FOREIGN TRADE

International trade is trade between countries. It can take place between two individuals or two organisations
based in different countries or even between two governments. It involves the physical movement of goods and
services from one country to another.
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 export.

Advantages/Reasons for Foreign Trade

 Climate conditions/raw materials : No country is able to be self sufficient i.e. to produce
all the goods and services that its people require. This is because countries are endowed
with different natural resources and experience different climatic conditions. Therefore,
countries that cannot produce some goods due to non-availability of raw materials or
unfavorable climatic conditions or lack of skills of their populations are able to buy goods
they lack from other countries.
 Need for supplements: Countries with insufficient goods are able to obtain supplements
from other countries to off set the short falls.
 Specialization: A country is able to concentrate on producing certain goods and services
in which it has comparative advantage. The law of comparative and advantages states
that a country should specialize in producing a good/service in which it is most efficient.
 Technology exchange: Foreign trade allows exchange of technology between countries.
 Foreign currency: A country is able to obtain foreign currency required to pay for
imports, and thus be able to maintain a favorable balance of trade and balance of
payments.
 Political friendship : countries may trade with one another in order to foster political
relationship.
 Market for goods: Foreign trade will help to expand /widen a country’s market for goods
and services produced locally.
 Foreign exchange: Countries may export goods in order to earn foreign exchange or
income which is used to finance development projects like the building of roads, school
etc.
 Surplus goods: A country may export to get rid of surplus. This is where a country
produces more than it can locally consume.
 Standards of living: Foreign trade helps to improve standards of living of many countries
by availing a wilder variety of goods and services to the people through imports.
 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.
 Cheaper foreign goods: some countries may produce a product more cheaply and hence
residents may prefer to buy such cheap foreign goods than the local ones.
 Competition from foreign goods: Some countries may deliberately bring in foreign goods
in order to give the local industries some competition. This will force 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.

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  Proximity of neighbors : Countries may trade by reason of being geographically close to
each other e.g. Zambia and Malawi.

Disadvantages of Foreign Trade to a country

 Foreign trade may result in natural resources of a country becoming exhausted sooner or
later.
 Foreign trade may expose a country to dumping. Dumping is the selling of low quality
goods in a foreign country at unfair price just to earn foreign exchange. This may result in
the closure of local industries whose products cannot be bought because residents have
preferred cheap foreign goods.
 Foreign trade may discourage self-sufficiency of a country, i.e. a country that depends on
imported goods may not make full use of its resources.
 A country that is specialized in producing and exporting one commodity, may suffer
hardships when the price of such a commodity falls on international markets.
 Undesirable and harmful products such as fire arms, prohibited drugs like mandrax,
cocaine etc may be imported in the country.

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. There are often dangers
of misunderstandings in communications between traders and these forces exporters to
translate documents, adverts and instructions into different languages usually at
additional costs.
 Distance problems, in foreign trade, goods usually move longer distance, for this reason
goods may need special packaging to protect them from bad weather conditions and
insurance for risks of loss due to theft and damage where transshipments are inevitable.
Long distances also mean that that any problem that may arise between the buyer and
seller may take some time to solve and transport arrangements to carry goods may be
expensive and time consuming.
 Differences in units of measurements. Different countries use different methods of
measuring distance, lengths, volumes and weights, for example while Zambia uses the
metric systems of meters/kilometers, liters and kilometers, litres and kilograms, Britain
uses the imperial system of yard/miles, pints and pounds. This leads to the following
problems:
 Difficulty by exporters to fix prices for their goods.
 Costly repackaging of goods in appropriate measurement required by foreign
buyers.
 Problems of payment for goods and services: Different countries use difference
currencies. Problems caused by this include:
 Exchange rates may fluctuate from time to time. This creates uncertainties as to
the amount of money the exporter would receive in payment for goods sold to the
importer.
 Commissions are paid to banks when exchanging money.
 Some countries may not have enough foreign currency to enable their nationals
buy foreign goods.
 It is difficult and expensive for the exporter to take legal action against d efaulting
importers.
 Laws and customs: Habits of work, day and dress differ from one country to another.
Certain goods are prohibited and certain foods are not eaten in some countries on

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 religious grounds. The difficulty caused by deference’s in countri es law and custom
include:
 Difficulty in obtaining information on laws and customs of other countries.
 Great effort and expense is spent on research and modification of goods in order to
meet the needs of foreign buyers.
 Documentation problems: Documents used in foreign trade are many, lengthy and
complicated and may need to be translated in the language of the recipient country.
 Trade barriers: These refers to trade restrictions and tariffs (duties) that a country may
impose. These may frustrate traders.
 High insurance costs: Traders may need to insure their goods at high costs. This is made
necessary because of the following:
 Pilfering and theft of goods on ports and in transit
 Accidents involving vehicles on roads, ships lost on sea, goods lost due to
jettisoning and aircrafts that crash.

Distinctions between Home and Foreign Trade

International trade differs from home (domestic) trade in the following ways:
 Home trade is the buying and selling of goods and services within one country. Goods move from one
part of the country to another and the distance is generally shorter. But international trade takes place
between two countries, with goods and services moving from one country to another and the distance
are generally longer.
 Home trade consists of wholesale trade and retail trade, whereas international trade consists of export
and import trade.
 Home trade takes place within a single country where there is a single legal banking and fiscal (tax)
system. Foreign trade, however, takes place between people of different countries who do not share the
same legal, banking and fiscal system.
 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.

Documents Used In Foreign Trade

1. 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. This means that the
holder of this document may take possession and claim ownership of the goods written on
it. Without it the owner cannot make a claim ownership of goods.
 It acts as receipt for goods received on board the ship. It is proof that he has received the
good for shipment.

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  It is an evidence of a shipping contract. It sets out the terms and conditions for carriage
and may be used as evidence in the courts of law where one party defaults.
 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. The shipmaster inspects the goods
when receiving them on the ship. If parts of the goods are damaged, he makes
amendments on the bill and signs it. This is called a Dirty Bill of Lading.
 He signs a clean bill of lading if all the goods are in order and no amendments are to be
made.

2. Charter Party
A Charter Party is a document of contract made between a ship owner and the hire r
(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.

Terms of Contract of the Charter party

The terms of the charter party are that;
 The owner undertakes to make the ship sea worth and the charterer promises to pay for
the hire of the ship.
 The ship will be placed at the disposal of the charter so that the charterer is free to use it.
 The ship shall be ready to commence the voyage without any unreasonable delay.
 The ship shall not deviate from its normal course or route unless for a good cause.

3. Airway Bill
 This is a document prepared by the captain of the airline when goods are transpor ted by
air.
 It is prepared in three copies: One to the consignor; one to the consignee and one to the
airline.

Importance of an Airway Bill

 It gives approximate value of goods for customs purposes.
 And other points (same as for the bill of lading)

4. 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 resident
in the exporter’s country.

Importance of Certificate Of Origin

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  It enables the customs authorities to know exactly where imported goods are coming from
and where applicable exempt them or change less duties e.g. those from COMESA
countries.
 It helps e.g. to prevent the importation of goods not allowed from countries with a trade
embargo.

5. Certificate of Insurance
 This is a document issued by the insurer to the exporter at the time when the contract to
cover goods in transit is made.
 This document is always enclosed with the goods in transit.
 A copy of the actual policy can serve in place of a certificate.
 A certificate of insurance may be for a specific journey, i.e. voyage policy; or for a period of
time when it is known as a 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 properly insured.

6. Consular Invoice /Certified Invoice

This is a document used in foreign trade. It is issued by the exporting country signed by the
consul of the importing country resident in the exporter’s 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 helps to prevent the importation of the prohibited goods.
 It quickens the clearance of goods at customs check points.
 It contains detailed information necessary for compilation of statistics on imports and
exports.

7. Indent
 An indent is an order for the supply of goods from abroad.
 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 sent either directly to the exporter or through and agent.
 An indent sent through a buying agent may be a closed indent or open indent.
a) 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.
b) 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.

8. Export Invoice
 For the definition, contents and importance of an export invoice refer to the invoice under
Home Trade.

Means of Payment in Foreign Trade

The following are the methods of payment for goods and services used in foreign trade.

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1. 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.

2. 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.

3. 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.

Advantage s of Letter o f 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 can not be withdrawn (cancelled) during a particular period.

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4. Bill Of Exchange
The Bill of Exchange Act defines a bill as “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 of mone y
to or to the order of a specified person or to bearer”.
 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.
 He/she can hold on to the bill of exchange until maturity date when the buyer pays
cash, or
 He/she can pass it on to someone else in settlement of debts by end orsing it or
 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 p ayment 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 o f 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.
 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.
 He/she instructs the bank to handover the documents to the importer’s bank (after
the importer has paid or accepted the bill).
 The bank will then send them to the importer’s bank with the rele vant
instructions that the importer’s bank should not release the documents until the
importer has either accepted the bill or paid the money.
 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.

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  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.
 When the exporter has drawn up a bill, the bank is responsible for seeing that
acceptance or payment is made before documents are released.
 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.

The Customs and Excise Authority

The customs and excise authority is a government department or appointed agent that
supervises the movement of goods in and out of the country. In Zambia, the Zambia Revenue
Authority (ZRA) performs the functions of the Customs and Excise Authority.

Functions of the Customs and Excise Authority

 To supervise the movements of imports and exports of a country.
 To supervise the movements of ships, vehicles, aircrafts and trains leaving and coming in
the country.
 To collect statistics on imports and exports.
 To stop the entry of harmful and prohibited goods such as cocaine, fire arms etc.
 To collect customs duty on imported dutiable goods.
 To collect excise duty levied on some locally produced goods such as cigarettes etc.
 To control bonded warehouses.
 To prevent smuggling of goods.
 To enforce trade restrictions such as quotas and embargoes.
 To inspect documents used in foreign trade.
 To control public health. The customs authority will help to control infectious diseases by
organizing quarantines of animals.

For what reasons are customs authorities re quired to undertake the following :
 Collection of statistics on import and exports
 Enforcement of quotas
 Controlling of bonded warehouses
 Controlling of customs duties?

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:

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  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 o f 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 important harmful or undesirable goods such as tobacco, spirits etc.

Why Do Countries Impose Tariffs And Trade Restrictions?

Countries impose tariffs and trade restrictions for the following reasons.
 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.

Types of Customs Duty.

The two types of customs duty are advalorem duty and specific duty.
 An Advalorem duty: Advalorem duty is customs duty levied as a percentage of the value
of imported goods. For example, imported goods may be valued at K500 000 and
percentage rate of customs duty is fixed at 20%. The customs duty payable will be:
20/100 X K500 000 = K100 000
 Specific duty: specific duty is customs duty charged according to the quantity of imported
goods. The quantity may be in terms of volume, weight or number of goods.

Customs Drawback
Customs drawback is the refunding of duty when customs duty has been paid on goods and later
the goods are ex-exported. Payment of customs duty may be avoided by storing goods in a
bonded warehouse.

Excise Duty.
Excise duty is a charge levied on certain locally produced goods such as cigarettes, spirits etc.
The reasons for collection of customs duty include:

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  To restrict consumption of certain goods considered harmful or undesirable such as
cigarettes.
 To balance any price advantage of home produced goods over imported goods which are
dutiable.
 To raise revenue for the government.

Exercise
What Are The Differences Between Excise And Customs Duty?

Entrepot Trade
Entrepot trade is a form of international trade where goods are temporarily imported into a
country and then re-exported to other countries. It may also be defined as the export trade done
by a country in another country’s products. It is carried out in goods such as diamonds, tea, etc.
Examples of ports undertaking Entrepot trade are Singapore, London and Rotterdam.

Payment of customs duty on goods handled in entrepot trade may be avoided by storing such
goods in bonded warehouses.

Terms of importing
When goods are imported, there are some costs which are not part of the original cost of the
goods themselves but are additional cost and these might have to be met by the importer. They
are determined by the way the price is quoted and there are many ways as follows:

Free on board (f.o.b)

This means that the price quoted includes all charges up to the point where the goods have been
loaded on to the ship. Any charges arising after this will have to be met by the importer.

Free alongside ship (f.a.s.)

This means that the price quoted only includes the cost o f bringing the goods up to the port of
loading but the cost starting from loading the goods onto the ship up until when the goods arrive
in the importers warehouse have to be met by the importer.

Cost, insurance and freight (c.i.f.)

This means that the price quoted includes the cost of goods, insurance premium, as well as the
carriage or transport charges levied by the shipping company up to the port.

Ex ship
This means that the price quoted includes the cost of goods and the transport charges up to the
port. However the costs of offloading the goods and the rest of the expenses have to be met by the
importer.

Duty paid
When the price is quoted as duty paid it means that the exporter has paid for the import duty as
well as all other related costs. In this case the importer only pays one cost as a lump sum.

The Middlemen of Foreign Trade

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The middlemen of foreign trade include merchants, factors brokers and forwarding agents. The
middlemen are necessary in international trade because they help to reduce problems faced by
importers and exporters.

1. Merchants
 Merchants are traders who are in business on their own, buying and selling goods for
themselves.
 They do not Work for any body. They are the principals of the goods they buy and sell.
 They act as wholesalers and provide delivery, warehousing facilities etc.
 Merchants are remunerated (paid) by profit they make as they buy and sell goods.
 Merchants import goods from other countries and sell them in the home country.

2. Factors
Factors are agents who may work in home or foreign trade.
 Factors have possession of the goods and documents of the delivered to them by their
principals who may be local manufacturers.
 Factors sell goods on behalf of the principals or someone else who may assign them.
 Factors may sell goods in their own names
 Factors only sell goods. They do not buy.
 Factors may undertake the packaging of goods, documentation and shipment of goods
being exported to foreign buyers.
 Factors are remunerated (paid) on commission basis.
 Factors guarantee payment for goods delivered to them by their principals.
 They may pledge goods and give credits to trusted customers.
 Factors receive extra commission known as Del credere in addition to their usual
commission. Factors are given extra commission because they bear extra risks such as
bad debts for goods sold on credit.

3) Brokers
Brokers are agents who may buy and sell goods on behalf of their principals or someone
else.
 Brokers do not have possession of the goods they sell or buy.
 Brokers do not sell or buy goods in their own names
 The main function of brokers is merely to bring buyers and sellers together for the
purpose of trade.
 Brokers are remunerated (paid) on commission basis. Brokers receive commission
known as brokerage.

4) Forwarding Agents
Forwarding agents are middlemen of international trade who assist people to export goods.
Forwarding agents are of particular importance to smaller businesses that do not possess
specialist exporting expertise or departments.

The functions of forwarding agents include:

 To organize the collection of goods from manufacturers for export.
 To reserve shipping space and arrange shipment of the goods.
 To attend to documents used in the transportation of goods such as bill of lading, airway
bill, insurance certificate etc.
 To obtain insurance cover for goods being exported.
 To arrange for delivery of goods to the importer.

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  To co-ordinate journeys and timetables of various transporting systems.
 To deal with any import/export formalities required for smooth transfer o f exported goods.

Balance Of Trade
This is the difference between the total value of goods exported and goods imported.
Balance of trade can as well as be defined as the difference between visible exports and visible
imports.

Balance of trade = Visible exports - Visible imports.

Visible exports: are goods that are seen and touched which a country sells to other countries
such as copper, sugar, blankets etc.

Visible imports: are goods that are seen and touched which a country buys from other countries
such as cars, computers, clothes etc Balance of trade can either be favourable or unfavourable.

Favourable balance of trade : This is when visible exports exceed visible imports.

Unfavourable Balance of Trade: This is when visible imports exceed visible exports. When this
happens the government must take action to improve the unfavourable balance of trade:
Action taken by governments to improve the unfavorable 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 trade and financial transactions for a country with the rest of
the world over a trading period usually a year.
Balance of payment can as well be defined as the difference between the total amount of money a
country earns from the exports of goods and services, and the total amount the country spends on
imports of goods and services.
Furthermore, balance of payment can be defined as the difference between visible exports plus
invisible exports and visible imports plus invisible imports.

Balance of Payment = visible exports + invisible exports – visible imports + invisible imports.

Invisible exports refers to services sold to other countries such as tourism, electricity, manpower,
transport, insurance, consultancy, banking, loans, etc.
Invisible exports are important to a country because they may offset unfavourable balance of
payment where visible imports exceed visible exports.

Invisible imports refer to services bought from other countries such as expatriate manpower,
tourism, banking, insurance, loans, electricity, consultancy etc.

