TOPIC ONE: INTRODUCTION TO COMMERCE

Definition of Commerce
Commerce can be defined as any of the following:
1. According to S. A Butt - Commerce is the sum total of all the activities beginning from the
place of production and ending at the retailer’s shop’
A study of commerce would therefore involve:
 A study of trade, the principal activity in distribution of goods,
 A study of auxiliary services that make trade possible
 A study of how best the above two could be organized so as to satisfy the needs of
a consumer in the most efficient manner.
2. Commerce is the system by which raw materials are distributed to industry and the finished
products to consumers.
3. Commerce is the sum total of those processes which are engaged in the removal of hindrances
of persons, place and time in the exchange of commodities (Saleemi)
4. Commerce is the sum total of all the activities beginning from the place of production and
ending at the retailers shop.
5. Commerce is a social science which is associated with trade and aids to trade.
6. Commerce includes all those branches that deal with the removal of obstacles / barriers to
satisfaction of human wants.
7. It is a study of the distribution of goods and services and the prices at which they are exchanged
with the aim of achieving the most efficient distribution to maximize the satisfaction of human
needs and wants.
8. According to N. A. Saleemi, commerce is a social science, which is associated with trade and
aids to trade.
9. According to G.R. Rwabutoga ( a Textbook of commerce), Commerce is concerned with trade
and other human activities embracing transport, finance, insurance, banking, advertising,
communications, market research and any other activity that helps people to exchange goods
and services.

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Importance/significance of Commerce
Commerce serves as the basic function of ensuring satisfaction of human wants/needs.
Different people produce different goods, some are not available in the same geographical location
hence people in different parts of a country for instance to meet their needs, they have to enter into
a form of exchange. This allows them to trade what they have in exchange with what they need
but do not have or produce. Commerce ensures that this is achieved.
Commerce is part of a wider subject called Economics, which is concerned with studying how
mankind tries to satisfy unlimited wants using scarce resources. Man tries to satisfy his wants as
efficiently as possible. As the resources are limited and the wants are unlimited, man has to choose
which of his wants to satisfy first. Scarcity and choice are, therefore, key words in the study of
economics.
Commerce is concerned with trade and other human activities (called trade facilitators) embracing
transport, finance, insurance, banking, advertising, communications, marketing research and any
other human activity which helps people to exchange goods and services. Commerce also involves
the study of the distribution of goods and services and the prices at which goods and services are
exchanged. Its aim is to achieve the most efficient distribution of goods and services so as to
maximize the satisfaction of human needs and wants.

Human wants
Human wants cover any human desire. Any human desire is known as wants, needs. These include
food, better quality food more clothes, large houses, new model cars, TV sets and other things that
make life better.
All wants of human beings cannot be satisfied because resources are limited or scarce.
Economic activities are aimed at the satisfaction of human wants as human effects are converted
into rewards such as salaries and wages which help to meet the wants.
Characteristics of human wants:-
a) Habitual: They are habitual meaning that they can be habit – forming. A person who smokes
or drinks may wish to give it up, but find himself unable to do so. Such wants include desire
for cigarettes or beer. A person may find himself unable to function normally without them.
b) Insatiable: They are insatiable meaning they are so numerous they cannot be satisfied, such
things as land where we can’t have all the land for ourselves since our resources are scarce.

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c) Competitive: They are competitive meaning that most wants can be satisfied by a number of
sources e.g. thirst can be satisfied by water, tea etc. This means you have to make a choice.

Growth of Commerce
Commerce plays a fundamental role in satisfaction of human wants. Before commerce, the
producer used to consume all his products. This meant we had to produce a little of everything in
order to meet our own needs. With the introduction of commerce came the exchange of goods and
services known as the barter trade. This was before money was introduced.
The growth of commerce introduced specialization which includes geographical and occupational
specialization. In geographical specialization, different regions of the world or a country produce
the types of goods they are best suited for.

The following factors have contributed to the growth of commerce:

1. Development of money and banking system led to greater production and exchange activities
as there was security of money for businessmen.
2. Improvement in the transport sector in terms of infrastructure and communication system.
3. Specialization or division of labour as people deal with what they could do best, effectively
and efficiently in terms of knowledge, climate and resources.
4. The diverse needs of human wants coupled with inability to produce everything for personal
needs.
5. The diversification of natural resources in different parts of the world in terms of availability
encouraged foreign trade.

Structure and Scope of Commerce

The structure of commerce means those limits under which different problems can be discussed.
The structure/scope of commerce comprises all commercial occupations. The main purpose of
commercial activity is to facilitate the trading or exchange of goods.

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Divisions of Commerce
Commerce is divided into:
1. Trade – Trade is the buying and selling of goods and service with an aim of making a profit.
Trade takes place within or between countries; trade can be home trade, Trade: This covers
the exchange i.e. the buying and selling of goods and services either within a country – home
trade or between different countries – foreign or international trade.
They may be further divided into:
(i) Retail trade – This refers to the selling of goods and services direct to the final
consumers or users by traders
(ii) Whole sale trade: Selling of goods to middlemen or manufacturers, agents in large
quantities.
(iii) Export trade – Selling of goods and services by one country to another or several
other countries.
(iv) Import trade – Purchase of goods and services by one country from another or from
others.
E.g. Retail and wholesale trade or international/foreign trade e.g. import and export trade.

2. Aids to trade – which include banks, insurance, warehousing, transport and advertising.
Retail and wholesale trade make up home trade; export and import make up foreign or
international trade.
Aids to trade or auxiliary services: Trade is the main branch of commerce. The aids are helpers
which facilitate trade and include:
i) Transport: Refers to the movement of goods and people from one place to another.
The chief forms of transport are land (road and railway) water and air. Transport
assists trade by distributing raw materials to manufacturers, semi-finished goods to
finishing firms and the finished goods to the consumers and users.
ii) Communication: This is the act, or any natural or artificial means of conveying
information. This consists of those people engaged in spreading commercial
information between producers and consumers by means of the press, wireless, radio,
television etc.

