling.
 Should be given due after sale services
Organisations that protect Consumers

Organisations in Zambia that protect consumers include the Government of the Republic of
Zambia, the Legislature, Zambia Bureau of Standards, the Competition and Consumer
Protection Commission and the Zambia Consumer Association.
The Government
The government can serve the interest of consumers by making policies that protect the
consumers from unfair trading practices, unfair prices, unhealthy foods etc.
The Legislature
The legislature promotes the interest of consumers by enacting laws that are aimed at
protecting consumers such as the Weights and Measurements Act, the Public Health Act, the
Trade Description Act and the Drug and Food Act.
The Zambia Bureau of Standards (ZABS)

The Zambia Bureau of Standards is a statutory body established under an Act of Parliament
for the preparation and promulgation of Zambian standards. The organisation serves the
country in the areas of standardisation, standards formulation, quality control, quality
assurance, import and export quality inspections, certification and removal of technical
barriers to trade.
The Zambia Environmental Management Agency (ZEMA)

Formally known as environmental council of Zambia was established to protect the
environmental destruction due to pollution and other factors.
The Energy Regulation Board (ERB)

The ERB was established by an act of parliament to regulate energy supplies and prices.
Competition and Consumer Protection Commission (CCPC)

The Competition and Consumer Protection Commission is a statutory body established under
an Act of Parliament whose responsibility is to safeguard and promote competition and protect
consumers against unfair trade practices. Its main purpose is to regulate the operations of
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markets in Zambia and the conditions of competition in those markets as well as to be the
main tool in the protection of consumers against violations of their rights.
Zambia Consumer Association (ZACA)

The Zambia Consumer Association is the leading consumer voluntary association in Zambia
established in the year 2000. Its main activities include:
o Handling complaints from consumers.
o Campaigning for consumer rights in trade in areas such as fair trade (checking for product
weights) and health (tobacco control and chemical safety).
o ZACA works in close collaboration with regulatory bodies in Zambia to address issues
concerning consumers.
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FOREIGN TRADE
Meaning of Foreign Trade

Foreign Trade also known as International trade is trade between countries. It can takes place
between two individuals or two organizations based in different countries or even between
governments. It involves the physical movement of goods and services from one country to
another or across national boundaries.
International trade consists of Import trade and Export trade. Import trade is the buying of
goods from someone outside the country. Goods entering the country from another country or
customs area are called imports. Export trade is the selling of goods to someone outside the
country. Goods sold outside the country are called exports.
Importance of Foreign Trade

There are several reasons why individuals, organisations and nations participate in Foreign
Trade and below are some of them:
 Due to uneven distribution of natural resources - No country is able to be self-sufficient,
therefore, countries that cannot produce some goods due to lack of raw materials or
unfavourable climatic conditions are able to buy such goods from other countries.
 To avoid wastage of surplus goods- Countries that are able to produce certain goods in
excess of the local demand may export the excess to other countries.
 To overcome seasonal shortages- Certain goods that can only be produced during a
particular season may be imported from other countries during offseason period.
 Price differences- If it is cheaper to buy some goods from other countries rather than to
make them, the country may decide to import such goods.
 Need for supplements: Countries with insufficient goods are able to obtain supplements
from other countries to offset their supply short falls.
 Specialisation: Countries that concentrate on producing certain goods and services in
which they have comparative advantage may have to import those goods that they cannot
produce locally.
 To have access to a variety of goods- International trade allows countries and
businesses to buy from various suppliers from different countries, hence, enabling their
citizens to have access to a variety of goods from which to choose.
 To acquire Foreign and improved Technology-Through foreign trade, countries are able
to acquire improved technology and machinery from other countries.
 To obtain Foreign Exchange: Countries export goods in order to earn foreign exchange
or income which is used for national development and also to pay for imports.
 For Political friendship: countries may trade with one another in order to foster political
relations and strengthen their ties as allies.
 To doge home competition- Organizations that find it too difficult to compete with already
established firms at home opt for foreign markets for their survival.
 To access markets for goods: Foreign trade helps to expand/widen a country’s market
for goods and services produced locally.
 To provide employment: If a country produces more of good services and exports it, the
larger export market will lead to an increase in production levels of that particular good/service
and thus create more employment for the local population.
 To help improve local goods through Competition- Some countries may deliberately
bring in foreign goods in order to give the local industries some competition, thus, forcing
them to produce better quality goods for the benefits of the population.
 Commercial policies: If the commercial policy of a country allows free trade, then this
will lead to an increase in trade with other countries.
 Proximity of neighbours: Countries may trade by reason of being geographically close to
each other e.g. Zambia and Malawi.
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Difficulties/Barriers/Problems faced by traders in Foreign Trade

The following are the problems faced by traders in foreign trade.
 Language problems: Different countries use different languages. This might result in
misunderstandings in communications between traders.
 Distance problems, longer distances mean that goods may need special packaging to
protect them from bad weather conditions and insurance for risks of loss due to theft and
damage where transhipments are inevitable.
 Differences in units of measurements. Differences in units of measurements bring
problems such as difficulties to fix prices for goods and; additional costs for packaging goods
in appropriate units of measurement required by foreign buyers.
 Problems of payment for goods and services: Different countries use difference
currencies which brings the problem of exchange rate fluctuations, additional expenses
through commissions paid to banks, etc.
 Religion, Laws and customs: some goods consumed in one country may not me
consumed in another country due to differences in Religions, laws and customs. These
differences also entail that certain goods need to be packaged in a certain way as required by
the customs and laws of the specific importin country.
 Documentation problems: There are many and lengthy documents used in trade which
brings problems and additional expenses for their processing and translation.
 Trade barriers: These are trade restrictions and tariffs (duties) such as trade embargoes
and quotas that a country may impose which may give restrictions to traders in terms of
quantities and types of goods which can be exported to certain countries.
 High insurance costs: Traders may need to insure their goods at high costs to cover
risks such as pilfering and theft of goods on ports and in transit, accidents involving vehicles,
ships and aeroplanes.
 War, Terrorism and Corruption – countries face challenges of instability, war, terrorism
and corruption. These all have a direct effect on international trade.
Distinctions between Home and Foreign Trade

 Home trade is the buying and selling of goods and services within one country while
international trade takes place between two countries.
 Home trade consists of wholesale trade and retail trade, whereas international trade
consists of export and import trade.
 There is a single legal, banking and fiscal system in home trade unlike in foreign trade
where there are different legal, banking and fiscal systems.
 In home trade there are no trade barriers like customs duties, quotas etc., whereas in
foreign trade there are barriers (except where such duties are not applicable).
 In home trade there is no difficulty in communication as a common language is usually
used. In foreign trade communication is difficult as the buyer and seller speak different
languages.
 In home trade the same currency is used so there is no problem of payment. In foreign
trade, different currencies are used so money has to be exchanged to a common basis,
posing a problem of payment.
 In home trade the same units of measures and weights are used, but these may be
different in international trade.
 Documents used in home trade are few and simple to understand but documents used in
foreign trade are many, lengthy and quite complicated to understand.
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Documents used in Foreign Trade
Bill of Lading
This is a document prepared by the shipmaster when goods are entrusted to him by the
exporter for transportation by sea.
Importance of Bill of lading

 It acts as document of title to goods and it is (quasi) negotiable. Without it the owner cannot
make a claim ownership of goods.
 It acts as receipt for goods received on board the ship.
 It is an evidence of a shipping contract.
 It shows details of the consignor, consignee and carrier and details of the goods.
 It shows the ports of loading and discharge of the goods.
 It is a receipt for freight charges detailing the amount paid for shipping.
 It states the conditions of goods received on the ship.
Charter Party
A Charter Party is a document of contract made between a ship owner and the hirer
(charterer) for the use of a ship for transportation of cargo.
A Charter Party includes the following details:
 Names of parties involved (i.e. the ship owner and the charterer).
 Type of charter
 Freight charges
There are two ways of preparing a charter party and these are:
 Voyage Charter: This refers to the hiring of a ship for a particular voyage or a trip. e.g.
from Durban to Sydney.
 Time Charter: This is the hire of a ship for a definite or specific period of time. During the
period of hire e.g. one month, the hirer is free to take the ship anywhere and make as many
trips as he/she wishes.
Airway Bill
 The Airway bill is a document used when goods are sent by air.
 This is prepared by the captain of the airline when goods are transported by air.
 It is prepared in three copies: One to the consignor; one to the consignee and one to the
airline.
 Unlike the bill of lading, the airway bill is neither a document of title nor quasi-negotiable.
Importance of an Airway Bill

 It gives approximate value of goods for customs purposes.
 It acts as a contract of carriage for the goods on the plane.
 It acts as a receipt for the goods put on the plane.
Certificate of Origin
 This is a document used in foreign trade which shows the origin or country where the
goods were made.
 It is prepared by the exporter and signed by the consul of the importing country.
Importance of Certificate of Origin

 It enables the customs authorities to know exactly where imported goods are coming from
and where applicable exempt them or charge less duties e.g. those from COMESA
countries.
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 It helps to prevent the importation of goods not allowed from countries with a trade
embargo or sanctions.
Certificate of Insurance
 This is a document issued by an insurance company to the exporter to show that the goods
being exported have insurance cover.
 A copy of the actual policy can serve in place of a certificate.
 It is always enclosed with the goods in transit.
 A certificate of insurance may be for a specific journey, i.e. voyage policy;
 or for a period of time i.e. time policy.
Importance of a Certificate of Insurance

 It allows the exporters (insured) to claim compensation should there be loss of goods due
to the insured risks.
 It assures the interested parties that the goods have been insured.
Consular Invoice /Certified Invoice

 This is a document issued by the exporting country and signed by the consul of the
importing country to certify that the prices indicated on the invoice are genuine.
The Importance of Consular Invoice

 It authenticates the value of goods imported so that the correct customs duty can be
charged on imported goods.
 It speeds up the clearance of goods at customs check points.
 It helps to prevent the importation of prohibited goods.
 It contains details used in compilation statistics on imports and exports.
Indent
 An indent is an instruction sent to an agent by the importer to order goods from abroad.
 It is not an order for goods but a letter asking the agent to order goods.
 It contains details such as; description of goods; prices and quality of goods ordered;
shipping instructions; date and address of delivery.
 An indent may be a Closed Indent or Open Indent.
o Open indent: This is one where the importer gives specific details of the goods to be
ordered but does not specify the supplier. It is therefore, up to the agent to find a suitable
supplier with whom to place the order.
o Closed indent: This is one in which the importer specifies the goods to be ordered as well
as the supplier from whom the agent should order the goods.
Letter of Hypothecation
 This is a letter written by the exporter authorizing the bank to sell the goods and send the
income to exporter less expenses if the importer fails to pay or accept the bill of exchange.
 It enables the importer’s bank to sell the goods in case of non-acceptance or non-payment
of the associated bill of exchange by the buyer. This therefore, enables the bank to sell the
goods in order to recover its money or to pay the exporter.
Zambia Revenue Authority (ZRA)

The Zambia Revenue Authority (ZRA) is a government department appointed to collect
revenue on behalf of government. The Authority is also tasked to supervise the movement of
goods in and out of the country.
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Functions of ZRA, Port Authority and Customs Authority

In relation to International trade, the Revenue Authority or Port Authority or Customs Authority
has special roles to play. In Zambia the Department of Customs and Excise under the
supervision of the Zambia Revenue Authority in the Ministry of Finance and National
Planning, performs the following functions:
Collection of Statistics on Imports and Exports:

 The customs authorities are required to collect statistics on imports and exports for the
following goods.
 To give details of import goods such as value, volume category and origin of goods.
 To give details of exported goods such as value, volume and destination of goods.
 To enable the calculations of the balance of trade and balance of payment.
 By allowing the calculations of the balance of payment, the government will be in a position
to know the state of foreign trade and take remedial action as required.
Enforcement of Quotas
 A quota is a restriction on the number of a particular type of goods that must be imported
into a country.
 The customs authorities are required to enforce quotas for the following reasons:
 To prevent dumping of cheap and possibly poor quality goods into the country.
 To protect home industries against unfair, competitions from foreign good.
 To help correct unfavourable balance of trade position.
 Quotas can be enforced as a retaliatory action against another country.
Controlling of Bonded Warehouses

 The customs authorities are required to control bonded warehouses for the following
reasons:
 To enforce payment of customs duty on dutiable goods stored in the on bonded
warehouses.
 To assist entrepot trade.
 To store dutiable goods on which customs duty has not yet been paid.
Collection of Customs Duty (import duty)

 This is a charge of levy imposed on imported dutiable goods from a different customs area.
 The customs authorities are required to collect customs duty for the following reasons:
 To raise revenue for government purposes such as construction and maintenance of
schools, hospitals etc.
 To protect home industries against unfair competition from foreign goods.
 To save foreign currency by reducing imports.
 To correct the unfavourable balance of payment.
 To discourage the importation of harmful or undesirable goods such as tobacco, spirits etc.
Supervising the movement of goods

 The customs authority keeps an eye on goods moving across the country’s borders.
 This prevents the smuggling of prohibited goods such as guns and drugs which are a
danger to national security and public health.
To control and maintain Public health

 Customs authorities ensure that no goods that can cause a health hazard are allowed into
the country. E.g. contaminated goods or goods with dangerous ingredients.
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Why Countries impose Tariffs and Trade Restrictions?

 To protect local industries.
 To prevent dumping of cheap goods in the country.
 To raise revenue for the government.
 To prohibit undesirable or harmful goods.
 To reduce imports thereby saving foreign currency. This leads to improvements in the
balance of payment.
 To make local goods competitive.
Requirements for a Good Harbour or Seaport

 Government office for customs control and immigration – These are needed at all
points
 Wharves – equipment, cranes and labour for loading and offloading.
 Storage facilities- in form of warehouses should be provided.
 Good communication – this is necessary for incoming and outgoing ships and general
information needs at the harbour.
 Access – The harbour must be accessible or linked to a good road and rail transport
system.
 Commercial premises or office space – must be provided for airline, shipping
companies, clearing and forwards agents etc.
 Clear Channels – marked channels, tugs and pilots for shipping, good runways, air traffic
control and marshals for aircraft.
 Dry Docks and repair yards – These must be available for shipping must hangars and for
maintenance facilities for aircraft
 Deep Water – This may permanent or tidal water
 Shelter – This may be in a natural bay or harbour, or may be provided by the banks of a
river. If these are not available groynes must be provided.
 Filling station – supplies of fuel with adequate safety measures must be available.
 Anchorage or Anchorages - Especially important if the ship carries dangerous goods and
is required to anchor in an isolated place for safety reasons.
 A breakwater - is a solid or nearly solid structure used to reduce the power of the waves
within a harbour or to reduce coastal erosion.
Bonded Warehouse
A bonded warehouse is a warehouses used for the storage of dutiable goods on which duty
has not yet been paid. They are under control of the customs and excise authorities.
They may be owned by the government or by private owners who have given their bond or
agreement not to release goods without customs duties being paid on them.
The importance of a bonded warehouse includes:
 Bonded warehouses can be used to hold goods awaiting re-export which allows the re-
exporter not to pay customs duty on them.
 Bonded warehouses can be used by traders who do not have sufficient working capital to
sell their goods while still in bond and use some of the money to pay the import duties or
customs duties.
 Bonded warehouses can be used for the preparation of goods for sale by labelling,
blending or bottling.
 Bonded warehouse can be used to store imported goods which are not required
immediately without paying customs duty until they are removed.
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Means of payment in Foreign Trade

The following are the methods of payment for goods and services in foreign trade.
Bankers Draft
 A banker’s draft is a cheque drawn on a bank instead of on the person’s own account.
 It is the equivalent of a bank’s own cheque.
 A bank customer who wishes to pay for goods or services by a banker’s draft first pays
his/her bank the local currency equivalent to the amount for goods or services.
 The bank then draws out a cheque from its account (the amount withdrawn by cheque
being the same which the importer paid into the bank’s account).
 The importer is then given the banker’s draft which he/she sends to the exporter as
payment.
 The exporter has more confidence in receiving payment by banker’s draft because it is
guaranteed by the bank.
Cable Transfers
 This involves the transfer of funds electronically between banks.
 The importer pays the money in her/his local bank and then instructs the bank to transfer
the money directly into the bank account of the exporter.
 In cable transfer no money is physically transferred but only book transfers take place.
 Settlements between the banks take place later when a number of such payments are “set
off” (i.e. cancel each other) where these payments occur in both directions.
 Cable transfer is especially useful where urgent payments need to be made because it is
very fast.
Letter of Credit
A letter of Credit is a document written by the importer’s bank, upon a deposit of money, to the
exporter’s bank to authorize the exporter’s bank to allow the exporter to obtain money against
the value of the transaction.
How payments are made by letters of credit

 The importer banks a sum of money into his own bank.
 The importer then instructs his/her bank to pay the exporter.
 The importer’s bank sends a letter of credit in favour of the exporter to the exporter’s bank
(in the letter the bank promises
 to pay the exporter upon production of relevant documents to prove that goods have been
shipped or dispatched).
 Upon proof of payment documents are given to the importer so that he/she can claim
ownership of the goods on arrival.
Advantages of Letter of Credit

 It guarantees immediate payment to the exporter in advance of dispatching goods.
 The importer is made certain that ownership of the goods is assured before payment is
made.
Types of Letter of Credit

 Revocable letter of credit
 This is a letter of credit that can be cancelled legally. The importer has the mandate to
nullify it.
 Irrevocable letter of credit
 This is a letter of credit that cannot be withdrawn (cancelled) during a particular period.
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Bill of Exchange
 The Bill of Exchange is “an unconditional order in writing, issued and signed by the
exporter to the importer, requiring the importer to either pay on demand or accept to pay
on demand a specified sum of money at a fixed date.
 When a bill of exchange is used the seller of goods (exporter) writes and signs a bill of
exchange and then sends it to the buyer (importer) for either acceptance or payment.
 If only acceptance is required on the bill of exchange, the buyer would write the word
accepted on the face of the bill and then signs it, thus agreeing to pay for goods a certain
sum of money immediately or at an agreed future date.
 The buyer returns the accepted bill of exchange to the seller.
 Options available to the exporter when a bill of exchange has been accepted.
o He/she can hold on to the bill of exchange until maturity date when the buyer pays
cash, or
o He/she can pass it on to someone else in settlement of debts by endorsing it or
o He/she can discount the bill of exchange at an amount slightly less than its face value.
Benefits of bill of exchange to a trader in foreign trade

 An accepted bill of exchange provides evidence of a debt for goods and the seller can use
it in a court of law where the buyer defaults in payments.
 A bill of exchange allows a period of credit to a buyer (importer), during which he/she can
sell goods and then pay for them.
 A bill of exchange allows the seller (exporter) to receive immediate payment for the goods
by discounting the bill of exchange at a bank or by presenting a sight bill to the buyer for
cash payment.
 The exporter can use the bill of exchange as security to obtain an overdraft or loan from a
bank.
Types of Bills of Exchange

 There are two types of bills of exchange according to the situations in which they are used.
 Clean bill of exchange: This is a bill of exchange without others documents attached to it.
It is used where the buyer and the seller know each other well.
 Documentary Bill of Exchange: This is a bill of exchange which has other documents
relating to goods attached to it. The documents attached include bill of lading. Insurance
certificate, letter of hypothecation, invoice etc. The documents are important to the importer
because without them, the importer cannot claim ownership of the goods and therefore, he
cannot be allowed to receive them.
o On the basis of the above, the exporter draws up a bill of exchange on his/her importer
after shipping the goods and gives it together with other shipping documents to the bank.
o He/she instructs the bank to handover the documents to the importer’s bank (after the
importer has paid or accepted the bill).
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o The bank will then send them to the importer’s bank with the relevant instructions that the
importer’s bank should not release the documents until the importer has either accepted
the bill or paid the money.
o The bill is referred to as document against payment. Where the exporter ensures that
payment is demanded before goods are made available to the importer.
o The bill is referred to as document against acceptance (D/A) where the exporter makes
sure that the importer accepts the bill before the he takes possession of the goods.
o When the exporter has drawn up a bill, the bank is responsible for seeing that acceptance
or payment is made before documents are released.
o To prevent delays and storage expenses of goods if the importer fails to accept or pay the
bill the exporter attaches a letter of hypothecation to the rest of the documents. This is a
letter written by the exporter authorizing the bank to sell goods and remit the proceeds
less expenses if the importer fails to pay or accept the bill.
Balance Of Trade
Balance of Trade is the difference between the value of goods exported out of the county and
the value of goods imported into the country. In other words, it is basically the difference
between visible exports and visible imports.
Visible exports are physical goods that a country sells to other countries such as cotton,
cobalt, sugar, copper, etc.
Visible imports are physical goods that a country buys from other countries such as
computers, machinery, vehicles etc.
Balance of trade can either be favourable or unfavourable
Favourable balance of trade is when visible exports exceed visible imports.

For example:
Given;
Visible exports - K500m and
Visible imports - K300m
Balance of Trade = K500m – K300 = K200m (Trade Surplus/Favourable balance of trade)
Unfavourable Balance of Trade is when visible imports exceed visible exports.