Sections of a balance of payment

Balance of payment is divided into two main sections of current account and capital account.
 Current Account: Items classified under current account are:

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  Visible export
 Visible import
 Invisible export
 Invisible import

 Capital Account
The important item under capital account of the balance of payment is investment and other
capital flows. The capital account shows the total amount of money a country has borrowed
from other countries and the total amount a country has lent to other countries.
When money is borrowed from other countries, the money is regarded as an import because
the money leaves the country in the same way we treat the money we spend on buying
something from other countries.
Balance of payment can either be favourable or unfavourable.

Favourable Balance of Payment

Favourable balance of payment is when the total amount of money a country earns from the
exports of goods and services exceeds the total amount the country spends on imports of goods
and services. This enables a country to have surplus earnings. Each country aims to have and
to maintain a favourable balance of payment.

Unfavourable Balance of Payment

Unfavorable balance of payment is when the total amount of money a country spends on imports
of goods and services exceeds the total amount of country earns from the exports of goods and
services, and a country is said to have a trade deficit.
When a country spends more money than it earns, it will be forced to borrow from other
countries, and this is how many countries end up having serious debt burdens.

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

Why Is It Important For A Country To Improve Its Total Export Figures Each Year?
It is important for a country to improve its total export figures each year for the following
reasons:
 For the country to earn foreign currency to pay for imports.

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 For the country to improve its balance of payment position so that it has a surplus over
imports.
 For the country to provide employment in the country and thus improve prosperity in the
country.
 For the country to improve the economic strength and thus giving it more world power.
 For the country’s currency to be strengthened.

Assignment
The figures below show the balance of trade and payment position of Zambia for the various years for your
interpretation.
Export Figures for 1993 and 1994
Principal Export commodities (Million Kwacha) 1993 1994
Copper 5 356 3 789
Lead & Zinc 314 217
Cotton & Flowers 132 350
Others 468 572
Total 6270 4928

Import Figures for 1993 and 1994

Import by commodities (Million Kwacha) 1993 1994
Vehicles and transport equipment 560 591
Machinery and selected goods 836 783
Food beverage and tobacco 904 490
Textiles and footwear 450 718
Metals and metal products 600 760
Chemical and rubber products 395 376
Other goods 2 456 1 245
Total 6 201 4 963

Calculate the Balance of trade positions for the years 1993 and 1994. State whether it is favourable or
unfavourable balance of trade.

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 CURRENT ACCOUNT 1995 1996 1997
Visible Export 5630 6090 6142
Visible Import 4910 5200 4492
Balance of trade (visible balance) 720 890 1650
Invisible balance (Balance on services) 416 319 530

Income receipts 1320 597 122

Income payments 632 1352 130
Official transfers (net) 365 446 349
Private transfers (net) 178 244 437
Current account balance ? ? ?

Capital balance 21 16 8
Balance on financial account 40 64 40
Total balance 1176 639 712
Net errors and omissions 196 249 121
Overall Balance ? ? ?
Details in these tables were adopted from commerce notes distributed by the BUSTAZ national secretariat

For the years 1995, 1996 and 1997 Calculate the Balance of payment positions and state whether the
balances are favourable or unfavourable.
What action can the government take to improve an unfavourable balance of payment?

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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, Chilanga 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.
The phrase business unit therefore refers to the various ways of owning a business that can undertake
any one of the activities mentioned above for a profit.
Some businesses are owned and controlled by the government on behalf of its citizens. These form the
Public Sector. They are called Public corporations or Parastatal companies. In Zambia, public
corporations include Zambia Electricity Supply Corporation (Zesco), Zambia State Insurance
Corporation (ZSIC), and Zambia National Broadcasting Corporation (ZNBC).
Some businesses are privately owned by individuals or a group of individuals. These form the Private
Sector. They 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.
Sometimes the government may decide to takeover privately owned businesses and convert them into public
corporations. This is called nationalization of industries.
The government may also decide to sell its ownership of the public companies to private individuals.
This is called Privatisation as it is the transfer of business ownership from Public (government) hands
to individuals (Private) hands.
THE PRIVATE SECTOR
Partnership
The partnership form of business organisation was necessitated historically by the limitations of the sole trader
business to cope with the increased activities. The increase in population and ever widening market demand
more capital, managerial ability and the ability to undertake bigger projects. It was in these circumstances that
the partnership form of business organisation emerged into the business world.
Partnership is defined as „the relation, which exists between persons carrying on a business in common, with a
view of 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, 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.

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The Partnership deed
As already seen, partnership is the result of an agreement. In UK, USA, Zambia, India, etc., the partnership
agreement may be oral or in writing, In France and Italy the partnership agreement should be in writing. Written
partnership agreements will help to avoid future disputes and mis-understandings among the partners. A written
partnership agreement is known as „Partnership Deed.‟ It is supposed to contain all relevant and important
matters concerning the partnership business. This is the basis and foundation of the whole partnership
enterprise.
Contents of the Partnership Deed
The purpose of having a Partnership Deed will be fully served only if all-important matters are included in it.
But what is important to one partnership may not be that important to another. So it is difficult to draw a clear
cut line as to what should be included and what need not be included. But the following points have common
nature and may have to be incorporated in any Partnership Deed.
 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. Thus 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 realised 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.

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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.
 Bank loans and overdrafts.
 Trade credit .i.e. goods and services obtained on credit from suppliers.

Liabilities of Incoming and Outgoing Partners

According to the Partnership Act:
 A person who is admitted as a partner into an existing firm does not thereby become liable to the creditors
of the firm for anything done before he became a partner, unless it is quite clear from the agreement that he
intended to make himself liable.
 A partner who retires from a firm does not thereby cease to be liable to outside parties for partnership debts
or obligations incurred before his retirement.
 A retiring partner may be discharged from any existing liabilities, by an agreement to that effect, between
himself and members of the firm as newly constituted, and the Creditors. And this agreement may be either
express or inferred as a fact from their course of dealing between the creditors and the firm as newly
constituted.

Different 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.
These can again be of two types:
 Particular Partnership – These are partnerships formed for undertaking a particular work or
venture or for a fixed period of time. This type of partnership will be dissolved on completion
of the project or venture undertaken, or after the fixed period of time.
 Partnership-at-will –These are partnerships formed without any agreement as to the duration of
the partnership or number of ventures for which it is formed. This type of partnership will be
continued as long as they enjoy the pleasure of the partners. They can be dissolved at any time
it is desired. If any particular partner desires to dissolve the partnership, he can do so by giving
notice of his intention to the other partners of the firm.

 Limited Partnershs – Partnerships having at least one partner with limited liability, is called a Limited
Partnership. In many European countries and the USA, Limited Partnerships are recognised. In
England a Limited Partnership formed under the Limited Partnership Act of 1907, which came into
operation on the 1 January 1908. There should be two types of partners in a Limited Partnership. They
are partners with limited liability and at least one partner with unlimited liability. Partners with limited
liability are known as „Limited Partners‟, and partners who are not limited partners are known as
„General Partners‟. The rights lf the limited partners are to some extent restricted. They cannot
withdraw any part of the capital contributed by them. Limited partnerships should be registered with
the appropriate authority. As in the case of General Partnership, Limited Partnership is not dissolved
on insolvency, retirement, or death of Limited 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.

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Types of Partners
Partners can be classified into different groups on the basis of their position, interest taken by them, and 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: - Some partners may not be taking an active part in the conduct of the
partnership business other than contributing the share capital and getting a share in the profits. Such
partners are called Dormant or Sleeping Partners. They are also liable for the debts and liabilities of the
firm as far as outsiders are concerned.
 Nominal Partner: - Partners who are neither contributing to the Share Capital or receiving any share in
the profit, but simply allows their names to be used as partners in the firm, are called Nominal
Partners. They are also liable to the third parties as other partners are.
 Partner in Profit: - Partners may be admitted on the basis of an agreement by which they get a share in
the profits without being liable for the losses. They are called Partners in Profit.
 Partners by Estoppel: - If any person represents himself to be a partner of a firm by his word or
conduct, then such a person cannot deny his partnership in the firm later on if any third party has given
credit on the faith of such representation. This is sort of deemed Partnership by the operation of law.
But because of this, he will not be entitled to any benefit from the firm.
 Partner by Holding Out: - If a person knowingly allows others to represent him as a partner, and if
third parties have given credit to the firm on the faith of such representation, then such third parties can
make him liable as a partner. Later on he cannot deny partnership in the firm for such liabilities to third
parties. He will not be eligible to share the benefits of the partnership business. Partner by Estoppel
and Partner by Holding Out, can be grouped under „Quasi Partners.‟
 Sub-Partner: - A Sub-Partner is a person who enters into a contract with a partner of a firm, to share
the profits received by such a partner from the partnership firm. He is having a business relationship
only with one partner, and will not be liable to the third parties, nor will he have any right in the
partnership business.
 Special or Limited Partners: - As discussed earlier, Partners with limited liability are known as
Limited Partners, or Special Partners.
 Incoming and Outgoing Partners: - A person who is admitted, as a new partner in an existing
partnership is known as an Incoming Partner. A Partner who is severing his relations as a partner with
an existing partnership is called an Outgoing or Retiring Partner.
 Minors Admitted to the Benefits of Partnerships: - Minors have no capacity to contract, and as such
they cannot be partners of a Partnership Firm. But the law does not prohibit admission of minors to the
benefits of the Partnership. Generally such persons are described as Minor Partners. The rights and
liabilities of a minor admitted to the benefits of the partnership are clearly laid down by the law.

Advantages of Partnership
 A partnership is easy to set up. It does not involve long and time consuming procedures
 More people are involved in the business so more capital can be raised than it is the case with sole
trader who is alone.
 Division of labour is possible as there are many people. It is possible to find tha6t each partner has a
different skill. This creates greater efficiency as compared to the sole proprietor.

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  Expenses and management of the business is shared. As a result, one or two partners can afford to take
a leave and there would still be someone to carry on the business, unlike with the sole trader proprietor
who must be there personally all the time.
 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. If for one reason or
the other, one partner leaves or even dies, a new partnership is formed. In sole proprietorship however,
if the owner dies the business might die with him/her.
 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. Because many people are involved there
are naturally bound to be disagreements, which can be very dangerous to the business
 Partners have unlimited liability and are therefore personally liable for the debts of the business. This
puts their personal assets at risk
 Lack of capital may limit expansion. The capital of a partnership is raised by partners‟ contributions.
This may not raise enough money to meet all the need of the business
 If one partner leaves or dies a new partnership agreement is required. This can be very irritating.
 Membership in a partnership is limited to twenty (except for professional partnerships) This is a
problem because it restricts the firm‟s ability to raise more capital
 One partner‟s decision can be binding on the other partners even if it‟s a wrong decision. This makes
forming partnerships with someone whose business initiative is suspect a very risky affair.
 The relationship in a partnership is a delicate one and can be broken up by conflict between partners
sometimes caused by a mere personality clash between partners.
 One or a few partners may be honest and hard working but because profits are shared by all the
hardworking partners may be discouraged.

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.
 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
1 The capital of the partnership is contributed by the partners
1 The capital of the sole proprietor is from his saving and pro
by entirely the owner of the business
2 Have unlimited liabilities 2 Have unlimited liabilities
3 Continuity depend on the trust and good working relationship
3 Continuity is dependant on the good health of the proprieto
developed Should he die the business most likely dies along

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4 Profits are shared between or among the partners 4 The profit is all for the proprietor

Companies
Definition:
A company may be defined as an association of a number of persons formed for the purpose of doing some
business with a common capital (joint stock) contributed by all of them.
It is also 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 company is a legal entity,
and just like any other person, can own property, enter into contracts and can sue or be sued against its
own name. The Assets owned by the company belong to the company and not the shareholders.
 Common Seal: - being only a metaphysical existence and 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 and 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. In limited liability companies the
liability of each member will be limited to either:
a. The unpaid amount on his subscribed capital or
b. Unpaid portion of the guaranteed amount, depending on whether the liability is limited to
shares or guaranteed amount

 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 be 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 Act.
 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. The company
according to the principle of majority takes the decisions.

Different Kinds of Companies

On the basis of formation and constitution, Joint Stock Companies are classified into the following groups:
 Chartered Companies: Companies formed under the provisions of a Royal Charter or a Royal
Proclamation or „Letter Patent‟, are known as Chartered Companies. Such companies were regulated
and controlled by the Charters issued to them. Chartered Companies have separate legal personality and
they have their liabilities limited to the extent provided in the Charter.

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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.
For the purpose of limitations of the syllabus, only the following will be explained in detail:
 Private Limited companies
 Public Limited companies
 Multinational companies
 Statutory companies i.e. Public corporations (Enterprises)/nationalized industries.

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 share holders 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,
the acts of the shareholders will not be binding on the company. There is no Agency-Principal
Relationship between the company and its shareholders.
 A private 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 a private limited company is 2.

Fisonga R. Highland Secondary School 22

  There is continuity of company existence even after the death of important share holders. This is
because shares of those who die or wish to leave the company can be sold to other people.
 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 share holders.
 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.
 There is continuity of company existence even after the death of important shareholders.
 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, 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 limited All shareholders have limited liability
partners.
A partnership lacks continuity of existence. A private limited company has continuity of
The death of one partner may end the partnership business.
existence. The death of a shareholder cannot end a company.

Fisonga R. Highland Secondary School 23

A partnership has no separate legal existence. A company has separate legal existence.
Partners can sue and be sued in their individual capacities.
A partnership is owned by partners. A company is owned by shareholders.
Membership is from 2 to 20 partners except for Membership of a private limited company is 2 and
some professional partnerships. there is no maximum number.
Partnerships lack borrowing capacity. Thus they have less
A company
access has greater borrowing capacity. Thus it
to capital.
has greater access to capital.
There are fewer formalities informing a partnership. There are more formalities required in forming a
Only a partnership agreement may be required. company, e.g. registering the company with the
registrar of companies.
There are fewer formalities in running a partnership, There are more formalities in running a company e.g.
e.g. financial accounts are not required by law to be annual General meetings, and by law, companies are required t
accounts with the Registrar of Companies.
filed with the Registrar of companies.
Control of a partnership is shared amongst the Control of a limited company is by a board of Directors.
partners.

Public Limited companies (PLCs)

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 share holders 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,
the acts of the shareholders will not be binding on the company. There is no Agency-Principal
Relationship between the company and its shareholders.
 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.
 There is continuity of company existence even after the death of important share holders. This is
because shares of those who die or wish to leave the company can be sold to other people.
 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

Fisonga R. Highland Secondary School 24

  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.
 There is continuity of company existence even after the death of important shareholders.
 A Public Limited company has separate legal existence from the shareholders who formed it.
 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.
 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.

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

Multinational Companies

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A Multinational company or corporation is an enterprise that has subsidiaries or branches in more than one
country. Examples include Shoprite checkers, BP Company, Game sores, Bata Shoe company etc.
Multinational companies are usually public limited company though they may also exist as private limited
company. They are some of the largest companies in the world, worth millions if not billions of dollars in
investment, and employ thousands of workers around the world. Their main objective is to expand their
operations into other profitable areas, in order to gain a large share of the world market and to benefit all the
companies in the group.
The decision making process is controlled from the head office where the parent company is and
implementation of policies is through the foreign subsidiaries. These subsidiaries could be companies set up by
the parent company or taken over. The parent company may own the subsidiary company 100% or 51% or
more, which means it has a majority of shares (controlling interests). Sometimes the parent company could only
have a large and influential number of shares in the subsidiary.

Advantages of Multinational Companies /Reasons for the growing importance of Multinational

companies in many countries
 Multinational companies pay taxes which boost the host government‟s income.
 They Provides employment around the world.
 They bring business knowledge, skills and technology with them which benefit the host countries.
 They bring foreign exchange to host countries by selling their goods abroad.
 They provide vital goods and services to private households as well as to other companies.
 They usually have world wide contacts which the host country can use to boost its export sales.
 Multinational companies can achieve great economics of scale. This means that they are able to provide
goods at a large scale but at a lower cost.
 They are able to provide richer variety of goods and services, better customer service and higher quality
products than most of the local companies can provide..

Disadvantages of Multinational Companies

 They tend to exploit underdeveloped economies through monopolistic practices. They dominate most
export markets and force small companies out of business or take over local firms
 They usually bring their own experts instead of training the locals to participate in important decision-
making in companies that operate in their own country.
 They can prevent the transfer of technology to the host country by ensuring that research facilities remain
based in their home country.
 They are able to pay high salaries and offer better conditions to attract most of the skilled locals at the
expense of the local industries
 Remittance of their profits back home drains away the host country‟s foreign exchange reserves.
 They are centrally controlled and most do not take into account the conditions in the field in the host
countries when drawing up their policies.