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 iii) Banking: Banks are institutions which receive and safeguard public funds. Banking
assists trade by safeguarding the trader’s money. They too provide efficient, safe and
convenient method of payment by use of cheques as well as lending them in form of
loans or over drafts.
iv) Warehousing: This stores the goods so that they are available when and where they
are required. It also protects goods from being stolen, going bad due to extreme
weather conditions and from other hazards.
v) Insurance: All business activities are exposed to a number of risks. Goods may be
stolen, catch fire, be damaged in an accident, and sink in sea etc. insurance firms
helps traders by minimizing such risks.

Significance of Commerce to an individual and the community.

1. Boosts development through capital goods e.g. machinery from other communities/societies.
2. Creates employment for large number of people.
3. Enables an individual to dispose off surplus goods for money
4. Enables civil societies to collect revenue in form of tax
5. Enables one to get goods that cannot be produced by an individual.
6. Enables people to get variety of need satisfying goods.
7. Encourages the movement of labour, technology and capital from one community to another.
8. Facilitates high standard of living
9. Helps some individuals to specialize in areas where they can do best.
10. Helps to promote good relations amongst people in the society
11. In case of emergency in one community, supplies may be obtained from another community.

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 TOPIC TWO: PRODUCTION

Meaning of Production
It can be defined as the creation of goods and services or increasing their usefulness to become
more satisfying. Production activities include transforming raw materials into finished products,
transportation and storage. Goods and services produced must have utility. There are several types
of utility:

Types/ Classification of Production

1. Direct Production
This is where goods and services are produced for own consumption rather than for
commercial purposes. It is commonly referred to as subsistence and is much more common in
rural areas. However, nowadays it is difficult to find someone living purely on this form of
production.
Characteristics of Direct Production
 Goods and qualities are mainly of low quality and quantity;
 Encourages individualism
 Leads to low standards of living;
 Does not encourage consumption;
 Can be very tiring;
 Does not encourage invention and innovation;
 A lot of time is wasted as one moves from one job to another;
 No one has the ability to provide all that he/she requires.

2. Indirect Production
It is the production of goods and services for selling the excess to the market in order to
purchase what one needs but doesn’t produce. It thus leads to specialization.
Characteristics of Indirect Production
 Production with a view for exchange;
 The producer specializes in one or a few areas of production;

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  It results in surplus of goods and services.
Levels of Production
1. Primary Level
This involves extracting the goods from their natural setting. The goods are either used as is or
they are processed further to make them more useful. Primary level of production mainly
involves mere ‘looking after’ e.g. growing crops where the farmer looks at the crops and nature
grows them, or extracting the materials from nature. Examples of primary production include:
farming, mining, fishing and lumbering.

2. Secondary level
It involves processing raw materials into much more useful products like processing clothes,
processing and food canning, manufacturing like furniture making and welding, and
construction roads, houses and railways

3. Tertiary level
This level deals with production of services. It may be divided into two categories:
 Communal services – it involves trade or aids to trade activities like banking, retailing,
banking and insurance.
 Direct personal services – include services rendered by individuals directly to the
consumers. E.g. teaching, nursing, pastoral work, legal practice, etc.

Factors of Production and their Rewards

They are resources necessary for the production process such that without them, production would
not be possible. They include:
1. Land
It refers to all natural e.g. soil, rivers, lakes and climate. Since it is natural, it cannot be
increased in quantity, it can only be improved in quality. Land earns rewards to the owners or
users in terms of royalty, rent and rates.
Characteristics of Land as a Factor of Production
 It is a basic factor of production since production cannot take place without it;
 It is fixed in quantity of supply;

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  It is not homogenous in quality. Production in one piece of land is different from that of
another.
 It is a natural resource;
 It lacks geographical mobility since it cannot be shifted from one place to another but it is
occupationally mobile as it can be put to alternative uses;
 It is subject to the law of diminishing returns;
 Its productivity can be improved by increasing the quantity and quality of capital.

2. Labour
Also referred to as human resource, it requires either human physical effort or mental effort or
both. It can be categorized as skilled where skills acquisition is required for one to be
productive, semi-skilled where some simple training is needed or unskilled where no training
is needed at all. Its reward is salaries and wages.
Characteristics of labour as a factor of production
 It is a basic factor of production;
 It cannot be separated from the laborer;
 It is human in nature, with capacity to think and limitations of moods;
 It cannot be stored;
 It is mobile both in terms of geographical and occupational mobility;
 The laborers sell their labour, not themselves.

3. Capital
This is also known as producer goods or capital goods and includes all man-made resources
used in production of goods and services. It earns interest.
Characteristics of Capital as a factor of Production
 Its supply is under man’s control since it is manmade;
 Can be improved through technology;
 It is a basic factor of production;
 It is subject to depreciation.

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4. Entrepreneurship
An entrepreneur organizes all the other factors of production and pays rent for the land, interest
for the capital and wages for the labour so as to use them. He/she is the organizer, the manager
and the risk taker. His/her reward is the profit.
Functions of the entrepreneur:
 Controls the business;
 Starts the business;
 Makes decisions;
 Owns the whole project;
 Acquires and pays for all the other factors of production;
 Pays for such expenses as electricity, water, stationery and postage;
 Bears the risk and enjoys the profit.