Example:
Given;
Visible exports - K500m and
Visible imports – K900m
Balance of Trade = K500m – K900 = -K400m (Trade deficit or Unfavourable balance of trade)
Action taken by governments when there is unfavourable balance of trade

 Imposing quotas, customs duty, restriction on import licenses etc.
 Banning completely the importation of certain goods considered less important or harmful.
 Improving on export of goods.
Balance of Payment
Balance of payment is a record of a country’s financial and economic transactions with the
rest of the world over a period.
Balance of payment comprise two sections: the current account and the capital account.
The Current Account section of the balance of payment is made up of the following items:
o Visible export
o Visible import
o Invisible export
o Invisible import
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The capital account section of the balance of payment is made up of the following:
o capital inflows and
o capital outflows.
 Visible exports are physical goods that a country sells to other countries such as cotton,
cobalt, sugar, copper, etc.
 Visible imports are physical goods that a country buys from other countries such as
computers, machinery, vehicles etc.
 Invisible exports are services sold to other countries such as tourism, electricity,
manpower, transport, insurance, consultancy, banking, loans, etc.
 Invisible imports are services bought from other countries such as consultancy, banking,
insurance, loans, expatriate manpower, tourism, electricity, etc.
 Capital inflows are investments brought into Zambia by foreign residents and companies.
 Capital outflows are investments taken to other countries by Zambian residents and
companies
Balance of payment can either be favourable or unfavourable.
Balance of payment = (Visible exports + Invisible exports + Capital inflows) – (Visible imports
+ Invisible imports + Capital outflows)
Favourable Balance of Payment

Favourable balance of payment is when the total amount of money a country earns from
export trade and capital inflows exceeds the total amount the country spends on import trade
and capital inflows.
Unfavourable balance of payment

Unfavourable balance of payment is when the total amount of money a country earns from
exports trade and capital inflows is less than the total amount the country spends on import
trade and capital inflows.
Remedial Action taken by a country to improve the unfavourable balance of payment

 Imposing quotas on the importation of goods especially those considered less essential to
a country or those considered harmful.
 Imposing tariffs (customs duty).
 Banning completely the importation of certain goods considered less important or harmful.
 Improving on export of goods.
 Borrowing money from other countries or from within the country.
 Where a country has foreign exchange reserves, it can use it to offset the balance of
payment deficit.
 Where a country has invisible items or services such as tourism, electricity, consultancy
etc. which it sells to other countries, it may earn enough money to offset the unfavourable
balance of payment.
 Devalue the currency. When the Kwacha is devalued in terms of other currencies, for
example, Zambian goods in other countries will cost less in currency terms and the goods
from other countries will cost more in Kwacha terms: therefore, exports to other countries
tend to rise and imports to Zamia to decrease.
 Limiting the number of import licenses issued.
 Place limits on credit to reduce consumer spending
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Differences between Balance of Trade and Balance of Payment
Balance of trade Balance of payment

Only consists of export and import of Consists of not only exports and imports
goods. of goods but also services and capital
inflows and outflows.
Capital inflows and outflows are not Capital inflows and outflows are included.
included in the balance of trade.
It is a partial picture of the country’s It is a full picture of the country’s economic
economic status as it is just a component status as it covers all components of the
of the current account of the balance of country’s trade and capital inflows and
payment. outflows.
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BUSINESS UNITS
The term business refers to any legal activity carried out with the view of making profit.
Business can be carried out in any one or more of the following activities:
 Manufacturing or producing something for sale. Examples of this include trade Kings
limited, Lafarge Cement PLC, Zambia Breweries PLC, Bata Shoe company etc.
 Buying and selling something for a profit. Examples of this include Shoprite checkers,
pep stores, game store and other retail and wholesale firms.
 Providing services. This includes accounting and Audit firms, Banks, Insurance
companies, customs clearing and Forwarding agencies etc.
Businesses owned and controlled by the government on behalf of its citizens are called
Public corporations or Parastatals. Parastatals are in the Public Sector. Parastatals in
Zambia include Zambia Electricity Supply Corporation (ZESCO), Zambia State Insurance
Corporation (ZSIC).
Businesses privately owned by individuals or a group of individuals form the Private Sector.
These tend to do their businesses in the most profitable areas of the economy as their main
aim is to make a profit for themselves. Such businesses operate as sole traders, Partnerships,
Private Limited Companies, Public Limited Companies or even as Co-operative Societies.
The taking over of privately owned businesses and converting them into public corporations is
called nationalisation.
The transfer of business ownership from Public (government) hands to individuals (Private)
hands is called Privatisation.
TYPES OF
BUSINESS
UNITS
PRIVATE SECTOR PUBLIC SECTOR
- Sole proprietorship - Public Corporations

- Partnerships - Local Authority Enterprises
- Private limited companies - Municipal Enterprises
- Public limited companies - Statutory bodies
- Cooperatives - State Services
- Joint Ventures
- Franchises
- Multinationals companies
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The Private Sector

Reasons for setting up private sector businesses
The following are some of the reasons why people set up businesses:
 To increase personal wealth through profit maximization
 To save something for after retirement and also leave an inheritance to the family
 For personal satisfaction and self-fulfilment
 To attain maximum freedom and make decisions unlike working for another person or
government
 To attain financial security
Sole Proprietor
Sole proprietorship is a business owned by one person who raises all the capital needed to
set it up and enjoys the profits alone.
Features /Characteristics of Sole Trading

 Easy to set up
 Little capital required
 Flexible (can easily switch from one business to the other if not profitable)
 Less documentation required
 Suitable for many different businesses
 Independent and quick decisions are made
 Profits are not shared
 Business affairs kept privately (secrete)
 There is personal contact with customers
 Easy to control and manage
Advantages of Sole Trading

 It is easy to set up
 It is easy to control and manage
 It requires small amount of capital to set up
 There is independent and quick decision on how to run the business
 The owner has personal contact with customers
 Profit is not shared
 Business affairs are kept private
 Less documentations required
 It is flexible (easy to switch from one business to another if not profitable.
 Suitable for many different business e.g. retailing, butcheries.
Disadvantages of Sole Trading

 He has unlimited liability, hence, his private property can be ceased by lenders and sold to
settle business debts.
 It lacks continuity of existence
 Has no separate legal status – He can sue or be sued in his/her individual capacity.
 Has little capital for business expansion.
 Lacks borrowing capacity because of limited capacity.
Partnership
Partnership is defined as ‘the relation, which exists between persons carrying on a business in
common, with a view to profit.’
Membership
The maximum number of members in a partnership is limited to twenty in the case of a non-
banking business and ten for a banking business. Partnership firms of Solicitors, Accountants,
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Stock Exchange members and other professions like Patent Agents, Actuaries, Chartered
Engineers, Surveyors, etc., are excepted from the above maximum limit subject to certain
restrictions.
The Partnership deed

A written partnership agreement is known as ‘Partnership Deed.’ It is supposed to contain all
relevant and important matters concerning the partnership business. Written partnership
agreements will help to avoid future disputes and mis-understandings among the partners.
Contents of the Partnership Deed

A Partnership Deed also referred to as the Deed of partnership or Articles of partnership is a
written agreement between or among partners on how they will run the business.
The Partnership Deed may contain articles on the following:
 Name of the partnership firm and the nature of business carried on
 Duration of the partnership and its commencement
 Contribution of capital by each partner
 Profits and loss sharing ratios.
 Drawings by partners
 Managerial responsibilities of each partner
 Remuneration of the partners, if any
 Interest chargeable on capital contributions and drawings by the partners
 Matters regarding loans and advances by the partners
 Books of accounts and their custody
 Duties, liabilities and powers of each partner
 Provisions as to admission of new partners as well as retirement and expulsion.
 Provisions regarding revaluation of assets and liabilities of the partnership business on
death or retirement of any of the partners or on dissolution.
 Any other matter of importance to the particular type of business.
Rules in the Absence of Partnership Agreement or Partnership Deed

The rights and duties of the partners are determined by their agreement, or by the Partnership
Deed, if there is one. But if there is no agreement or Partnership Deed, the following rules will
apply according to the Partnership Act of 1890:
 Profits and losses shall be shared equality.
 All partners are to contribute equal amounts of capital to the business.
 Every partner is an agent to all other partners. This means any contract made by one
partner on behalf of the business binds all other partners.
 No partner can claim a salary for working in the partnership business.
 No partner can claim interest on his or her capital invested in business.
 Books of accounts must be kept at a place of business and all partners must have access
to the books.
 It should be realized that the Partnership Act does not apply if there is a Partnership Deed
or Agreement, as long as it is not contradicting the provisions of the law.
NB: The Partnership Act of 1890 was meant to guide the first form of partnership known as
Ordinary Partnership where all partners are actively involved in running the business and
have unlimited liability. The introduction of the Limited Partnership where some partners are
not involved in the daily running of the business and have limited liability is guided by the later
Partnership Act of 1907.
Sources of capital for partnerships

The sources of capital for a partnership include:
 Contributions made by partners from their individual savings.
 Loans from members, relatives and friends.
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 Bank loans and overdrafts.

 Trade credit. i.e. goods and services obtained on credit from suppliers.
Kinds of Partnerships
According to the nature and duration, partnerships can be classified as follows:
 General Partnerships – These are partnerships in which all the partners are with unlimited
liability.
 Limited Partnerships – Partnerships having at least one partner with limited liability, is
called a Limited Partnership. Partners with limited liability are known as ‘Limited Partners’, and
partners who are not limited partners are known as ‘General Partners’. Limited Partners are
not allowed to take an active part in the management of the partnership business, and as
such cannot act as agents of the firm.
Types of Partners
Partners can be classified into different groups on the basis of their position, interest taken by
them, their rights, duties and liabilities.
 Active Partners, Working Partners or Managing Partners: - Partners, who take an
active part in the day-to-day working and management of the firm, are called Active Partners
or Working Partners or Managing Partners. All partners, including those who are not active in
the management of the firm, are bound by the actions of the Active Partners in the ordinary
course of the business.
 Dormant or Sleeping Partners: - are partners who may not be take an active role in the
conduct of the partnership business but contribute to the capital and get a share in the profits.
 Nominal Partner: - are partners who neither contribute to the Capital or receive any share
in the profit, but simply allow their names to be used as partners in the firm.
Advantages of Partnership
 A partnership is easy to set up since it does not involve long and time consuming
procedures.
 more capital can be raised as more people are involved in the business.
 Division of labour is possible as there are many people.
 Expenses and management of the business is shared.
 The individuality of each partner is not totally lost as many of the personal advantages of
the sole trader are maintained by the partners.
 There is greater continuity in a partnership than is the case with sole proprietorship.
 Decision-making is consultative. As a result, the quality of decisions tends to be better than
that of a sole trader.
 A partnership is not required to publish its accounts annually so there is secrecy in the
business
Disadvantages of Partnership
 Decisions may be delayed by disagreements among partners.
 Partners have unlimited liability and are therefore personally liable for the debts of the
business.
 Lack of capital may limit expansion.
 If one partner leaves or dies a new partnership agreement is required.
 The firm’s ability to raise more capital is restricted because membership in a partnership is
limited to twenty (except for professional partnerships)
 One partner’s decision can be binding on the other partners even if it’s a wrong decision.
Similarities between the sole trader and the partnership

 Both the sole trader and the partnership have unlimited liability.
 Both the sole trader and the partnership have no separate legal identity.
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 Both the sole trader and the partnership have no assured continuity of existence.
 Both the sole trader and partnership business are controlled directly by the owners.
 In both the sole trader and the partnership, the business affairs are kept private. Financial
accounts are not made known to members of the public.
Comparisons of Partnership and Sole Proprietorship Businesses

Partnership Sole Proprietor
The capital of the partnership is contributed by The capital of the sole proprietor is from his
the partners saving and provided by entirely the owner of
the business
Have unlimited liabilities Have unlimited liabilities
Continuity depend on the trust and good Continuity is dependent on the good health of
working relationship developed the proprietor. Should he die, the business
most likely dies along
Profits are shared between or among the The profit is all for the proprietor
partners
Companies
A company is an association of a number of persons formed for the purpose of doing

business with a common capital (Joint Stock) contributed by all of them. A company can also
be defined as ‘an Incorporated Association which is an artificial person created by law, having
a common seal and perpetual succession.
The main Characteristics of Joint Stock companies

 Legal Entity: - A Joint Stock Company, being an artificial person created by law, has an
independent existence of its own as distinct from that of the members of the company. The
Assets owned by the company belong to the company and not the shareholders.
 Common Seal: - Being only an artificial person it is not possible for the company to sign by
itself. So there will be a Common Seal for the company and it should be affixed whenever
signature of the company is required. The common Seal of the company being so important
should be handled carefully and kept under proper custody.
 Common Capital and Transferable Shares: - Each company will have an Authorized
Capital that is divided into convenient units called Shares. These Shares are transferable.
Those who buy such shares become the members of the company.
 Principal of Limited Liability: -Even though there is provision for organizing companies
with unlimited liability, most of the companies are with limited liability.
 The Acts of the Company and its Shareholders are not mutually binding: The
Company being a separate legal entity, the acts of the shareholders will not be binding on the
company. There is no Agency-Principal Relationship between the company and its
shareholders.
 Perpetual Succession: - The Continued existence of the company is not affected by the
death, insolvency, lunacy or the retirement of its shareholders. The company will never die but
will continue to exist until it is dissolved according to the provisions of the law.
 Democratic Management: - A representative body called ‘Board of Directors’ is entrusted
with the management of the company. The Directors are elected members of the company.
Kinds of Companies
On the basis of formation and constitution, Joint Stock Companies are classified into the
following groups:
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 Statutory Companies: Companies formed by Special Act of the legislature other than the
Companies Act, are called Statutory Companies. Public utility companies such as Zambia
Railways, Zambia Electricity Corporation etc., are some of the statutory companies that can
be cited in Zambia.
 Holding Company: This is a company that has expanded its operations to include the
management of small companies that might be associated to it in its delivery of service or
production. Normally such companies would hold 51% or more shares in another company,
usually this is to safeguard its interest on the market so as to be of an added advantage as
compared to their competitors.
 Subsidiary Company: This is a small company whose major shares are held by another
bigger company already referred to as Holding Company.
 Multinational Companies: A Multinational company or corporation is an enterprise that
has subsidiaries or branches in more than one country. It is usually a public limited company.
 Unlimited Companies: There is provision for companies to be registered with the liability
of the members unlimited. In an Unlimited Company; the liability of the members is unlimited
just like partnership or one-man business. This is a disadvantage and this may be the reason
that such companies are not popular.
 Private and Public Companies: A registered company can either be Public or Private. A
Public Company is a limited company with a Share Capital, which has a Memorandum Stating
that it is a Public Company and which has been registered as such. A Private Company is a
company, which is not a Public Company.
NB: For the purpose of limitations of the syllabus, only the following will be explained
in detail:
 Private Limited companies
 Public Limited companies
 Statutory Companies (Public corporations)
Private Limited Companies

The main features of a private limited company are as follows:
 Membership is from two (2) shareholders and there is no maximum number.
 The owners of a private limited company are shareholders.
 A private limited company is registered with the Registrar of companies.
 The capital of a private limited company is raised by the sale of shares.
 A private limited company is required to hold annual general meetings.
 All shareholders in a private limited company have limited liability.
 A private limited company has a separate legal existence from its owners as it is separate
legal entity.
 A private limited company is controlled by a Board of Directors elected by fellow
shareholders at company annual general meetings.
 There is continuity of company existence even after the death of important shareholders.
 The letters LTD or the word Limited is written after the name of the company.
 Shares of private limited companies are not offered for sale to the public on the stock
exchange.
 There is restriction on transfer of shares from one person to another. Shares are usually
sold with permission of other shareholders.
 A private limited company does not need a trading certificate for it to start business
activities. It can start business immediately it is issued with a certificate of incorporation.
 Financial accounts are not filed with the Registrar of companies.
Advantages of a private limited company

 All shareholders have limited liability.
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 A private limited company has separate legal existence from the shareholders who formed
it.
 A private limited company has more capital because of more shareholders and has more
borrowing capacity.
 Contracts made on behalf of the business are enter into in the names of the company.
 Financial accounts are not advertised to the public, and therefore, a private limited
company has privacy of financial accounts.
Disadvantages of a private limited company

 Shares cannot be offered for sale to the general public. This limits the amount of capital a
private limited company can raise.
 There is restriction on transfer of shares. Shares are usually transferred with permission of
other shareholders.
 There are more formalities in forming a company. E.g. registration of the company with the
registrar of companies.
 There are more formalities in running the company, e.g. holding of annual General
Meetings, filling of financial accounts with the Registrar of companies etc.
 There is a limitation in how much capital can be raised because shares are not sold on the
stock exchange.
Differences between a Partnership and a Private Limited Company

Partnership Private Limited Company
Partners have unlimited liability except for All shareholders have limited liability
limited partners.
A partnership lacks continuity of existence. A private limited company has
The death of one partner may end the continuity of existence. The death of a
partnership business. shareholder cannot end a company.
A partnership has no separate legal A company has separate legal
existence. Partners can sue and be sued in existence.
their individual capacities.
A partnership is owned by partners. A company is owned by shareholders.
Membership is from 2 to 20 partners except Membership of a private limited
for some professional partnerships. company is 2 and there is no maximum
number.
Partnerships lack borrowing capacity. A company has greater borrowing
Thus they have less access to capital. capacity. Thus it has greater access to
capital.
There are fewer formalities in forming a There are more formalities required in
partnership. Only a partnership agreement forming a company, e.g. registering the
may be required. company with the registrar of
companies.
There are fewer formalities in running a There are more formalities in running a
partnership, e.g. financial accounts are not company e.g. annual General
required by law to be filed with the meetings, and by law, companies are
Registrar of companies. required to file accounts with the
Registrar of Companies.
Control of a partnership is shared amongst Control of a limited company is by a
the partners. board of Directors.
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Public Limited Companies (PLCS)
A Public Company is a limited company with a Share Capital, which has a Memorandum
stating that it is a Public Company and which has been registered as such.
Features of Public Limited companies

The main features of a private limited company are as follows:
 Membership is from two (2) shareholders and there is no maximum number.
 The owners of a Public Limited company are shareholders.
 A Public Limited company is registered with the Registrar of companies.
 The capital of a Public Limited company is raised by the sale of shares on the stock
exchange.
 A Public Limited company is required to hold annual general meetings.
 All shareholders in a Public Limited company have limited liability.
 A Public Limited company has a separate legal existence from its owners as it is separate
legal entity.
 A Public Limited company is controlled by a Board of Directors elected by fellow
shareholders at company annual general meetings.
 The minimum number of the members of a Board of Directors for Public Limited Company
is 2.
 The letters PLC are written after the name of the company.
 Shares of a Public Limited company are not offered for sale to the public on the stock
exchange.
 There is no restriction on transfer of shares from one person to another
 A Public Limited company needs a trading certificate for it to start business activities.
 Financial accounts are filed with the Registrar of companies and are published in the press.
Sources of capital for Public limited companies

 The sources of capital for a public limited company include the following:
 Sale of preference and ordinary shares to members of the public.
 Issuance of debentures
 Mortgaging property
 Ploughing back undistributed profits. profits
 Bank loans and overdrafts.
 Debt factoring
Advantages of a Public Limited Company

 All shareholders have limited liability.
 A Public Limited company has separate legal existence from its shareholders.
 A Public Limited company has more capital because of more shareholders and has more
borrowing capacity.
 Contracts made on behalf of the business are enter into in the name of the company.
 Shares can be advertised by means of a prospectus to the public and this creates greater
possibilities of raising greatest sums of capital.
 Public limited companies enjoy great economies of scale, thus, they are able to provide
goods in large quantities at lower costs.
 Banks are likely to lend more favourably to a public limited company because it is a large
business and less likely to default in repayment of the loan.
 Its large size allows the company to buy the latest and most modern equipment and
technology which will in turn lead to further savings in labour and overhead expenses.
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 It can afford to employ specialists in such fields as marketing, accounting, and personnel
which mean it is more efficient.
Disadvantages of a Public Limited Company

 A public limited company is difficult and expensive to form. The formalities involved are
complex, costly and time consuming.
 There are more formalities in forming a company. E.g. registration of the company with the
registrar of companies.
 There are more formalities in running the company, holding of annual General Meetings,
filling of financial accounts with the Registrar of companies etc.
 There is no privacy as its accounts are published in the press annually.
 There is the risk of “take-over” bids by other companies because shares of a public limited
company can easily be bought on the stock exchange.
 It may grow and become so big that it is difficult to manage. Decisions can be delayed
because of the amount of administration or bureaucracy involved. All important decisions
have to be taken at board meetings or annual general meetings.
Similarities between Public and Private limited companies

 Both must be registered with the registrar of companies.
 Both can be formed by a minimum of two persons and have no maximum number.
 Both are legal entities with legal statuses of their own.
 Both have their names ending with the word ‘Limited’ meaning that they have limited
liability.
 Both are controlled by a board of directors.
 Both raise their capital by the sale of shares and their ownership and capital is divided into
shares.
 Both are required to prepare a Memorandum and Articles of association prior to
registration.
 Both are legally required to hold an annual General Meeting (AGM).
Differences between Private and Public Limited companies.