Documentation in Company Formation

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

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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.
A memorandum of Association contains the following details:
 The location of the company‟s registered office.
 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.

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.
 The Articles of Association contains the following details:
 The rights, obligations and powers of the directors.
 The procedure for calling 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 document issued by the Registrar of companies after ensuring that both the memorandum and articles of
association are in accordance with the provisions of the Companies act. It certifies that the company has been
registered and incorporated as a separate legal body. 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.
A private limited company can start business activities upon receipt of a certificate of incorporation.

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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 advertisement or an invitation to the members of the public for the purchase of shares on offer. 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.

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:
 Director‟s Report
 Auditor‟s Report
 Declaration of dividend and statement of reserves
 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.

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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.

Types of Capitals
The capital of a company may be made up of share capital and loan capital.
Share Capital:
This is capital raised from the sell of shares. There are various types of share capital as follows:
 Nominal or authorised share capital: This is the amount of Share Capital, which a company is authorised
to issue as per its Memorandum of Association.
 Issued or allotted share capital: This is that part of the company‟s authorized Share Capital which is issued
to the shareholders.
 Paid up share capital: This is that part of the Issued Capital, which is paid up by the shareholders. The
remainder of the Issued Share Capital is termed Uncalled Share Capital. The company can call this up at
any time in accordance with the Article of Association of the company.
 Reserve Liability or Reserve Capital: is that part of Uncalled Capital which has been determined by a
special resolution of the company not to be called up except in the event for the purpose of winding up the
company. It is only available to the creditors when the company is wound up.

Classes of Shares
According to the rights attached to each, shares may be classified into preference shares, ordinary shares and
founder shares.
Preference Shares
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

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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
Ordinary Shares are also called Equity 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.
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 share holders 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
 Repayment of capital if a company is liquidated.
Ordinary shareholders have the greater risky 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

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 Preference shares Ordinary shares
a Preference shares receive dividends before ordinary
Ordinary shares receive dividends after preference shares.
shares
b Preference shares do not have voting rights at
Ordinary
annual shares have voting rights at annual general
general meetings meetings.
c Preference shares have a fixed rate of dividend
Ordinary shares have no fixed rate of dividend
d They are less risky because they are the firstThey
to receive
bear greater risk because they are the last to be paid
dividends at the end of each of each successive
dividends
year and repayment of capital in case of company
and capital repayment in case of company. liquidation.
e Preference shares may be cumulative or participative
Ordinary shares are usually given to founder members.

Loan Capital
The loan capital of a company is capital raised by a company through borrowing. This may consist of bank
loans and debentures.
Debentures
A Debenture is defined as “an instrument in writing issued by a company under its Common Seal and
acknowledging a debt for a named sum of money and giving an undertaking to repay that sum on or after a
fixed date and meanwhile to pay interest thereon at a certain rate per annum at stated intervals.”
In simple terms, 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.
Different Kinds of Debentures
Debentures may be classified in two ways: according to the security pledged against them and; according to
redemption:
 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

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 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
1 Shares are part of the Company‟s Share Capital 1 A Debenture is a loan due by the Company
2 A Shareholder gets dividends 2 Debenture holders get interest for the amount of the
Debenture
3 A Shareholder is a member of the company 3 A Debenture holder is only a creditor of the company
4 The rate of dividend received by a Shareholder varies according
4 Interest
to on debentures is definite and at a fixed rate
the profit earned by the company (Ordinary Shareholders)
5 A Shareholder is entitled to vote and can participate in the5 A Debenture holder can not vote or participate in
management of the business as Director. management.
6 The Share amount is not refunded except in the case of Redeemable
6 The Debenture amount may be refunded after a fixed p
Preference Shares or on winding up.
7 On winding up of the company, shareholders will get anything
7 Debentures
only as creditors of the company have first priori
after paying the Debenture holders. getting their share upon the winding up of the company.

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:

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 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:
 To pay interest on capital borrowed
 Set aside for future repayment of loans
 Re-invested(ploughed back) in the business to improve and expand the industry,
 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
 The government can 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 ands 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.
 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.

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  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.

Nationalisation of industries
Sometimes the government may decide to takeover privately owned businesses and convert them into public
corporations. This is called nationalization of industries. The main methods used by the government to take over
private businesses are:
 Expropriation
 By compensation
Expropriation
By this method, the government simply takes over private businesses by force without paying any compensation
to owners.
Compensation
With this method, the government takes control of private businesses by buying a certain percentage of shares
e.g. the government may buy 51% of the ordinary shares at nominal price. The government does not pay for the
shares immediately but pays for them over a period of time from the profits the company makes.
Reasons for nationalizing industries
 For the central government to control prices, thus protect consumers from the unscrupulous traders.
 To provide services and goods even in areas where business may not be good for private investors.
 To undertake large scale projects that require large capital outlay and which private businesses may not
be able to finance e.g. construction of railway lines, hydro dam projects etc.
 To control essential services such as water, electricity etc, and thus avoid wasteful competition between
companies.
 To safeguard strategic industries e.g. nuclear plants, mines etc.
 For political reasons some industries may be nationalized to create more employment opportunities for
the country‟s inhabitants.

Differences between a public limited company and a public corporation

Public Limited Company Public Corporation
a A public limited company is formed by a minimum A public corporation is set up by an Act of
of two shareholders with no maximum number. parliament.
b Shareholders own a public limited company A public corporation is owned by the government
c The motive of forming a public limited company is The motive of forming a public corporation is to
to make profit. provide services at reasonable prices.
d The public limited company raises capital through The public corporation raises capital through
the sale s of shares to the public. government grants.

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 e The Board of directors elected by the shareholders The Board of Directors appointed by the Minister in
controls a public limited company. charge of the Ministry controls a public corporation.
f The Board of Directors controls the workings of Parliament investigates the workings of the public
the company. corporations through select committees.
g Profits made in public limited companies are Profits made in public corporations are used for the
distributed to shareholders as dividends. improvement of infrastructure in the country e.g.
building of hospitals, schools etc.

THE STOCK EXCHANGE

The stock exchange is a highly organised market for the purchase and sale of second hand quoted securities.
(Quoted Securities are those, which the Stock Exchange Council has agreed may be sold on the Stock Exchange and
includes equity securities and debt securities)
Equity securities include the different types of shares while debt securities include central government and local
government bonds.
The Stock Exchange provides a facility that enables Companies to raise long-term capital from members of the
public (Investors) and investors to exchange their shares for cash.
Those investors who want to dispose of their investment because they need cash and those who want to invest
because they have surplus cash available are given a platform on which they can do the exchange.

Since prices are not fixed, the Stock Exchange does not and indeed cannot guarantee that an investor who sell
shares will receive as much as he paid for them, but except in very unusual circumstances, the investor knows that
he will be able to dispose of his holding on the other hand, the Company that issued the Securities knows that the
money paid/raised is permanently at its disposal.

People can sell and buy shares in a particular company without the company‟s capital being affected in anyway.

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 stock exchange but through licensed brokers.

Functions of the stock exchange

 To provide a market where stocks and shares can be bought and sold, thus giving an incentive to investors to
buy shares.
 To enable companies to raise the capital required in financing the expansion of existing businesses or in
financing new businesses by offering shares for sale to members of the publics.

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 To provide rules which protect investors against fraudulent acts by some licensed dealers.
 To publish prices at which shares are traded at the stock exchange (this depends on the demand and supply of
the shares).
 To ensure that licensed members of the stock exchange perform their duties in accordance with the strict rules
of the exchange.
 To compensate members of the public defrauded by dealers on the stock exchange.
 To ensure 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.
 To enable 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.
 To enable the government to raise loan capital requirement to build school, hospital etc.

How capital is collected at the stock exchange

Capital is collected by selling securities. Securities are a general name for all stocks, bonds and shares of all types.
When one buys a share, one is given a share certificate. This certifies that one is a shareholder of that company.
The main types of shares and other securities traded at the stock exchange include:
Preference shares, Ordinary shares, Deferred shares, Debentures, Stocks, Local government bonds and government
bonds. We have already dealt with first four items on this list. Let us therefore deal with the last three items.
Stocks: A stock is a number of shares, usually 100 shares that are consolidated into one block for easy trading.
Local government bonds: Local government bonds are loans to the local government. This is obtained by the
local authorities to fund capital projects in their localities.
Central government bonds: These are loans to the central government provided by lenders at the stock exchange.
They may be obtained to fund the government capital projects such as building of bridges, hospitals, schools etc.
The Members of the Exchange
The members of the Stock Exchange, who have to pay substantial membership fees and annual subscriptions, are
divided into two groups, Stockbrokers and stockjobbers.
Stockbrokers: These are agents of the investing public. They act on behalf of the investors and must follow their
investor‟s instructions. If one wants to buy or sell shares on the Stock Exchange one must get a broker to act for
them. In practice stockbrokers may be more than agents:
 They are usually ready to advise their principal (client) of what action to take.
 The brokers are in close daily contact with the market and may be aware of important changes of which
they are able to inform their clients.
 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.
Stockjobbers or Dealers: Stockjobbers 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. They normally specialise in a fairly narrow range of securities and of course they develop a
detailed knowledge of them.

The modern system of the stock exchange has only the brokers who act in dual capacity as agents of the general
public as well s dealers in stocks and shares. The Lusaka Stock exchange has no jobbers.

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The Lusaka Stock Exchange
The Lusaka stock exchange was opened on 21st February 1994 as a non-profit making public limited company.
Reasons for the establishment of the Lusaka stock exchange
 To promote and encourage private sector enterprise and initiative.
 To attract local and foreign investment through the recognition of Zambia as an emerging capital market with
potential investment returns.
 To facilitate the privatization of parastatals companies (i.e. public corporations) and the creation of wealth for
Zambians through wide ownership of shares.
 To develop and establish a securities exchange in Zambia.
 To remove all exchange controls and to enable free movement of funds in and out of the country.

Functions of the Lusaka stock exchange

 To provide a source of cheaper, long term capital for existing and new companies.
 To provide an opportunity for the Zambian people to share in the success of private enterprise and the privatized
parastatals companies.
 To encourage the international investment community to invest in Zambian business and industry thus
increasing substantially the pot of money available to business.
 To facilitate the privatization of state owned companies as part of the economic reforms to liberalize the
Zambian economy, promote private sector initiative and create a free market system.
 To promote wealth creation through wide ownership of shares by Zambian citizens.
 To provide an efficient, fair, orderly and transparent market for secondary trading in shares and other
marketable securities.

Main players of the Lusaka Stock Exchange

The main players of the Lusaka Stock Exchange include: brokers/dealers, listed companies, private investors,
institutional investors, underwriters, merchant banks, government and foreign investors.
1) Brokers/Dealers
Brokers/dealers are professionals who are trained to help the general public in buying and selling shares on the
stock exchange. They are licensed and authorized by the Security Exchange Commission as members of the
Lusaka stock exchange to trade in stocks and shares.
The brokers on the stock exchange may act in dual capacity as an agent of the general public as well as a dealer
in stocks and shares.
When a broker acts as an agent of the public, he performs the following duties:
 He buys and sells shares on behalf of members of the general public.
 He buys or sells shares for his customers at the best price shown on the stock exchange. This is called
the execution rule.
 He advises buyers and sellers on a particular type of shares to buy or sell, on future performance of the
company, on the right price of shares etc.

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  He prepares documentation, for example when a deal to buy or sell shares is concluded, a broker
prepares a contract note which gives details of the purchase or sale of shares, the amount to pay or
receive for the shares and all other expenses incurred including his remuneration.
 He takes care of all the details required to complete the process of buying and selling shares at the stock
exchange.
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 ands 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.,
2) Listed companies
Listed companies are companies whose shares are registered with the stock exchange Commission for public
trading on the Lusaka Stock Exchange.
They are companies that have:
 Met the LUSE listing requirements.
 Their listings approved by the LUSE listing committee and the full LUSE Board.
 Paid the listing fee in accordance with the market value of their issued capital.
3) 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.
4) 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.
5) 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.
6) 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.
7) Foreign investors
Foreign investors can invest in growth sectors of tourism, agriculture, mining, banking and many more and
enjoy high returns.

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The benefits of being a shareholder
The benefits to a person who buys shares in a company include:
 One is able to receive dividends from companies whose shares he owns.
 He gains from the increase in value of shares since if the company performs well, the demand for shares
will be high and share prices will go up.
 He may attend and vote at the company general meetings, receive regular information on the company and
copies of the annual reports and accounts.
 He will have the right to buy further shares if the company decides to issue them.
 He will benefit from the bonus declared by the company. A bonus is a free issue of shares to shareholder.

The risk of investing in shares

There is a risk associated with investing in shares just as there are risks in investing in any other business. The
main risk associated with investing in shares is a loss arising from a drop in share prices.
To minimize the loss due to a drop in share prices, investors should study company reports, market reports and
should consult the professional advice of brokers where needed.
The need/necessity of a stock exchange
 Although a company can actually raise capital without the stock exchange, it would be impossible to raise
long-term capital without it. This is because investors are not prepared to commit their money permanently
to a company, but the company needs it permanently. It is only through the Sock Exchange that this conflict
is overcome and investors are able to turn their shares into cash when they want to dispose of their
investments.
 The Stock Exchange offers protection to investors by insisting on the highest standards of behaviour from
members and by closely examining companies before allowing a quotation. If this did not happen it would
be much more difficult for industry, and indeed the Government to raise the money it needs.
 Pension Funds and Insurance Companies are able to offer a better service to their clients because of the
existence of the Stock Exchange, which gives them a profitable outlet of their funds.
 By providing a ready market in gilt-edged Securities, the Stock Exchange allows the government to
implement the various aspects of monitory policy, which depend upon the sale, and purchase of
Government Securities.
 The Stock Exchange is an important Economic indictor. Stock Exchange prices reflect the underlying
economic conditions in the country and within particular industries. Lower prices reflect pessimism and
grim outlook, high prices optimism.

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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 need them. It is actually storage, but it should not be restricted to goods but raw materials as well. If
there were no facilities for storage, producers would only be required to produce enough goods to be bought and
consumed by the customer on a daily basis. In this way mass production and all its benefits would not be
enjoyed.
In reality production is usually ahead of demand i.e. goods are produced before the demand for them is known.
This is true because each time a consumer goes to the shop he or she had not placed his/her order previously.
This leaves the manufacturers the tasks of anticipating demand, manufacturing the goods and storing them until
demand appears, yet they need a steady inflow of supplies of raw materials to be able to continue producing, all
of which need the function of storage.
This is an aid to trade that is concerned with the safe keeping (storage) of goods from the time of production to
the time of consumption.

The Importance of Warehousing

 Warehousing provides the place for the safe keeping of raw materials, partly finished items and
finished goods
 Warehousing is very important for agricultural goods such as watermelons, tomatoes, maize and the
like, that are produced seasonally. Cold storage warehousing preserves them and hence prolongs the
life of especially those that are perishable and enables consumers to obtain them throughout the year.
 There are goods such as Christmas cards and jerseys, which are seasonal in demand i.e. they are only
used during certain seasons. So when they are produced they have to be stored until there is demand
for them.
 Warehousing makes it possible for customers to have an even supply of goods, especially those that
are imported from other countries.
 Warehousing protects goods from damage due to bad weather. This is because they are refrigerated or
insulated to prevent rain or adverse heat or cold from affecting goods. In addition it also protects goods
against theft/pilferage, as most warehouses are equipped with the necessary facilities to make it
difficult for theft to occur.
 Warehousing provides storage for goods in transit (i.e. while they are being transported) either at sea
ports, airport or railways terminals especially where transport is immediately available.
 Warehousing helps to stabilise prices. It evens out supplies and in this way prices remain fairly stable.
If there were no storage facilities, supply and prices would fluctuate from time to time, causing severe
problems to consumers. Either shortage or excess goods on the market usually cause fluctuation in
prices.
 Warehousing is necessary for some goods such as wines, spirits, tobacco and cheese to mature. These
goods improve in quality overtime. The best wines, for example, are the ones that have stayed in the
vat longest. Production is usually ahead of demand. This time lag between production and demand is
bridged by storage.
 Warehousing provides the space for the retailers to inspect the goods before buying them.

Types of warehouses
There are so many types of warehouses that it is difficult to analyse them one after the other in full. But
generally the following can be recognised.

1) Manufacturer’s warehouses
These are warehouses owned by manufacturers. They are used for the storage of raw materials, finished goods,
machinery, tools etc.