Types of Utility
1. Form utility – involved the changing of raw materials into finished products.
2. Time utility – it is created by storage of goods until an appropriate time, e.g. storing seeds
until planting time;
3. Place utility – this is the bridging the gap between the producer and the consumer of a
commodity, for instance moving maize from the fields into the market.
4. Possessive utility – it is created when ownership of goods change from one person to another.

Division of Labour and Specialization

Division of Labour: This involves breaking down a production process into stages and assigning
each stage to an individual or a group of individuals. It was first observed to be productive by a
British economist, Adam Smith, who observed that workers in a pin manufacturing factory were
much more productive when assigned to specific stages of production.

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Specialization: This refers to a situation where one concentrates in production of what he/she
produces best and leaves the others to produce the rest. One may for example concentrate on
teaching or farming or engineering or treating people.

Advantages of Division of Labour and Specialization

1. Output per worker is greatly increased;
2. It encourages invention and innovation as one repeats the same process over and over, he
can easily come up with more innovative and efficient tactics or solutions to a certain
challenge.
3. Enables greater use of machines in production making production fast and efficient;
4. It saves time where the worker does not have to move from one activity to another;
5. It enables a worker to acquire skills in a particular field;
6. It enables one to engage in a trade in which he/she is best suited or talented to do;
7. Leads to production of high quality goods and services;
8. Routine jobs involved reduce mental and physical effort.

Disadvantages of Division of Labour and Specialization

1. Its monotonous nature leads to boredom;
2. Specialization may make a country dependent on other countries;
3. Specialization makes a worker dependent on one trade risking his employment in case
his/her skills or product lose demand in the market;
4. It hinders creativity since people work mechanically like machines;
5. Interruption of the work of a few people derails the entire process;
6. Specialization and division of labour brings people together bringing about congestion
causing social crimes like prostitution and robbery.
7. Lack of motivating pride in the final product by any of the individual worker.

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Classification of Goods and Services produced in an Economy
1. Free goods and economic goods – free goods are mainly the free gifts of nature. They are
abundant, have utility but no monetary value while economic goods have both monetary value
and utility due to their scarcity nature.
2. Producer goods and consumer goods – producer goods are also known as capital goods and
are used to produce other goods. They include such equipment as machinery, tools, tractors,
Lorries and grinding mills. Consumer goods are readily usable by their final consumer and
include foods, television, cars, cosmetics, medicines etc. some goods can also be both
producer and consumer depending on the intention of the buyer e.g. a building might be for
renting or for occupation.
3. Perishable goods and durable goods – perishable goods go bad easily for example the
horticultural products while durable goods are usable for a longer period of time and are able
to withstand spoilage. They include cars, furniture, buildings, metals etc.
4. Public goods and private goods – public goods are owned by the government or are
collectively owned, for instance infrastructure like roads, railways, ports, courts, churches,
etc. while private goods are owned by individuals and the individuals have exclusive right to
usage for example cars, private schools.
5. Intermediate goods and finished goods – intermediate goods are not ready for use but
require more production e.g. sisal, wood, cotton, skins and hides, minerals etc. while finished
goods are final products ready for use like bread, furniture, shoes, ornaments et.
6. Material goods and non-material goods – material goods are tangible while non-material
goods are services.

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 INSURANCE

Definition of insurance
Insurance is an undertaking or contract between an individual or business and insurance on
occurrence of risk(s) (i.e. against events whose occurrences are unforeseen but causes financial
losses or suffering to the affected parties.
Risks are also referred to as contingencies, hazards or perils and include:
 Fire outbreak
 Accidents
 Thefts
 Deaths
 Disabilities
Risks are real and unforeseen. Methods to eliminate such risks have achieved very little and thus
have necessitated the need for insurance.

Importance of insurance
1. Continuity of business: Every business enterprise is exposed to a variety of risks e.g. fire,
theft etc. The occurrence of such risks often results in financial losses to the business. Insurance
provides adequate protection against such risks in that, if a trader suffers losses as a result of
insured risk, she/he is compensated, thus he/she is able to continue with business operations.
2. Investment projects: Insurance enables investors to invest in profitable yet risky business
projects that would otherwise avoided. Not all the money received as premiums (by the
insurance companies) is used up for compensation to those who have been exposed to risk and
suffered losses. The rest of the money is invested in other businesses to earn profits.
3. Creation of employment: Insurance does provide employment opportunities to members of
the public.
4. Government policy: The profits earned are a source of revenue for the government i.e.
insurance companies are profit-making organizations which generate revenue to the
government through payments of taxes
5. Credit facilities: The insurance industry have also established credit or lending facilities
which the business community uses by borrowing. Loans are made available to the public for

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 different investment projects in different sectors of the economy and also for personal
requirements.
6. Development of infrastructures: The insurance industry plays a crucial role in the
development of urban facilities in major towns. Both residential and office buildings have been
developed by insurance firms. The firms also participate in development projects in the areas
where they operate. They contribute to development of a region by constructing and
infrastructural facilities
7. Life policies can be used as security for loans from either the insurance company or other
financial institutions.
8. Provision of life and general insurance policies encourages Kenyans to plan ahead for their
dependents thereby reducing the number of needy future students.
9. Loss prevention-The insurance companies encourage the insured not to cause accidents thus
channeling the unclaimed resources into the economy.