Private limited companies Public limited companies
Shares are privately sold to friends, Shares are publicly sold to members of the
relatives etc., and hence the title Private public by way of prospectus hence the
Limited company. name Public limited company.
Shares are not offered for sale on the Shares are offered for sale on the stock
stock exchange. exchange.
The name of private limited company ends The name of public limited company ends
with LTD. with PLC.
Financial accounts are not advertised to Financial accounts are both advertised to
the public but are only filed with the the public and filed with the Registrar of
Registrar of companies. companies
A private limited company can start trading A public limited company cannot start
immediately it is incorporated. business until it has raised the required
capital.
A private limited company does not require A public limited company requires a trading
a trading certificate for it to start trading. certificate before it can start trading.
Shareholders in a private limited company Shareholders in a public limited company
have direct control over the company. have no direct control over the company.
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Registration Process in the Formation of Companies
Founder of a Private Ltd Company

Founders of a Public Ltd Company
Register with the registrar of companies (PACRA)

Submit: Memorandum of Association
Articles of Association
And other documents required
Receive Certificate of Incorporation from PACRA
Commence trading as a Private Ltd

co. Issue a Prospectus
Obtain capital through share issue
Receive a trading Certificate
Commence trading as a Public Ltd co.
Documents used in the Formation of Companies
In Zambia depending on the type of company one wants to form two documents may be
required to be presented to the Registrar of Companies: the memorandum of Association and
the Articles of Association. However, in the case of a Public Limited Company the documents
required will then be three. The third one being an advertisement for the sale of shares called
a Prospectus.
Memorandum of Association
This document lays down and defines the powers and limitations of the company. Its main
purpose is to govern the relationship of the company to the outside world.
Contents of the memorandum of Association

 The location of the company’s registered office.
 The name of the company.
 A statement clarifying whether it is a private or public limited company.
 The objectives of the company (i.e. whether the company is going to be producing
something, buying and selling something or providing a service.
 The statement that shareholders have limited liability.
 The amount of authorized capital i.e. the amount of capital to be raised by selling shares.
 The number of shares to be taken by each of the directors.
 The names and addresses of the first members of the Board of Directors.
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Articles of Association
This document lays down the rules and regulations for the internal affairs of the company. It
states clearly how the company is going to be run and managed.
Contents of the Articles of Association

 The rights, obligations and powers of the directors.
 The procedure for calling and conducting annual general meetings.
 The procedure of electing directors.
 The borrowing power of the company.
 The issue, transfer and forfeiture of shares.
 The procedure for dealing with any alterations in the amount of capital.
 The procedure of distributing profits and carrying out auditing.
The Certificate of incorporation

This is a document issued by the Registrar of companies to certify that the company has been
registered and incorporated as a separate legal body.
It is issued ensuring that both the memorandum and articles of association are in accordance
with the provisions of the law. It is a birth certificate of a company.
With this recognition of the company as a separate legal body, the incorporated company may
do what any ordinary person can do in its own name such as:
 Can sue or be sued in courts of law
 Enter into contracts with people and organizations.
 Own property.
 Employ people.
 Buy and sell goods and services.
Note that:
A private limited company can start business activities upon receipt of a certificate of
incorporation.
A public limited company cannot start business until it has raised the required capital by sale
of shares to members of the public. Sale of shares is done by first issuing a prospectus.
Prospectus
This is an invitation to the members of the public for the purchase of shares on offer in the
company. It is issued by promoters of a company and must be registered with the Registrar of
companies before placing it in newspapers, magazines etc. or before sending it directly to
potential shareholders.
A prospectus contains information such as:

 Promoters: Detailed information about the promoters, directors etc. and their interest in
any property being bought, number of shares and class of shares held.
 Shares: the type, number and price of shares the company is selling.
 Company performance: It should state the names of auditors and their report on the past
performance of the company and its future prospects. It should also state the value of assets
and liabilities on the latest balance sheet.
 Preliminary Expenses: The initial expenses that are incurred in the establishment of the
Company. In the purchase of fixed assets and current funds if it is a new company.
 Details of Shares: Voting rights, payments to be made on application and allotment of
shares.
When a public limited company has raised capital, it must be issued with a certificate of
trading by the Registrar of companies. With this, the company can start its business activities.
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Other Company Matters
Company Annual General Meeting

 An Annual General Meeting (AGM) is a meeting of all shareholders (owners of the
company) which should be attended by all shareholders.
 An AGM is convened to look at the yearly operations of the company
 This meeting is held every after 12 months from the time of the previous meeting, but not
after 15 months
 A member who cannot or fails to attend this meeting can appoint a proxy to represent him
at such a meeting. A proxy will have as much power to participate in all the deliberations
of the meeting, as would have the shareholder if he attended.
 This meeting is open to all shareholders and a 21 days’ notice is given before holding such
a meeting.
 The Agenda for an AGM may include the following:
o Director’s Report
o Auditor’s Report
o Declaration of dividend and statement of reserves
o Elections of new directors and directors’ remunerations (during which only ordinary
shareholders are allowed to vote on a one share one vote basis)
Extra Ordinary General Meeting

 This meeting is called anytime an urgent issue or matter has arisen, which cannot be
postponed until the next annual general meeting. And hence the directors can call for this
meeting anytime such need arises.
 If the directors do not call for such a meeting shareholders can do so by applying to the
directors to call for such a meeting only if the concerned members hold 1/10 of the paid up
share capital.
 If such a meeting is not called within 21 days, from the date of such an application, the
shareholders can hold such a meeting and any resolution passed at this meeting will be
binding.
 The agenda for such a meeting will be dependent on the reason for its convening.
Board of Directors
 A limited company is controlled and governed by a board of directors which is elected by
the shareholders during the annual general meetings.
 The members of the board vary from two in a private limited company to at least six in a
public limited company.
 The board draws up the policy of the company.
 It is headed by the chairperson.
 The powers and limitations of the board are stated in the articles of association of the
company.
 The board members may or may not be shareholders in the company.
 The day to day running of the business is in the hands of the Managing Director or general
manager, whose main role is to implement the policies of the company. He/she can be an
employee (general manager) or a director, in which case he/she would have the title of
managing director.
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The Public Sector

The public sector consists of businesses owned and controlled by:
 The Central Government on behalf of the whole population in the country e.g. ZESCO,
ZSIC etc.
 The Local Government on behalf of the local population in the district, municipal or city
councils.
Public Corporations
A public corporation is a business organization that is organized and controlled by either the
central or local government for conducting business for the benefit of the whole population.
The following are the main features of public corporations:

 Incorporation: a public corporation is set up by an act of parliament and has legal identity
separate from the government.
 Ownership: The government owns a public corporation on behalf of all citizens in the
country.
 Control: they are controlled by a Board of Directors appointed by the Minister in charge of
the ministry under which the corporation falls.
 Purpose: the purposed of forming a public corporation is to provide members of the public
with goods and services at reasonable prices.
 Sources of capital: the capital of a public corporation is provided by the central
government in form of grants. Loans may also be obtained from creditors to finance a public
corporation.
 Distribution of profits: profits made by public corporations are usually used as follows:
o To pay interest on capital borrowed
o Set aside for future repayment of loans
o Re-invested (ploughed back) in the business to improve and expand the industry,
o To improve infrastructure in the country such as building of health clinics, schools,
bridges, roads etc.
 Policy: the general policy is decided by the government in consultation with the board of
directors.
 Regulation: public corporations are regulated by parliament through select committees.
Advantages of Public corporations

 They can be used to control the provision of essential or strategic goods and services such
as electricity, marketing of minerals, water, telecommunication, etc.
 They are usually big so they enjoy enormous economies of scale which trickle down to the
public in the form of cheaper goods and services.
 They provide secure employment to a large number of local people.
 They help to implement government policies e.g. on prices of essential goods and services.
 They are a source of income to the government and therefore may help in reducing tax
such as Pay As You Earn.
 They are able to provide essential goods and services even in areas that may be deemed
to be unprofitable.
 Profits made in public corporations are used to develop the country by constructing roads,
building hospitals and schools, etc. For the benefit of the citizens.
Disadvantages of Public Corporations

 They are inefficient and wasteful with most of them operating below full capacity.
 Because of monopoly (especially those that have no competitors) they tend to provide poor
quality goods and services.
 They have too much bureaucracy and red tape in decision making.
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 They are too expensive to run and overstretch the taxpayers’ money as tax payers are
made to pay for losses made in public corporations.
 Their performance may adversely be affected by Political interference.
 The “I do not care “attitude of workers contribute to inefficiency and poor performance of
public corporations.
 Public corporations are expensive to run.
 Workers usually have no self- interest to perform duties efficiently. This results in poor
quality products being offered to the public.
Differences between a public limited company and a public corporation
Public Limited Company Public Corporation

A public limited company is formed by a A public corporation is set up by an Act
minimum of two shareholders with no of parliament.
maximum number.
Shareholders own a public limited company A public corporation is owned by the
government
The motive of forming a public limited The motive of forming a public
company is to make profit. corporation is to provide services at
reasonable prices.
The public limited company raises capital The public corporation raises capital
through the sale of shares to the public. through government grants.
The Board of directors elected by the The Board of Directors appointed by the
shareholders controls a public limited Minister in charge of the Ministry
company. controls a public corporation.
The Board of Directors controls the workings Parliament investigates the workings of
of the company. the public corporations through select
committees.
Profits made in public limited companies are Profits made in public corporations are
distributed to shareholders as dividends. used for the improvement of
infrastructure in the country e.g. building
of hospitals, schools etc.
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THE STOCK EXCHANGE
The Stock exchange is a highly organized market for capital or long-term finance. Like any
other market where buyers and sellers meet to exchange (trade) goods and services, the
Stock Exchange brings together directly (open floor trading system) or indirectly (online
trading system) the Sellers and Buyers of capital or long-term finance (securities). The Stock
Exchange is therefore a market for the purchase and sale of second hand quoted securities
(Quoted Securities are those, which may be sold on the Stock Exchange and includes equity
securities and debt securities). The most popular of these stock exchanges in the world
include: The New York Stock Exchange, the London Stock Exchange, the Tokyo Stock
Exchange etc. In Zambia, our Stock Exchange is known as the Lusaka Stock Exchange
(LuSE).
Purpose of the Stock Exchange

 Raising Capital for businesses - It helps Public limited companies to get capital through
the sale of shares to the general public.
 Promoting business activity – when people invest their savings into shares instead of
consuming or keeping it as idle deposits in banks it will promote business activity.
 Helping companies grow - through the sale of shares, takeover or Merger agreements
using the stock exchanges, companies are able to expand their; product lines, market share
and distribution channels.
 Promote good Corporate governance- Companies listed on the stock exchange
generally tend to improve on their management standards and efficiency in order to satisfy the
demands of the shareholders and the rules imposed by stock exchanges and the government.
 Provides an opportunity for institutional investment- The stock exchange enables
financial institutions such as insurance companies, building societies, pension funds etc. to
buy shares in other companies and thus invest profitably the funds collected from the general
public.
 Provision of a ready market for stocks – The stock exchange provides a ready market
where stocks and shares can be bought and sold, thus giving an incentive to investors to buy
shares.
 Creating investment opportunities for small investors- As opposed to other businesses
that require huge capital, investing in shares is open to both the large and small stock
investors because a person buys the number of shares they can afford.
 Government capital raising for development projects – To enable the government to
raise loan capital requirement to build school, hospital etc.
 Profit sharing – Those that buy shares in companies are entitled to share of profits
through dividends and also Capital gains when stock prices increase.
 It is a Barometer of the economy - The movements of share prices can be an indicator of
the general trend in the economy. Low prices reflect pessimism and a grim outlook while high
prices indicate optimism.
 Privatization policy implementation - The stock exchange provides an ideal channel for
the implementation of the privatization policy. Government owned or nationalized businesses
may be sold to interested members of the general public using the stock exchange.
 Rules and protection of trade participants- The stock exchange provide rules which
protect investors against fraudulent acts by some licensed dealers. It ensures that licensed
members of the stock exchange perform their duties in accordance with the strict rules of the
exchange.
 Publication of Share Prices- The stock exchange gives regular updates on the share
price movements for members of the general public to make informed decisions. It publishes
the prices at which shares are traded at the stock exchange (this depends on the demand and
supply of the shares).
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 Compensation – The stock exchange provides compensation for members of the public
defrauded by dealers on the stock exchange.
 Ensures that companies wishing to have their shares traded on the stock exchange meet
the rigorous rues and listing requirements of the stock exchange before their shares could be
quoted.
Primary and Secondary Trading on the Stock Exchange

When a public limited company offers shares for sale to the public for the first time on the
stock exchange, this is referred to as primary market trading.
When shares that have been bought through a primary market trading are offered for sale or
purchase at the stock exchange, this is referred to as secondary market trading.
Members of the public do not deal directly with the Securities Exchange but through
licensed brokers.
Types of Securities on the Securities Exchange

Securities is a general term used for all products that are sold and bought on the stock
exchange market platform. These are divided into two groups namely: Equity Securities and
Debt Securities.
SECURITIES
Equity Securities Debt Securities
Ordinary Shares Preference Shares Government Bonds & Corporate Bonds

Local Govt Bonds (Debentures)
Equity Securities
 These are Capital items sold or bought in form of shares.

 The buyers of such securities become part owners of the organization and are entitled to
dividends or share of profits made by the business.
 Shares take the form of Ordinary and Preference shares.
 The shares are usually sold in form of bundles and not as single shares. For example, 100
shares may be consolidated into one block for easy handling and to avoid having too
many minority shareholders. A bundle of shares sold as one is known as a Stock.
Classes of Shares
According to the rights attached to each, shares may be classified into preference shares,
ordinary shares and founder shares.
Preference Shares
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Preference Shares are that type of shares, which are entitled to some priority over the other
classes of shares in the company in that they receive dividends before the ordinary shares.
This may be a right to preference in payment of dividends when dividends are declared at a
pre-determined fixed rate, or it may be a preference in repayment of capital when the
company is wound up.
The main characteristics of preference shares are:

 They have a fixed rate of dividend. The rate of dividend is indicated in the share title e.g.
5% Preference shares.
 They have no voting rights at annual company meetings. Lack of voting rights makes
preference shareholders to have no say in the management of the company.
 Preference shareholders are first to receive:
 Dividends at the end of each successive financial year.
 Capital repayment in case of company liquidation.
Types of preference shares

Preference Shares may be of different types according to the rights attached to each.
 Cumulative Preference Shares: these are preference shares that get a fixed dividend
every year. If in one year no profits are made, they are paid in arrears in the next year when
profits are made. However, even if the company makes a big profit, they receive no more than
their fixed rate of return.
 Non-cumulative Preference Shares: these Preference Shares also have a preferential
right to receive dividends at a fixed rate just like cumulative preference shares. But if the profit
earned by the company is not sufficient to distribute dividends in one year, they will not have
any claim on arrears of dividends if the company makes a big profit in the subsequent year.
 Participating Preference Shares: these Preference Shares also have a preferential right
to receive dividends at a fixed rate just like cumulative preference shares. However,
Participating Preference Shares have a right to participate in the surplus profits of the
company after satisfying the claims of all shares. The Participating Preference Shares will first
get their fixed rate of dividend and then a share in the surplus profits, if any, along with the
ordinary shareholders. These shares also have a right to participate in the remaining balance
of assets in the event of winding up of the company. If it is not specifically mentioned,
Preference Shares are deemed to be non-participating.
 Redeemable Preference Shares: Redeemable Preference Shares are those type of
Preference Shares issued with a condition that the amount of the shares will be repaid to the
shareholders after a fixed period of time. The fixed percentage of dividend will be paid, if there
is sufficient profit, until it is redeemed.
Ordinary Shares
These are shares, which have no preferential right. The Ordinary shareholder will get a
dividend only if there is any balance of profit left after paying dividends to all the Preference
Shares. Ordinary Shares are also called Equity Shares
Characteristics of ordinary shares

 They have voting rights at annual general meetings of the company. Their right to vote
entitles them to participate in the management of the company.
 They have no fixed rate of dividend. The dividend is proposed by the board of directors
and proposed by shareholders at the annual general meetings.
 Dividends paid to ordinary shareholders vary from year to year according to company
profits. In years of losses or insufficient profits, no dividends may be declared to ordinary
shareholders but may be paid huge dividends in good years.
 Ordinary shareholders are the last to be paid;
 Dividends out of company profits and
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 Repayment of capital if a company is liquidated.

 Ordinary shareholders have the greater risk of losing capital invested in the company
because they are the last to be paid.
Deferred Shares or Founder Shares

Deferred Shares are ordinary shares which are generally issued to the promoters or founders
of the company for services rendered by them to the company. They are also called Founders
or Management shares. Payment of dividends to founders may be put off temporarily to a
later time, especially in the first years of the company’s existence until enough dividends can
be declared. It is for this reason that they are called deferred shares.
Differences between Preference Shares and Ordinary Shares

Preference shares Ordinary shares
Preference shares receive dividends before Ordinary shares receive dividends after
ordinary shares preference shares.
Preference shares do not have voting rights Ordinary shares have voting rights at
at annual general meetings annual general meetings.
Preference shares have a fixed rate of Ordinary shares have no fixed rate of
dividend dividend
They are less risky because they are the They bear greater risk because they are
first to receive dividends at the end of each the last to be paid dividends and
of each successive year and capital repayment of capital in case of company
repayment in case of company. liquidation.
Preference shares may be cumulative or Ordinary shares are usually given to
participative founder members.
Debt Securities
 These are loans or a form of borrowed capital obtained through the stock exchange by
private sector organizations or the government.
 Debt securities therefore take the form of Corporate Bonds (debentures) and Government
bonds.
 Debt Securities make up the loan capital of a company.
Debentures
A debenture is a document creating or acknowledging a debt due from a company.
The main characteristics of debentures are:

 Debentures are loans to a company.
 Debenture holders are called creditors and not shareholders.
 Debenture holders are the first to be paid a fixed rate of interest out of the company profits
before shareholders are paid their dividends. The rate of interest indicated in the
debenture title e.g. 8% Debentures.
 Debenture interest is paid to debenture holders whether the company makes profit or loss.
 Debentures are quoted on the stock exchange.
 Debentures are repaid on fixed dates.
 Debentures do not carry voting rights, and therefore do not participate in the management
of the company.
Kinds of Debentures
Debentures may be classified in two ways: according to the security pledged against them
and; according to redemption:
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According to the security pledged against them, they may be naked or mortgaged
debentures:
Mortgaged debentures or Secured Debentures

These are debentures that require valuable assets to be surrendered to lenders as security for
the loans. Generally, when Debentures are issued, a charge on the properties or assets of the
company is created, which means the assets or properties of the company are mortgaged
with the Debenture holder. If the company fails to repay the loans, expiry of the specified
period, the Debenture holder can recover the money by getting the assets.
Naked Debentures or Unsecured

These are debentures that do not require valuable assets to be surrendered to lenders as
security for the loans. Such debentures are also called Unsecured Debentures. The
unsecured Debenture holders are treated as ordinary creditors on winding up the company.
According to redemption, they may be redeemable or irredeemable.
 Redeemable Debentures
These are debentures whose amount, whether secured or unsecured, can be redeemed
(bought back or repaid) by the company after the expiry of a fixed period. They are issued for
a fixed period of time.
 Irredeemable or Perpetual Debentures

These are debentures which can never be redeemed (bought back or repaid) by the
company. The money borrowed against them remains outstanding until the Company is
liquidated. Their date or the period of redemption of Debentures is not fixed. The holders of
irredeemable debentures keep getting interest against their debentures indefinitely.
Differences between Shares and Debentures

Shares Debentures
Shares are part of the Company’s Share A Debenture is a loan due by the Company
Capital
A Shareholder gets dividends Debenture holders get interest for the
amount of the Debenture
A Shareholder is a member of the company A Debenture holder is only a creditor of the
company
The rate of dividend received by a Interest on debentures is definite and at a
Shareholder varies according to the profit fixed rate
earned by the company (Ordinary
Shareholders)
A Shareholder is entitled to vote and can A Debenture holder cannot vote or
participate in the management of the participate in management.
business as Director.
The Share amount is not refunded except in The Debenture amount may be refunded
the case of Redeemable Preference Shares after a fixed period.
or on winding up.
On winding up of the company, Debentures as creditors of the company
shareholders will get anything only after have first priority in getting their share upon
paying the Debenture holders. the winding up of the company.
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Bonds
Bonds on the stock exchange may be divided into two types; Corporate bonds and
Government Bonds.
Corporate bonds or Debentures

These are loans provided by lenders at the stock exchange to a company which are repaid
with interest after a specified period of time. Debenture holders do not become part owners of
the company and do not take part in the profit sharing. It is however a very safe way of
investing in private sectors businesses on the lender’s side as the money and the interest is
repaid whether the business is making some profit or not.
Government bonds and local government bonds

These are loans obtained by the central government to finance expenditures which are not at
present to be met by taxation such as war loans and for construction of roads, bridges and
power stations. These are usually viewed as the safest by the stock exchange lenders as
repayment by the government is guaranteed.
The capital of a company may be made up of share capital and loan capital.
Authorised Capital
Equity/Share Capital Debt/Loan Capital (Debentures)
Ordinary Preference Naked Redeemable Mortgaged Irredeemable

Shares Shares Debentures Debentures Debentures debentures
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THE LUSAKA SECURITIES EXCHANGE
The Lusaka Securities Exchange (LuSE) like any other stock exchange is a market place
which deals with Primary Issuance (first issue) and Secondary trading of Securities. It was
established in 1993 under a preparatory funding from the UNDP and IFC/World Bank as a
capital market development project. LuSE started its formal operations on 21st February 1994.
The main driver to its formation was to privatise public corporations and to enable the private
sector access to finance.
Purpose/Functions of the Lusaka Securities Exchange

 To be a source of cheaper, long term finance
 To encourage local and foreign investment
 To assist in empowering Zambians through wider ownership of shares
 To reduce government interest in parastatals
 To provide an efficient, fair, orderly and transparent market for secondary trading in shares
and other marketable securities.
The Main Players on the Stock Exchange

Participants in the stock market range from small individual stock investors (represented by
Stock Brokers) to large hedge fund traders also known as Jobbers.
Stock broker
 Is a regulated professional who buys and sells shares and other securities on behalf of
investors who are not allowed to do business on the stock exchange.
 They act on behalf of the investors and must follow their investor’s instructions.
 They offer advice to their principals on various investment options to take.
 Due to their important role played at the exchange brokers assume the role of Investment
Consultants.
 They may also buy and sell shares on their own account.
 Examples of stock brokers on the Lusaka Securities Exchange are: Pangaea/Renaissance,
Intermarket Securities and Stockbrokers Zambia.
When a broker acts as a dealer at the stock exchange, he performs the following
duties:
 He buys and sells shares for himself as a principal with a view to make profit.
 He deals with stockbrokers and not with members of the public.
 He may specialize in certain types of securities (shares). For example, he may specialize
in mining shares only or in oil shares.
 He is a market maker who quotes prices of certain stocks and shares on the stock
exchange.
 He prepares documentation, for example he prepares a contract not when a deal to buy or
sell shares is concluded.
 He advises clients on market conditions etc.
Dealers
 A dealer is an investor who buys stocks only to resell them at a profit very quickly.
 Dealers do not deal with the general public but operate on their own behalf, aiming to make
a profit called the jobber’s turn by buying shares at a low price and selling at a high price.
 Jobbers are similar to wholesalers in that they hold various quantities of shares that they
are willing to sell to brokers in large or small amounts.
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 They normally specialise in a fairly narrow range of securities and of course they develop a
detailed knowledge of them.
Other participants on the stock exchange
Listed Companies
 Listed companies are companies whose shares are registered with the stock exchange
Commission for public trading on the Lusaka Securities Exchange.
o They are companies that have:
o Met the LUSE listing requirements.
o Their listings approved by the LUSE listing committee and the full LUSE Board.
o Paid the listing fee in accordance with the market value of their issued capital.
 Private investors
Private investors are individuals who have cash, which they can save or invest by buying
shares of selected companies traded on the stock exchange.
 Institutional investors
These are companies and institutions that invest money in company shares. Examples of
institutional investors include insurance companies, pension funds, building societies etc.
 Underwriters
Underwriters are investors who agree to buy a certain number of shares that are being issued
on the stock exchange usually by a new company if the public does not buy them.
Underwriting ensures that a certain number of shares will definitely be sold so that there will
be sufficient funds to start the business width.
 The Government
The government sells stocks or bonds on the stock exchange to raise loan capital for building
schools, hospitals, bridges, buying military equipment etc.
 Foreign investors
Foreign investors can invest in growth sectors of tourism, agriculture, mining, banking and
many more and enjoy high returns.
 Merchant Banks
These play an important role in public issue process of shares. They act as a bankers
facilitating fund transfers among share buyers and sellers. They also at times act as brokers
on behalf of their clients.
The Securities and Exchange Commission of Zambia