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 The importance of manufacturers’ warehouses.
(a) They provide storage for raw materials.
(b) They allow pre-demand production i.e. production of goods before demand.
(c) They provide storage for finished goods before such goods are sold.
(d) They provide storage for seasonal goods such as umbrellas, rain coats etc.
(e) They prevent shortages by storing goods when they are plentiful and releasing them on the market
when they are in short supply.

2) 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
1. They allow the wholesaler to repackage the goods into smaller quantities to suit the retailers‟
requirements.
2. They allow the preparation of goods for sale such as blending, branding, bottling etc.
3. They enable retailers to inspect goods before buying.
4. They prevent damage of goods due to bad weather and theft.
5. They facilitate the storage of goods which are demanded seasonally e.g. Umbrella, raincoats etc.
6. They act as reservoirs for retailers, supplies.

3) Retailers 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
(a) They enable the preparation of goods to take place e.g. packaging, branding, pricing of goods etc.
(b) Losses on goods due to theft, weather deterioration are reduced.
(c) They allow the stocking of large quantities of goods for supplying to branch outlets.
(d) They allow the storage of goods which await demand.

4) Public Sector Warehouses

Many government departments have large depots e.g. the Ministry of Works or Ministry of Education
Departmental Stores. There are also parastatals like the Food Reserve Agency (FRA) in the Ministry of
Agriculture and Co-operatives, Nitrogen Chemicals of Zambia and many others who have large warehouses for
the storage of farm implements and requisites. FRA warehouses are perhaps the most elaborate form of public
warehouses. They run a number of grain stores, sometimes called Silos in various parts of the country. The
organisation is quite important for it holds government‟s food strategic reserves.
Importance of public warehouses
 They provide storage for goods awaiting transportation at railway stations, sea ports etc.
 They help to prevent losses on goods due to theft and bad weather
 They help international trade by providing storage for goods awaiting transport or customs clearance.
 They help to ensuring a steady supply of public goods so as to minimise fluctuations in prices of the staple
food maize meal.
5) 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.

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 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 needs 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, labeling or packaging.

6) Cold Storage Warehouse

This is a form of specialist warehouse used mainly for the storage of perishables like fruits, meats, fish, milk,
butter, cheese and so on. The development of cold storage together with refrigerated containers has therefore
been a big boost to trade in perishable goods as it enables them to be exported throughout the world without the
fear that they will go bad.

ADVERTISING

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One of the effects of the division of labour is that each manufacturer produces more goods than he can use
himself. To dispose off them a market must be found, and it is the function of the marketing/advertising
department of the firm to establish a market for its products. We shall take a general look at the work of the
advertising department.
Advertising is used for so many different purposes that it can only be loosely defined as: an aid to trade
concerned with the spreading of information (awareness) about goods, services and events.
In the context of commerce, the main objectives of advertising are specifically to increase, or at least maintain,
the sales of a product or service.

Business purpose/aims/functions of advertising

 To inform customers about the availability of services.
 To persuade consumers to buy goods or services advertised.
 To remind consumers and traders of the existing goods and services.
 To inform customers of where goods can be found and at what price.
 To inform customers about changes in the make of goods.
 To inform customers of the location of shops and offices.
 Informing members of job vacancies to enable companies recruit suitable personnel for jobs.
 To enable traders to penetrate new markets for their products.
 To increase and maintain sales.
 To enable traders to remain competitive in business.
 To inform the public on the use of a product and the withdrawal of a product from the market.
 To warn customers of a fault in a product.

Non- business purposes/functions of advertising

Other than for the above business purposes, advertising can be carried out for the following non-business
purposes:
 To inform the general public about job vacancies in government institutions in order to recruit new
staff.
 To inform people on matters of public interest e.g. Road signs, health matters such as warnings on
cigarettes, disease out breaks etc.
 To make government announcements e.g. on laws, tax changes etc.
 Announcing births, deaths, marriages, charity appeals, lost and found property etc.

Types of Advertising
1. Informative advertising
This is a type of advertising that is designed to inform people in a clear and straight forward manner.

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.
 Explain the usefulness of a product or services for particular purposes and situations.
Examples of informative advertising are;
 Announcing births, deaths, marriages etc.
 Announcing modifications in products, changes in office locations
 Advertising in technical and trade journals. Such advertisements usually contain technical details of
products and invite inquiries from interested parties.
 Advertising of particular events, Such as trade fairs, exhibitions, concerts and sporting activities.
 Advertising of employment opportunities.

2. Persuasive/competitive advertising

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 This is the advertising of a particular manufacturer‟s product in order to promote that particular product or
brand. 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.

The following are the 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.
 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.

3. Collective /generic advertising

This is when producers in one industry put their resources together to advertise a product in general in
order to promote its use. E.g. producers of different types of milk may advertise their products by
saying “DRINK MORE MILK”. In this advert, no particular brand of milk is mentioned. Such
advertisements belong to a special kind of persuasive advertising, and are normally financed by the
trade association to which firms in the industry belong. (A trade association is a body representing the
interest of all the firms in an industry; in addition to this kind of joint advertising, the trade association
might make itself responsible for research, information and negotiation with the Government or the
trade unions)
Advantages of collective advertising
 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 of collective advertising

 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.

Advantages of advertising
To the manufacturer or trader

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  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 is 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.
 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 promotes dangerous and harmful products.
 Advertising encourages impulse buying.

Forms of advertising media

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These are means through which advertising is carried out or done.
1. Television
Advantages
 It gives lasting impression by means of sound and vision.
 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.
 Advertisements shown in colour have immense impact to attract customers.
 It provides repeated advertisements.
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.

2. 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.
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.

3. Newspapers
This is part of the print media, e.g. the post, Times of Zambia, Daily mail
Advantages
 They give a wide national coverage since newspapers are read by all classes of people.
 Advertisements can be placed on appropriate pages of the paper to catch the attention of the readers
e.g. business item on business pages etc.
 Newspapers provide large space for conveying more information on products or services thus
newspaper advertisements can be more detailed.
 Newspapers give longer life to advertisements since newspapers can be kept for longer time.
 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 are perishable. They can be discarded or destroyed within a short period of time.
 Poor quality of print may reduce the effectiveness of adverts.
 Illiterate people are not able to access the information in newspapers.

4. Magazines
Advantages

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  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 milky 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 colorful 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.

5. Leaf Lets/handbills
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.

6. 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.

7. 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.
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.

8. 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 prepackaged
 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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9. Exhibitions
 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.

10. Other media of advertising include plastic bags, calendars, public transport, trade marks, T- shirts etc.

Sales Promotions
Advertising is just one of the ways in which producers try to increase sales. Other methods of winning the
attention of the public belong to the general category of sales promotions. The aims are of course the same as
with advertising, but promotion schemes tend to demand more of the consumer than just watching or reading an
advertisement. Ways of promoting sales include the following:
1) Free Samples
This is usually used when introducing consumers to a product letting them to try it out free. It is a very
expensive method of promoting sales, especially where a sample is sent to every household. Accordingly, it is a
method reserved for things that are cheap and have a notional sale. Often the distribution of free samples is
linked with an extensive back-up advertising programme. Sometimes free samples are given at particular shops
to persuade people to do their shopping there, and increasing the retailer‟s sales.
2) Price Reduction
This is where goods are offered at some percentage less the recommended price, and the cartons are often
printed with the price reduction. For example, the popular Game Stores Fact and Bonanzas expected fortnightly.
Sometimes the price reductions are indirect or conditional. Some manufacturers distribute coupons to
householders which can be used in part payment for their goods; others allow a price reduction in exchange for
the label from the previous packet bought. In either case the retailer, who is involved in extra work, redeems the
labels for cash from the manufacturer or his representative.
3) Competitions
Sometimes producers organise competitions. A condition of entry is the purchase of perhaps six packets of the
producer‟s goods. This achieves an immediate boost in sales, which the producer hopes will be sustained, as
new customers become regular buyers.
4) Free Gifts
Petrol stations try to increase their sales by giving glasses, footballs or cups away when a certain amount of
petrol is bought. Stationery shops have a variation of this; they sometimes include giving away diaries,
calendars, pictorial deco, on which they give details of what they offer and how they can be contacted. This is
also becoming popular with most Asian shops in Zambia especially in the Kamwala area.

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. The
advertiser will choose the target group according to peoples‟ age, sex, income or occupation. For

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 example, a firm advertising farm equipment will aim at farmers because it‟s the farmers who are
expected to buy farm equipment.

 Coverage (area to be covered): The firm should determine the extent of the advertising campaign,
whether national, regional, town or in store.
(a) Radio, television and newspapers are suitable for national advertising.
(b) Bill boards, posters, local news papers, leaflets and even windows display are suitable for local
advertising.
 Types of message: Advertising messages should be brief to minimize costs but forceful enough to
capture the attention of consumers to products on sale. Media such as television, radio and newspapers
will not be used for length advertisements as the cost would be increased abnormally, may be carried
out on such media as the cost is minimized.
 Cost of advertising media: Advertising increases the overhead expenses of a business, for the cost of
to be justifiable the advertiser should use a media that is likely to bring greater benefits such as
increased turnover, greater profits and brand loyalty at a relatively lower cost.
 The nature of the product: Some goods are bulky and cheap e.g. sand, timber etc while some are
small but expensive e.g. jewellery. The nature of the product to be advertised should therefore be
closely considered. This is 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: When advertising consideration should be made on
how long the advert is expected to run in order to be effective. Informative advertising may be a one-
off thing while competitive advertising may be designed to last. It is therefore imperative to consider
whether the medium has a long lasting effect or not.

Methods of Appeal
These are persuasive techniques that are used in enticing people to buy a particular product or service. These
techniques are used because the impact of the message depends not only on what is said but also how it is said.
(a) Personality symbol: This creates a character that represents a product. Famous people are shown
using the product to give it an acceptable image.
(b) 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.

(c) The slice of life: The advertisements show one or more people using a product in a normal life setting.

(d) Ambition: The advertisement suggests that success comes by using a particular product, e.g. NIDO
kinds go further.

(e) Musical: This shows one or more people or even cartoons singing about the effectiveness of the
product i.e. using Jingles.

(f) 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.

(g) Scientific evidence: This presents a survey or scientific experiment about the product to prove its
effectiveness.

(h) Dramatic: This may be used so that if the advert is fun or amusing, then the product can be
remembered and bought.

(i) Social acceptability: A product is claimed to make the user more acceptable to other people.

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 (j) 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.

(k) 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.

(l) Other methods of appeal include loss leaders, health, display of goods, etc.

Advertising Agencies
These are organizations that specialize in creating and promoting advertisements on behalf of other
businesses, e.g. Hickey Studios, ATMED. They are remunerated by commission from their clients. Most
manufacturers do not posses 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.

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.

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Ways of Controlling Advertising
(a) 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 in which it is displayed.
 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. This makes advertisers to prepare advertisements with a sense of responsibility to both
the consumer and the advertising industry in general.

(b) 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 products and those that are
harmful.

(c) 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.

(d) 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.

BANKING
What is banking?

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Banking is a commercial activity that involves the collection of surplus funds from the general public,
safeguarding them, lending some of them at an interest to those in need, making them available to true owners
on demand and the provision of security.

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 and can provide security.

Financial institutions performing banking functions

 Central banks
 Commercial banks
 Building societies
 Savings and credit banks
 Micro Finance institutions
 Foreign Exchange Bureaus
 Discount houses/Merchant banks
 Pension funds institutions

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

1. Issuing of notes and coins
 Printing, minting, storing and circulating bank notes and coins.
 Issuing bank notes and coins and withdrawing dirty money from circulation.
 Keeping foreign exchange reserves.
2. Banker’s bank
The central bank is the bank for all commercial banks in the country. All commercial banks are
required by law to maintain deposit accounts with the central bank. This enables commercial banks
settle inter bank indebtedness by way of bankers clearing system as well as replenish their stock.
3. The Government bank
 The central bank acts as the banker to the central Government and Government departments.
 The Government deposits money in the central bank it receives from various sources such as taxes,
customs duties etc. and make payments from the same account.
 When there are no funds in the government account to cover expenditure, the central bank gives
short term loans to government.
4. Lender of the last resort
 The central bank is where banks go to borrow money when they have liquidity problems. This
happens if the bank cannot get money from any other source. The central bank is therefore
considered as the last option/resort.
5. Supervision of exchange rate
 The central bank supervises the exchange rate to avoid artificial increases. This helps to stabilise
the rate at which the local currency is exchange with foreign currencies.
6. Supervision of the banking system
 The central bank supervises commercial banks and other financial institutions.
 The central bank gives bank licenses and gives strict guidelines to new banks.
7. Servicing the national debt
The central bank is responsible for the payment of local and foreign loans to foreign governments and
financial institutions such as the International Monetary Fund and the World Bank.
8. Advisor to the government

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 The central government advises the government on monetary policy matters such as inflation,
taxation and exchange rates.
9. Management of the country’s foreign reserves
The central bank controls the amount of foreign currency that is made available for buying goods and
services from other countries. This is called exchange control. Foreign currencies held by the central
bank in accounts abroad are called foreign exchange reserves.

National Savings and Credit Bank

National Savings and credit bank was established by an act of parliament in 1972. It operated under the General
post office until 1997 when it started providing full banking services as a bank on its own.

Main reasons for the establishment of National savings and credit bank
The main reason for the establishment of the national savings and credit bank was to provide effective and
efficient financial services in order to:
 Alleviate poverty and;
 Help to develop small indigenous businesses in Zambia.

Main objectives for establishing the national savings and credit bank
 To provide innovative credit and savings services.

 To provide and develop small, medium, rural and emerging private sector enterprises throughout
Zambia.
 To play an active roe in stimulating economic activities among the poorest sections of the economy.
 To alleviate poverty among the isolated and marginalized sections of the populations.
 To act as the major catalyst for the mobilization of savings among ordinary Zambians in both rural and
urban areas.
 To act as a financial intermediary for donor funds and external financing intended for micro and small
enterprise development.

Main services provided by the national savings and credit bank

The bank provides numerous financial services that include the following:
a) Lends money in form of loans to individuals and businesses for provision of working capital,
purchasing of fixed assets, farm implements, livestock, raw materials etc.
b) Safe-keeping of money in savings and deposit accounts,
c) Provides payroll services through its branches.
d) Allows customers to withdraw money from any branch because accounts are centrally maintained.
e) Offers money transfers.
f) Discounts‟ invoices by established companies.
g) Buys and sells foreign exchange.
h) Offers advances to customers who are salaried.
i) Leases equipment such as machinery to customers.
j) Guarantees on behalf of businesses that promise to provide a certain service or to perform a certain
business.

Building Societies
Main services of the Zambia national building society include:
a) To offer savings and fixed deposit accounts.

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 b) To provide estate and insurance services.
c) To buy shares and stocks on behalf of customers.
d) To provide mortgages.
e) To offer society bonds.

Commercial Banks
Commercial banks are financial institutions set up to promote and facilitate financial transactions. Commercial
banks in Zambia include Barclays bank, Finance bank, Zambia National Commercial bank, Stanbic Bank etc.
Customers of commercial banks include individuals, schools, colleges, universities, churches, clubs, Societies,
private and public limited companies, public corporations, etc.

Services provided by commercial banks

 Provision of Finance – Commercial banks provide finance, either in form of loans or overdrafts to the
business people. This is traditionally the most important function of commercial banks.
 Receiving payments – Commercial banks help business people receive payments for goods sold or
services provided. These transactions cut across the various transactions in both foreign and home trade.
This takes the shape of documentary letters of credit and acceptance of cheques.
 Making payments – Commercial banks help business people make payments for supplies obtained.
Both importers (in international trade) and retailers (in home trade). The use of payment facilities like
direct debit, standing orders or credit transfers.
 Discounting bills – Commercial banks accept and discount bills of exchange. A bill of exchange is a
means of payment used in both home and international trade. It is usually made for a future date either
three months or more. Instead of waiting for its maturity, a trader may take the bill to the bank and
money less face value of the bill is given.
 Provision of Forex – Commercial banks provide foreign currencies to business people. This is normally
done with the approval of the central bank if the amount needed is huge, however for small amounts
this is done over the counter.
 Financial Advice – Commercial banks give business advice on a variety of business matters such as
insurance, taxation, investment opportunities, and import and export information etc.
 Safe custody of money and valuables – Commercial banks provide a basic facility of looking after the
customers‟ money and important documents or valuables such as jewellery, title deeds of real estates,
wills, certificates, antiques etc.
 They provide customers with Electronic Funds Transfer at the Point of Sale (EFTPOS) CARDS and
Credit Cards.
 They provide customers with Automatic Teller Machines. Automatic Teller Machines are cash
dispensing machines which operate 24 hours service. They can be used to withdraw money, collect
mini bank statements and some may even be used for depositing cash.
 Miscellaneous services – Commercial banks also provide other services. For example they can act as
executors or trustees, provide cheque guarantee.