Terms used in Insurance

1. Insurance: This is a written contract that transfers to an insurer the financial responsibility
for losses arising from insured risk.
2. Premium: This is the specified amount of money paid at regular intervals by the insured to
the insurer for coverage against losses arising from a particular risk.
3. Risk: These are perils or events against which an insurance cover is taken. It is the calamity
or problem a person or business faces and results into losses.
Note: The calculation of premiums depends upon the type of risk insured against. The higher
the probability of the risk occurring, the higher the premium. The more the risks the business
or person is exposed to the more the premiums payable.
4. Pure risk: This is a risk which results in a loss if it occurs and results in no gains if it does
not occur. For example, if a car is involved in an accident, there will be a loss and if the
accident does not occur there will be no gain or loss
5. Speculative risk: This is a risk which when it occurs, may result in a loss or a profit. For
example, a person may buy shares at ksh.50 each, one year later the shares may be valued at
ksh40 each meaning a loss of ksh.10 alternatively, their value might not have changed or

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 might have increased to ksh.45 each. Speculative risk lures people to venture into business in
the first place.
6. Insured: This is the individual or the business that takes out the insurance cover and therefore
becomes the policy holder. The insured pays premiums to the insurance company to be
compensated should the risk insured against occur or cause loss.
7. Insurer: This is the business company that undertakes to provide cover or protection to the
people who suffer loss as a result of occurrence of risks
8. Actuaries: These are people employed by an insurance company to complete expected losses
and calculate the value of premiums.
9. Claim: This is a demand by the insured for payment from the insurer due to some loss arising
from an insured risk.
10. Policy: This is a document that contains the terms and conditions of the contract between the
insurer and the insured. It’s issued upon payment of the first premium.
Information contained in a policy includes;
 Name, address and occupation
 Policy number of the insured
 Details of risks insured
 Value of property insured
 Premiums payable
 Other special conditions of the insurance, for example nominees
11. Actual value: This is the true value of the property insured
12. Sum insured: This is the value for which property is insured, as stated by the insured at the
time of taking the policy.
13. Surrender value: This is the amount of money that is refunded to the insured by the insurer
in case the former (i.e. the insured) terminates payment of the premiums before the insurance
contract matures. The policy holder is paid an amount less than the total amount of the
premium paid.
14. Grace period: This is term allowed between the date of signing the contract and the date of
payment of the first premium. During this period the insurance contract remains valid. This
period is usually a maximum of thirty (30) days.
15. Proposer: This is a person wishing to take out an insurance cover (prospective insured)

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16. Cover note (Binder): This is a document given by the insurance company to an insured on
payment of the first premium while waiting for the policy to be processed. It is proof of
evidence that the insurer has accepted to cover a proposed risk.
17. Annuity: This is a fixed amount of money that an insurer agrees to pay the insured annually
until the latter’s death. It occurs when a person saves a lump sum amount of money with an
insurer in return for a guaranteed payment which will continue until he/she dies.
18. Consequential loss: This is loss incurred by a business as a result of disruption of business
in the event of the insured risk occurring.
19. Assignment: This is the transfer of an insurance policy by an insured to another person. Any
claims arising from the transferred policy passes to the new policy holder called an assignee.
20. Beneficiaries: These are people named in a life assurance policy who are to be paid by the
insurer in the event of the insured.
21. Nomination: This is the act of designing one or more people who would be the beneficiaries
in the event of death of the insured. These people are called nominees.
22. Average clause: This clause is usually included in policies to discourage under-insurance.
The clause provides that the insured can only recover such proportions of the loss as the value
of the policy bears on the property insured. It is usually included in marine or fire insurance
policies.
The amounts recoverable are arrived at using the following formulae:

Example:
If a house worth kshs.800,000 and insured against fire for kshs.600,000 was damaged by fire
to the tune of kshs.400,000,the insured would be compensated;

23. Double insurance: This is taking of insurance policies with more than one company in
respect to the same subject matter and the risk. It is significant because if one of the insurers

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 is insolvent at the time the claim arises the insured can enforce his/her claim against the
solvent insurer or if both insurers are solvent then they share compensation. (Insolvency is a
state where a business is not able to pay all its liabilities from its existing assets)
24. Co-insurance: This is an undertaking by more than one insurance company to provide
insurance cover for the same risk for an insured. This will usually occur for properties that
have great value and face great risk exposures that an insurer cannot successfully make
compensation for e.g. value of aeroplanes, ships etc.
Co-insurance help spread risks to several insurers, each insurer covering only a certain
proportion of the total value. The insurance company with the largest share is called the
“leader” and acts on behalf of all the participating insurance companies’ e.g. in collecting
premiums from the insured and carrying out documentation work, making claim after
collecting each insurers premium contribution etc.
Note: Co-insurance is different from double-insurance in that in co-insurance company
approaches another insurance company to help in covering the insured property while in
double-insurance; it’s the insured who decides to approach different insurance companies to
insure the same property against the same risk.
25. Re-insurance: ‘Re-insurance’ means insuring again. This is a situation where an insurance
company insures itself with a bigger insurance company called re-insurer for all or part of
the risks insured with it by members of the public. Re-insurance indirectly insure an
individual’s risks. Re-insurance helps to reduce the burden on an insurance company when
the loss is too high for a single insurer. When such losses occur, the claim is met by both the
insurer and re-insurer(s) proportionately (according to agreed percentages)
Note: Re-insurance deal with the protection of insurance companies only, while insurance
companies protect individuals and business organizations.

Factors that may make it necessary for an insurance company to re-insure

 Value of property - When the value of property is great, such as ship, the risk is too high
to be borne by a single insurer
 High risk of loss - When chances of loss through the insured risks are high, it becomes
necessary to re-insure.

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  Number of risks covered - When the insurance company has insured many different
risks, it would be too costly to compensate many claims at once, hence the need for re-
insurance
 Need to spread the risk - When the insurance company wishes to share liability in the
event of a major loss occurring
 Government policy - The government may make a legal requirement for an insurance
company to re-insure

26. Pooling of risks: The insurance operation is based on the theory that just a few people out of
a given lot may suffer a loss. There is therefore a “pooling of risks” i.e. the loss of the
unfortunate few is spread over all the contributors of the group, each bearing a small portion
of the total loss. This is why the burden of loss is not felt by the individuals because it is
“shared” by a large group.