Going by the vast numbers of participants and the billions of dollars or Kwacha traded on the
stock exchange, there is need for some regulatory mechanisms. The main regulator of the
Stock Exchange is the Securities and Exchange Commission (SEC).
The Securities and Exchange Commission was established by an Act of parliament in 1993 as
a statutory body to regulate the capital market in Zambia.
The roles of the Securities and Exchange Commission is to:

 Give licenses to stock exchange participants.
 Act as the stock exchange police.
 Ensure that only registered shares of a public company are traded on the stock exchange.
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 Control the compensation fund meant to compensate persons who suffer losses due to
default by the dealer or investment advisors.
 Authorize all collective investment schemes.
 License any securities market.
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BANKING
What is Banking?
Banking is an Aid to trade that helps to safeguard funds through various accounts offered and
provides finance.
What is a Bank?
A bank is a financial institution which collects surplus funds from the general public,
safeguards them, lends out at an interest some of the funds not required immediately by true
owners.
Financial Institutions- All financial institutions are categorized under either Banking
Institutions or Non-Banking institutions.
Banking Financial Institutions

 Central banks
 Commercial banks
 Building societies
 Savings and credit banks
Non-Banking Financial Institutions

 Bureau de change
 Discount houses/Merchant banks
 Pension funds institutions
 Insurance companies
 Micro Finance institutions
 Clearing houses
Services provided by Banking Institutions
 Providing Standing order or banker’s order services for making and receiving payments.
 Providing Credit transfer (bank Giro credit system) services for making and receiving
payments.
 Providing Direct debiting services for making and receiving payments.
 Providing Night safe facilities for depositing money after bank working hours.
 Providing Automated teller machine facilities for cash withdrawals, cash deposits as well as
for making payments and receiving bank statements.
 Providing Point of sales services that enable account holders to pay for goods and services
using their debit and credit cards.
 Providing Credit cards to qualifying customers that enable them to buy goods beyond the
money they have in their bank accounts.
 Providing Mobile banking services to enable bank customers to transact using mobile
phones.
 Providing Internet banking services to enable bank customers to buy, sell and transfer
funds online.
 To provide personal and business finance through Overdrafts, loans, mortgages etc.
 To provide international traders with travelers cheques to enable them to transact while
abroad.
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Standing Order or Banker’s Order or Stop Order

 A standing order is an instruction to the bank by its customer to pay fixed sums of money at
regular intervals to specified person or organization.
 It is used when making regular payments of a fixed sum, which must not be paid once but
repeatedly over a period of time.
 The account holder provides the bank with a written order to regularly debit money from
his/her account and pay it to the payee’s account. He/she states the name of the payee,
account number, bank branch, date of payment and amount to be paid.
 The bank makes payment for the customer for as long as there is enough money in the
customer’s bank account.
 The bank will continue paying until the customer instructs the bank to stop. The bank
charges a fee for this service.
Uses of a standing order

 when paying for hire purchase instalments
 When paying for insurance premiums
 When paying for mortgages etc.
 When paying for club subscription.
The benefits of using Standing order include:

 The customer does not need to remember dates on which to make payments.
 It is a safer and cheaper method of payment than sending cash or cheques by post.
 Payments are made promptly.
 No time is wasted in counting money and in depositing money at a bank.
 The customer receives payments promptly, and thus can make good business plans for his
money.
 He is saved the troubles of sending reminders to debtors.
 No time is wasted in counting money and in depositing money at a bank.
Credit Transfer (Bank Giro Credit System)

 This is a facility provided to current account holders for making payments directly into the
payee’s account. It can be used for making both single and multiple payments to large
numbers of people. It is available to business customers, companies, parastatals, and
both local and central government entities handling large payments which result into
writing many cheques or carrying a lot of cash around.
 The customer fills a form at the bank stating the payee’s name bank and branch, account
number and amount to be paid for each payee and pays the total by one cheque to the
bank or simply instructs the bank to take money out of his bank account and pay it out to
the respective payee(s).
 The bank transfers the amount to the payees’ accounts as instructed, usually electronically.
 Funds can be transferred electronically to another account at the same branch, to accounts
at another branch or to accounts at a different bank.
 It is an instant and fast means of payment and funds are available in the beneficiaries’
account the same day and time.
 Only one debit entry is made into the customer’s account against numerous payments.
 Charges are levied by the bank for the service
 Software can be installed at the customer’s computers to facilitate this transaction.
 The person or organization being paid by credit transfer must have a bank account, but the
person making payment may not operate one.
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Uses of a credit transfer

 When making payments to several people at once. E.g. a company can use it for paying
workers’ salaries or dividends to shareholders or when paying several traders at once.
 When paying an individual person or organisation. E.g. paying Zesco only for electricity
bills.
 The benefits of using this service are:
 Funds are transferred directly into bank accounts of people to be paid using only one
cheque.
 Paper or clerical work is greatly minimized.
 Credit transfer saves time when paying several people.
 It is a safer and more secure method of making payments.
 There are no restrictions on the number of payees one can pay at a time.
 The customer is able to receive payment promptly.
 Time is not wasted in counting money.
 It means improved control over receipts which means the business would have a
predictable cash flow.
Direct Debiting
 Direct debiting is used for making payments that vary in amounts from time to time.
 The current account holder authorises his bank to pay as soon as the creditor asks for
payment. He then informs his creditor to submit a copy of the bills to his banker for
payment. Upon receipt of the bill, the bank would immediately effect the payment.
 Amounts paid to the creditor may vary and payable on varying dates fixed by the creditor.
Uses of direct debiting

 Paying annual subscriptions to professional bodies.
 Paying water, electricity and telephone bills.
 Paying for supplies on a regular basis.
 The benefits of using this service are:
 Direct debiting enables payments that vary in amounts to be paid from time to time. This
reduces clerical work, as there is no need to change or altered record whenever there is
an increase or decrease in amounts to be paid.
 The customer does not need to remember dates on which to make payments.
 Payments are made promptly.
 Cheques do not have to be written hence saving on stationery.
 Payments are received on dates wanted by the creditor.
 Direct debits avoid outstanding debts and bad debts.
 Payments are received promptly.
 Direct debit is safer and more secure method of payment.
 The creditor can ask for payment from the debtor’s bank at any time payment is due.
Night Safe Facility

Night safe facility enables bank customers to deposit money when banks are closed.
Procedures for night safe facility

 Cash for depositing is placed in a lockable leather bag supplied by the bank together with
completed paying in slips.
 The leather bag or cash wallet is then dropped into the night safe through an opening in the
bank wall.
 The following day, the bank customer collects his or her wallet and then deposits money in
the usual way.
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Automated Teller Machine – Cash Dispenser (ATM)

 These are machines from which account holder can withdraw money.
 They are situated outside the bank building so money can be obtained 24 hours a day.
 The customer is provided with a coded plastic cash card (ATM card) and a secret Personal
Identification Number or PIN.
 To obtain money from his/her account the customer inserts the card into the machine and
enters his/her PIN and the amount of money to be withdrawn. The machine then gives the
money, provided there are sufficient funds in the account.
 More sophisticated Teller machines can now accept deposits, transfer money from one
account to another, issue mini-statements and even accept orders for chequebooks or full
statements.
The benefits of using Automated Teller Machine include:

 Cash withdrawals, deposits and account information are readily available, 24 hours a day
 There is no need to go to the bank and waste time queuing for cashier services as you can
withdraw money and even obtain mini-statements from the ATM
 Customers know where they stand financially because mini-statements can be obtained
from the machine any time.
 Customers can choose their own PIN for security purpose. The PIN can also be changed
as often as necessary.
 Surplus balance can be moved to interest bearing accounts without going into the bank
(only available on application)
 There are many ATM outlets around the country so no need to carry large sums of money
in cash when travelling (and risk losing it to thieves)
 It is quick and easy to use and the card is even easier to carry than a cheque book
 There is no fee for using ATM cards
 The can be used to buy at POS and so it is a “tow-in-one” i.e. a cash and a debit card. The
term debit card here means that it enables money to be deducted from your account and
transferred to the trader’s account, at the POS terminal where you use the card for buying
goods/services.
Limitations of the Automated Teller Machine

 There is a limit on the daily withdrawals by ATM cards. For example, the ATM cardholder
cannot withdraw more than K5 000 each day, with his/her ATM card. This means the
customer still has to go and queue in the bank if he/she would like to withdraw more cash.
 The mini statement provided by ATM only shows the last transaction and balance, so it is
not a comprehensive or detailed statement.
 Using the card to buy goods at POS terminals tempts people to overspend, as there is no
limit to the amount one can spend. The only limit is the amount of money available in
one’s account.
Point of Sales Services
 This is a way provided by some banks for their customers to pay for goods and services
using ATM card, in shops where POS terminals are installed.
 The terminal has a small machine, which automatically dials into the computer centre to
obtain an authority to pay for each transaction.
 To use the card for paying for goods, the customer goes to a shop where the terminal is
installed and collects the goods he/she would like to buy and gives his/her ATM card to
the cashier at the till.
 The cashier would swipe the card through a special machine (POS terminal) to obtain
authorisation to deduct money from the customer’s account.
 When the permission is obtained the customer is given a small slip issued by the machine.
 The slip is like a withdrawal slip; it instructs the bank to debit the customer’s account by the
invoice amount.
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 After everything has been done the money is then electronically transferred from the
customer’s account to the trader’s account. This service is also known as Electronic Fund
Transfer at the Point of Sale (EFTPOS)
Features of POS
 The card is used to pay for goods and services at POS terminals
 The trader swipes the ATM card on the POS terminal in order to obtain permission to debit
the customer’s account. This swipe automatically dials at the computer centre of the bank
i.e. a message is sent to the computer centre by the small machine at the POS terminal
 Such authorisation would be forthcoming as long as there is money in his/her account the
permission would not be granted if there were insufficient money.
 Money is transferred electronically from the cardholder’s account to the merchant’s
account.
 Some of the benefits of using this service are:
 It is safe and simple to operate by merchants
 It involves less handling of cash and therefore is less risky
 No returned cheque problem. When customers pay by cheque there are always cases of
dishonoured cheques.
 There is no limit on the number of transactions or amount you can spend per day. The
holder is only limited by available funds in his/her account
 It reduces the need to carry cash or chequebook. You just carry the ATM card
 Automatic authorisation of transaction makes it fast and convenient
 The account is automatically updated once a transaction has been authorised.
Credit Cards
A credit card is a card that enables the holder to buy goods and services on credit from
certain businesses (which could be shops, hotels/restaurants, garages or petrol stations).
Credit card companies such as Access, Barclay card, Premium card and VISA issue them.
The credit card companies enrol businesses that are prepared to accept its cards in payment
for goods and services and also enrol people who want to use their credit cards. The credit
card holder pays an annual fee for their cards and has a credit limit, which is the maximum
they can have outstanding on their account.
The procedure for use of a credit card

 Upon selection of goods wanted from a retail shop, the card holder presents the credit card
to the shop owner.
 The shop owner then prepares an invoice or voucher, quoting the card holder’s name and
his identification number. The cardholder would be required to sign the invoice or
voucher. The signature on the voucher must appear the same as the specimen signature
on the credit card.
 The shop owner then sends the invoice to the company that issued the credit card
requesting it to pay the money for the goods or services supplied to the cardholder.
 Upon receipt of the bill, the company immediately pays it off, but less a commission, and
then charges the cardholders’ account with the full invoice price.
 Each month the cardholder receives a statement from the credit company, setting out a
record of the purchases made using the credit card and the total amount he/she owes the
credit card company. He/she then settles the account by cheque.
The circumstances in which a credit card might be used are:

 When shopping at retail shops.
 When paying for meals at hotels, restaurants etc.
 When paying for accommodation at hotels etc.
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 When paying for fuel at garages.

 When drawing cash at banks that belong to the credited card scheme e.g. Drawing cash at
the branches of banks operating Access, Barclay or American Express Credit Card
schemes.
 The benefits of using this service include:
 The cardholder is allowed to have easy credit for goods and services.
 Ownership of goods passes to him or her immediately he or she signs the invoice or
voucher.
 The card holder does not need to carry cash.
 Several bills can be settled by issuing one cheque per month. This allows the card holder
to make savings on bank charges.
 The shop owner receives payments promptly.
 Cash flow problems are erased since banks pay him or her promptly.
 Has increased sales because cardholders get more goods from the shop.
 Uses fewer documents e.g. no need to complete hire purchase documents.
 The shop owner suffers no bad debts.
 The bank or credit company is able to make more money in interest charges on
cardholders’ outstanding balances, and on amounts charged on each shop owner’s sales.
Mobile Banking /Telebanking

 A special facility which is offered by the banks to their account holders on their request.
 It is a service which allows its customers to perform transactions over the telephone.
This normally includes bill payments for bills from major billers (e.g. for electricity) PIN is
used to access the bank account.
 The service offers bank account holders access to their bank accounts 24 hours daily.
 With this facility, the account holder is able to:
o Pay bills such as electricity and water bills.
o Check the account balance.
o Balance Transfer Facility (BTF) from one account to another account.
o Requesting cheque books.
o Buy airtime from mobile service providers
o Sending money to another person
Internet Banking
 It is a term used for performing transactions, payments etc. over the Internet through a
bank.
 Customer has to open the bank’s website to access this service.
 PIN code is used for authentication.
 Facilities are same as Telebanking.
Online Payment Services

 Payment can be deposited into payee’s account through internet.
 Used for both local and especially more common in international transactions.
 Payer has to go to any branch of the bank where payee holds his account.
 Payer has to fill in ‘online deposit slip’ by mentioning payees account number and branch
name and code.
 Bank where payer deposits the money will remit it to payee’s bank branch.
 Remittance will be made in a few minutes.
 Remittance is sending of money without physical movement of money.
Overdraft
 An overdraft is an arrangement where a bank customer is allowed to withdraw more money
than his or her balance in the current account up to an agreed limit.
NOT FOR SALE

 It is a short term finance obtained to meet short term financial needs such as paying for
insurance premiums wages, water, electricity and telephone bills as well as buying stock.
 When an overdraft is granted and the bank account is overdrawn, the account is debited
with the sum of an overdraft and the figure overdrawn may be printed in red.
 Deposits made in the current account reduce and even cancels out overdrafts balances.
 Interest on overdrafts is calculated on amounts actually overdrawn and is charged on daily
outstanding balance.
 The rate of interest on an overdraft is not fixed.
Bank Loans
 A bank loan is a fixed sum of money borrowed by a customer for a specific purpose,
usually for the purchase of a capital item.
 A business may for example, apply for a loan to purchase a building, equipment and
machinery’ used in operation or to buy trucks used for delivering goods to customers and
collecting raw materials from suppliers
 The amount of the loan is credited to customer’s current account as if the customer is
depositing his or her own money.
 As the loan is being credited to customer’s account, a loan account is also opened to which
the amount of the loan and interest to be charged is debited.
 A loan is repaid in fixed instalments.
 A fixed rate of interest is paid on full amount of the loan. Interest on a loan is paid whether
the borrower uses the loan or not.
 Before a loan is granted, the bank may require some kind of security in form of life
assurance policy, shares in a company, a farm or any valuable asset, which can be
surrendered to the bank so that in case of default by the borrower, the bank can sell it to
recover the amount of the loan.
Procedures for obtaining a loan

 To get a loan a customer fills in a loan application form stating his/her particulars and the
amount and purpose for which the loan is required.
 Before the bank manager decides whether or not to give a customer a bank loan he would
require the customer to show a simple budget i.e. monthly income and expenditure, so as
to determine whether the customer can afford to make the necessary repayments.
Factors the bank manager would consider before granting a loan include:
 The purpose for which the loan is required, a quotation may be required if it is for the
purchase of properties.
 The amount of the loan i.e. how much money the customer needs;
 The security against which the loan would be given, preferably an immovable asset either a
house or land.
 Banks may also accept a written letter of guarantee from a recognised guarantor or
employer. Assets such as shares, life assurance policies and even money kept in a fixed
deposit account are accepted as security.
 In addition, the bank manager might also want to ascertain the credit worthiness of the
customer, for example, the manager would make inquiries to establish whether the
customer has other loans with other institutions that he/she has failed to pay.
Four key facts the customer should consider before borrowing money:
 The rate of interest i.e. how much the bank charges for lending the money
 The instalment amount or how much the customer would pay every month
 The repayable period i.e. for how many months or years is the loan given; and finally
 The total amount of money to be repaid after the calculation of interest and other charges.
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The Difference between Bank Loan and Overdraft

Bank loan Bank Overdraft
Usually used for the purchase of Capital Used for short-term financial needs
items
Collateral security is required Mostly does not require security
Interest is charged on the full amount Interest charged on the amount over-drawn
It is an expensive way of borrowing It is a cheaper way of borrowing
It’s a formal way of borrowing It is an informal way of borrowing
When granted a loan an account is No separate a/c opened for repayment
opened
Money deposited has no effect on Loan Money deposited affects the amount of
overdraft
Mortgages
 A mortgage is a loan given to a customer of a bank or building society in form of expensive
property such as a house.
 A person buying property by means of a mortgage becomes the owner of the property
immediately the mortgage is granted, but he/she cannot sell the property until the entire
loan has been paid back.
 Mortgage lending is long term finance. Loans are usually repaid over a period of 20 to 25
years.
Travellers’ Cheque
This is the most suitable way of carrying money when going out of the country. The traveller’s
cheques are bought by or issued to the traveller in local or foreign currency. The traveller
signs it in the presence of the issuing bank official. Traveller’s cheques can be exchanged for
cash when they are signed again in the presence of another bank official in the foreign
country. They are safer to carry than cash, as they are valueless until countersigned by the
person to whom they were issued. Traveller’s cheques can be used to buy goods and
services. While he is away a traveller can approach any shop or his hotel, sign them a second
time and receive value or cash for them. The shopkeeper or other persons whose
goods/services have been bought with traveller’s cheques will simply deposit them into their
own bank account, just like any other cheque.
Types of Accounts offered by Financial Institutions
Current Account
 A current account is used by individuals and organizations that wish to safe keep money
but would also like to withdraw some of the money at any time.
 It uses cheques for withdrawing cash from the account and also for making payments. For
this reason, a current account is referred to as a cheque account.
 There is no minimum balance required to maintain the current account.
 It is the only bank account that can be overdrawn or allows overdrafts.
 There is no interest paid on deposits.
 The customer pays ledger fees since he or she is allowed to deposit and withdraw at any
time.
 Cheque books are issued to current account holders.
 Bank statements are periodically issued to customers, which provide them with a record of
deposits, withdraws and current bank balance for the month.
Opening a Current Account

 An application form for opening a current account is completed.
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 The bank might be interested in knowing whether the prospective customer is honest or
not, and therefore, would ask the applicant for referees.
 The bank would also ask the prospective customer to sign a specimen signature card. This
helps the bank to recognize signatures of its customers and thus avoid forgery on
cheques.
 Once the bank is satisfied with the details given by the applicant, it would allow for a
current account to be opened. A cheque book would be issued to the new customer.
Advantages of holding a current account to a bank customer

 The customer is able to make payments by cheque and keep used cheques as receipts of
payments.
 A customer can be allowed to have an overdraft when faced with temporary financial
difficulties.
 The customer is allowed to use night safe facilities.
 The customer is able to make payments by credit transfer, standing order and direct order.
 The customer is able to get loans.
 No minimum balance required to maintain the account.
 The customer can obtain foreign exchange.
 Safe keeps customer’s money.
Savings Account
 A savings account is used by people who wish to save fairly small amounts of money.
 A minimum balance is required to maintain the account.
 Interest is paid on savings account.
Advantages of holding a savings account.

 Interest is paid on savings account deposits.
 Safe keeps the customer.
 Able to obtain foreign exchange.
 Able to receive financial advice on investments.
 Customers have easy access to their money. They do not need to give notice to withdraw
money from the bank.
 Withdrawals can be made at ATMs at any time.
Disadvantages of a savings account

 There is a limit on the daily withdrawals.
 No cheque books are provided, so the customer has to personally get to the bank and
withdraw the money.
Fixed Deposit Account

 A deposit account is used by bank customers who wish to safe keep large sums of money
not needed for immediate use.
 Money can only be withdrawn from a deposit account after an agreed fixed period. The
customer is charged interest if money is withdrawn before the agreed period.
 Capital and interest is repaid in full on maturity.
 There is minimum investments capital required for one to open a fixed deposits account.
 Overdraft facilities are not allowed on fixed deposit accounts.
 Interest on a deposit account is fixed.
Advantages of holding a fixed deposit account

 A higher rate of interest is paid on deposits.
 Safe keeps customer’s money.
 Can receive financial advice on investment.
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 No fees charged for operating a deposit account.