Services provided by commercial banks: A detailed explanation

1. 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.

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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 installments
 When paying for insurance premiums
 When paying for mortgages etc.
 When paying for club subscription.

Advantages of a standing order to a bank customer making payment (debtor)

 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.

Advantages of a standing order to a bank customer receiving

Payment (creditor)
 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.

2. Credit Transfer(Bank Giro credit system)

This is a facility provided to current account holders for making regular 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.

Features of credit transfers

 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.
 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.

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.

Advantages of a credit transfer to the bank customer making payment

 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.

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 There are no restrictions on the number of payees one can pay at a time.

Advantages of a credit transfer to the customer receiving payment

 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.

3. 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.

Advantages to the bank customer making payment (debtor)

 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.

Advantages to the customer receiving payment (creditor)

 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.

EXERCISE
What do you think are the differences between Standing order and direct debit?
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4. Night safe facility

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

Procedures for night safe facility

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  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.

5. Banks may act as executors and trustees for wills

Executor
An executor is a person appointed to carry out the terms of a will on behalf of the deceased person. A bank can
act as an executor.

Advantages of appointing a bank to act as an executor include the following:

 The bank is never ill and does not die. Therefore it can carry out the terms of the will without any
disruption.
 The bank staff is highly skilled with the massive knowledge and experience, and therefore can
administer any estate with great success.
 Banks are impartial in their dealings with customers.
 Losses through fraudulent acts are eliminated.
 Most banks have international connections, and therefore can attend to the sale of assets anywhere in
the world, and pay the beneficiaries wherever they are living.

Trustee
Trustee is a person appointed to look into the affairs of a person still alive, for example looking into the affairs
of a minor. A bank can be appointed to act as a trustee.

Advantages of appointing a bank to act as a trustee.

 Same as those of an executor.

6. Automatic 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
machines can now accept deposits, transfer money from one account to another, issue mini-statements and even
accepts orders for chequebooks or full statements.
Advantages of ATM
 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

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  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.

Disadvantages of ATM
 There is a limit on the daily withdrawals by ATM cards. For example, the ATM cardholder cannot
withdraw more than K500 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.

7. 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 customers account by the invoice amount. After every thing has been done the money is
then electronically transferred from the customers account to the trader‟s account.
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 se nt 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.

Merits
 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.

Demerits
 It the ATM card is stolen the thief can use the card to buy goods or services for as long as they can forge the
signature the account holder
 The card tempts one to overspend since there is no limit on the amount one can spend per day.

8. Credit cards

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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 enrols 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.
 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.

Advantages of a credit card to a cardholder or customer

 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.

Advantages of a credit card to the shop owner

 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.

Advantages of a credit card to the bank or Credit Company.

 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.

Disadvantages of credit cards

 Shopkeeper gets the payment less commission for the credit company.
 Customers are tempted to overspend and may run into financial problems.
 Involves a lot of paperwork to the Credit Company.
 Not all businesses accept credit cards so the card holder‟s choice of shops is limited.

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Types of Bank Accounts
1. 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 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.
 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.

2. 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.

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  No cheque books are provided, so the customer has to personally get to the bank and withdraw the
money.

3. 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.
 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.

EXERCISE

What are the differences between a Current account and a Deposit account?
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Cheques
Definitions of a 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.

EXERCISE

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 1. What is a cheque counter foil?
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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.
The Payee
 This is the name of the person to whom moneys are to be paid upon the presentation of the cheque at
the bank.
The Drawer
 This is the name of the account holder

Requirements of valid cheque/Parts of a cheque

Date
 All cheques should carry the date on which they are drawn (or written).
 When you receive a cheque, you should pay it into your bank account soonest.
 A cheque remains valid for six months from the date of issue. Meaning any cheque presented after that
period is said to be stale or expired.
 Post dated cheque, are cheques, which bear a date in the future. Meaning the bearer should only present
it for payment on or after the post date, but within six months.

The Drawee’s name

 Normally the cheques will bear the name, branch and any other details relating to the address of the
bank.

Payee’s Name
 This must be written on the top line of the cheque
 If the cheque is open money is given over the account, but if it is a crossed cheque then the payee
deposits such a cheque in his or her account.

Amount
 The amount to be paid out should be indicated in both figures and words.
 It is important to indicate the amount in words and in figures to avoid someone tampering with the
amount especially if it‟s only in figures.
 If the amounts in words and figures differ the bank dishonours such a cheque by referring the payee to
the drawer.

Drawer’s Name
 Often the name is printed beneath the box in which the figures are written. Whatever the case the
position of the name does not matter, what matters is the fact that the name should be on the cheque.

The Drawer’s Signature

 The drawer must sign the cheque and the signature should tally with the ones given on the signature
card at the time of opening the account.
 Any difference in the signature would warrant the cheque being referred to the drawer for verification.

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 Cheque Number/Account Number/Branch Code
 With the advent of electronic cheques the cheque, Account and Branch code numbers have been
combined. These are the numbers that appear at the bottom of the cheque.
 These numbers need not be tampered with because they become very useful when electronically
clearing the cheque.

EXERCISE
1. In the space below draw a complete cheque and label the following parts:
a. The drawer
b. The drawee
c. The payee
d. The account number
e. The branch number
f. The bank number

Types of Cheques
Bearer cheque
 A bearer cheque is a cheque that is made payable to any person presenting it at the bank regardless of the
name written on it.
 It has the words „Pay ………………..Bearer‟ written on its face.
 It does not require any endorsement.
 It does not require any form of identification at a bank since cash is paid to any person presenting it.
 Bearer cheques are barely used nowadays because they are not a safe mean of making payment.

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Order cheque
 An order cheque is a cheque that is made payable to a person named on the cheque or to another person to
example, a dishonest finder of a lost bearer cheque can take it to the bank and easily cash it.whom the payee
orders the bank to pay money.
 It has the words „Pay ……………………or order‟ written on its face. An order cheque must be endorsed
before passing it on to another person.
 Endorsing is the signing of a name at the back of a cheque. The purpose of endorsing a cheque is to enable
ownership of a cheque to change from the payee to the new holder who should have a bank account.
 An order cheque requires some form of identification at a bank e.g. national registration card.

Open cheque
An open cheque is a cheque that:
 Has no parallel lines drawn across its face.
 Can be cashed over the counter at a branch of the bank on which it is drawn. For this reason, it can be used
to pay someone who does not have a bank account.
 Can be passed on to another person in settlement of debts by first endorsing it.
 May be deposited into payee‟s bank account.
 Cannot be safely posted to a person at a distant town.

Crossed Cheque
A crossed cheque is a cheque that:
 Has two parallel lines drawn across its face with or without words between the crossings.
 Cannot be cashed over the counter but must be deposited into a bank account.
 Can be safely posted to a person at a distant town. This is because a crossed cheque is deposited into a
bank account, and therefore even if a cheque is lost or stolen, a thief or anyone who finds it cannot
easily get cash out of it.
There are two ways of crossing cheques namely, general crossing and special crossing.

General Crossing
 A cheque is said to be generally crossed if two lines are drawn across its face.
 The phrase “Account payee only” or “And Company” or “Not negotiable” may be added in between the
parallel lines.
 The effect of general crossing is that the cheque can only be deposited or paid into a bank account and
not exchanged for cash across the counter.
 This provides a security feature, in case the cheque is stolen the time given for the cheque to clear,
gives enough time for the drawer to make a stop order.

Special Crossing
 Special crossing also involves drawing two parallel lines on the face of a cheque.
 The name of the payee‟s branch is written in between the lines.
 This means that the cheque can only be paid into an account at that branch named in the crossing.
 This specification the bank makes it easy for tracing the cheque in case of it being lost.
Exercise
Types of Cheque Crossings

Show Different Ways Of Crossing A Cheque And Explain Their Meaning/Effect.

Type of Crossing Effect of Crossing

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6.……………………………………………. ………………………………………………………………
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Dishonoured Cheque
A dishonoured cheque is a cheque that is refused payment by the bank. When a cheque is refused payment, it is
returned to the payee with the letters R/D (refer to drawer) written on it. It is the duty of the payee to find out
from the drawer the reasons for dishonouring the cheque.

Reasons for cheque dishonor.

The bank can dishonor a cheque for the following reasons:
 When there are insufficient funds in the drawer‟s account to honour the cheque.
 When the amount in words differs from the amount in figures.
 When the drawer‟s signature differs from that specimen signature.
 When the drawer does not sign the alteration on the cheque.
 When the cheque is stale i.e. it is more than six months old.
 When the cheque is stopped by the drawer. This may be when the cheque is stolen or lost.
 When the cheque is postdated.
 When the bank has been notified of the death, insanity, or bankruptcy of the account holder.

Advantages of cheques
 Cheques are safer than cash.
 Cheques can be made out for any amount.
 A cheque can be stopped if it is stolen or lost or when the drawer dies.

 Large sums of money are easily and safely carried in cheque form than in cash.
 Used cheques act as receipts for payments made. They are legal evidence of payment.

Disadvantages of cheques
 A crossed cheque can cause inconveniences to a person who has no bank account.
 A cheque can be refused in payment because it is not legal tender.
 Cheques are not really suitable for small amounts. E.g. petty cash items.
 Cheques may be difficult to use for large amounts. Creditors may demand for bank certified cheques.
 Banks charge fees for issuing cheque books and may charge each transaction paid by cheque. This is an
unnecessary expense.

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

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 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
 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.

The Bank – Cheque Clearing System

Once you are paid by cheque you go to the bank, join the queue and cash your cheque. Sometimes when you
reach the counter the bank teller will take the cheque from you and ask you to wait while he/she verifies the
drawer‟s signature and checks if there is sufficient balance in the account before you are paid. This is not the
clearing of cheques. 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).
Every working day several thousands if not millions of cheques are drawn and paid in the bank account, as a
routine of business transactions. 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.

1. Branch Clearing
 This clearing takes place when both the payee and the drawer bank at the same branch.
 The branch simply transfers the amount from the drawer‟s account to the payee‟s account
 The cheque does not need to go to the clearinghouse.

2. Internal Clearing
 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.
 The cheque in this case is transferred to the bank‟s clearing department at the headquarters and
dealt with from there.
 It does not have to be sent to the clearinghouse since no other banks are involved.

3. Town Clearing
 This occurs when two or more (different) banks are involved but all of them are in the same
town or city.
 The cheques still pass through the clearinghouse, but is specially cleared on the same day rather
than taking many days.

4. General Clearing
This clearing takes place when two or more banks are involved and they are not all in the same town.
To explain this lets take an example of a girl Lwisa Kabende at Highland High School who has an
account with Barclays Bank, Mutaba Branch. She pays her school fees by a cheque originated from her
bank, Barclays Bank.

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 Step 1
 The bursar Mr. Chikoye takes Lwisa‟s cheque together with other cheques that might have been
paid by other students on that date.
 He deposits them in the School Account at Indo – Zambia Bank Cairo branch.
Step 2
 Indo – Zambia Bank Cairo branch collects all the cheques which come in that day, including
Lwisa‟s cheque.
 The cheques are sent to Indo – Zambia Bank headquarters.
Step 3
 The cheques at Indo – Zambia Bank headquarters are sorted in trays according to the banks that
originated them.
 Lwisa‟s cheque goes into the Barclays‟ tray.
 The value of the cheques in each tray are totaled
Step 4
 All the trays of cheques for the various banks are taken to the Clearinghouse (BOZ)
 All other banks also bring with them cheques in trays, with value of cheques in each tray totaled.
 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.
 Any net indebtedness would be settled by the Central bank moving the difference from one bank‟s
account to another.
 This is possible because all commercial banks maintain their accounts with the Central Bank as a
rule, (BOZ).
Step 5
 Lwisa‟s cheque is now in the clearing department of her own bank, Barclays.
 Barclays Bank will next send Lwisa‟s cheque to her own branch, Mutaba.
Step 6
 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.
 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.

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.

How Commercial Banks Finance both Home and Foreign Trade

One of the main roles of commercial banks is to lend money to businessmen and women to help them run their
businesses, In fact most if not all businesses are in one way or the other run using money which is borrowed
from commercial banks and other financial institutions. There are many ways by which commercial banks help
business people with finance. The banks finance traders in the following ways:
1. 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.
 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.

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  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.

2. Bank loan
 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 installments.
 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
1 Usually used for the purchase of 1 Used for short-term financial
Capital items needs
2 Collateral security is required 2 Mostly does not require security
3 Interest is charged on the full amount 3 Interest charged on the amount over-
drawn
4 Its an expensive way of borrowing 4 It‟s a cheaper way of borrowing
5 It‟s a formal way of borrowing 5 It‟s an informal way of borrowing
6 When granted a loan an account is 6 No separate a/c opened for repayment
opened
7 Money deposited has no effect on 7 Money deposited affects the
loan amount of overdraft

3. 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.

4. 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.

5. Bankers Draft
A banker‟s draft is an equivalence of a banker‟s own cheque. The bank draws it on itself. The bank sells it
to any customer who would like to use it for paying for goods/ services. It is used as a means of payment
where his/her creditor does not know the person offering payment personally and the creditor is reluctant
to be paid by a personal cheque. It is very useful particularly when paying large sums of money. Its main
advantage is that it is safer than a personal cheque, and the drawer cannot stop it.
6. Travelers Cheque

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 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.
7. 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 Rights of a Customer in Banking

The following are the rights of workers in banking:
 The bank should honour customer payment instructions provided that customer instructions are
properly drawn especially cheque payments.
 The bank customer has the right to secrecy of his or her account details or affairs unless it is in the
interest of the public, or compelled by law or by express/implied consent by customer that the secrets e
revealed.
 The bank customer has a right to be provided with a statement of account within reasonable time or be
provided with account balance on request.
 The bank customer has a right to have money and cheques deposited for collection and customer
account credited with proceeds. If a cheque is not honoured, the customer‟s bank account will be
debited.
 The bank customer has a right to be repaid money on demand during banking hours.
 The bank customer ha the right to be informed immediately if forgery of his/her signature is detected.
 The bank customer has the right to be given reasonable notice of closure of the bank account.
 The bank customer has the right to be treated fairly and reasonably in all dealings.
 The bank customer has the right to be provided with all services and products that meet the required
banking standards.
 The bank customer has the right to be helped in choosing a service or product to fit his or her needs.
 The bank customer has the right to be helped in understanding how his or her bank account operates.
 The bank customer has the right to be provided with bank credit facilities, product and services based
and applied solely on commercial principles and criteria and not to be discriminated against on the basis
of race, religion, age, pregnancy, marital status, sex, gender, disability, language etc.
 The bank customer has the right to be provided with safe, secure and reliable banking and payment
systems services.

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  The bank customer has the right to be helped to understand the basic financial implications of:
 A mortgage, debenture loans and all other charges.
 Overdrafts and loans.
 Savings and investment products.
 Card products.
 Payment services.
 Foreign exchange.
 Current accounts.
 Direct debit and credit.

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 TRANSPORT

Transport is an aid to trade concerned with the movement of people, goods, raw materials and equipment
from one place to another. 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 an efficient transport system
 Transport bridges the gap between points of production and points of consumption. It enables
goods to be brought within the customer‟s reach (or inputs within the producer‟s reach)
 Transport ensures that goods are distributed effectively to avoid problems of surpluses of
produce, falling prices, rising prices and shortages on the market.
 Transport brings goods from different parts of the world within the reach of consumers thereby
increasing variety in the goods available.
 Transport levels out supply by transferring goods from where they are produced to where they are
needed. In this way, transport helps to prevent scarcity or shortage and adds to the security of life.
 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.
 Transport reduces the amount of capital and storage space needed by the manufacturer and traders
because; if deliveries can be made regularly and quickly then smaller stocks are needed at any
one time. Traders would therefore have no reasons to take the risk of holding large stocks and
incur high storage costs.
 Transport enables the workers to speedily move to and from work and also salesmen and business
executives to move to places of business.
 Transport shortens the time between production and consumption. It enables goods to reach the
consumers quickly hence reducing warehousing, insurance and marketing expenses.
 Transport enables people to move from one place to another either on holiday, when visiting
friends and relatives or shopping.