Benefits of the “pooling of risks” to insurance company

 Pooling of risks enables an insurance company to create a common pool of funds from
the regular premiums from different risks.
 It enables the insurance company to compensate those who suffer loss when the risks
occur
 The insurance company is able to spread risks over a large number of insured people
 Surplus funds can be invested in for example, giving out loans or buying shares in real
estates
 It enables the insurance company to meet its operating costs by using the pool funds
 It enables the insurance company to calculate to be paid by each client
 It enables the company to re-insure itself with another insurance company.

27. Under-insurance: This occurs when the sum insured as contained in the policy is less than
the actual value of the property e.g. a property of shs.500, 000 can be offered for insurance as
having a value of shs.400, 000

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28. Over-insurance: This is a situation where the sum insured is more than the correct value of
property e.g. a person insures property of shs.300, 000 for shs.600, 000.If total loss occurs, he
is compensated the correct value of the property i.e. that which he has lost
29. Agents: These are people who sell insurance policies on behalf of the insurance company.
They are paid on commission that is dependent upon the total value of policies sold
30. Insurance Brokers: These are professional middlemen in the insurance process. They
connect the people wishing to take insurance with the insurers. They act on behalf of many
different insurance firms, unlike agents.
Their activities include:
 Examination of insurance market trends
 Correspondence between the insured and his clients
 Advising the insured and would be policy holders on the best policies for their property
etc.
He receives a commission (reward) known as brokerage.

Principles of insurance
Principles of insurance provide guidance to the insurance firms at the time they are entering into a
contract with the person taking the cover. These insurance principles include:
1. Help to determine whether a valid insurance contract exists between the two parties at the
time claims are made.
2. Provide checks and controls to ensure successful operations of insurance for the benefit of
both the parties
It is therefore important that a prospective insured (person wishing to take insurance policy) has
basic knowledge of these principles as stated in the insurance law.
The insurance principles include;
1. Insurable Interest: This principle states that an insurance claim cannot be valid unless the
insured person can prove that he has directly suffered a financial loss and not just because the
insured risk has occurred.
Going by this principle one cannot insure his parents or friends or other people’s property since
he/she has no insurable interest in them. If such properties are damaged or completely
destroyed, he/she will not suffer any financial loss.

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 For example, Mr. X has no insurable interest in the property of his neighbours. He does not
suffer any financial loss should they be destroyed. This principle ensures that people are not
deliberately destroying other people’s properties/life in order for them to receive
compensation.
In life insurance (life assurance) it is assumed that a person has unlimited interest in his/her
own life. Similarly it is assumed that one has insurable in the life of spouse and children e.g. a
wife may insure the life of her husband, a father the life of his child because there is sufficient
insurable interest.
2. Indemnity
The essence of this principle is that the insurer will only pay the “replacement value” of the
property when the insured suffers loss as a result of an insured risk.
This principle thus puts the insured back to the financial position he enjoyed immediately
before the loss occurred.
It is therefore not possible, then, for anybody to gain from a misfortune by getting
compensation exceeding the actual financial loss suffered as this will make him gain from a
misfortune.
This principle does not apply in life assurance since it is not possible to value one’s life or a
part of the body in terms of money. Instead, the insurance policy states the amount of money
the insured can claim in the event of death.
3. Utmost good faith (uberrima fides)
In this principle the person taking out a policy is supposed to disclose the required relevant
material facts concerning the property or life to be insured with all honesty. Failure to comply
with this may render the contract null and void hence no compensation.
e.g.
 A person suffering from a terminal illness should reveal this information to the insurer.
 One should not under-insure or over-insure his/her property.
4. Subrogation
This principle compliments the principle of indemnity. It does so by ensuring that a person
does not benefit from the occurrence of loss.
According to this principle, whatever remains of the property insured after the insured has been
compensated according to the terms of the policy, becomes the property of the insurer.

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 Example: Assuming that Daisy’s car is completely damaged in an accident and the insurance
compensates for the full value of the loss, whatever remains of the old car (now scrap), belongs
to the insurance company. Scrap metal can be sold for some values and should Daisy take the
amount she would end up getting more amount than the value of the car which will be against
the principle of indemnity.
Note: This principle cannot be applicable to life assurance since there is nothing to subrogate.
5. Proximate cause
This principle states that for the insured to be compensated there must be a very close
relationship between the loss suffered and risk insured i.e. the loss must arise directly from the
risk insured or be connected to the risk insured.
Example
 If a property is insured against fire then fire occurs and looters take advantage of the
situation and steal some of the property, the insured will suffer loss from ‘theft’ which is a
different risk from the one insured against, so he/she will not be compensated.
 However if the property burns down as a result of sparks from the fire-place, the proximate
cause of the loss is sparks which are directly related to fire. So the insured is entitled for
compensation.

Classes of Insurance
Insurance covers are mainly classified into two,
 Property (non-life) general insurance
 Life assurance
1. Life Assurance
The term assurance is used in respect of life contracts. It is used to mean that life contracts are
not contracts of indemnity as life cannot be indemnified i.e. put back to the same financial
position he was in before the occurrence of loss.(life has no money value, no amount of money
can give back a lost or injured life)
Life insurance (assurance) is entered by the two parties in utmost good faith and the premiums
payable in such life contracts depend on:
 Age; The higher the age the higher the premiums as the age factor increase the chances of
occurrence of death.

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  Health condition; A person with poor health i.e. sickly person pays higher premiums as
opposed to one in good health.
 Exposure to health risks; the nature of a person’s occupation can make him susceptible
to health problems and death.