 Capital and interest is repaid in full on maturity.
 Enables depositors to choose an investment period suitable to their needs.
Documents used in Banking

 Bank Statement - A bank statement or account statement is a summary of financial
transactions which have occurred over a given period on a bank account held by a person or
business with a financial institution.
 Cheque - A cheque or check is a document that orders a bank to pay a specific amount of
money from a person's account to the person in whose name the cheque has been issued.
 Cheque book - A cheque book is a book of cheques which the bank gives to account
holders (especially Current Account holders) so that you can pay for things by cheque.
 Deposit Slip- A deposit slip is a small written form that is sometimes used to deposit funds
into a bank account. A deposit slip indicates the date, the name of the depositor, the
depositor's account number and the amounts of checks, cash and coin being deposited.
 Withdrawal Slip -a small paper form which has to be filled in before making
a withdrawal of money from a bank, building society, etc. The teller checks the signature on
the withdrawal slip and the details on the withdrawer’s identity card (National Registration
Card or Passport or Driver’s licence).
 ATM Slip - This is a print out from the Automated Teller Machine after one makes a
transaction. In case of cash withdrawal, when you get less or no cash at all, the ATM
slip becomes handy for dispute resolution telling the exact date/time of transaction and
reference number etc.
Means of Payment
The means of payment through banks include the following:
 The Cheque
 Standing Order
 Direct debit
 Bankers Draft
 EFTPOS
 Online Payment service
The Cheque
A written order by a current account holder to a bank to pay a specified amount of money to
the bearer or person named on the cheque.
A written order by the drawer to the drawee to pay a specified amount of money to the payee.
Features found on a cheque

 Bank name and branch - Drawee
 Name of the cheque recipient -Payee
 Name of the cheque issuant- Drawer
 Signature of the cheque issuant (drawer)
 Date of issue
 Account number
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 Cheque number
 Cheque book number
 Amount in figures
 Amount in words
 Branch code
Parties to a Cheque
The Drawee
The bank upon which the cheque is drawn or the bank where the account is held is known as
the drawee. Normally the cheques will bear the name, branch and any other details relating to
the address of the bank.
The Payee
This is the person to whom moneys are to be paid upon the presentation of the cheque at the
bank.
The Drawer
This is the person who issues out the cheque. Often the drawer name or signature is printed
beneath the box in which the figures are written. This is the name or signature of the account
holder. Whatever the case the position of the name or signature does not matter, what
matters is the fact that the drawer’s name or signature should be on the cheque.
Advantages of using cheques as a means of payment

 Cheques are safer and more convenient. Cheques can be made out of any amount and is
not bulky. It reduces the risks of and need for carrying large sums of money around.
 The clearing system of cheques provides a proof of payment so no receipt is required when
paying someone by cheque.
 Cheques are numbered so they can be traced if lost or stolen
 Less time is spent counting money and the account can be more easily checked
 Cheques can be safely sent by post especially when crossed
 Payment may be stopped if necessary. The drawer simply gives a written instruction to the
bank not to pay such a cheque and when it reaches the bank it would be dishonoured.
 The cheque stab that remains in the cheque book provides a record of payment made and
the customer can easily carry out bank reconciliation’s.
Disadvantages of using cheques as a means of payment

 Cheques are not legal tender so one cannot be forced to accept them in payment
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 Cheques may be valueless if the drawer has no money in his/her account

 Cheques need to be taken and possibly paid into a bank account thereby wasting time.
 Cheques are not practical for paying small debts e.g. when paying a bus fare or buying
only one sweet
 Some people do not have bank accounts so paying them by crossed cheque may simply
inconvenience them.
 Banks charge for issuing cheque books and charge for each transaction processed. This
constitutes unnecessary expenses.
Types of Cheques
 Open cheque is cheque which is cashable over the counter of the particular bank on which
it is drawn.
 Bearer cheque: A cheque which is payable to the holder.
 Order cheque: A cheque which is payable to specific person. If the first payee wants to
give the cheque to another person, he must endorse the cheque to him with his sign.
 Crossed cheque is a cheque which cannot be cashed over a counter but must be paid into
an account.
Credit Transfer
Suitable for making payments to a number of payees at the same time. Used to pay salaries,
rents, hire purchases instalments. Payer gives information of payees in written to the bank.
Payer writes a cheque in the favour of the bank of the whole amount to be paid.
NB: Details under notes for services offered by banking institutions
Bank Draft
Issued by the bank in favour of seller on the advice of the buyer. The buyer approaches the
bank with the request and payment in cash or through cross cheques in favour of the bank.
The buyer has to pay bank charges in addition to the amount of payment. It is a secured
means of payment. Usually suitable when buyer and seller are not known to each other, and
seller wants secure means of payment (of course bank is more reputable than a person).
NB: Details of the notes under services offered by banking institutions.
EFTPOS
Electronic Fund Transfer at the Point of Sale is a means of payment provided by some banks
for their customers to pay for goods and services using ATM cards (debt cards), in shops
where POS terminals are installed.
NB: Detailed notes under services offered by banking institutions
Bills of Exchange
 A bill of exchange is an unconditional order in writing addressed by one person to another,
signed by the person giving it, requiring the person to whom it is addressed to pay on demand
or at a fixed or determinable future time a certain sum in money to or to the order of a
specified person.
 A bill of exchange is a method of payment in overseas trade whereby the seller of goods
writes a document and the buyer signs that document agreeing to pay for goods supplied to
him or her on demand or at some future date.
 After the buyer has signed the bill, the document is returned to the seller.
 Where the buyer needs the cash urgently, he will discount the bill of exchange at a bank.
 Where the seller needs the cash urgently, he will discount the bill of exchange at a bank.
 Discounting a bill of exchange means cashing the bill at a bank in the same way a cheque
is cashed, but a bill of exchange is cashed at a less value. The bank pays less money
because it has to wait for money from the buyer. Thus the cash given to the seller is indeed
some form of a loan or an advance.
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Documentary Credits
 A documentary credit is a method of payment in overseas trade whereby the importer
requests his or her bank to arrange for a credit to be opened for the exporter at a bank in the
exporter’s country.
 The exporter receives payment for goods immediately he presents the documents that
prove dispatch of goods to the importer such as bill of lading, insurance certificates etc. at a
bank where the credit has been opened.
 There are different kinds of documentary credits. The best of all, however, is confirmed
irrevocable documentary credit.
The advantages of documentary credits include:

 Payment for goods consigned to the importer is guaranteed by the importer’s bank.
 The exporter does not have to worry about the credit worthiness of the importer.
 The importer is allowed a period of credit.
 The exporter receives payment for goods immediately he presents the necessary
documents proving dispatch of goods to the importer.
The Central Bank
The Central bank is a country’s bank that controls the financial activities in a country. The
Bank of Zambia is Zambia’s central bank. It is run by the governor and a board of directors.
The governor is appointed by the republican president. The main clients include the
government and commercial banks.
Functions of the Central Bank

 Printing and minting of money.
 To act as a bank for all commercial banks (Banker’s bank)
 To be a banker to the central Government and Government departments.
 To be a lender of the last resort for commercial banks and other financial institutions.
 To supervise the exchange rate
 To supervise the banking system
 To service the national debt
 To advise the central government on monetary policy matters such as inflation, taxation
and exchange rates.
 Management of the country’s foreign reserves by controlling the amount of foreign currency
that is made available for buying goods and services from other countries.
 To provide protection against counterfeit money.
The Bank – Cheque Clearing System

The clearing system is a process by which various banks come together and settle the
amounts they owe each other as a result of their customers’ business transactions.
It takes place in a place called the clearinghouse. Initially this house was situated at the
Central bank, which is the Bank of Zambia (BOZ).
Each bank has a separate clearing department whose work is to deal with cheques once their
customers have paid them. There used to be four ways by which banks clear cheques. This
time around only two systems are applicable.
 Branch Clearing
o This clearing takes place when both the payee and the drawer bank at the same branch.
o The branch simply transfers the amount from the drawer’s account to the payee’s account
o The cheque does not need to go to the clearinghouse.
 Internal Clearing
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o This occurs when the payee and the drawer have bank account with the same bank but
different branches. E.g. if the payee banks with ZANACO Manda Hill, while the drawer banks
with Cairo Rd. Business Centre.
o The cheque in this case is transferred to the bank’s clearing department at the
headquarters and dealt with from there.
o It does not have to be sent to the clearinghouse since no other banks are involved.
 Town Clearing
o This occurs when two or more (different) banks are involved but all of them are in the same
town or city.
o The cheques still pass through the clearing house, but is specially cleared on the same day
rather than taking many days.
 General Clearing
o This clearing takes place when two or more banks are involved and they are not in the
same town.
o To explain this let’s take an example of a girl Lwisa Kabende at Highland Secondary
School who has an account with Barclays Bank, Mutaba Branch. She pays her school fees by
a cheque originated from her bank, Barclays Bank.
Step 1
o The bursar Mr. Chikoye takes Lwisa’s cheque together with other cheques that might have
been paid by other students on that date.
o He deposits them in the School Account at Indo – Zambia Bank Cairo branch.
Step 2
o Indo – Zambia Bank Cairo branch collects all the cheques which come in that day,
including Lwisa’s cheque.
o The cheques are sent to Indo – Zambia Bank headquarters.
Step 3
o The cheques at Indo – Zambia Bank headquarters are sorted in trays according to the
banks that originated them.
o Lwisa’s cheque goes into the Barclays’ tray.
o The value of the cheques in each tray are totalled
Step 4
o All the trays of cheques for the various banks are taken to the Clearinghouse (BOZ)
o All other banks also bring with them cheques in trays, with value of cheques in each tray
totalled.
o From there each bank receives back the trays of cheques, which have been drawn on it.
Cheques are exchanged between banks. What this means is that Indo – Zambia Bank will
hand over the tray of cheques that originated from Barclays Bank to Barclays Bank. The value
of each tray would be noted.
o Any net indebtedness would be settled by the Central bank moving the difference from one
bank’s account to another.
o This is possible because all commercial banks maintain their accounts with the Central
Bank as a rule, (BOZ).
Step 5
o Lwisa’s cheque is now in the clearing department of her own bank, Barclays.
o Barclays Bank will next send Lwisa’s cheque to her own branch, Mutaba.
Step 6
o When the cheque arrives back at its branch, a teller checks Lwisa’s signature, the date of
payment and the amount of money in word and that in figures and if all are correct and there
is enough balance in the account, then Lwisa’s account is reduced (debited) by the amount of
the cheque.
o The cheque has at long last been cleared. Indo – Zambia Bank Cairo branch will now be
added (credited) with the value of Lwisa’s cheque for schools fees.
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NB With the advancement of technology this long process of clearing cheques manually is no
longer in use. All Banks have agreed to introduce an electronic cheque clearing system. This
means a computerised system of clearing cheques is in use. Hence, the establishment of the
Electronic clearinghouse which is an independent institution, though under the supervision of
the Central Bank.
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INSURANCE
Insurance is an aid to trade that provides cover to businesses against financial losses caused
by risks such as fire, theft, floods, accidents etc.
Examples of insurance service providers in Zambia include: Zambia State Insurance
Corporation (ZSIC), Madison Insurance, Goldman Insurance, Professional Insurance,
Guardian Insurance, etc.
How Insurance works
Pooling of Risks
 Insurance functions on the concept of pooling of risks or sharing risks. Because “a loss
lighteth rather easily upon many than heavily upon a few”.
 Pooling of risks means people or businesses faced with a risk pay a small amount of
annual or monthly payment to the insurance company in return for insurance cover.
 The annual or monthly payments made in return for insurance cover are called premiums.
 In this way a common fund (collection of premium, pool) is created at the insurance
company.
 From this pool the insured who suffer financial losses are compensated thus, the pooling of
risks enables the fortunate to help the unfortunate.
 The pool of funds contributed is used in the following ways:
o As compensation money to those who suffer losses.
o For administrative expenses of the insurance company such as salaries, rents,
equipment, tax, stationery, transport etc.
o Pay profits (dividends) to shareholders of the insurance company.
o Surplus funds are invested in property, businesses and some lent out to businesses
and the Government.
Importance/Purpose/Functions of Insurance
To an individual
 Life assurance provides a savings plan and also benefits the dependants of the assured
through e.g. endowment policies, whole life policies and investment policies.
 Insurance helps individuals to overcome misfortunes like the theft or damage of property by
fire, floods or accidents.
 Insurance reduces the suffering and loss of earnings caused by disablement due to
accidents through compensation from companies with public, employer and third party fire
and theft insurance policies held by businesses.
 Insurance provides safety and security against the loss on a particular event. In case of life
insurance payment is made when death occurs or the term of insurance is expired. The
loss to the family at a premature death and payment in old age are adequately provided by
insurance. In other words, security against premature death and old age sufferings are
provided by life insurance. Similarly, the property of insured is secured against loss on a
fire in fire insurance. In other insurance, too, this security is provided against the loss at
fire, against the loss at damage, destruction or disappearance of property, goods, furniture
and machines, etc.
 Insurance affords peace of mind since much of the uncertainty that centres about the wish
for security and its attainment may be eliminated.
 Insurance protects mortgaged property. At the death of the owner of the mortgaged
property, the property is taken over by the lender of money and the family will be deprived
of the uses of the property. On the other hand, if the property was insured, the insurance
company will provide adequate amount to the dependents at the early death of the
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property-owner to pay off the unpaid loans. Similarly, the mortgagee gets adequate
amount at the destruction of the property.
 Life insurance provides profitable investment. Individuals unwilling or unable to handle their
own funds are able to find an outlet for their investment in life assurance policies.
Endowment policies, multipurpose policies and deferred annuities which are a better form
of investment.
To a business
 Insurance enables the business to arrange for compensation or indemnification in case of a
loss resulting from the occurrence of a risk.
 Insurance provides businessmen and women with the confidence to continue trading and
to enter into large scale business investments that they might have avoided for fear of
incurring great financial losses.
 Some businesses, especially those involved in foreign trade would need relevant insurance
documents to obtain payment through documentary credits.
 Insurance helps businesses to settle claims against them from third parties through
employer liability insurance, third part fire and theft motor insurance and public liability
insurance.
 Insurance provides companies with the opportunity to pool up risks and for a fairly low
monthly or annual premium, reduce the risk of financial loss.
To a nation
 Insurance is an invisible export that brings income to the country and helps to improve the
country’s balance of payment position.
 Insurance companies work as institutional investors. They lend money to businesses such
as banks, joint stock companies and in this way they make an important contribution to the
economic life of the country.
 Insurance helps the country’s economy to grow by giving confidence to businessmen and
women to enter into large scale business investments thus providing the much needed
goods and services and employment to the many citizens in the nation.
 Insurance creates jobs in nearly every area of the country. It also allows companies to
continue producing cars, jewellery and other items that would represent substantial
financial losses if they were damaged or stolen. This allows people who work for these
companies to continue earning income.
The Principles of Insurance

These are a set of principles which ensure that the insurance pool of funds is not abused by
gamblers on insurance. Failure to comply with the principles may render a policy null and
void, in which case the insurance company would not pay out any claim arising from such a
policy. The main principles are:
The Principle of Insurable Interest

 The principle of insurable interest states that the insured must possess an insurable
interest in the object insured.
 Insurable interest is financial interest in the subject matter of contract.
 This means only the person who stands to lose financially if the risk insured against occurs
has the right to insure the property or life.
 So an insurance contract without the existence of insurable interest is not legally valid and
cannot be claimed in a Court.
 The importance of the principle of insurable interest is that it prevents people who are not
true owners of items from insuring them. This is because if people were allowed to insure
items or lives which do not belong to them, they might be tempted to deliberately destroy
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the items in order to claim compensation and thus make profit out of the loss. It therefore
prevents insurance from becoming a gambling contract
 For example, if Mrs. Makasa owns a house, he is entitled to insure it because he stands to
lose financially (i.e. he will lose the money that he spent on building or buying the house) if
it is destroyed by floods or fire. Mr. Chikoye cannot insure Mr. Makasa’s house because
he has no insurable interest in the house. He would not lose anything if the house is
destroyed. Mr. Chikoye might also be tempted to destroy the house so as to claim
compensation and make profit out of Mr. Makasa’s loss.
The Principle of Utmost Good Faith

(Also known as the Principle of disclosure or Uberrima fides).
 The principle of Utmost Good Faith also known as Uberrima Fides is a principle of
insurance which demands that both the insurer and the insured must act in good faith by
telling the truth without leaving out any material facts relating to the insurance contract
whether asked for or not. The proposer (person seeking insurance cover) should complete
a proposal form giving full, accurate and detailed information without omitting any material
facts relating to the risk and property being covered.
 The principle of Utmost good faith states that both parties (insurer and the insured) in the
insurance contract must disclose all material facts for the benefit of each other.
 This is important because correct information helps the insurance company to:
o Assess the risk
o Decide whether to accept the risk or not
o Calculate a fair premium
 The information will also help the person seeking insurance cover to make a decision to
either accept or reject the conditions.
 False information or non-disclosure of any important fact from either party makes the
contract voidable or nullified.
 The insurance company on its part must honour all its promises reflected in the insurance
contract.
 For example, a person insuring a house against fire must tell the insurance company the
truth if he or she keeps inflammable materials like petrol, paraffin, etc. in the house. The
presence of inflammable materials increases chances of the house catching fire, and
therefore a higher premium may be fixed. Where information on inflammable materials is
withheld and later the insurance company discovers this omission of facts, the insurance
contract would be void and compensation refused if the house is destroyed by fire.
The Principle of Indemnity

 The principle of indemnity states that the insured must be restored to the same financial
position as before the risk. This means replacing what one has lost.
 The principle of indemnity is based on the idea that the assured in the case of loss shall
only be compensated against the actual total loss. The insured must not be allowed to
make profit out of the loss as he/she may be encouraged to cause losses deliberately.
 Indemnity is limited to the sum insured as insurance companies do not compensate at
more than the sum insured. It always pays out at either the sum insured or at the market
value of the loss whichever of the two is lower.
 The principle of indemnity is supported by two subsidiary principles, rules or corollaries of
contribution and subrogation.
Contribution
 Contribution applies where one insures an item with more than one insurance company. If
the item is destroyed by the risk insured against, the insurance companies concerned would
contribute proportionately toward the amount of compensation required without allowing the
insured person to make profit out of the loss.
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Subrogation
 Subrogation states that once the insured is compensated in full for the loss, the residue or
remains of the damaged item becomes the property of the insurance company. (to
subrogate means to take over the right to the remaining or salvage value of the property).
 The insured must not be allowed to make profit out of the loss by receiving compensation
money and keeping the wreck or recovered item. It prevents the insured being indemnified
from two sources in respect of the same loss.
 Suppose Josphat Phiri has damaged Morris Bwembya’s s motor car negligently. If he pays
Morris Bwembya’s loss in full, Morris Bwembya cannot collect the same from the
insurance company. On the other hand, if Morris Bwembya applied to his insurance
company for indemnity under his policy, he will not be permitted to collect the damages
from Josphat Phiri. In the latter case the insurance company will be entitled to collect that
amount
The Case of Under-Insurance

 Underinsurance is when the insured value of an item is less than its actual value.
 In such cases the rule of Average Clause applies. This rule states that the insured is
his/her own insurer for the value of the item not covered by the insurance company. If a
person insures 60% of the total value of the item, the insurance company would also pay out
60% of the total loss sustained in compensations.
 This prevents people who under insure from making profits out of their losses.
 For example, if you insure a car valued at K80 000 000 for only K60 000 000 and it is later
partially damaged in an accident such that it needs K40 000 000 to repair, the amount of
compensation will be calculated as follows:
 Insurance claim = Sum Insured X Market value of loss sustained

True value
= K60 000 000 X K40 000 000
K80 000 000
= K30 000 000
Therefore, the insurance company will only pay out K30 000 000 in compensation. The rest of
the expenses will be borne by the insured.
Cases where Indemnity does not apply

 The principle of indemnity does not apply to some situations because not all types of losses
can be restored to the same financial position as before the risk occurred. The following are
examples:
o Death or loss of body parts. Once a person dies, life cannot be replaced or if a person
loses an eye it cannot be replaced.
o Offer of new for old insurance policies. Some insurance companies offer new for old
insurance policies where the old items lost are replaced with new ones. In this case the
principle of indemnity does not apply because the insured is restored in a better financial
position than he/she was in before the risk occurred.
The Doctrine of Proximate Cause or Causa Proxima

 The doctrine or principle of proximate cause states that the insurance company or insurer
is only liable for the insured peril and can only pay compensation if the loss was caused by
the risk that was covered by the policy.
 The cause need not be the first or last but must be the dominant cause or there must be a
direct link between the cause (insured risk) and the result (loss incurred).
 The insurance company would only compensate a person who has suffered a loss if the
risk insured against is the immediate cause of the loss.
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 This principle is found very useful when the loss occurred due to series of events. It means
that in deciding whether the loss has arisen through any of the risks insured against, the
proximate or the nearest cause should be considered.
 No compensation is payable if the loss is caused by a risk not insured against.
 For example, if a farmer insures his store house against fire and not burglary, and the store
house is destroyed during a burglary, the farmer has no cause to claim for the loss suffered.
This is because the risk that was insured against was not the immediate cause of the loss.
Insurable and Non Insurable Risks

A risk is an event that causes financial loss. There are two types of risks namely insurable
and non-insurable risks. Their differences are as follows:
INSURABLE RISKS NON-INSURABLE RISKS
These are risks that can be insured These are risks that cannot be insured
against against
They have past records They have no past records
They are capable of being assessed and They are not capable of being assessed and
their chances of occurring estimated. their chances of occurring cannot be
estimated.
A fair premium can be calculated on A fair premium cannot be calculated on them.
them. Not easy to accurately calculate or ascertain
the premium.
A business undertaking or activity must A risk is non-insurable if the act is illegal and
be legal for its risks to be covered by is not in the public interest e.g. Stealing,
insurance Companies drug trafficking.
A person only has insurable interest in If the person seeking insurance cover has no
an item if the item belongs to him/her. insurable interest in the item to be insured.
The risk is preventable or its effects can Most non-insurable risks are un preventable
be reduced through precautionary
measures
A large number of are interested in being Few people are interested in insuring against
insured. them.
Occur regularly Do not occur regularly
Examples of insurable risks include Fire, Examples of non-insurable risks include risk
Theft, Accident, Burglary, Aviation, etc due to changes in fashion, great natural
catastrophes like: Earthquakes, Hurricanes,
losses due to bad management etc.
Types of Insurance Cover

There are two broad categories of insurance: life assurance and non-life insurance. The term
assurance refers to certainties i.e. events that must take place e.g. death. The term insurance
refers to probabilities i.e. events that may or may not take place e.g. fire, theft, accident etc.
Life Assurance
Assurance refers to cover given to events that are certain to occur e.g. death. For such
events, life assurance provides a means of saving funds. The principle of indemnity does not
apply to life assurance. This is because when a person dies he/she cannot be restored back
to life.
Types of life assurance policies
Whole life policy
This is a policy under which a person assures his/her life for a certain sum of money which will
be paid to his/her dependants only when he/she dies. The person decides the amount of
money he/she wants to assure his life for and the insurance company calculates the amount
for premium to be paid monthly. To fix the premium the insurance company will consider the
person’s age, occupation, health record, lifestyle as well as the duration and amount of cover
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required. The assured continues to pay the premiums for his/her entire working life until
he/she retires or dies. The assured person however does not receive compensation money;
the money is given to his/her beneficiaries who may be his/her children when he/she dies.
Annuity assurance
This policy provides a Series of regular payments paid to the assured until he/she passes
away. A person may arrange for such payment to begin at his/her retirement time. It is a
suitable policy for self-employed people who have no pension plan.
Endowment policy.
This is a policy which covers a person for only a fixed period of time, e.g. 15 years. The
person decides how much he/she wants to assure for and the insurance company calculates
the amount for premium to be paid monthly. The compensation money is paid either at
maturity date or at death of the assured person whichever comes first. Since the assured
person is able to obtain compensation money if he/she lives up to maturity date of the policy,
endowment policy saves two useful purposes: providing a means of saving money where the
assured survives up to maturity date and; providing assurance where the assured person dies
before maturity.
Endowment policy can be with profits or without profits.
 Endowment policy with profit: this is a policy which pays the sum insured plus a profit or
bonus. The bonus comes from the profits realized form investments made by the insurance
company from the insurance pool.
 Endowment policy without profits: This endowment policy provides the assured with a
lump sum upon expiry of the cover without any profits or bonus.
Fire Insurance
Types of fire insurance
Ordinary fire insurance

Ordinary fire insurance provides insurance protection to a wide range of property such as
personal and business buildings including factories, warehouses etc. and their content
against damage caused by fire, lighting, floods, explosions etc.
Consequential loss insurance

 This policy provides cover for the loss of profit suffered as a result business stoppages
caused by the insured risk. If a shop or factory gets burnt, for one reason or the other, the
businessman or woman loses profits because it is going to be temporarily closed or forced to
restrict production until such a time when the repairs are completed.
 Under this policy, the Insurer provides compensation for the loss of profits and also pay for
the overhead expenses such as rent, rates, salaries etc. The consequential loss policy also
known as Business interruption insurance therefore cover the following:
 Loss of net profit due to interruption of business as a result of fire or any other insured peril
 Standing charges which continue to be payable during the period of interruption
 Increase in cost of working as a result of work to reduce the consequential loss
 Wages for employees
 Auditors’ fees
 The policy is issued specifying the probable maximum period of the interruption of
business, which is known as indemnity period.
House hold policies

These are policies which cover the loss of property in a house and the house itself if it is fully
damaged.
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Lightening or special perils such as aircraft, malicious damage, and impact on building,
thunderbolt and explosions are also usually covered under fire policy. It may still be extended
to damage by natural events, such as storms, floods and earthquakes and non political riots
and strikes. Usually damages caused by water used to put off fire on a neighbouring property
are also covered by fire insurance. For example, if fire breaks up on the second floor of
Findeco House, in the process of trying to put off the fire properties of those in the first floor
are damaged by the water, they would be compensated.
Factors considered when fixing premium for fire insurance

 The size of premium for fire insurance depends on the likelihood of fire breaking out and
the following are some of the factors:
 Materials used in construction of building i.e. whether materials are bricks or wood or
concrete; and whether the roofing is thatch or of iron sheets or asbestos.
 Whether inflammable materials such as petrol, diesel, paraffin, etc. are stored in the house
or not.
 The nature of the surrounding of the building i.e. whether there is danger of fire breaking
out from the neighbouring houses or not.
 Whether additional fire protection facilities are available or not e.g. Fire Brigade services
provided by the local government.
Motor Insurance
Motor vehicle insurance
It is compulsory by law for motor vehicle owners to insure against loss or damage to third
parties.
The main policies existing under motor vehicle insurance are:
 Third party motor vehicle insurance

The third party motor insurance is the minimum motor insurance any vehicle that moves on
road is required to have. It covers the death or injury caused to third parties as well as
damage to their property. The insured’s own vehicle is not covered.
 Third party, fire and theft motor insurance

This type of motor insurance provides insurance cover to:
o Third parties for death or bodily injury caused to them and their property.
o The insured’s own vehicle for accidental damage to the vehicle, injury to the driver, loss of
vehicle by fire theft or by instant mob justice.
 Comprehensive motor Insurance

Comprehensive motor insurance covers a variety of risks that may happen to the vehicle. It
includes third party, fire and theft as well as covers damage to the vehicle, injury to or death of
the insured himself and loss of property in the vehicle. It is the best and at the same time the
most expensive type of motor insurance.
Factors considered when fixing the premium for motor insurance.