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.
1) The Cost of transport;
Transport costs reduce 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. So it must be
considered seriously when choosing a method of transport. Generally, expensive transport like air
is suitable for valuable goods like diamonds, medicine, and jewellery whereas the cheaper forms
of transport are suitable for transporting cheap and bulky goods such as grain, coal, timber and
bricks.
2) How urgently the goods are needed
If the goods are required very urgently, the quickest means of transport like air is used; however,
if goods are not urgently needed, then slower methods like rail and sea can be used. For example,
air transport can be used for urgently needed medical supplies, spare parts, perishable goods, etc.
3) The distance to be covered

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 When sending goods over short distances, road transport is preferable as it offers door-to-door
delivery service. For longer distances, however, air rail and sea transport are more suitable.
4) Nature of goods
Goods are transported using different vessels depending on their nature. 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.

5) Size and weight of the goods

The method of transport to be used also depends on the size, weight, and width of the goods.
Generally, bulky and heavy goods such as coal, ores and timber are better sent by rail and sea
transport whereas small packages of goods such as stationery, groceries and clothing might be
better sent by road.
6) Safety
The chances of theft or damages of goods on transit are greater in some method of transport than
others. This is even more so when sending especially fragile and valuable goods such as window
glass, chinaware and porcelain, diamonds, gold, etc. A good transport system should not expose
goods to theft, breakage etc.
7) Access to the Terminal
The extent of the choice of method of transport would largely depend on the geographical
location of the sender‟s point of loading and consignee‟s point of offloading. 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.
8) The reputation of the carrier
A particular carrier may be known to give a reliable service and will therefore be preferred to
others
9) The value of goods
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 road, rail, sea, air, inland waterways and pipelines.

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.
Reasons for the drastic increase in the use of road transport
a) Roads have been expanded and improved upon to reduce congestion and link main production
centres. This means that motor vehicles can travel faster because of the open roads and the dual
carriage ways.

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 b) There has been an increase in the variety of vehicles to suit the requirements of various road
transport needs. For instance, there are small vans, lorries, tankers, bulk powder carriers,
articulated vehicles, refrigerated vehicles etc.
c) It is the core method on which all other forms of transport rely because almost all journeys either
start or end by road
d) There has been an improvement in the mechanical efficiency of vehicles. Engines have been
improved to keep fuel costs down as oil prices rise.

Advantages of Road Transport

a) Flexibility route: Road transport is so flexible that firms can provide a door-to-door service.
Vehicles can be routed easily. Goods can be loaded at the factory and delivered straight to the
customer. There is no problem of changing from one form of transport to another, with all the
extra handling that this involves.
b) Flexible timetable: It does not follow a fixed timetable and goods can be removed as and when
ready and on any route.
c) Ability to reach remote places: Road transport can reach places which are not easy to reach by
other forms of transport.
d) 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.
e) Economy: The road haulage industry is very competitive, consisting of both large and small
firms. This competition is an incentive to efficiency and economy, often resulting in lower
charges for customers
f) Speed: It is faster than rail transport over short distance especially for such tasks as delivering
goods to customers within the town. Motorways networks speed up movement and reduce
congestion
g) Low cost of vessels: Firms can buy their own vehicles for greater convenience. They can also
advertise on the sides of the van.
h) 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

 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.
 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.
 Restrictions: Restrictions of driving hours, size and tonnage of truck as well as speed makes road
transport unsuitable in certain circumstances.
 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.

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  High road maintenance costs: Roads are very expensive to maintain and vehicles may not last if
they are not properly maintained.

The use of Own Fleet

Large companies find it more convenient to buy and operate their own fleet of trucks for delivering goods
and collecting raw materials. The advantages and disadvantages of using own fleet of trucks include the
following.

Advantages of using own fleet

The advantages to a firm of using its own fleet are as follows:
a) It can be cheaper and profitable if the company produces enough goods to keep the trucks busy.
b) It gives direct contact with customers and suppliers. This means problems can be identified and
solved more quickly before they become too big.
c) Better care can be taken of the goods as a business will be handling its on goods
d) A business can respond more quickly to customers needs
e) Deliveries can be arranged more flexibly with respect to time and routes.
f) The company vehicles can be painted with advertisement on the sides so the fleet provides, free
advertising for the business, wherever the vehicle goes.
g) The use of own fleet means less documentation would be required.
h) Raw materials and equipment can be collected as and when needed.
i) Own fleet is more convenient. Goods can be delivered as and when necessary.

Disadvantages
The advantages to a firm of using own fleet are as follows:
 It is expensive to operate one‟s own fleet of vehicles. This is mainly because of attached costs
such as purchase of vehicle, licenses, maintenance, fuel, insurance and depreciation.
 Drivers have to be paid regularly and a transport manager has to be employed
 Long distance deliveries to overseas customers for example, may not be possible in own trucks.
This means sea, air and possibly rail transport might still have to be hired even if the company
has its own fleet.
 The other problem of road transport like traffic congestion, limited carrying capacity and the fact
that trucks may have to return empty from delivery trips remains a problem.
 It may not be economical to have own fleet if output is too small.

Reasons for hiring other firm’s transport

A firm may hire other firm‟s transport for the following reasons:
a) If it is too small to have its own fleet.
b) If it is exporting goods to far away destinations and transhipments are needed.
c) If it is more cost effective to use hired transport.
d) If the workload is too big for the firm‟s own transport to cope with.

Freight liners
These are container carrying trains which link up with special road and sea terminals, and can be loaded
and unloaded quickly and easily. The terminals are located in large towns and industrial areas.
Freightliner trucks collect and deliver the containers at each end of the rail journey. The simplified
handling of freightliners results in improved speed and reduced handling cost, simplified and more
effective timetable, reduced losses from damages or theft and direct link between terminals such as port.

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Freightliner service movement are carried out mainly at night when the lines are less busy from other
traffic.

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.
Why rail transport has lost its position as leader of land transport in Zambia
Rail transport has lost its position as leader of land transport for the following reasons:

a) The inevitable disadvantages of rail transport such as it cannot offer door to door delivery service,
delays, theft etc.
b) Rail transport has high staffing and maintenance costs that result in less return for improvement
of services.
c) There have been a lot of improvements in road transport such as the availability of a variety of
shapes and sizes of vans and trucks with special facilities to meet all kinds of needs.
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.
However, the advantage to the railways may not be as great as these figures suggest: the railways
require a large team behind the scenes to programme trains and maintain the network.
 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.

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  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.
 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.

Differences between Road and Rail transport

Road transport Rail transport
1 Road transport offers door to door delivery Rail transport does not offer door to door delivery.
2 Road transport is flexible as to timetable Rail transport is not flexible to timetables.
especially where one is using own vehicle.
3 Road transport is cheaper because of less Rail transport is very expensive because of high
capital costs. capital costs
4 Road transport is uneconomical in the use Rail transport is economical in the use of labour.
of labour
5 Road transport is faster over short distances Rail transport is faster over long distances.
6 Road transport may not be extended into sea Rail transport may be extended into sea for easy
for easy loading and offloading of goods loading and offloading of good

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.
Types of shipping vessels available in sea transport.
There are several types of sea transport vessels available. They include:
a) Passenger Liners
 Passenger Liners carry passengers and may also carry some special cargo such as surface mail
and small parcels of high value.
 They run on fixed routes and adhere to fixed timetables. For this reason delivery dates can be
guaranteed.

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  The liners operators belong to associations such as the shipping conference, which determine
the fares, the freight charges and the frequency of journeys.
b) Cargo Liners
 These are ships used mainly for delivering goods although they may also carry a few
passengers.
 They operate on fixed routes and follow a regular timetable. These ships will leave the port
on time even if some of the scheduled cargo has not yet arrived.
 They belong to associations such as the shipping conference, which jointly determine the
freight charges and the frequency of journeys.
c) Tramp ships
 These ships do not have fixed routes or timetable.
 They go where ever and when ever they are needed to take cargo.
 They do not normally carry passengers.
 They are normally hired or chartered by whoever wants their cargo to be transported.
 A charter party agreement is signed between the ship owner and the trader who wants a ship to
transport his/her cargo. The agreement can either be a time charter or voyage charter
 Charter party agreements are usually signed at the Baltic Exchange in London where agents of
various ship owners meet. The Baltic Exchange is the World‟s largest market for the
chartering of ships from all over the world. Through the Exchange, shippers can obtain
information on the availability of shipping space, type and quantity of cargo for shipment, the
destination of the cargo and freight charges. Thus, the captains are told by radio where to
deposit or collect the next cargo.
 Charges are usually based on space available, size and weight of cargo, and the distance.
Types of charter
Time charter: this is an agreement where the ship is hired for a specific period of time e.g. two
months, six months etc. The trader ten takes full control of the ship for the duration of the hire,
making as many deliveries as the time can allow. At the expiry of the period, the ship goes back
to the owners unless the agreement is renewed.
Voyage charter: This is an agreement whereby the ship is hired for a particular trip or voyage
(e.g. from Durban to Walvis Bay), whatever the duration of the trip. Once the goods have been
delivered the ship goes back to the owner.

Specialised ships
These are ships built for specific purposes. They include the following:
These are ships used mainly for carrying large quantities of one good e.g. ore, grain, timber or coal.
Refrigerated ships used for transporting fresh produce are also bulk carriers.

d) Roll-on-roll-off Ferries
 Roll-on-roll-off ferries also known as Ro-ro ships are ships specially designed for mobile
cargo such as motor vehicles, tractors and trailers.
 The cargo can be driven onto the vessel on loading and driven off on unloading at the
destination port without difficult.
 They are usually used for short sea (water) trips e.g. for crossing a big river or a canal.

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  They also cut costs and reduce the chances of loss and damages of goods on transit.
 A good example is the ferry (pontoon) at Kazungula, the boarder between Zambia and
Botswana which helps vessels to cross the Zambezi River.
e) Container ships
 These are cellular designed vessels used to carry large standardised containers that can be
loaded and unloaded quickly by crane.
 The containers may be fitted with refrigeration units for frozen goods that need to be shipped
around the world.
 The containers easy the problems of loading and offloading goods at sea ports as well as
reduce the risk of pilferage or thefts.
f) Oil Bulk Ore (OBO) ships or Bulk Carriers.
 These are multipurpose ships that can carry ore, heavy dry bulk goods and oil.
 They are more expensive to build but very economical because they can make return
journeys with cargo rather than empty as single.
 These are ships can carry cargo such as oil and mineral ores like corn, copper, cobalt,
manganese and tin in one voyage
 They are specially designed to maximise safety and simplify loading and unloading of the
cargo.
 Their large size helps to cut costs of transporting large amounts of cargo which may be
needed worldwide such as oil.
g) Tankers
 Tankers, also known as petroleum tankers , are merchant ships designed for the bulk transport of oil.
 There are two basic types of oil tankers: the crude tanker and the product tanker.
 Crude tankers move large quantities of unrefined crude oil from its point of extraction to refineries.
 Product tankers, generally much smaller, are designed to move petrochemicals from refineries to points
near consuming markets.

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 all continents of the world as all continents have long sea coasts.
 Sea transport provides 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

a) Sea transport is relatively slow. As a result, it is not suitable for urgently required goods.
b) Sea transport does not offer door-to-door services as some areas have no water.
c) 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.
d) Bad weather can easily cause serious delays and losses at sea.

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 e) Goods can easily be lost or damaged especially where containers are not used.
f) 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.
 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.

The importance of seaport facilities

 They enable ships to dock, load, refuel and obtain the necessary provisions, quickly
 Efficient cargo handling reduces not only the turnaround time of ships but also cuts dock and
freight costs.
 They enable goods to be imported and exported efficiently thereby increasing the volume of
world trade.
 They provide warehousing facilities where goods can be processed for entre pot trade purposes.

INLAND WATERWAYS
This is transport by lake, rivers, canals and dams using crafts such as barges, boats and canoes. In some
countries canals, navigable by rivers and lakes provide an inland waterway transport system, with barges
moving goods from one place to another. In East Africa, for example, a lot of trade is carried out over
Lake Victoria, which is incidentally shared by all three countries (Uganda, Kenya, and Tanzania)
Advantages of inland waterways
 It is cheaper than other transport (road and rail) because of the low energy cost.
 It provides a smooth carriage, suitable for fragile goods like glassware, chinaware and pottery.
 Barges can efficiently carry large loads of bulky goods such as coal, cement and iron-ore.

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Disadvantages of inland waterways
 It reaches only limited number of locations.
 It is very slow because of the restricted speed of barge and many locks on some routes.
 Many waterways, especially canals are very narrow and cannot take wide barges.
 Labour costs are high in relation to the short distance which can be covered daily.
 In cold climate, the waterways may freeze in winter and stop transport completely.
 Canals are very expensive to maintain. For example, banks, locks and aqueducts need regular
attention and the canal needs to be regularly dredged to keep them deep enough for large barges
to pass through.

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.
Reasons for the increase in importance of air transport in the recent years
a) Air transport is faster than any other type of transport and this makes it the most preferred choice
in an era where speed of delivery is increasingly becoming an important factor.
b) There has been an increase in the number and size of airports and aircrafts.
c) There has been an increase in the volume of trade in small and valuable consumer goods for
which air transport is the best method of transport..
d) Air transport charges have become more competitive.
e) There is more security of goods in air transport as there is less possibility of theft of goods.
f) The incidental costs associated with exporting goods are often lower when goods are sent by air.
This is because air transport requires less packaging and insurance costs, thus, making air
transport economical for the carriage of goods.
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 are now being used to speed up cargo loading and unloading at airports, since
huge cranes handle them mechanically.
 New and large aircrafts are now being built which are able to carry large loads.

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

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  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.
 Air transport causes air and noise pollution.

Requirements for a good air port

a) 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.
b) Customs facilities to regulate the entry of goods.
c) 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.
d) Technical equipment such as radio, ladder which is needed for the safety of passengers and
aircraft.
e) Repair and maintenance facilities which are necessary to check on aircraft on arrival and before
departure.
f) 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.
 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.

CONTAINERISATION
The use of containers is one of the major developments in transport which came as a solution to problems
associated with the traditional method of transporting goods. Containers are large metal boxes in various
standard sizes which are filled with goods at, for example, the manufacturing firm‟s warehouse. The
goods can be locked, or if going abroad, checked and sealed by Customs Authorities, and the documents
prepared in advance. They are loaded on special trucks which take them either directly to their
destination or to rail terminals. It is from there that they can be railed to a sea port and loaded onto
container ships. Thus containers can be used in road, rail, and sea transport and to a limited extent, in air
transport. They carry goods that are neither large nor bulky such as clothing, shoes, bedding, and
electronic products such as television sets, fridges, etc. Special cranes are used to transfer containers from
road to rail or vice versa in a short time.
When are containers preferably used?
Containers are preferably used in the following circumstances:
 When transhipment is inevitable.
 When goods are being transported to other countries.
 When there is need to protect goods from corrosion and rust due to bad weather.
 When speedy customs clearance is required.

Advantages of containers

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  They increase speed of goods delivery.
 They increase the safety of goods as thee is less risk of pilferage and damage to goods.
 They reduce the need for warehousing since loaded containers can be safely stored outside.
 Containers are made in standard size so they can be used in rail, road, sea and to a limited extent
air transport,
 Vehicles, ship and rail wagons can be fully used as container vessels have special designs to carry
containers. The benefit of this is that more goods can be carried per trip than it was originally
possible.
 The use of containers simplifies loading of goods at terminals as cranes are used. As a result, the
ship turnaround time at port is reduced saving harbour costs as well as freight cost.
 Packaging and insurance costs are reduced, as containers are very strong and safe.
 The risks of damage and pilferage are reduced, as containers are very strong and safe.
 They enable mixed cargo to be easily carried.
 Goods are easily documented.
 Special containers can be used such as refrigerated containers for perishables like milk,
vegetables, fish and meat products.

Disadvantages of containers
 Not all vehicles and ships are standardised to carry containers. This means a company might still
have to hire standardised trucks.
 Not all terminals (ports) have mechanised container-handling facilities. This would require
expensive upgrading of ports for them to be able to handle containers
 It requires large capital investment to establish container ports.
 They are not economical for carrying very small loads as there would be wastage of space
 The use of containers in air transport is particularly limited because of weight restriction.

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. The project of construction was
facilitated by a loan advanced to the government of Zambia by the people‟s republic of China.
Advantages of pipelines
a) They reduce risk of pollution when transporting.
b) They increase the safety in the transportation of inflammables such as gas and oil.
c) They are a cheap method of transporting as compared to other forms of transport.
Disadvantages
a) There is high risk of spreading of diseases, e.g. where water is contaminated from the source or
three leakages.
b) It requires a constant close check to avoid contamination by foreign substances.
c) Disasters may result where for example; where an oil pipeline leaks into a water source, a farm or
a fishing place.
Modern Developments and Trends in Transport
 The growth of containerisation of goods by road, rail, sea and air transport systems.
 Improvements in roads and motorways.