Types of policies
a) Whole life assurance - In whole life assurance, the assured pays regular premiums until
he/she dies. The sum assured is payable to the beneficiaries upon the death of the assured.
Whole life assurance covers disabilities due to illness or accidents i.e. if the insured is
disabled during the life of the policy due to illness or accidents, the insurer will pay him/her
for the income lost.
b) Endowment policy/insurance - This is whereby the insured pays regular premiums over
a specified period of time. The sum assured is payable either at the expiry of the period
(maturity of policy) or on death of the insured, whichever comes first.
The insured, at expiry of policy is given the total sum assured to use for activities of his
own choice. (Ordinary endowment policy)
Where the insured dies before maturity of contract, the beneficiaries are given these
amounts.
Note; the assured person may be paid a certain percentage of the sum assured at intervals
until the expiry of the policy according to the terms of contract. Such an arrangement is
known as Anticipated Endowment policy.
Advantages of Endowment policies
 They are a form of saving by the insured, for future investments
 Premiums are payable over a specified period of time which can be determined to suit
his/her needs e.g. retirement time
 Where the assured lives and time policy matures, he receives the value of sum assured.
 Policy can be used as security for loans from financial institutions.

Differences between a whole life policy and an endowment policy

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 Whole life Endowment

Compensation is paid after the death of the Compensation is paid after the expiry of an
assured agreed period

Premiums are paid throughout the life of the Premiums are paid only during an agreed
assured period

Benefits go to the dependents rather than the The assured benefits unless death precedes the
assured expiry of the agreed period

Aims at financial security of the assured and

Aims at financial security of dependents
dependents

c) Term insurance- The insured here covers his life against death for a given time period e.g.
1yr, 5yrs etc. If the policyholder dies within this period, his/her dependents are
compensated. If the insured does not die within this specified period, there is no
compensation. However, a renewal can be taken.

Special Schemes
a) Education plan/policies - This policy is normally taken by parents for their children’s
future educational needs. The policy gives details of when the payments are due.
b) Statutory schemes - The Government offers some types of insurance schemes which are
aimed at improving/providing welfare to the members of the scheme such as medical
services and retirement benefits.
A member and the employer contribute, at regular intervals, certain amounts of money
towards the scheme.
Examples
 N.S.S.F
 N.H.I.F
 Widows and children pension scheme (W.C.P.S)

Characteristics of Life Assurance

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 It is a cover for life until death or for a specified period of time
 It may be a saving plan
 It is normally a long term contract and does not require an annual renewal
 It has a surrender value
 It has a maturity date when the assured is paid the sum assured bonuses and interests.
 A life assurance policy can be assigned to beneficiaries
 The policy can be any amount depending on the assureds’ financial ability to pay premiums
 The policy can be used as security for a loan

2. General Insurance (Property Insurance)

This type of insurance covers any form of property against the risks of loss or damage. A person
can insure any property he has an insurable interest in.
General insurance is usually divided into;
a) Fire insurance/department
b) Accident insurance/department
c) Marine insurance/department

a) Accident Insurance
This department covers all sorts of risks which occur by accident and includes the following;

i. Motor policies: These provide compensation for partial or total loss to a vehicle if the
loss results from an accident. The policy could either be Third party or Comprehensive.
Third party policies cover all damages caused by the vehicle to people and property
other than the owner and his/her vehicle. This includes pedestrians, fare-paying
passengers, cows, fences and other vehicles
In Kenya, a motor-vehicle owner is required by law to have this policy before the vehicle
is allowed on the roads. One can also take a third party, fire and theft policy.
Comprehensive policy covers damages caused not only to the third party but also to the
vehicle itself and injuries suffered by the owner. Comprehensive policies include full
third party, fire, theft and malicious damage to the vehicle.

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 ii. Personal Accident Policy: These policies are issued by insurance companies to protect
the insured against personal accidents causing;
 Injury to the person
 Partial or total physical disability as a result of the injury
 Loss of income as a result of death
If death occurs due to an accident, the insured’s beneficiaries are paid the total sum assured.
In case of a partial or total disability as a result of accident, the insured can be paid on
regular periods, e.g. monthly as stipulated in the policy.
Compensation for injuries where one loses a part of his/her body can be done on a lump
sum basis. The insured is also paid the value of hospital expenses incurred if hospitalized
as a result of an accident.

iii. Cash and / or Goods in Transit Policies: These are policies that specifically provide
cover for loss of cash and goods in transit between any two locations.
E.g. Goods and cash moved from business to the markets, from suppliers to business etc.

iv. Burglary and Theft Policies: These policies cover losses caused by robbers and thieves
Burglary policies are enforceable only if the insured has met the specified safety and
precautionary measures for protection of the insured items.
E.g.
 How much money should be maintained in different kinds of safety boxes?
 Positioning of each of the cash boxes is also an important precautionary measure.
NB: The control measures are aimed at reducing both the extent and probability of loss
occurring
v. Fidelity Guarantee Policies: These policies cover the employers against loss of money
and/or goods caused by their employees in the course of duty.
 The losses may be as a result of embezzlement, fraud, arithmetical errors e.t.c
 The policies may cover specified employees or all the employees

vi. Workmen’s compensation (employer’s accident liability): These policies provide

compensation for employees who suffer injuries in the course of carrying out their duties.