 The number of accidents the type of motor vehicle being insured has been involved in
based on statistics available.
 The number of people wishing to insure against the risk.
 The type of motor vehicle insurance required whether it is third party or comprehensive
insurance.
 The age of the driver. Young people are charged higher premiums because they drive
faster than older people and therefore are more likely to cause accidents.
 The purpose for which the vehicle is used. Higher premiums are charged on sports cars
than on family cars that are not used for car racing.
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 The value of the vehicle.

 The number of people using the vehicle.
 Occupation of the vehicle user.
Accident Insurance
This covers such risks as accidental damage to property, burglary and personal accident.
 Personal Accident
This insurance covers the insured against partial or total disability arising from accidental
causes. A professional sports star may take out an accident insurance, which covers him/her
in case he/she gets injured and cannot work either permanently or for a period of time. In such
a case the insurance company may compensate for the loss of income. In the event of the risk
occurring, the person would be paid a compensation for the loss of income due to disability.
 Group Personal Accident

o This provides a similar cover as in personal accident above but only for members of a
particular group, e.g. a football team.
o There are other policies which fall under accident insurance but may be treated as a
separate form of insurance \known as Property insurance. This includes household insurance,
which is itself divided into two types.
 Content Insurance
o This covers the entire moveable items in your house e.g. furniture, carpets, sports
equipment, television and video equipment, jewellery etc. So long as they are in the house or
being used by you away from home, if something wrong happens to them you would be
compensated. It covers losses resulting from theft, fire, flooding, lightening, accidental
damage and the like. In case of theft or fire, the insurance company would pay a monetary
compensation equal to the value of the goods at the time they were stolen or burnt. This is
because most contents insurance takes into consideration wear and tear. For example, if your
five-year-old stereo was stolen, you would be paid enough money to buy another five-year-old
(second hand) stereo of similar model, but not a brand new replacement of the item insured.
The only problem is that the premium is much higher.
 Building Insurance
This insurance covers you against any risk occurring to your house, for example fire,
explosion, damage by vehicle or aircraft, flood, lightening and subsidence. It may as well
cover claims for personal accidents and liability.
Liability Insurance
 Employer’s liability insurance (workmen compensation)
This policy covers the business against claims arising from the death or injury of an employee
while on duty. This insurance is necessary because some occupations are very dangerous
and may cause injury or illness to employees. The law requires all businesses to have
employer liability insurance.
 Public liability insurance

Public liability insurance covers business owners and manufacturers against claims by
members of the public for deaths, accidents etc. caused to them due to business owner’s
negligence. Without such insurance cover a trader might close down his business if a
substantial claim was made against it hence the need for public liability insurance.
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 Fidelity bond/guarantee
This class of insurance provides compensation to employers for money or goods stolen by
employees. The benefits of the fidelity guarantee policy are paid to the employer when the
employee is convicted in court of law of having stolen goods or cash.
 Credit insurance
Businesses selling goods on credit run the risk of having some of its customers failing to pay
their debts. Credit insurance provides compensation to traders for loss resulting from bad
debts i.e. loss of money due to non-payment by credit customers.
 Theft insurance
This class of insurance provides compensation to insured persons whose goods are stolen
from homes or businesses or in transit.
Marine Insurance
Marine insurance covers losses or damage to property and life caused by sea risks. The
main types include:
 Cargo insurance
This police cover the goods which are being carried by the ship for loss or damage at sea.
The insurance may be arranged to cover the cargo on a single consignment i.e. particular trip
or voyage e.g. from New York to Durban; or it may be open for several consignments known
as floating policy.
 Hull insurance
This insurance policy covers damage caused to the body of the ship, its machinery and
fixtures, and also against damage to other ships. Sea risks that may cause loss or damage to
the ship or goods include storm, collision with other ship, fire, sinking of a ship, piracy, bad
storage in the ship, theft, bad packing, seizure by enemy etc. The owner of the ship takes
Hull insurance either for a particular journey known as Voyage policy or for a period of time
known as Time policy e.g. one year, two years and so on.
 Freight insurance
This policy covers the transport cost charged by the shipping company for carrying the goods.
At certain times, freight (transporting charge) is not paid in advance until the goods reach their
final destination. Freight insurance, therefore covers ship owners against the possibility of not
being paid freight or hire money by clients who do not pay transport charges in advance.
 Ship owner’s liability insurance

This insurance policy covers the ship owner against claims from third parties. This may be for:
Deaths or injuries caused to crewmembers and passengers; loss or damage caused to other
ships in collision; and Loss or damage caused to port facilities.
Types of marine policy

Voyage policy - This type of marine policy is taken out for a particular journey e.g. from
Durban to New York. Cargo insurance is usually taken on voyage policy rather than time
policy.
Time Policy - Time policy is a marine insurance policy taken for a particular period of time to
cover goods going by sea transport to cover the hired ship, for example, for a period of six
months.
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Mixed policy - Mixed policy covers both the voyage and time policy.
Floating policy - A floating policy requires that a sum of money agreed upon between the
person seeking insurance cover and the insured is deposited with the underwriter so that each
time a ship makes a journey; the premium is deducted from the amount deposited with the
underwriters. Floating policies are appropriate where regular shipments of goods are made.
They save time and troubles of taking out separate policies for each trip made.
Aviation Insurance
This class of insurance provides compensation to insured persons who suffer deaths or
injuries caused by air accidents.
Insurance Brokers
Brokers are independent professional people who sell insurance on behalf of the insurance
companies.
The work of insurance brokers includes:
 Giving information to their clients on kinds of insurance policies offered by different
insurance companies.
 Advising clients on the best possible policy for them.
 Securing the best possible premiums for their clients by first comparing premiums offered
by different insurance companies.
 Collecting premiums from their clients on behalf of insurance companies.
 Undertaking paperwork relating to taking out insurance on behalf of their clients.
 dealing with claims on behalf of their clients who suffer losses.
Why is it advisable to arrange insurance cover through a broker rather than directly
with an insurance company?
 A broker would obtain a wider choice of insurance companies, and see different kinds of
insurance cover.
 A broker may save time for the person seeking insurance cover.
 It may be cheaper to get insurance cover through a broker.
 The person seeking insurance may get better overall service.
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COMMUNICATION
Communication is an aid to trade that facilitates the process of transmitting information from
one person or firm to another. This can be done in written, oral, visual or physical form.
Many organisations provide the means by which other organisations can make contact. In
Zambia, the Zambia Telecommunication Corporation and the Zambia Postal Services are
examples of such firms. In addition, there are privately owned companies like Airtel, MTN,
Vodafone, DHL, Post.NET etc. that provide postal and telecommunication services.
Reasons for Communication

Effective communication is essential to a business for the following reasons:
 It enables managers to issue instructions to their staff to tell them what to do. This enables
the business to operate smoothly and efficiently.
 It enables members of staff to pass their grievances or suggestions to management in an
amicable way if there is a well-established and reliable line of communication
 It enables management to keep staff informed of what company and employment related
issues so that they are able to perform their work better.
 It enables the firm to contact its customers to remind them either to pay due accounts or to
invite them to buy new products available for sale.
 It enables a firm to contact its supplies, to either place orders for goods/raw materials or
send payments for goods ordered.
 It enables a firm to contact its suppliers in order to check and establish the market price
and conditions for purchase of goods.
 It helps firms to discuss and settle problems, complaints, queries, etc. with its suppliers or
customers and or other businesses.
 Worldwide communication systems widen the extent of overseas (foreign) market by
enabling foreign customers to be contacted speedily by telecommunication services, or
airmail.
 It enables a management to organise market surveys and business tours.
 It enables management to call for and organise business meetings.
 It enables the headquarters of a firm with many branches to keep in touch with its branches
Postal Services
These are services provided by the post office for posting and delivering of letters, parcel.
They include the following:
 Airmail
This is the type of mail that is conveyed by air from the office of origin to the office of
destination. Postage rate is a little higher than for those conveyed by rail or car and it is
charged by weight.
 Surface Mail
This class of mail is conveyed over the surface by rail, road, and boats in some areas.
Postage rate is lower than that of airmail and it is determined by weight. It can be use by
businessmen to send less urgent messages. The main disadvantage is that it is very slow.
 Express Mail service

Express Mail service provides fast and safe means of delivering letters and parcels up to a
certain size and weight. The word “Express” must be written clearly in the top left-hand corner
of the package. Mail is personally accepted at post office and delivered to the destination.
Charges for the service are based on distance and weight. Individuals may use this service to
send special gifts to friends and family e.g. gifts, presents etc.
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 Registered Mail
This service is used for sending valuable items such as cash by post. They are recorded at
the time of posting and, the sender is given a certificate of posting or receipt as proof of
posting. Mail items in this category are handled in a hand-to-hand delivery; right form the
sender straight to the addressee. The receiver must provide proof of identification and sign a
post office slip when receiving the mail as proof of delivery. The main advantage is that
registered mail is very safe. If a registered mail is lost, the post office will normally pay
compensation up to certain amount, proportionate to the value of the package and the
registration fee paid on posting.
 Cash-On-Delivery
This service enables a trader to send parcels to customers by post and ask the post office to
collect the payment when delivering the item. The money is then remitted to the trader by the
post office, less a small charge. It is widely used by mail order firms. This service provides a
safe guard to both sellers and buyers. sellers do not have money tied up in bad debts and do
not have to keep sending reminders to debtors, while customers do not have to send off
money in advance, perhaps to obscure companies that may take months to deliver the goods.
 Money Orders and Postal Orders

Two options are available to customers namely, by money order or postal order. Money can
be sent by money order using the postal money order or telegraphic money order.
Telegraphic money order essentially uses the fax. What happens is that the receiving post
office faxes a message to the paying post office to effect the payment of the sum in question
to the named payee. It is a very fast method of sending money that can be used if there is
need to send money urgently to someone. Usually a commission is charged for the service.
 Data Post
Data Post provides a speedy and reliable service for sending business documents and goods.
It is particularly useful for exchange of computer materials such as tapes, diskettes etc. This
facility provides door-to-door overnight service for delivering packages or parcels by road so
that they can reach their destination by next morning. Packages display the data post sign
and are given special security treatment. It enables packets to be collected and returned at
times prearranged with the post office.
 Poste Restante
This service enables letters or parcels to be addressed to a post office for it to be collected in
person. The parcel or letter must be marked “poste restante” meaning “to be collected in
person” and addressed with the name of the person to whom they are sent and the address
of the main post office in the town. The person wishing to receive this service applies in
person at the Post Office® branch where they would like to receive mail from. The person then
tells your friends, family and business contacts their Post Office address as below. All mail
sent to the Poste restante address should include a return address on the back of the
envelope.
Here is how Poste Restante addresses can be written:
Your name
POST RESTANTE
Post Office name
Full address of the Post Office
Postcode of the Post Office
Country (if applicable)
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The addressee then calls at the post office to collect the mail across the counter. This service
is particularly useful to sales people who continually travel from one town to another. This
service is operated both locally and internally.
 Business Reply Services

This service enables members of the public to send short replies to businesses without having
to pay for a stamp. It is mostly used by customers for replying to letters of guarantee,
questionnaires and mail order forms. Before the service can be used, a license must be
obtained from the post office and a deposit paid to cover the likely cost of delivering the
letters. The trader provides ‘Business Reply’ postcards or envelopes that the customers use
for writing replies. When they are delivered, the trader pays a charge over and above the
normal postage.
 Recorded Delivery
This facility provides a proof of both posting and delivery of letters. Letters sent by recorded
delivery are not posted in the posting boxes but delivered to the counter where they are
recorded and a receipt given to the sender as a proof of delivery. The receiver signs a form to
say that the letter or parcel has been received. If lost or damaged a small compensation is
paid by the post office. It is mostly used by traders who want to ensure that their debtors
receive their bills and by legal practitioners sending important legal documents by post.
 Freepost
Freepost is a postal service whereby a person sends mail without affixing a postage stamp,
and the recipient pays the postage when collecting the mail. This service allows potential
customers to write to a business, in reply to its adverts, without paying postage. It is similar to
the business reply service except that no special envelope or postcards are used. Instead the
trader includes the word “FREEPOST” in his address. The trader then pays postage on all
the replies received, plus a small charge. typical uses of freepost include where a business
sends bulk mail to potential customers, the bulk mail including envelopes or postcards that
potential customers can return to the business by freepost. In another typical use, magazines
include subscription cards that potential subscribers can return by freepost. Because no
stamp is needed, many people are encouraged to reply. Usually the trader obtains a licence
or approval from the post office prior to using this facility.
 Private bags
Private bags are used for posting and receiving letters. Being lockable, the bags offer security
and can easily be handled. When letters are received by the post office, they are locked in the
mail bag. The letters cannot be removed until the owner collects the bag and opens it at his or
her own place. Therefore, private bags provide more security to the letters than post office
boxes.
 Post office boxes.

A post office box is used for receiving letters and parcels. An individual or organisation
renting a post office box is given a key to the box. Letters can be collected at any time. The
hirer pays an annual fee to the Post Office for renting the box.
 Franking machine
Franking machines print postal impressions on envelopes. The postal impressions show the
amount of postage, place and date of posting. Franking machines are used by organisations
that send many letters at once. They save time in affixing postage stamps on each letter.
A franking machine can be bought or hired form a company that sales or manufactures
franking machines. However, before the franking machine can be used, a licence to use it
must be obtained from the post office. The post office sets meters for the franking machines.
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The hirer of the franking machine pays the post office according to the units of postage value
used.
Telecommunication Services
Telecommunication authorities provide several means by which people or organisations can
instantly communicate with each other at a distance.
 The Telephone
Telephone provides people engaged in commerce with speedy means of contacting with other
business people over any distance either within the country or abroad.
Circumstances in which a telephone may be used

o When a customer wants to inform the supplier of wrong type of goods supplied, wrong
quantity etc.
o When a customer wants to contact the supplier for an immediate response to a query.
o When a customer wants to inquire on the availability of goods and services from the
supplier speedily.
o When the supplier wants to inform the customer of prices of goods and services and terms
of payment speedily.
Advantages/Importance of a telephone
o It enables business people to immediately contact and speak to a customer, supplier or
another business over a transaction.
o It is helpful in clearing queries between suppliers and their clients.
o It helps business people to get the immediate reply when they want it.
Disadvantages of a telephone as a means of speedy communication.

o A telephone does not provide a written confirmation of the conversation.
o A telephone is not reliable for messages that are highly technical and complicated in
nature. For example, it may not be advisable for a trader to place an urgent order for a spare
part for a complicated piece of equipment using a telephone.
o Language would be a barrier of communication on phone if the users do not understand
each other’s language.
Telephone Services Offered for Business Use
Toll Free Service

This is a service which allows customers to make free calls to specific numbers in an
organisation, the number will allow the organisation to pay for the calls that the customers make
to communicate with the business. A billing number will be assigned to the company to provide
for monthly rentals and call charges. Customers can make a call to the organisation from
anywhere within the country. The main advantages are that it provides a way of bringing
customers closer to the company. It encourages the customer to make more calls to the
business in order to comment, query, or place orders. This feedback is essential to any
organisation, since it provides information that will help organisations to better position
themselves in this competitive environment.
Voice Mail
Voice mail is a telephone-activated and voice-prompted system that allows you to leave and
receive messages, respond to messages and forward messages to another person’s mailbox. It
allows people to communicate at their convenience. It has the following benefits:
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o Your calls are answered when you cannot.

o Accuracy and confidentiality of message is maintained.
o You never miss a call.
o Continuous availability since it is within the telephone network.
Local call
A local call is a telephone call to another telephone number within the same area or within the
same telephone exchange.
Trunk calls
A trunk call is a telephone call from one telephone exchange to another distant exchange.
 Cell Phones (Mobile/cellular phones)

A cell phone offers the following business and personal uses:
o It has a provision for sending and receiving short messages.
o It is able to send and receive electronic messages with attachments.
o It has memory capacity to store SMS and E-mails messages.
o It has a provision for phone book where one can store important phone numbers.
o It has storage capacity for photos, music and even work files.
o It is able to keep a historical record of incoming calls, outgoing calls, voice mail, calls
diverted etc.
o Many types of cell phones have an internet provision which can be used for obtaining the
latest market information, stock exchanges share prices, as well as browsing for goods and
services.
o It can be used for online banking as it enables one to check on their account balances,
bank statements, make payments and even receive payments.
 Telex
The telex or Teleprinters is a combination of a telephone and a typewriter. Subscribers to this
service have a teleprinter installed in their offices and are given a number in the same way as
telephone users. To send a message, the sender dials the receiver’s number, and types out
the message, manually on the teleprinter. The message is automatically printed at the
recipient’s office, even if there is no one to receive it. Thus a message can be sent during the
night and await the arrival of the recipient at the office the next morning. It also provides a
written record; hence, it is good for messages requiring written confirmation. The cost of
sending a message on a telex machine depends on the length of the message, the time taken
to send it as well as the distance of the receiver from the sender.
 Telemessages
These have replaced telegrams as a means of communication quickly with people within the
country without a telephone or telex. The message that you wish to send is dictated over the
telephone to the operator. The message is then transmitted by telex to the office nearest to
the addressee and it is guaranteed that it will be delivered with the first class post the
following morning. This is not as efficient as the former telegram service, which normally
provided same day delivery.
 Fax (Facsimile)
This service enables a business to send exact copies of a document to distant places using
telephone lines. The fax machine is plugged into the telephone network and therefore it uses
and the bills are added to the user’s telephone bills. It is used for sending urgent documents
as quickly as a telephone call. The message is sent by first dialling the fax number of the
receiver. Once an initial contact is made, the document is put on the fax machine for
transmission. As the copy comes out of the sending fax machine, the exact copy of the same
document is being obtained at the receiving fax machine. Thus documents can be received
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24hours a day even when it is after working hours for as long as the machine is left on. It can
transmit documents whether printed, typed, hand-written or drawn plans.
 Electronic Mail (e-Mail)