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  Improvements in modern handling facilities at airports, seaports and rail stations.
 The growing importance of high speed trains.
 The increased importance of air freight due to more airports world-wide.
 The building of larger aircrafts.
 Improved technology to reduce on fuel consumption.
 Provision of better storage facilities at airports a better loading and off loading equipment.
 Special containers, which are light in weight, have been developed for use in air transport.
 Improved landing and navigation system such as autopilot has helped to overcome the effects of
for example, bad weather.
 Improved docking facilities and computerised processing of documentation reduces on
turnaround time for vessels.
 Opening up of areas by the introduction of motorways has decongested the roads and increased
the efficiency of road transport.

COMMUNICATION

To operate effectively, firms require a lot of accurate commercial information to move quickly
between persons and firms. 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 that provide the means by which other firms can communicate. In addition,
there are privately owned companies like Airtel, MTN, DHL, PostNET etc that provide postal and
telecommunication services.
Importance of efficient communication
Effective communication is essential to a business for the following reasons:
 Internal communication enables managers to issue instructions to their staff to tell them what
to do. This enables the business to operate smoothly and efficiently.
 The staff are also able to pass their grievances or suggestions to management in an amicable
way if there is a well established and reliable line of communication
 Management can keep staff informed of what is going on so that they are able to perform
their work better. Workers need to be informed of such things as working conditions, pay,
holiday, safety regulations, training opportunities etc.
 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.

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  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:
a) First Class Post
This is a fast method of sending letters although it is slightly expensive. Usually, letters posted by
first class services early in the day are sorted and sent very quickly and may be delivered on the next
working day. A trader may use it when sending urgent and important letters, business documents or
even payments especially by cheque.
b) Second Class Post
The post office also offers second-class post. It is a service used for less urgent or perhaps heavy
letters weighing more than 750g. It is slower but cheaper and can be used for sending printed matter
such as catalogues, pamphlets, trade journals, minutes of official meetings etc.
c) 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.
d) 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.
e) 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.

f) 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.
g) Cash-on-Delivery

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 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. .
h) Courier Services
This service is provided through courier service named Expedited Mail Service (EMS). EMS operates
along the line of rail. EMS mail is given priority over other mail items in custom clearance and it is
delivered straight to the customers‟ home or office and not sent through the postal boxes or bags.
i) Financial Services
One other service that is provided by the post office is sending and receiving of money. 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.
j) Philately
Issuing of postage stamps and historic items of the post office is done by the department of philatelic
products. Historical stamps and other items depicting postal events are sold at the post office, e.g. first
day cover envelopes and postage stamps.
k) 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.

l) 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.
m) 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.
n) 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
o) 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 includes 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.
p) 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.

q) 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.

r) 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. The hirer of the franking
machine pays the post office according to the units of postage value used.

The continuing need for postal services

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Despite the abundant sophisticated telecommunication systems currently available in Zambia, there has
been a continuing need for postal services. The following are the reasons:

a) Postal services are usually cheaper than telecommunication services, and therefore there will
always be people who will prefer to use the cheaper postal services in comparison to the expensive
telecommunication service.
b) Postal services are used in sending goods in parcels over distant places. It is not possible for one to
send a parcel of goods by telephone or by fax, telex or by internet.
c) Postal services do not require special equipment to transmit or to receive messages. Thus postal
services are usually used for sending messages to the remotest areas.

TELECOMMUNICATION SERVICES
Telecommunication authorities provide several means by which people or organisations can instantly
communicate with each other.

a) 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

 When a customer wants to inform the supplier of wrong type of goods supplied, wrong
quantity etc.
 When a customer wants to contact the supplier for an immediate response to a query.
 When a customer wants to inquire on the availability of goods and services from the
supplier speedily.
 When the supplier wants to inform the customer of prices of goods and services and terms
of payment speedily.
Advantages/Importance of a telephone t
 It enables business people to immediately contact and speak to a customer, supplier or
another business over a transaction.
 It is helpful in clearing queries between suppliers and their clients.
 It helps business people to get the immediate reply when they want it.
Disadvantages of a telephone as a means of speedy communication.
 A telephone does not provide a written confirmation of the conversation.
 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.
 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

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 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:
 Your calls are answered when you can not.
 Accuracy and confidentiality of message is maintained.
 You never miss a call.
 Continuous availability since it is within the telephone network.
Personal calls
A personal call is a telephone call that specifies a person to whom the caller wishes to speak.

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.

International call
An international call is a call made from one country to another country e.g. from Zambia to
South Africa.

Transfer charge call

A transfer charge telephone service enables telephone charges to be transferred to the called
telephone subscriber provided he or she agrees to pay for the telephone call before it is made.

b) Cell Phones (Mobile/cellular phones)

The cell phone has emerged as one of the greatest wonders in the business world. So much can
now be done using a cell phone than was possible a while ago. It offers the following business
and personal uses:
 It has a provision for sending and receiving short messages.
 It is able to send and receive electronic messages with attachments.
 It has memory capacity to store SMS and E-mails messages.
 It has a provision for phone book where one can store important phone numbers.
 It has storage capacity for photos, music and even work files.
 It is able to keep a historical record of incoming calls, outgoing calls, voice mail, calls
diverted etc.
 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.

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  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.

c) Telex
The telex or Teleprinters have been regarded as 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, thee 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.
The Telex plus is a more modern development of telex. This enables a subscriber to transmit the same
message to up to 1000 different destination, feeding the message into the machine only once.
d) Telex
The telex or Teleprinters have been regarded as 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, thee 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.
The Telex plus is a more modern development of telex. This enables a subscriber to transmit the same
message to up to 1000 different destination, feeding the message into the machine only once.
e) 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 ZamPost
guarantees 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. The overseas
telegram service remains.
f) Prestel
(Abbreviation of press telephone)
Prestel is a system, which allows a subscriber to have information extracted from a computer through
the telephone network displayed on an adapted television set. The subscriber can dial into any
300,000 pages of information on a wide range of subjects. Many of these deal with current events and
are constantly updated, thereby providing businessmen with immediate checks on such things as
commodity prices and interest rates.
Major developments include DATEL, the transmission of computer information via telephone and
telegraph systems, and the provision of the data processing services for commerce and industry
through National Data Processing.
g) 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

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 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 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.
h) 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.
i) 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.
j) 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.
k) Datel
This service provides a means of transmitting information from one computer to another, using the
public telephone network. By this service, a firm can send information to computers on sites in other
parts of the country as well as in many countries around the world. Through the use of modems
attached to the telephone network, data can be transmitted quickly between various computers around
the world. Multinational companies and chain stores can use this to transfer information on daily sales
to be compiled at their head offices.

l) 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 vey expensive, as a result, it is appropriate to only use it
for sending short messages.
m) Satellite
Satellites and their earth stations are essential for transmitting, for example, television programs
around the world. Sporting events like the world cup soccer and Olympic Games can be seen live and
clearly around the world via the satellite.
n) View Data
View Data is a type of information retrieval service in which a subscriber can access a remote
database via a common carrier channel. Data can be requested and received on a video display over a
separate channel. The access, request and reception are usually via common carrier broadcast
channels.View data can be used by subscribers to make bookings, place orders, access their bank
accounts and send messages. Individual businesses can have their own view data services allowing
them to link their various branches and offices using the Prestel computers. Charges are based on
telephone distance, complete time and frame character for the information given.

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 o) Teletex
This is a new service faster than telex, which allows business letters to be sent from one computer
terminal to another in any part of the world over the public telephone network. While the message is
being sent or received, the terminal can be used for some other function, such as word processing.
p) VSAT Network
This is a point-to-point and or point-to-multiple points two-way data and voice satellite based
communication network that connects a company‟s headquarters with remote or branch offices via
satellite. Vsat stand for Very Small Aperture Terminals. This service is flexible, fast and reliable for
use by large companies whose operation extends to areas, which have no telecommunication
infrastructure. In addition, the service is easy to install and relocate.
q) 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 fiber 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

 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.
 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.
 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 vey low costs.
 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.
 Distribute Product Catalogs
Businesses can use the internet to distribute product catalogs. In the old days, putting
together a product catalog 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 catalog and make it available to millions of users
immediately.
 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.

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  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.
 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.
 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.
 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.
 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

 It is used for voice and video conferencing.
 It is used for online news and weather services.
 It is used for entertainment with the provision of music and videos.
 It is used for online chatting by allowing people to carry on discussions using written text.
 It allows people to do education related research.
 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.

The disadvantages of Internet

Following are the disadvantages of Internet:
 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.
 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.
 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 your hard disk can crash, giving you a lot of trouble

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ZAMBIA COMMUNICATIONS AUTHORITY
This authority was established by an act of parliament of 2009. The principal responsibility of this
authority is to regulate the communication industry both postal and telecommunication. The need for such
an independent body was realised, when the government of the Republic of Zambia decided to liberalise
the communication industry. This removed the element of monopoly that was enjoyed by the two
parastatals namely Zambia Postal Services (ZAMPOST) and Zambia Telecommunications Company
(ZAMTEL).
Function of ZICTA
 To facilitate the provision of communication services throughout the country including those in
rural and underserved areas.
 License all companies that set up communications facilities in Zambia in the likes of Airtel,
MTN, Business centres, and Courier service providers like DHL etc.
 Regulate the industry by providing guidelines of operation and intervene in time of disputes.
 Carry out inspections of such facilities, to certify the quality of service provided and safe guard
the security of the country.
 Promote the interests of consumers, purchasers and other users of telecommunications services in
respect of the prices charged, the quality and variety of such services.
 To monitors the quality of services provided to the consumers so as to ensure that standards and
regulations are kept by the providers and that the consumers are protected from the harmful
effects of ICTs.
 To supervise and administer the provision of radio communication services and products in
Zambia.
 To do research on Cost of Service to ensure that tariff regulation is fare on both the provider and
the consumer. A

The Rights of Consumers relating to communication and information services.

a) Full Disclosure – The right to receive clear, conspicuous, and complete information about rates,
terms and conditions for available and proposed products and services from the regulator or
service provider as the case may be and to be charged by the service provider only for those
services and under the terms and conditions that have been approved or they have agreed to.
b) Privacy- The right to lawful personal privacy and to be protected against unauthorized access to
or use of their personal conversation or information
c) High Quality, Reliable Service-The right to high quality, reliable service from both service
providers and the regulator reflected through Key Performance Indicators developed to meet
identified needs.
d) Timely, Accurate Bills and Redress- The right to accurate and understandable bills for products
and services they authorized and to fair prompt redress for problems they may have with the bills
or that may arise during use of those products or services.
e) Responsive Regulator Authority- The right to a responsive regulatory authority that is
proactively looking out for their interests and takes into account the needs and values of
consumers.
f) Emergency Services- The right to access free emergency services.
g) Market abuse-The right to be protected from market abuses such as unfair trade practices,
including. false and misleading advertising and anti-competitive behavior. The Authority shall
have the following powers.

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 INSURANCE
Def. Insurance is an aid to that provides protection to businesses against financial losses caused
by risks such as fire, theft, floods, accidents etc.
Def. Insurance is a commercial practice by which a company provides a guarantee of
compensation for specified loss, damage, illness, or death in return for payment.

Buying and selling of goods and services takes a number of risks which, if they occur, involve
traders in financial losses. For example, a warehouse can be gutted down by fire, cars may be
smashed in accidents, goods may be stolen or damaged by floods or an employee may be injured
in the course of carrying out his duties. Insurance is designed to protect the financial well-being
of an individual, company or other entity in the case of unexpected loss. Some forms of insurance
are required by law, while others are optional. Agreeing to the terms of an insurance policy
creates a contract between the insured and the insurer. In exchange for payments from the
insured, the insurer agrees to pay the policy holder a sum of money upon the occurrence of a
specific event. Examples include car insurance, health insurance, disability insurance, life
insurance, and business insurance.

Examples of companies providing insurance in Zambia are Zambia State Insurance Corporation (ZSIC),
Madison Insurance, Goldman Insurance, Professional Insurance etc, Guardian Insurance, etc.

THE IMPORTANCE/FUNCTIONS/PURPOSE OF INSURANCE

 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 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

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 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 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 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 homes, cars, jewelry 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.

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 pays 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:
 As compensation money to those who suffer losses.
 For administrative expenses of the insurance company such as salaries, rents, equipment,
tax, stationery, transport etc.
 Pay profits (dividends) to share holders of the insurance company.
 Surplus funds are invested in property, businesses and some lent out to businesses and the
Government.

THE STATISTICAL BASIS OF INSURANCE

a) Statistics is information shown in figures collected from the past, arranged for comparisons and used
to predict future events.

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b) The importance of statistics to insurance companies include the following:
 Statistics enables insurance companies to assess risks and thus be able to decide whether to
accept these risks or not.
 Risks that have statistics (i.e. past records) are accepted by insurance companies while those
with no past records are not accepted.
 Statistics help insurance companies to work out the number of possible losses each year(the
frequency of losses)
 Statistics help to calculate the possible size of each of these losses.
 Statistics help insurance companies to value assets or property at risk (the maximum possible
loss).
 Statistics helps insurance companies to calculate a fair premium required to accumulate a
sufficient pool of funds out of which those who suffer losses are compensated.

BUSINESS 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

a These are risks that can be insured against These are risks that cannot be insured against
b They have past records They have no past records
c They are capable of being assessed and their They are not capable of being assessed and their chances of
chances of occurring estimated. occurring cannot be estimated.
d A fair premium can be calculated on them. A fair premium cannot be calculated on them.
e A risk is non-insurable if the act is illegal and is not in
the public interest e.g. Stealing, drug trafficking.
f A risk is also non-insurable if the person seeking
insurance cover has no insurable interest in the item to
be insured. A person only has insurable interest in an
item if the item belongs to him/her
Examples of insurable risks include fire, theft, Examples of non-insurable risks include risk due to
accident, floods etc changes in fashion, losses due to bad management etc.

THE PRINCIPLES OF INSURANCE

The operations of insurance are governed by 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:

a) The principle of insurable interest

i. The principle of insurable interest states that the insured must possess an insurable interest in the
object insured.
ii. Insurable interest may be defined as a 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.
iii. So an insurance contract without the existence of insurable interest is not legally valid and cannot
be claimed in a Court.
iv. 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 the items in

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 order to claim compensation and thus make profit out of the loss. It therefore prevents insurance
from becoming a gambling contract
v. For example, if Mr. 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.

b) The principle of Utmost good faith

(Also known as the Principle of disclosure or Uberrima fides).
i. 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.
ii. This is important because correct information helps the insurance company to:
1) Assess the risk
2) Decide whether to accept the risk or not
3) Calculate a fair premium
iii. The information will also help the person seeking insurance cover to make a decision to either
accept or reject the conditions.
iv. False information or non-disclosure of any important fact from either party makes the contract
voidable or nullified.
v. The insurance company on its part must honour all its promises reflected in the insurance
contract.
vi. 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.

c) The principle of indemnity.

i. 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.
ii. 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.
iii. 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.
iv. 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.
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.

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  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 underinsurance

v. Underinsurance is when the insured value of an item is less than its actual value.
vi. 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.
vii. This prevents people who under insure from making profits out of their losses.
viii. 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:
 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.
 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

a) The doctrine of proximate cause states that 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.
b) 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.
c) No compensation is payable if the loss is caused by a risk not insured against.
d) 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.

THE PROPOSAL FORM

a) The proposal form is an application form for insurance cover. The proposer fills it in answering all
the questions asked in utmost good faith.
b) He/she gives all the information relevant to the risk and the property.

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c) The information filled in the proposal form is important because the insurance company uses it to
make an accurate assessment of the risk and calculate the premium to be paid.
d) Any misinformation will render the contract null and void i.e. the insured would have to bear the full
extent of the loss.

THE INSURANCE POLICY

a) The insurance policy is written evidence of insurance contract.
b) In this document, the insurer agrees to pay premium in exchange for insurance cover and the
insurance company agrees to compensate the insured if a risk insured against occurs.
c) The document contains information such as the risk insured against, the sum insured, the identity of
the insured object, the period covered by the insurance policy and the renewal date.
d) If the premium is not paid by the renewal date, then the policy lapses. This means that the insured is
no longer covered.