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 The employer insures his employee against industrial injuries i.e. the employer is only
liable for the compensation of workers who suffer injuries at work.
vii. Public liability: This insurance covers injury, damages or losses which the business or its
employees cause to the public through accidents. The insurer pays all claims from the
public up to an agreed maximum.
viii. Bad debts: This policy covers firms against losses that might result from debtor’s failure
to pay their debts.

b) Marine Insurance
This type of insurance covers ships and cargo against the risk of damage or destruction at the
sea. The main risks sea vessels are exposed to include; fire, theft, collision with others, stormy
weather, sinking etc.
Types of marine insurance policies
The marine insurance covers are classified as Hull, cargo, freight and ship owners’ liability.
i. Marine Hull: This policy covers the body of the ship against loss or damage that might
be caused by sea perils. Included here is any equipment, furniture or machinery on the
ship. A special type of marine hull is the part policy, which is for a specified period
when the ship is loading, unloading or at service.
ii. Marine Cargo: This type of policy covers the cargo or goods carried by the ship
the policy is taken by the owners of the sea vessels to cover the cargo being transported.
It has the following sub-divisions.
 Voyage policy - Here cargo and ship are insured for a specific voyage/journey. The
policy terminates automatically once the ship reaches the destination.
 Time policy - Here insurance is taken to cover losses that may occur within a
specified period of time, irrespective of the voyage taken
 Fleet policy - This covers a fleet of ships, i.e. several ships belonging to one person,
under one policy.
 Floating policy - This policy covers losses that may occur on a particular route,
covering all the ships insured along that route for a specified period

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  Mixed policy - This policy provides insurance for the ship and cargo on specified
voyages and for a particular period of time. No compensation can be made if the ship
was on a voyage different from the ones specified even if time has not expired
iii. Composite policy - This is where several insurance companies have insured one policy
of a particular ship especially when the sum insured is too large to be adequately covered
by one insurer.
iv. Construction policy/builders policy - This covers risks that a ship is exposed to when
it is either being constructed, tested or being delivered.
v. Freight policy - This is an insurance cover taken by the owner of the ship for
compensation against failure to pay hiring charges by a hirer of the ship.
vi. Third parties liability - This is an insurance policy taken by the owner of the ship to
cover claims that might arise from damage caused to other people’s property.
Description of marine losses
The following are some of the losses encountered in marine insurance.
 Total loss: This occurs where there is complete loss or damage to the ship and cargo
insured. Total loss can be constructive or actual.
 In Actual total loss, the claims are as a result of the ships and/or cargos complete
destruction. It could also occur; when a ship and its cargo are so damaged that what
is salvaged is of no market value to both the insurer and the insured. When a ship is
missing for a considerable period of time enough to assume that it has sunk.
 Constructive total loss occurs when the ship and/or cargo are totally damaged but
retrieved. It may also occur; where a ship and its cargo are damaged but of market
value. This could be as a result of decision to abandon the ship and cargo as the
probability of total loss appears imminent. If the cost of preventing total loss may
be higher than that of the ship and its cargo when retrieved e.g. many lives may be
lost in the process of trying to prevent total loss.
 General average - This is a loss that occurs as a result of some of the cargo being thrown
into the sea deliberately to save the ship and the rest of the cargo from sinking. The losses
made are shared by the ship owners and the cargo owners proportionately as the effort
was in the interest of both.

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  Particular average - This occurs where there is a partial but accidental loss to either the
ship or the cargo. When this happens each of the affected party is solidly responsible for
the loss that has occurred to his property. A claim can, however be made if the loss
incurred amounts to more than 3% of the value insured.
c) Fire Insurance
This type of insurance covers property damage or loss caused by accidental fire. Cover is
offered to domestic commercial and industrial premises, plant and machinery, equipment,
furniture fittings stock etc. In order to claim for compensation as a result of loss by fire, the
following conditions must be fulfilled;
 Fire must be accidental
 Fire must be immediate cause of loss
 There must be actual fire.
There are several types of fire insurance policies. These include;
i. Consequential loss policy; (profit interruption policy): This covers or compensates
the insured for the loss of profit suffered when business operations have been affected. It
is offered to protect future earnings of an enterprise after fire damage.
ii. Sprinkler leakage policy - This provides cover against loss or damage caused to goods
or premises by accidental leakages from firefighting sprinklers
iii. Fire and Related perils policy - This covers buildings which include factories,
warehouses, shops, offices and their contents. The policy does not cover loss of profit
arising from fire damage.

Characteristics of General Insurance

1. It’s a contract of indemnity
2. It cannot be assigned even to ones relatives
3. The insured must have an insurable interest in the property to be insured
4. Premiums charged depends on the degree of risk, the higher the premium charged.
5. Compensation for loss can only be up to a maximum of the value of the insured property or
the sum insured in case of under insurance.
6. It has no surrender value
7. It’s normally a short term contract which can be renewed periodically, usually after one year.

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Factors to be considered when determining premiums to be charged
1. Health of the person
2. Frequency of occurrence of previous losses
3. Extent of the previous losses
4. Value of the property insured
5. Occupation of the insured
6. Age of the person or of the property in question
7. Location of the insured(address and geographical location)
8. Period to be covered by the policy
9. Residence of the insured.

Procedure for taking a Policy

1. Identifying an Insurer
2. Filling a proposal form
3. Calculation of the premium to be paid
4. Issuing of cover note (Binder)
5. Issuing of the policy

Procedure of Claiming Compensation

1. Notification to the insurer - The insurer has to be notified about the occurrence of any
incident immediately.
2. Filling a claim form - The insurer provides the insured with a claim form which he fills to
give details of the risk that has occurred
3. Investigation of the claim - The insurer arranges to investigate the cause of the incident and
to assess the extent of the loss incurred. The insurer is then able to establish whether the insured
is to be compensated and if so, for how much.
4. Payment of claim - On receipt of the report of the assessor, the insurer pays the due
compensation to the insured. (Payment of the compensation shows that both the insurer and
the insured have agreed on the extent of the loss and the payment is the settlement of the claim)

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Differences between Life Assurance and General Insurance
1. The insured risk is bound to happen for life assurance whereas for general insurance, the event
insured against may or may not happen.
2. Life assurance appreciates in value while general insurance does not appreciate in value.
3. Life assurance may be used as security for a loan while general insurance cannot be used as
security for a loan.
4. In life assurance, principles of indemnity, subrogation and contribution do not apply while for
general insurance, principles of indemnity, subrogation and contribution apply.
5. For life assurance, no limit to amount of cover while for general insurance, value of property
determines amount of cover.
6. Life assurance has surrender value while general insurance does not have surrender value.
7. For life assurance, one can insure life with different companies while for general insurance,
one is legally required to insure with only one insurance company.
8. Life assurance is long term/ no renewal while general insurance is a short term contract/
requires renewal.