Electronic mail refers to a variety of facilities, which allow computer users to communicate
with other distant computers in different parts of the world. Businesses can use it to rapidly
exchange printed communication using telecommunication links. Its greatest advantage over
the post and fax is that it is faster and more flexible and the message can be as short or as
long as you like. You can send files, spreadsheets, graphics, database, and even audio and
video files via E-mail.
 Confravision or Videoconferencing
This allows people situated at different distant locations to hold face to face discussion, but
without the inconvenience of everyone travelling to the same meeting place. It provides
studios which link up by sound and vision, so that discussions can take place as if all those
attending were present in the same room. Its greatest advantage is that it eliminates the need
for time-consuming and expensive travel. In addition, it eliminates the trouble of arranging
overnight accommodation and having to face the dangers, delays and inconveniences of long
distance travel.
 Radio Paging
This service allows a user to send a telephone number or message to another user. It
provides a beeper, which warns people of the message, either, that they are required, for
example, to return to their point of operation or to their phone. Some systems are so
advanced that they provide a visual display on the pager, of up to 70 characters, called
message masters. It is commonly used in shops, factories, offices and hospitals.
 International Telegram
This facility allows printed messages to be sent or received from other countries. The
message is given to the telecommunication authorities by either telephone or telex for delivery
to the addressee. A message can be sent to an individual or to multiple addressees and it
arrives in a distinctive envelope. Its biggest disadvantage is that it is very expensive, as a
result, it is appropriate to only use it for sending short messages.
 Internet
The Internet is an arrangement of connected computers, which lets the computer users all
over the globe exchange data. It is essentially one network, which is the sum of thousands of
individual private and public networks interconnected by satellite and fibre optic cable
systems. The principal components of the Internet are the World Wide Web (WWW) and e-
mail. With the passage of time, the Internet has become the most effective business tool in
the contemporary world. It can be described as a global meeting place where people from
every corner of the world can come simultaneously.
Uses/advantages of the Internet to people engaged in Commerce
o Global Audience
Content published on the Internet is immediately available to a global audience of users. This
makes the World Wide Web a very cost-effective medium to publish information.
o Operates 24 hours, 7 days a week
Businesses do not need to wait until resources are available to conduct business. From a
consumer's perspective as well as a provider's business can be done at any time. The fact
that the Internet is operational at all times makes it the most efficient business machine to
date.
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o Relatively Inexpensive
It is relatively inexpensive to publish information on the Internet. Various organizations and
individuals can now distribute information to millions of users at very low costs.
o Product Advertising
Businesses can use the World Wide Web to advertise various products. Before purchasing a
product, customers will be able to look up various product specification sheets and find out
additional information. Businesses can use the multimedia capabilities of the World Wide Web
to make available not only various product specification sheets but also audio files, images,
and even video clips of products in action.
o Distribute Product Catalogues
Businesses can use the internet to distribute product catalogues. In the old days, putting
together a product catalogue used to be very costly in terms of time and money needed to
publish and distribute it. The World Wide Web changes all this by allowing content developers
to put together a sales catalogue and make it available to millions of users immediately.
o Online Surveys
Internet can be used to conduct online surveys on the World Wide Web at very low costs as
compared to traditional methods. For example, in order to fill out various needs of customers
or what they would like to see in a future product, it's often necessary to compile a list
of addresses and mail a questionnaire to many customers. Results of such a survey can be
automatically updated to a database. This database can then be used to keep a pulse on
various opinions and needs of customers.
o Announcements
With the World Wide Web, businesses can distribute various announcements to millions of
users in a timely manner. Because there is virtually no time lag from the time it takes to
publish information to making the information available to users, the Web is an ideal medium
to publicize announcements.
o Provide Technical Support
Business organisations can use their Web site to provide technical support to customers.
Because Web pages can be updated immediately with new information, various technical
support literature can be immediately modified in light of new findings and developments.
o Obtain Customer Feedback
The interactive nature of the World Wide Web is ideal for obtaining customer feedback.
Businesses can easily set up a CGI script to obtain customer feedback about a product or
service. Because customer feedback submitted by customers can be read immediately, it's
possible to respond to various customer concerns in a timely manner, increasing customer
satisfaction and quality of customer service.
o Immediate Distribution of Information
When information is added to a Web site, it's immediately available for browsing by millions of
Internet users. The World Wide Web is an ideal medium of information distribution because it
takes away the time lag associated with publishing content and actually making it available to
users.
o Easy Integration with Internal Information Systems
Internet information systems deployed on the Internet can be easily integrated with internal
information systems managed with office productivity applications such as Microsoft Office.
 Non-commercial uses of internet

o It is used for voice and video conferencing.
o It is used for online news and weather services.
o It is used for entertainment with the provision of music and videos.
o It is used for online chatting by allowing people to carry on discussions using written text.
o It allows people to do education related research.
o It allows for on-line learning where people can obtain on-line course materials and have
their examinations conducted online without necessarily going physically to universities
offering such programmes.
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The disadvantages of Internet

Following are the disadvantages of Internet:
o Spamming: Spamming denotes distribution of unsolicited e-mails in large numbers. They
are meaningless and they unnecessarily block the whole system. These activities are treated
as illegal.
o Theft of personal details: While using the Internet, there is high probability that your
personal details like name, address and credit card number may be accessed by con artists
and used for fraudulent purposes.
o Virus threat: Virus is a program that interrupts the usual operation of your personal
computer system. PCs linked to the Internet have high probability of virus attacks and as a
result of this
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TRANSPORT
Transport is an aid to trade concerned with the movement of goods and people from one
location to another. Modes of transport include air, land, water and pipeline.
Transport plays an important part in the production and marketing of goods because without it
raw materials would not reach the producer and finished goods would not be distributed to the
customers.
It therefore brings producers, retailers and consumers into contact with each other.
The importance of transport to an individual
The importance of transport to an individual

 It enables workers to move to and from work.
 It is a source of income to those employed in the transport sector.
 It enables individuals to access goods produced in faraway places.
 It enables individuals to visit relatives and friends and areas of interest as tourists.
The importance of transport to a nation

 It helps to improve the economy through revenue from the transport sector.
 It helps countries to develop their economies by opening up wider markets for products.
 It helps the nation to avoid shortages of goods in different parts of the country by moving
goods quickly to areas where there are potential shortages.
 It brings foreign exchange in the country.
 It ensures that goods are distributed effectively to avoid problems of surpluses of produce,
falling prices, rising prices and shortages on the market.
 It shortens the time between production and consumption by enabling goods to reach the
consumers quickly.
The importance of transport to the world

 It makes foreign trade possible through the movement of goods from one country to
another.
 It increases the variety of goods available to the people of the world by moving goods from
different parts of the world within the reach of consumers.
 It encourages tourism worldwide.
 Transport prevent scarcity or shortage of raw materials and finished goods in the world by
transferring goods from where they are produced to where they are needed.
 Transport provides more opportunities, high mass production and trade between countries
or regions of the world, which in turn means cheaper goods to the consumer and a higher
standard of living.
Factors affecting the choice of Method of Transport

A business has various methods of transport such as road, rail, sea and air transport to
choose from. However, before deciding, which method of transport to use for transporting a
particular consignment of goods, the following factors are considered.
 The Cost of transport: as it reduces the profits of the business and have a great bearing
on the price at which goods and services are finally going to be sold as it forms part of the
cost of goods.
 How urgently the goods are needed.
 The distance to be covered.
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 Nature of goods: Some goods require special facilities e.g. oil which requires tankers,
pipes; meat and fish which requires refrigerated containers, coal, furniture, sand and bricks
which require suitable facilities as well.
 Size and weight of the goods
 Safety: The chances of theft or damages of goods on transit are greater in some method of
transport than others. A good transport system should not expose goods to theft, breakage
etc.
 Access to the Terminal: The type of transport chosen should have easy access to loading
and off-loading points. This would reduce extra-transportation costs, theft, and breakage of
goods.
 The reputation of the carrier: The carrier should have a reputation of reliability
 The value of goods: this is because some goods cannot bear the costs of some
transport systems because of their low value. For example, coal and sand cannot be
transported by air because their value is low in comparison to their value.
Methods of Transport
The main forms of transport include sea, road, rail, air and pipeline.
Road Transport
Road transport is by far the most important form of inland transport. It is the most ideal for the
day-to-day running of a business. In recent years, there has been a drastic increase in the use
of road transport.
Advantages of Road Transport

 Flexible route: Road transport is so flexible that firms can provide a door-to-door service.
 Flexible timetable: It does not follow a fixed timetable and goods can be removed as and
when ready and on any route.
 Ability to reach remote places: Road transport can reach places which are not easy to
reach by other forms of transport.
 Varieties of vehicles with special facilities: There are different shapes and sizes of vans
and trucks with special facilities to meet all kinds of needs.
 Economy: Road transport is a competitive sector and this brings efficiency and economy,
often resulting in lower charges for customers
 Speed: It is faster than rail transport over short distance especially for such tasks as
delivering goods to customers within the town.
 Low cost of vessels: Firms can buy their own vehicles for greater convenience.
 Close supervision of goods: Goods can be better protected, as they are under the care
of the driver most of the time.
Disadvantages of Road Transport

 Not suitable for bulk goods: Road haulage is not economically suitable for transporting
goods of great bulk for long distances e.g. Coal and iron ore.
 Traffic congestion and delays: Road transport may be subject to delays over long
distances, which do not trouble the railways. This is unavoidable because most road journeys
begin and end in congested urban areas.
 Social Costs: The social cost of road transport is very high. It includes costs arising from
road accidents, noise and air pollution. These costs are usually met by tax payers.
 Limitations in capacity: The capacity of road haulage trucks is often limited to a few tons
of goods but for railways, connecting a chain of wagons can increase tonnage.
 Disruptions: Road transport is more easily disrupted by bad weather than rail transport.
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 No return loads: Return loads are not essential to keep costs competitive, but this may not
be easy to get as there is no guarantee that a lorry hired to ferry goods say, from Lusaka to
Kabwe, will carry something on its return to Lusaka.
 It has Restrictions in driving hours, size and tonnage of trucks as well as speed.
 It has Vehicle maintenance costs: the direct vehicle operating costs are high compared
with the load carried; this is brought about by costs such as drivers’ wages, motor vehicle
licensing, insurance, fuel, depreciation etc.
 High road maintenance costs: Roads are very expensive to maintain and vehicles may
not last if they are not properly maintained.
Rail Transport
Rail transport remains one of the most important forms of inland transport especially in
transporting bulk cargo such as copper ore, cobalt, coal, iron, steel, petroleum, etc. In the
recent past, certain developments have seen transport losing its position as leader of land
transport in Zambia.
Advantages of rail transport

 Rail transport is faster over long distances than road transport.
 Rail transport is economical in the use of labour. While every lorry has a driver and
sometimes a driver’s mate, it only takes two men – a driver and a guard – to run a train with
50 to 60 trucks.
 Railway lines may have direct and easy access to sea ports, so they offer a distinct
advantage for exporting, especially where manufacturers have their own railway sidings.
 Special facilities are provided for industrial customers. Bulk deliveries of oil, cement,
coal and motor cars, for instance, are often carried in the producer’s own rolling-stock, painted
with his own livery.
 It is suitable for carrying heavy and bulky goods such as coal, cement, cars, iron ore,
china clay and timber over long distance on land.
 The train is more comfortable for passenger travel than road transport. The wide seats
and corridors provide space, while benefit is guaranteed with dining facilities, running water
and toilets.
 Rail transport is less likely to be disrupted by bad weather than road transport.
 There is less damage to the environment, for instance, due to air pollution, and it is safer
to carry dangerous goods by rail than by road.
Disadvantages of rail transport

The main disadvantages of rail transport are:
 Transhipment is inevitable in rail transport since goods have to be delivered to the
railway station at the beginning and end of each rail trip.
 The extra loading and offloading costs during transhipment means increased costs as
well as higher risks of damage to or loss of goods.
 It is very difficult to estimate the cost of delivering a given consignment of goods by
railway. The reason for this is the enormous range of overhead costs that the railway has to
bear: the capital costs of the track, signalling, rolling stock, terminals and managerial staff.
 Short journeys by rail usually waste time and money, particularly where the
consignments are small. Only where bulk loads are carried on a continuous basis does
railway have real advantage.
 Timetables impose rigidity on the railways, which the road haulers do not suffer from.
The manufacturer who operates his own fleet of Lorries, and can programme them exactly to
his own requirement enjoys the greatest flexibility.
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 Rail transport cannot deliver door-to-door. It is tied to the railway line and only serves
towns and places along the railway line.
 It is not suitable for emergencies, which requires urgent delivery of goods.
 Rail transport has heavy capital costs. It is expensive to construct and maintain a good
rail line.
 Goods are not closely supervised by the driver and this result in several cases of theft.
Sea Transport
Road and rail transport carry the bulk of inland consignment, but most of our international
trade relies on sea transport. Though an increasing amount is being carried by air, it is an
undeniable fact that sea transport has formed the backbone of long distance trade between
countries for centuries now.
Advantages of sea transport

 Sea transport is a relatively cheaper means of transport particularly over long
distances.
 The cost per unit of goods transported is very low because large quantities of goods
can be carried in one shipload.
 Sea transport has greater carrying capacity than any other type of transport.
 The medium of sea transport, namely water is a free gift of nature, unlike rail and road
transports which require large sums of money to construct and maintain water is free. Money
is required only for the building of ships, docks and harbours.
 Sea transport provides links to all continents of the world as all continents have long
sea coasts.
 Sea transport can provide a variety of sea vessels for carrying passengers and cargo.
 Sea transport is economical in the use of labour and fuel.
Disadvantages of sea transport

 Sea transport is relatively slow. As a result, it is not suitable for urgently required goods.
 Sea transport does not offer door-to-door services as some areas have no water.
 Damp air and salty conditions at sea together with long sea journeys means goods have to
be well packaged to protect them from corrosion and rust and this can be expensive.
 Bad weather can easily cause serious delays and losses at sea.
 Goods can easily be lost or damaged especially where containers are not used.
 Sea transport requires other forms of transport to take the goods to and from ports
hence, transhipment is inevitable.
Seaport Authorities
Seaport authorities are responsible for providing port facilities to enable ships to dock, load,
unload, fuel and get other provisions efficiently. These facilities affect the cost of sea
transport.
Requirements and functions of a good sea port/Facilities provided by the port

authorities
 Good transport connections inland. Port authorities ensure easy access by linking the port
to the road and railway network by a system, which is capable of handling the volume of traffic
that passes through the port.
 Mechanical handling facilities like gantry cranes forklifts, straddle carriers, elevators as well
as jetty, Pneumatic pumps and other facilities to ensure speedy discharge and loading of
vessels.
 Provision of warehouse facilities for goods awaiting sales, transport, processing or to assist
in entre pot trade.
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 Provision of office buildings for shipping companies, banks, restaurants and any other
organisation using the port.
 Provision of Ship repair yards e.g. dry dock facilities for routine maintenance and repairs to
be effectively carried out on ships
 Provision of Sheltered docking and deep-water access. Port authorities ensure that coastal
waters are deep enough for big ships to land. This is done by carrying out regular dredging
 Provision of Specialised facilities for handling certain cargo such as timber, loose grains,
coal, oil are usually provided.
 Provision of efficient customs offices to facilitate the forwarding and clearing of goods by
shippers.
 Provision of infrastructure that can handle matters relating to emigration, immigration,
sanitation, police and security in order to avoid delays and hold-ups to ships.
Air Transport
The world has seen a steady increase in the in air freight over the years, and this is likely to
continue for several reasons.
Advantages of air transport
 Air transport is very fast thus, goods are delivered with good speed.
 insurance charges and packaging costs are usually lower since the goods are in
transit for a shorter period,
 Goods can move quickly from one place to another by a combination of routes on a
single ticket. This saves time, money and energy.
 Both sea and land can be crossed in one journey without the need to transfer people or
cargo from one mode to another. This saves a lot of time and money.
 Special containers can be used to speed up cargo loading and unloading at airports,
since huge cranes handle them mechanically.
Disadvantages of air transport.
 It involves very high capital and running costs such as electronic equipment, aviation
fuel, insurance, crew and the maintenance of air craft.
 It is not suitable for carrying heavy (and bulky) goods like cement, coal, iron ore and
timber because of weight restrictions
 It has very high service charges.
 The carrying capacity of aircraft is limited in terms of weight, volume and size.
 It can be easily halted or disrupted by strong winds, heavy rains, volcanic ash, mist or
fog as it is very sensitive to bad weather
 It is not suitable for short distance journeys.
 It relies on other forms of transport. This is because most airports are out of town and
one has to get to and from the airport by road.
Requirements for a good Airport

 Enough space for short and long tern vehicle packing for motorist who accompany people
to the airport or who pick up passengers from the airport.
 Customs facilities to regulate the entry of goods.
 A good level runway space as far as possible from buildings and hills which should be large
enough to accommodate wide bodied aircraft. This is necessary to reduce the possibility of
collisions on landing and take-off.
 Technical equipment such as radio, ladder which is needed for the safety of passengers
and aircraft.
 Repair and maintenance facilities which are necessary to check on aircraft on arrival and
before departure.
 Warehouse facilities for goods awaiting sales, transport, processing or to assist in entre pot
trade coupled with special security to ensure that cargo is not stolen.
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 Good road and rail accessibility to and from the airport enough to accommodate the
volume of traffic that passes through the airport.
 Provision of office buildings for airlines, banks, restaurants, information desks, lounges,
clearing and forwarding agencies and any other organisation using the airport.
 Provision of infrastructure that can handle matters relating to emigration, immigration,
sanitation, police and security in order to avoid delays and hold-ups to aeroplanes.
Pipelines
Pipelines are used for transporting water, gas, and oil without using vehicles. It is attractive
and safe although it is costly to install and only transports a limited range of goods. Pipelines
have always played a very important role in the petroleum industry in Zambia. The Tanzania,
Zambia (Tazama) pipeline has always been used to transport crude oil from Dar-le- salaam to
Ndola.
Advantages of pipelines
 They reduce risk of pollution when transporting.
 They increase the safety in the transportation of inflammables such as gas and oil.
 They are a cheap method of transporting as compared to other forms of transport.
Disadvantages
 There is high risk of spreading of diseases, e.g. where water is contaminated from the
source or three leakages.
 It requires a constant close check to avoid contamination by foreign substances.
 Disasters may result where for example; where an oil pipeline leaks into a water source, a
farm or a fishing place.
Documents used in Transport
Bill of Lading (for details refer to notes under foreign trade)
Charter Party (for details refer to notes under foreign trade)
Airway Bill (for details refer to notes under foreign trade)
Consignment Note
 This is a document used when the seller has used hired transport to deliver goods to the
buyer.
 The document is made out in triplicate (three copies) which when signed by the buyer, one
copy goes to the transporter, another to the seller and the last one remains with the buyer.
 The document is sent together with the goods and the consignee (buyer) signs it to confirm
receipt of the goods upon their arrival. The carrier (transporter) will then use the signed copies
of the consignment note to claim payments for freight (transport costs) from the hirer (seller).
 The document is both a request and an instruction to the transporter to accept and deliver
specified goods to the buyer.
 Each of the three parties: seller, transporter and buyer sign the document and each
remains with a copy.
Ticket
 A ticket is a document that the transporter gives to passengers upon payment for the
transport charges.
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 It acts as proof that a particular perform aboard a bus, train, aircraft, ship etc has paid the
transport charges. Without a ticket which is a proof of payment, one may not be allowed to
board on the transport vessel.
 Details on the ticket include: the name of the transporter, the name of the passenger, the
destination of the passenger, departure date and time, amount paid, the seat number and
other details that may be deemed important by the transporter.
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WAREHOUSING
Warehousing is the name given to the protection given to goods from the time they are
produced until when the customers buy them. It also involves the storage of raw materials,
components, spare parts and machinery as well.
The Importance of Warehousing

 Warehousing provides the place for the safe keeping of raw materials, partly finished items
and finished goods
 It helps to store goods that are produced seasonally e.g. watermelons, tomatoes, etc.
 It helps to store seasonally demanded goods such as jerseys, rain coats etc.
 It makes it possible for customers to have an even supply of goods, especially those that
are imported from other countries.
 It helps to protect goods from damage due to bad weather.
 It provides storage for goods in transit.
 It helps to stabilise prices by storing goods when in high supply and releasing them when in
low supply.
 It provides space for the preparation of goods through blending, branding, labelling etc.
 It provides storage space for goods such as wines, spirits, tobacco and cheese to mature.
 It provides space for the traders to inspect the goods before buying them.
Types of Warehouses
Manufacturer’s Warehouses
These are warehouses owned by manufacturers. They are used for the storage of raw
materials, finished goods, machinery, tools etc.
The importance of manufacturers’ warehouses.

 They provide storage for raw materials.
 They allow pre-demand production i.e. production of goods before demand.
 They provide storage for finished goods before such goods are sold.
 They provide storage for seasonal goods such as umbrellas, rain coats etc.
 They prevent shortages by storing goods when they are plentiful and releasing them on the
market when they are in short supply.
Wholesaler’s Warehouses
These are warehouses owned by wholesalers. They are used for keeping goods bought from
manufacturers but which are awaiting sale to retailers.
Importance of wholesaler’s warehouses

 They allow the wholesaler to repackage the goods into smaller quantities to suit the
retailers’ requirements.
 They allow the preparation of goods for sale such as blending, branding, bottling etc.
 They enable retailers to inspect goods before buying.
 They prevent damage of goods due to bad weather and theft.
 They facilitate the storage of goods which are demanded seasonally e.g. Umbrella,
raincoats etc.
 They act as reservoirs for retailers, supplies.
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Retailer’s Warehouses
These are warehouses owned by large retailers where goods awaiting sale are stored.
Examples of retailers, warehouses include those owned by game stores, Furn city etc.
The importance of retailers, warehouses

 They enable the preparation of goods to take place e.g. packaging, branding, pricing of
goods etc.
 Losses on goods due to theft, weather deterioration are reduced.
 They allow the stocking of large quantities of goods for supplying to branch outlets.
 They allow the storage of goods which await demand.
Bonded Warehouses
 These are warehouses for storage of dutiable goods on which customs duty has not yet
been paid.
 These are mostly found in boarders, ports, airports and at railway stations.
 They are under the strict control of customs and excise authority.
 They may be owned by the private individuals, companies or government.
 The owner enters into a bond (agreement) with the government that goods are not going to
be released until duty has been paid on them.
The importance of bonded warehouses

 They allow for the preparation of goods by packaging, branding and even blending them.
 They protect goods from theft and bad weather.
 They allow goods to be offered for sale while in transit.
 They allow the importer to put off payment of duty on goods.
 They allow the importer to transfer payment of duty on goods to the new owner.
 They allow exporters to avoid payment of customs duty on dutiable goods meant for re-
export.
 They encourage entrepot trade to take place because duty can be avoided through them.
When can a bonded warehouse be preferred to other types of warehouses?

Bonded warehouses may be preferred to other types of warehouses in the following
circumstances.
 When imported goods are dutiable and the trader doesn’t have sufficient money to pay for
the duties immediately.
 When the imported goods are not required immediately and they therefore need to be
stored under the control of the customs authorities without payment of duties until they are
removed.
 When goods are to be re-exported and no customs duty is to be paid.
 When the goods need to be prepared for sale by blending, branding, labelling or
packaging.
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ADVERTISING
Advertising is an aid to trade concerned with the spreading of information or awareness about
a product, service, or an organisation. It is a means of presenting the most persuasive
possible selling messages to the right people for the product or service through the
advertising media.
Features of Advertising
 Advertising is always paid for, if not it becomes simply publicity (news).