REINSURANCE
a) Reinsurance is an arrangement whereby an original insurer who has insured a risk insures a part of
that risk again with another insurer.
b) The original insurer will do so in order to reduce his liability that may result from the risk.
c) The insurer transferring the risk is called the „principal‟ or original the insurer to which the
business is transferred is called the „reinsurer or „guaranteeing office‟.
d) Since it is also a contract of indemnity. The original company must disclose all the material facts
to the reinsurer.
e) If, for example, an insurance company accepts a risk which is too big for it to cover alone, it can
reinsure it with another company, in which case the premium collected would be shared amongst
or between the insurances companies involved.
f) When a risk insured against occurs, the responsibility of compensating the insured is shared
between or amongst the insurance companies involved.

PROCEDURE IN TAKING OUT INSURANCE COVER

a) The person seeking insurance cover (proposer) approaches the insurance company directly but
preferably through an insurance broker.
b) He/she obtains a proposal form to fill in, giving full, accurate and detailed information about the
property concerned and the risk being insured against.
c) The insurance company assesses the risk being covered and calculates the premium to be charged.
d) Upon payment of the premium the proposer is now insured. He/she is then given a cover note. A
cover note is a temporary policy or document of insurance contract.
e) The full policy would then be issued to the insured within a month or so. The policy contains all the
terms and conditions and warranties of the contract.

REASONS WHY THE INSURANCE COMPANY MAY REFUSE TO OFFER INSURANCE COVER
Sometimes the insurance company may refuse to insure a property for the following reasons:
a) If the risk is too high or inevitable i.e. if it has excessively high possibility of occurring or cannot be
avoided, the insurance company may refuse to accept it.
b) If it is difficult to fix the premium. This may be because it is a unique kind of risk which is not
common and there are not enough data to guide the insurance company on how to calculate and fix
premium.
c) If the cover required is too big. In such a case the insurance company would fear to take it alone
unless there is a possibility for re-insurance.

PROCEDURE IN MAKING A CLAIM

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A claim is a detailed account of what is lost or damaged and its value which the insured desires to
receive as compensation.
a) The insured informs the police of the event or loss immediately it happens.
b) The insured notifies the insurance company as soon as possible.
c) The insured completes a claim form giving full details of the loss suffered.
d) The insurance company will arrange to inspect the damage to assess and determine the extent of the
loss suffered and compare it with the sum claimed to see whether it is fair and reasonable. This is
done by qualified assessors to prevent profits being made out of insurance by dishonest clients.
e) The insured signs the agreement of loss form to bind him or her to accept the amount of
compensation arrived at.
f) The insurance company then settles the claim by paying out monetary compensation to the insured or
paying in kind, i.e. by them buying a replacement of whatever is lost.
g) If there are remains, they are subrogated to the insurance company.

INSURANCE BROKERS
a) Brokers are independent professional people who sell insurance on behalf of the insurance
companies.
b) They give information to their clients on kinds of insurance policies offered by different insurance
companies.
c) They advice clients and seek the best possible policy for them.
d) They seek to secure the best possible premiums for their clients by first comparing premiums offered
by different insurance companies.
e) They collect premiums from their clients on behalf of insurance companies.
f) They undertake paperwork relating to taking out insurance on behalf of their clients.
g) They deal with claims on behalf of their clients who suffer losses. They may also deal with specific
problems affecting their clients.
h) They are paid a commission known as brokerage for their work. The commission is based on the
premiums collected from the insured.

Why is it advisable to arrange insurance cover through a broker rather than directly with an insurance
company?
a) A broker would obtain a wider choice of insurance companies, and see different kinds of insurance
cover.
b) A broker may save time for the person seeking insurance cover.
c) It may be cheaper to get insurance cover through a broker.
d) The person seeking insurance may get better overall service.

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.

1. 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

a) Whole life policy

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 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 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.

b) 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.

c) 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.

2) FIRE INSURANCE

Types of fire insurance

a) 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.

b) Consequential loss insurance

This covers the loss of income, and the expenses incurred, after a covered risk interrupts normal
business operations. For example, a trader may insure his or her shop against fire. If later fire total
destroys the shop, then the trader has not only lost the business building and content but also the
profit he/she was making. The loss of profit is as a consequence of fire destroying the shop and its
contents.

Factors considered when fixing premium for fire insurance

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The size of premium for fire insurance depends on the likelihood of fire breaking out and the following
are some of the factors:
a) 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.
b) Whether inflammable materials such as petrol, diesel, paraffin, etc are stored in the house or not.
c) The nature of the surrounding of the building i.e. whether there is danger of fire breaking out from the
neighbouring houses or not.
d) Whether additional fire protection facilities are available or not e.g. Fire Brigade services provided by
the local government.

3) ACCIDENT INSURANCE

a) 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:
 Third parties for death or bodily injury caused to them and their property.
 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.

 Full comprehensive
Full 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.
 The value of the vehicle.
 The number of people using the vehicle.
 Occupation of the vehicle user.

d) 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.

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 e) Public liability insurance
Public liability insurance covers claims 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.

f) 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.

e) 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.

f) Theft insurance
This class of insurance provides compensation to insured persons whose goods are stolen from homes
or businesses or in transit.

g) Air travel
This class of insurance provides compensation to insured persons who suffer deaths or injuries caused
by air accidents.

4) MARINE INSURANCE
Marine insurance covers losses or damage to property and life caused by sea risks. The main types
include:

a) 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.

b) 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.

c) 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.

d) 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.

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 Types of marine policy
a) 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.

b) 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.

c) Mixed policy
Mixed policy covers both the voyage and time policy.

d) 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.

THE LLOYDS OF LONDON

a) Lloyds of London is a well organized international market for marine insurance and other risks such
as aviation, motor insurance etc.
b) Lloyd's started in the 1600s and it insures all or part of large risks that include such things as hazards
involving aviation, shipping or general catastrophes. It has since expanded to offer reinsurance for
numerous hazards.
c) Its main responsibility is to provide facilities for its members (underwriters and broker) who effect
insurance.
d) Lloyds of London only allows its members to do business on its floors.

Lloyds Insurance syndicates

An insurance syndicate is a group of companies or a group of underwriters who join forces to
issue insurance for high risks. Those risks include such things as property with a high value or an
exposure to a hazardous liability risk. Insurance syndicates offer coverage for a wide variety of
risks that are so large that no one insurance company or underwriter could assume all the
financial risk. Underwriters at Lloyds work in syndicates.

Lloyds Underwriters
a) These are individuals at Lloyds who personally undertake to insure risks for their personal profit.
They are the actual insurers at the Lloyds.
b) Underwriters are very rich people who have unlimited liabilities. They work in groups or syndicates.
c) They do not deal directly with members of the public but with brokers who represent the public. A
broker present slips describing the risks to be insured against.
d) Underwriters sign on the slips presented to them by brokers to indicate the amount of risk that they
are willing to cover.
e) They receive insurance premiums from their clients in exchange for the insurance cover and if the
risk insured against occurs they pay out compensation from their own pockets.

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f) Underwriters who think they have undertaken too big a risk may reinsure some of it with other
underwriters.

Lloyds brokers
a) Lloyd‟s brokers are insurance agents who act as a link between those seeking insurance and Lloyd‟s
underwriters.
b) Brokers advice their clients on the best possible policy to take.
c) Brokers seek to secure the best possible premium for their clients by first comparing premiums
offered by several underwriters.
d) Brokers approach several underwriters where it is not possible for one underwriter to cover the risk.
In such cases they approach several underwriters who will each sign for the amount they can cover
until the whole amount is covered.
e) Brokers collect premium from their clients and remit it to the underwriters.
f) They undertake paper work in the preparation of policies and other clerical work.
g) Brokers also collect evidence of losses or damages for presentation to underwriters.
h) Lloyd‟s brokers are paid on commission basis by underwriters. The commission is known as
brokerage.

Procedure for taking out an insurance policy at Lloyds

a) A person seeking insurance cover first approaches a Lloyd‟s broker who helps him/her to obtain
insurance cover. This is because members of the public are not allowed to deal with underwriters
directly.
b) The broker prepares a slip giving details of the insurance cover needed.
c) The broker goes round and obtains quotations from underwriters who are willing to accept the risk.
The broker then accepts the most advantageous.
d) The first underwriter to accept the risk and sign on the slip is called a lead. The lead also indicates
the proportion of the risk he/she is prepared to cover and the rate of his/her premium.
e) Once the lead is secured, the broker approaches other underwriters to accept proportions of the risk
until it is 100% covered usually at the same rate of premium set by the lead.
f) When full cover is obtained, the broker prepares the policy using details on the slip and takes it to
the Lloyds policy signing office for official signing by underwriters.
g) When the policy is ready (signed and sealed), it is forwarded to the client upon payment of
premium.

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 BUSINESS CALCULATIONS AND ACCOUNTING RATIOS

Every firm needs to keep a detailed and accurate record of:

 The value of assets (i.e. properties owned by the firm.)
 The value of liabilities,(i.e. the amount owed by the business to others)
 Changes in assets and liabilities
 The value of sales
 The value of purchases

Proper and accurate records are particularly essential for the following reasons:
 For the firm to calculate and make available to owners details of the value of the firm and profits
made.
 For managers to effectively control the firm and plan its future developments.
 For calculation of tax assessable to the firm (i.e. income tax, corporate tax and value added tax)
 To meet the provisions of the Company‟s Act which requires that a company‟s accounts be filed
in the company registration office annually.

THE PROFITABILITY OF A BUSINESS AND BUSINESS CALCULTAIONS

Profit is the reward for doing business. The business person takes the risk of manufacturing something or
providing some service so as to get profit. The profitability of a business can be looked at from the point
of view of gross profit or net profit.

Gross profits
Gross profit is the difference between the cost of goods sold and the proceeds from their sale. Put simply,
gross profit is selling price minus cost price. Gross profit is not the true profit since the expenses incurred
in selling the goods have not been taken into account. It is calculated as:
Gross Profit = Turnover minus Cost of goods sold.

Net Profit
This is the true profit obtained from trading. In other words, it is the real reward of the trader. It is the
amount left after allowances have been made for all expenses such as rent, salaries, storage, insurance,

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water/telephone bills, advertising and transport. Net profit is very important since it enables the trader to
know the actual benefit of trading and to compare it with the profit he/she had hoped for, also it allows
the trader to know the return on his/her investments, assist in forward planning and to help him/her to
obtain a loan from the bank. In addition, it is important for tax purposes. Net profit is calculated as:
Net Profit = Gross Profit (plus other incomes) minus Expenses.

Profit mark-up
Profit mark-up is when gross profit is expressed as a percentage of cost price.
i.e. Mark-up = Gross profit X 100
Cost price (cost of sales)

Gross Profit Margin

Profit margin is when gross profit is expressed as a percentage of selling price.
Gross profit margin = Gross profit X 100
Selling price
In business practice, to calculate the gross profit you have to sum up the total of goods sold during the
year called turnover as follows:
i.
Determine the value of opening stock (i.e. stock at start).
ii.
Determine the total value of goods bought during the year (i.e. purchases).
iii.
Find out if any goods were returned to the supplier during the year (i.e. purchases returns).
iv.
The difference between (2) and (3) is called Net Purchases of the year.
v.
Add (1) to (4) i.e. opening stock to net purchases to get the total value of goods available for sale
during the year.
vi. Find the value of closing stock by stocktaking(i.e. physical counting of unsold goods)
vii. Subtract (6) from (5) i.e. closing stock from the goods available for sale, to get the final cost of
goods sold during the year. This is called the “Cost of Sales”.
viii. Calculate the gross profit i.e. Net sales minus cost of sales.
Summary
c) Cost of sales = Opening stock plus net purchases minus closing stock
d) Net Sales = cost of sales minus gross profit
e) Gross Profit = Net sales minus cost of sales
f) Net Profit = Gross Profit minus Expenses
g) Expenses = Gross profit minus Net profit

Turnover
The turnover or net sales is the net value of goods sold during an accounting period calculated as follows:
Turnover = Sales minus Returns inwards
Or Turnover = Sales minus Cost of goods sold plus gross profit.

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Cost of goods sold
This is the cost price of the goods that have been sold. It is calculated as:
Cost of goods sold = Opening Stock plus Net Purchase minus Closing Stock
Or Cost of goods sold = Turnover minus Gross profit.

Rate of turnover or rate of stock turn

It is the number of times the average stock can be sold in an accounting period. (It is actually the number
of times a firm orders and sells out its stock each year). It is calculated as follows:
Rate of stock turn = Turnover or Rate of stock turn = Cost of goods sold
Average Stock Average stock

Average stock
This is the average number of stock held in the business for the accounting period. It is actually the
average of the opening and closing stock. It is calculated as:
Average Stock = Opening Stock + Closing Stock
2
Gross profit percentage
This shows the average profit made from trading. It is sometimes called the gross profit percentage of
turnover. It is calculated as follows:
Gross Profit Percentage = Gross Profit x 100
Turnover

Net profit percentage

The Net Profit percentage shows actual average profit made after taking into account all costs and
expenses incurred. It is also known as the net profit percentage of turnover. It is calculated as follows:
Net Profit Percentage = Net Profit x 100
Turnover

THE BALANCE SHEET AND THE INTERPRETATION OF ACCOUNTING RATIOS

A balance sheet is statement of the financial position of the business or an individual at a given time. It
shows the company‟s assets and liabilities.

The balance sheet equation

The balance sheet equation can be written as:
Capital = Assets – Liabilities
It is represented in tabular form as follows:

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ASSETS LIABILITIES

K K
Buildings/Land and Freehold 5 000 000 Preference share capital 2 000 000
Shop fittings and Fixtures 3 000 000 Ordinary share capital 4 000 000
Vehicles/machinery 1000 000 Bank Loans 1 300 000
Cash at Bank 400 000 Creditors 600 000
Cash in Hand 600 000 Bank overdrafts 100 000
Stock of Goods 700 000 Mortgage on buildings 2 700 000

Total 10 700 000 Total 10 700 000

THE BALANCE SHEET INTERPRETATION

The balance sheet of a firm shows the financial position at a particular date. It gives the summary of its
reserves, capital, liabilities and assets.
a. Assets
These are the properties of a business. Assets can be divided into two: Fixed Assets and Current
Assets.
i. Fixed Assets: These are properties of a business with a long life which are bought for use
in the business and for profit generation e.g. Land, Buildings, and Equipment etc.

ii.
Current Assets: These are properties of a business whose value change from day to day
e.g. Debtors, Cash in hand, Cash at bank, and Stock of goods (raw materials) of the
business.
b. Liabilities:
This is money owed by a firm to other business or individuals and can be divided into fixed or
long term liabilities and current liabilities.

i. Long term-Liabilities are amounts, which have to be repaid over a number of years, for
example, a ten-year loan or mortgage on premises.
ii. Current Liabilities are short term and have to be repaid in less than a year‟s time, for
example,
creditors, bank overdrafts etc.

RATE OF RETURN ON CAPITAL INVESTED

The rate of return on capital invested is extremely important to a businessman or woman for it tells
him/her exactly how much he/she is getting from the investment. It is calculated as:
Rate of Return on Capital Invested = Net Profit x 100
Capital at start of the year
This ratio helps the businessperson to determine the profitability of his/her business. He/she is thus able to
decide whether it is worthwhile or not to keep his/her money in that investment.

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EARNINGS PER SHARE
EPS = Net Profit
Number of ordinary shares issued

CURRENT RATIO (WORKING CAPITAL RATIO)

This is the measure of the business‟s ability to pay its current debts. A ratio of 2:1 is considered
favourable.
Current ratio = Current assets
Current liabilities

ACID TEST RATIO (QUICK RATIO)

This is the measure of the ability of the business to pay off maturing short term financial obligations
without relying on the sales of stock. A ratio of 1:1 is considered satisfactory.
Acid test ratio = Current assets – Closing stock
Current liabilities

DEBTOR/SALES RATIO (OR DEBTOR RATIO)

This ratio measures money tied up in debts
Debtors/sales ratio = debtors or debtors X 365 days
Sales Sales

CREDITORS/PURCHASES RATIO
This ratio measures money owed by the business to the suppliers of goods.
Creditors/Purchases ratio = Creditors or Creditors X 365days
Purchases Purchases

GEARING RATIO

Gearing ratio = long term liabilities + Preference shares

Ordinary share capital + Preference shares + reserves + Long term liabilities

In the compilation of these notes the references and pictures used were from the following
sources

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Lobley D. (1975) Success In Commerce

Matimba A. ( ) Distinction In Commerce

Matindike G (1993) Focus On Commerce

Williams D.T. (1967) Commerce

Wokorach J.B. (1997) Commerce A Complete Course

http://www.zicta.co.zm/

http://en.wikipedia.org/wiki

http://www.encyclo.co.uk/

http://www.insurexchange.com/glossary/ma

http://www.inspirational-quotes.info/

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