 Advertising always uses a medium e.g. Television, radio, Newspapers, Magazines etc. It
is therefore non-personal, otherwise it may be confused with Personal Selling
(Salesmanship).
 Advertising always has an identified sponsor otherwise it could be abused to convey
unlawful messages or be a tool for propaganda.
 Advertising is about something specific e.g. an idea, goods, services etc.
 It is aimed at a specific group of people known as the target audience e.g. Children,
students, house wives, Teachers etc.
 Advertising is mostly persuasive. Non-persuasive messages about the company or its
products are best disseminated through Public Relations.
Business Purposes/Aims/Functions of Advertising
 To inform customers about the availability of goods and services.

 To persuade consumers to buy goods or services advertised.
 To remind consumers and traders of the existing goods and services.
 To maintain customer loyalty or hold on to the business’ market share.
 To inform customers of where goods can be found and at what price.
 To inform customers about changes or product modifications.
 To inform customers of the location of shops and offices.
 To build a brand image or company image.
 To announce job vacancies and enable companies recruit suitable personnel for jobs.
 To enable traders to penetrate new markets for their products.
 To attract new customers to a product or service
 To enable traders to remain competitive in business.
 To challenge competitors’ advertisements or to claim superiority in the industry.
 To warn customers of a fault in a product.
 To change people’s attitudes and habits e.g. Keep Lusaka clean campaign.
Modes of Advertising/Advertising Media
Advertising modes are the means/platforms through which advertising is carried out or done.
There various mode of advertising one can use to advertise or sell their goods or services.
Television
Advantages
 It gives lasting impression because of the combination of colour, sound and action.
 It gives a wide coverage.
 The advert can be shown at the right time for the right audience.
 It gives display and demonstration of products by means of sound and vision.
 It provides repeated advertisements.
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 It has high status and perceived credibility.

 Can involve the entire family.
Disadvantages
 It is very expensive.
 It is not well received by viewers as some consider it an interruption to interesting
programmes.
 It is only limited to people who have television sets.
 Television adverts may be short lived and hence may not create a lasting impression.
 Some adverts may not be taken seriously by some people who think of them as
entertainments.
 Repetition may be irritating to the viewers who may be forced to Zap or Zip (Zapping –
using remote control to remove sound or change channels while Zipping is where viewers
of recorded programmes use the fast forward button to skip commercials)
Radio
Advantages
 It gives a wide coverage
 It is cheaper than television advertising.
 It can be directed to a specific audience by using special time or language.
 It gives lasting impression through catchy tune or jingle.
 Repeated advertisements can be done on radio.
 Radio does not require sole attention i.e. people can do other things at the same time e.g.
driving while listening to the radio.
 Radio is listening is usually habitual as it is a form of companionship.
Disadvantages
 Consumers do not physically see the goods being advertised.
 Some radio stations have limited coverage. e.g. community radio stations
 Radio adverts tend to be short and this reduces its effectiveness unless it is broadcast
repeatedly.
Newspapers
This is part of the print media, e.g. The Mast, Times of Zambia, Daily mail, Daily nation etc.
Advantages
 They give a wide national coverage since newspapers are read by all classes of people.
 It is flexible as the advertiser can decide the size and duration of the advertisement in the
paper.
 Newspaper advertisements can be as large as the advertiser wants it to be.
 Exposure to the advertisement is not limited as readers can go back to the message again
and again if so desired.
 Space for newspapers can easily be booked.
 The use of daily newspapers for advertising ensures an immediate coverage of the
intended audience e.g. congratulatory messages, funeral messages etc.
 Newspapers are relatively cheap, thus, more people can afford them.
Disadvantages
 Newspapers have a short shelf life as newspapers are usually read once and then
discarded.
 Poor quality of print may reduce the effectiveness of adverts.
 Illiterate people are not able to access the information in newspapers.
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Posters
Advantages
 These are cheap to produce
 They may be made in various sizes and placed in various locations e.g. along high ways,
on walls etc. to attract the target audience.
 They do not need much attention once they are strategically placed.
 They are long lasting.
 They can be used to advertise items within a particular area e.g. advertising discounts
being offered in a particular shop.
 Geographically selective- they can be placed in places patronized by the target audience.
Disadvantages
 They do not give a wide coverage especially when stuck in only one area.
 They may be destroyed due to bad weather such as rains; they may be torn down and
often defaced.
 They may not be acceptable to local authorities as they make the locality look untidy.
 They have high production costs.
Leaf Lets/handbills/Flyers
Advantages
 Coupons may be offered through leaflets.
 Leaflets are cheaper than either television or magazines.
Disadvantages
 Leaflets may involve high distribution costs for a limited audience.
 They may not reach their intended audience.
 They may be discarded or destroyed immediately.
Magazines
Advantages
 They offer targeted advertising where certain adverts can be targeted at a Particular
audience for example, a men’s magazine may advertise men’s shoes trousers etc.
 Many readers other than the buyer of the magazine (secondary readership) have access to
adverts in magazines. This is as a result of their long life
 Magazines have a long term impact as magazines can be kept and referred to later.
 The use of colourful illustrations can create aspiration.
 Special coupon offers can be made through magazines.
Disadvantages
 Some magazines may have limited readership as they appeal only to certain classes of
people, e.g. some women may not want to read men’s magazines, some farmers may not
want to read accountant journal, etc.
 Magazines’ advertising is very expensive.
 Magazines may be expensive as a result they may reach fewer people.
Exhibitions (Trade fairs/Agricultural shows)

 This include fashion parades, trades fairs etc.
 They are very effective media because they attract large numbers of people who may
already have interest in goods being exhibited.
 Under this media, customers are given first-hand information on products.
Advantages
 It helps to raise the company profile
 It helps to start building relationships with customers since you meet them face to face.
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 It helps to answer questions on concerns about the product.
Disadvantages
 It is expensive as it includes costs such as stand space, stand design and build, travel and
accommodation for staff etc.
 Results are not guaranteed despite the investment in the exhibition.
 Unexpected number of participants in the exhibitions.
Bill Boards
These are normally placed in strategic places which are frequented by people. They may be
along the high ways, railway stations, cross roads or at bus ranks. They are a very effective
tool in advertising especially if they are properly designed.
Advantages
 You are guaranteed that people will see your adverts since it is place along highways and
busy streets.
 You can customise your advertisement by placing it wherever you feel it has the most
impact.
Disadvantages
 There is a limitation as to the amount of information that can be communicated because an
average person may only see the advertisement for about 3 to 5 seconds.
 It is expensive. This is because businesses usually have to enter into long term
commitments with billboard companies as it takes a lot of time, energy and money to
constantly changes billboard advertisements.
Social Media Advertising

This is advertising through web based social networks like Facebook, twitter, LinkedIn,
YouTube, etc.
Advantages
 Social media sites are great for building customer relationship and offers an incredible
reach and opportunity to connect with customers.
 Offers a wide reach with its potential for viral marketing.
 Social media tools are relatively inexpensive.
Disadvantages
 Targeting is so low because of the diversity and breadth of audiences.
 Visitors mainly go to social media sites to socialise and are mostly not interested in
advertising.
 Social media can be a hard branding tool for small businesses and it is not easy to build
awareness, create appeal and generate traffic.
Point of sale display

 These include window displays and displays inside the shops.
 It is aimed at the in store “traffic” e.g. people who walk in and out of the shops
 Goods are attractively displayed to entice people to buy on impulse
 They are attractively pre-packaged
 The disadvantage of this medium is that appeal is limited to people who or pass near the
shop come to or pass near the shop doing “window shopping”.
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Factors Considered When Choosing Advertising Media

 Target group. This refers to the class of people who will be expected to buy a product or
service.
 Coverage (area to be covered): The firm should determine the extent of the advertising
campaign, whether national, regional, town or in store.
 Types of message: Advertising messages should be brief to minimize costs but forceful
enough to capture the attention of consumers to products on sale.
 Cost of advertising media: Since advertising increases the overhead expenses of a
business, a business should use a medium that is likely to bring greater benefits to the
business.
 The nature of the product: The nature of the product to be advertised should therefore be
closely considered because using an expensive medium for cheaper goods might raise the
final consumer’s price and reduce sales thereby defeating the very purpose of advertising.
 Methods of appeal: Rightful methods of appeal must be used in the rightful media of
advertising.
 The duration of the advertising campaign: Consideration should be made on how long
the advert is expected to run in order to be effective.
Methods of Appeal
These are persuasive tactics used in enticing people to buy a particular product or service.
These tactics are used because the impact of the message depends not only on what is said
but also how it is said.
 Personality symbol: This creates a character that represents a product. Famous people
are shown using the product to give it an acceptable image.
 Romance: The advertisements suggest that the user of the product will be more attractive
to the opposite sex, e.g. advert on fair and lovely cream.
 The slice of life: The advertisements show one or more people using a product in a
normal life setting.
 Ambition: The advertisement suggests that success comes by using a particular product,
e.g. NIDO kinds go further.
 Musical: This shows one or more people or even cartoons singing about the effectiveness
of the product i.e. using Jingles.
 Work simplification: The advertisement suggests that the product simplifies work
performance. This persuades many people to buy a product with a view of simplifying their
work e.g. a detergent paste may be shown to be very powerful as to simply washing.
 Scientific evidence: This presents a survey or scientific experiment about the product to
prove its effectiveness.
 Dramatic: This may be used so that if the advert is fun or amusing, then the product can
be remembered and bought.
 Social acceptability: A product is claimed to make the user more acceptable to other
people.
 Emotional appeal: This is designed to appeal to our pride or hidden fears, for example “if
he doesn’t ask you for a next date, then the reason would be your breath” in tooth paste
adverts.
 Excellence: This method suggests that the service offered is of high quality. This is seen
in most advertisements for banking, transport, hotels, education, health etc. which places
emphasis on excellence.
 Other methods of appeal include loss leaders, health, display of goods, etc.
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Types of Advertising
Informative Advertising
This is a type of advertising that is designed to inform people in a clear and straight forward
manner. Most of the advertising done during the launch of a new product is informative also
known as Educative advertising. It is aimed at announcing the new product and providing
detailed information on how it is made, what it is used for, where it can be found, how it can
be stored etc.
The aims of informative advertising are as follows:

 To inform customers of where goods or services are available and at what prices.
 To inform the public about the terms and conditions for the supply of a particular goods or
service.
 To explain the use of a product or services for particular purposes and situations.
 Examples of informative advertising are;
o Announcing births, deaths, marriages etc.
o Announcing modifications in products, changes in office locations
o Advertising in technical and trade journals. Such advertisements usually contain
technical details of products and invite inquiries from interested parties.
o Advertising of events, Such as trade fairs, exhibitions, concerts and sporting activities.
o Advertising of employment opportunities.
Persuasive Advertising
This is a type of advertising which is aimed at influencing or enticing customers in favour of
purchasing a particular product. Most of the advertising which surrounds us daily urging us to
buy different kinds of products and services is persuasive advertising.
This type of advertising employs very powerful techniques aimed at leading the target
audience through a process of AIDA (Attention, Interest, Desire and Action) or AIDCA
(Attention, Interest, Desire, Conviction and Action).
Persuasive advertising keeps the wheels of industries running by creating demand for goods
produced. It is mainly aimed at consumers and is the kind which tries to persuade them to buy
the advertisers’ products rather than his competitor’s by assuring potential customers that it is
better.
Aims of persuasive advertising

 To persuade customers to change brands (i.e. to switch on other brands) by promoting one
particular product rather than other brands.
 To secure a larger share of the market for a particular manufacturer’s product.
 To increase sales (turn over) and profits.
 To penetrate new markets (i.e. to help new products to catch on the market).
 To maintain the market share of a product.
Advantages of persuasive advertising

 It leads to better goods and services as producers would be forced to produce better goods
and services to get a larger share of the market.
 It enables businesses to increase turn over and yield greater profits.
 Competitions may result in lower prices of goods and services as all competitors want to
win more customers.
 It helps to promote the image of the company and its product.
Disadvantages of persuasive/competitive advertising

 It adds to the cost of a product and ends up making the product more expensive for the
consumer.
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 It may be misleading to consumers who might end up buying poor quality products.
 Most of the competitive adverts do not provide consumers with sufficient information about
products.
 Some customers are persuaded to buy goods they cannot afford which may be beyond
their means of life on credit.
 It encourages impulse buying
 It may promote dangerous and harmful products.
Generic/Collective Advertising
 Generic Advertising - is a kind of advertising where the advertiser does not promote a
specific brand but just uses generic terms. E.g. we have in stock cooking oil, tooth paste,
detergents, bathing soap etc. Large retail outlets that stock lots of goods from various
suppliers use generic advertising instead of brand advertising. It is equally utilized where it is
not so important for customers to choose a particular manufacturer’s brands because the
commodities are not so different from manufacturer to manufacturer e.g. oranges, tomatoes,
eggs etc.
 Collective Advertising – Also known as Cooperative Advertising is a kind of team work

advertising. It is a kind of advertising which is designed to benefit more than one advertiser.
Examples of Collective advertising are in the form of advertising by Cooperative societies on
behalf of its members, Joint advertising by Trade Associations on behalf of members, Mutual
advertising schemes by firms whose businesses are interdependent and also Dealer Support
Schemes. Collective advertising offers benefits for all members or affiliates
Advantages
 It is cheaper since it is not aimed at promoting a specific brand
 It is very ideal for products where customers are not interest in specific brands e.g.
tomatoes.
 Generic advertising can be used when launching new products so that the firm is not
affected in an event that the new product fails as no specific brand name would have been
used.
 It increases the demand for a product.
 It is cheaper since the cost of advertising is spread among several producers.
 It allows competitors to group together for their mutual support.
Disadvantages
 Brand loyalty cannot be attained as adverts do not emphasize on specific brand names but
generic names.
 Generic advertising may not be as effective as brand advertising where customers are
particular with brand names.
 It does not emphasize a particular producer’s product.
 It is not effective in defeating competitors, obtaining greater market share and in earning
greater profits since it is neutral.
 It does not target different markets.
Competitive Advertising
This a type of advertising where firm tries to out-do other firms dealing in the same type of
products by directly or indirectly comparing their brands against those of competitors. The
messages under competitive advertising are usually confrontational or aimed at bringing down
the competitors’ brands while claiming superiority. Common themes and slogans used in
competitive advertising include: ‘we are the best in town’, ‘we are the number one producer of
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quality cement’ ‘we are second to none’ ‘no one beats our quality’, ‘use our brand, don’t settle
for less’ etc.
Advantages
 Increased competitive advertising may lead to provision of quality services and products.
 The claims made by various firms are helpful in the consumer purchase decision making.
 Competitive advertising helps in product differentiation and market positioning.
Disadvantages
 Where it becomes a practice for all firms to make superiority claims, the messages become
ineffective and irrelevant to the consumer’s decision making.
 Intense competitive advertising may lead to increased expenditure on advertising as firms
try to offset competitor messages, this may lead to increased prices of goods are the cost
of advertising is passed on to the consumer.
Advantages of Advertising
To the manufacturer or trader

 It helps to inform consumers on the various old and new products which the manufacturer
has for sale.
 Persuading consumers to buy goods or services leads to higher turnover, greater profits
and creates brand loyalty.
 It helps new products to be introduced and to penetrate the market.
 It helps to maintain sales for a product.
 Advertising induces customers to change brands.
 It enables producers to recruit suitable employees for job by advertising job vacancies.
 It helps to promote the public image of the company and its products.
 It enables producers to remain competitive in business. This is applicable to producers
whose products have been on market for many years.
 Advertising brings competition amongst producers of similar products e.g. competition for
market share amongst producers of washing pastes.
To the consumer:
 It creates greater competition among producers leading to better quality goods. This
provides consumers with better quality goods.
 Consumers are informed of goods and services which they might otherwise not have been
aware of.
 The consumers’ standards of living are improved through improved products
 Advertising provides wide variety/choice selection.
 It reminds customers of old and existing goods.
 It helps to educate consumers on how to use certain products.
 Consumers are informed of product modification, changes in location of shops, offices etc.
 Advertising allows for mass production of goods because of large sales the results from
successive advertising thereby leading to lower prices of goods for the benefits of
consumers
 It gives indirect benefits such as keeping down the cost of a newspaper.
 It gives information to consumers on matters of public interest e.g. health matters, birth
notices, death notices etc.
 It provides finance for commercial television and radio, which in turn provide entertaining
programmes to consumers.
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 It can help the producer to obtain information regarding services of raw materials,
machinery, spares and other inputs.
 Advertising allows for events such as sports activities, political meetings etc. to be
advertised.
 Advertising creates employment.
Disadvantages of Advertising
To producer/trader
 It can be a great expense to the business especially if it does not result in increased sales
and greater profits.
 Competitive advertising especially for similar products like washing detergents may be a
waste of resources.
To the consumer
 It adds to the cost of a product making it more expensive for the consumer.
 Advertising may attempt to mislead or deceive customers.
 Advertising may make some people to live beyond their means by forcing them to buy
more goods on credit than they can afford.
 Advertising may promote dangerous and harmful products.
 Advertising encourages impulse buying.
Advertising Agencies
 These are organizations that specialize in creating and promoting advertisements on behalf
of other businesses.
 They are remunerated by commission from their clients. Most manufacturers do not
possess the particular skills that are needed to devise, make and place such
advertisements.
 The advertiser normally consults advertising agents and selects one of them to run the
campaign for them.
 Since the advertising agent handles campaign for many advertisers, they can afford to
employ specialists in many fields, a luxury which individual manufactures could not afford
for themselves.
Reasons for Using Advertising Agencies

 It may not be economical for a company to have its own full time advertising staff or
department especially if it’s a small firm.
 Advertising agencies have highly specialized staff that help the seller to reach potential
buyers.
 May help the seller to negotiate on the cost of the advertisement with the advertising
medium.
Functions of Advertising Agencies

 They give specialist advice on the choice of media.
 They create advertisements on behalf of their clients.
 They produce advertisements on behalf of their clients by putting ideas of advertisements
in form of videos, posters etc.
 They help clients to book for space and time on the media chosen by negotiating time and
space for advertisements
 They co-ordinate advertising campaigns with sales departments of clients.
 They supply sellers with market research facilities.
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Control of Advertising
The main aim of most persuasive advertisements is to entice consumers to buy certain
products. Advertising companies can go therefore, to any lengths to achieve this objective.
This may neglect the welfare of the consumer’s hence the need for strict controls on
advertising.
The reasons for controlling advertising include:
 Some advertisers may attempt to mislead or deceive consumers in an effort to increase
sales.
 Untrue statements about a product may be made in an effort to persuade consumers to
buy a product.
 Some advertisements may undermine social standards and may lower moral standards
especially those aimed at young people.
 It may promote dangerous and harmful products.
 Some advertisements can be intrusive.
 Some advertisements may be illegal.
 It may make some people to live beyond their means by forcing them to buy more goods
on credit than they can afford.
 Some advertisements emphasize only the good points of a product.
Ways of Controlling Advertising
Control of Advertising by Self-Regulation (Code of Advertising Practice)
This is done by advertisers themselves coming up with a document containing a set of
standards to be followed by all the members, i.e. self-regulation. The document contains
ethics to protect consumers from misleading, dishonest and untruthful advertisements. These
ethics require that all advertisements are:
 Legal: Must not contain anything which is against the law of the country
 Honest: Must not deceive consumers.
 Decent: Must abide by the moral code of conduct and society norms
 Truthful: Must not mislead consumers by false statements, omission of vital information
or by exaggeration.
Control of Advertising by Legislation
The government controls advertising by passing laws to protect consumers from dishonest,
misleading and untruthful advertisings, and also from those that promote indecency,
dangerous and harmful products
Control of Advertising by the Media
The media may also help by refusing unsuitable advertisements in the media. This makes the
‘messengers’ i.e. the advertising agencies to exercise and show a sense of ethics and
responsibility whenever they plan and produce adverts.
Control of Advertising by Voluntary Associations
Consumers can protect themselves by forming Consumer Protection Associations. These are
non-profit organizations which are formed and financed by consumers. Through these
associations, consumers can pass complaints against certain products and may influence
decency, honesty and truthfulness on the manufacturing and advertising industry.
The functions of Consumer Associations include;

 Carrying out comparative tests on goods sold in shops e.g. tests may be carried out on
weights of products in order to establish these products which are under weighed
 Publishing the findings of tests in association magazines or in the press.
 Identifying and recommending to consumers, products which are found to be good quality.
 Informing members on legal matters relating to purchase of goods.
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Commerce 7100 Supplementary Study Notes 0

SUPPLEMENTARY STUDY TEXT

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James Gwenani, MBA Fin., ZiCATech, BBA Ed., Dip. Ed.

Edgar Shiluwe, BBA Ed., Group Dip. Marketing, Dip. Ed.

John Kaputula, MBA Fin., ZiCALic, BBA Ed., Dip. Ed.

BUSINESS STUDIES TEACHERS ASSOCIATION OF ZAMBIA

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©2022 BUSTAZ Lusaka Province

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PROVINCIAL EDUCATION OFFICER’S STATEMENT

Allan Lingambe PhD

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Lenny N. Longwe (Mrs.)

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Anderson L - (1972), Commerce around us, Longman, Harare, Zimbabwe

Kotler P. et al, (1996), Principles of Marketing, Prentice Hall, UK

Lobley D., (1993), Success in Commerce, Holder Education, UK

Matimba A., (2009), Distinction in Commerce, Matimba A, Zambia

Wokarochi J. B., (2016), Commerce A Complete Course, Salama Publishers, Botswana

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INTRODUCTION TO COMMERCE ....................................................................................... 9

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Reasons why Businesses Purchase on Credit................................................................. 34

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Primary and Secondary Trading on the Stock Exchange ................................................. 65

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Rail Transport ............................................................................................................ 108

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The Branches of Commerce

Trade Aids to Trade

Home Foreign Advertising

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Career Prospects in Commerce

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The Meaning of Production

Human Needs and Wants

Goods and Services

INDUSTRY COMMERCE DIRECT

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How the three Branches of Production are interlinked

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NB: All goods may be classified as either:

Production and the Chain of Distribution

PRODUCE PRODUCER PRODUCER PRODUCER PRODUCE

CONSUMER CONSUMER CONSUME CONSUME CONSUMER

Production and Commerce versus Environment

Effects of Production on the Environment

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Possible Solutions to the Effects of Commerce on the Environment

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Parties to a Valid Contract

Elements of a Valid Contract

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What is Pre-sales service?

What is After-sales service?

Factors to consider when establishing a Retail Outlet

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Small Scale Retailers