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 WAREHOUSING

Definition
A warehouse is a building for storing goods and services until the need for them arises. A
warehouse is also usually referred to as a go down, silo or depot.
Warehousing is the process and the systems for relieving goods, protecting them against all types
of hazards and ensuring their availability to those who need them. Therefore, it involves three main
processes:
1. Receiving goods into a warehouse;
2. Storing them
3. Releasing them to the users.
Thus, warehousing helps to create time utility and is therefore classified as an ‘aid to trade’.

Importance of Warehousing to Business-

1. It enables a steady flow of goods into the market as the producers store their commodities and
regulating their supply as needs arise;
2. It stabilizes the prices by reducing the supply of goods when the market is faced with surplus
and increasing the supply whenever there is shortage;
3. It protects the goods from adverse weather conditions thereby upholding their quality until they
are sold;
4. It facilitates the bridging of time between when the goods are manufactured and when they are
demanded. This is especially so for goods with seasonal demands;
5. It acts as a reserve that can meet a sudden unexpected demand, for instance cereals can be
stored in a warehouse just in case a drought strikes;
6. It enables ample time and opportunity for such practices like blending, branding, packaging,
grading and sorting out of goods before they are sold.
7. Warehousing ensures that goods are protected from loss through theft or pilferage;
8. It enables buyers to inspect the goods before they buy them;
9. Warehousing allows time for some goods to ripen or mature before they are sold, for instance
ripe bananas or tobacco leaves;

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10. It encourages specialization in production and distribution. Producers concentrate on
producing while distributors store the goods for sale to the consumers;
11. By allowing manufacturers to buy raw materials in bulk as they await their needs to arise,
warehousing ensures a continuous production schedule;
12. It allows importance ample time to look for a market.

Essentials of a warehouse
In order to be as effective as possible, warehouses require some features and resources. These
include:
1. Proper buildings suitable to house various types of goods;
2. They should be conveniently located to enhance accessibility by the users;
3. Proximity to a good transport network system to ensure smooth movement of goods in and
out;
4. The warehouse should be equipped with appropriate protection equipment to keep the goods
safe from water, sunshine, human animals, excess heat and such factors;
5. It should be spacious enough to enable both storage of goods and movement of goods and
personnel;
6. It should be equipped with proper facilities for handling goods like forklifts and an necessary
working materials and tools to facilitate operation;
7. It should be equipped with adequate facilities to care for goods for instance cold room
facilities for perishable goods;
8. It should be manned by well trained staff for efficient delivery of services;
9. The warehouse should be equipped with an efficient communication network.
10. A warehouse should conform to the law of the land.
11. It should have proper recording system to monitor movement of goods.

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Types of Warehouses
Warehouses are usually categorized on the basis of ownership or types of goods stored.
1. Warehouse Types Based on Ownership
a) Private Warehouses
These warehouses are owned by individuals for storing goods. They include:
i. Wholesalers warehouse – they enable the wholesalers to buy goods from the
producers in bulk and prepare them so that they will be ready whenever the retailers
need them;
ii. Producer’s warehouses – they store producer’s goods before the goods are released
to the market. They are most conveniently located near the producers or their clients.
iii. Retailers – they are commonly owned by some large scale retailers like the chain
store and supermarkets to suit the purchase of goods in large quantities and sell them
gradually.
Advantages of Private Warehouses
1. They enable the manufacturers more control over the manufacturing operations. They
enable for instance coordination between the manufacturing process and delivery to
the market
2. They are usually flexible enough to adapt to the different requirements for different
goods by offering special facilities not accessible in public warehouses;
3. The owner can custom make the warehouse to suite any need;
4. The owner does not incur the cost of hiring space unlike in public warehouse;
5. Decision making is independent and therefore quick since the owner does not have to
consult;
6. The owner is not tied down by procedures of receiving and issuing the goods unlike
in public warehouses;
Disadvantages of Private Warehouses
1. When there is low volumes the resources may become underutilized;
2. High initial cost of production;
3. The owners may suffer some problems associated with small scale firms like lack of
enough funds to employ adequately qualified personnel.

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 b) Public warehouses
The term public implies that these warehouses can be used by any member of the public to
store his/her goods whereby the owners of the premises lend parts or the entire warehouse
to any individual. To enhance versatility and suitability, the owners site the warehouses
strategically near ports. This is because they are most c56ommonly used by importers or
exporters.
Many public warehouses offer some additional services like packaging, clerical services,
market reports, preparing export samples and insuring the goods. Ownership of the goods
in the warehouse is usually proved and transferred from one owner to another through a
document known as a warehouse warrant. This enables the owner of the goods to sell goods
in the warehouse without having to physically transfer them from one place to another.

Advantages of Public Warehouses

1. Public warehouses enable various small scale owners of goods to come together and
sell their commodities together thus enjoying the economies of scale;
2. The owner does not have to construct his/her own warehouse;
3. Very convenient to traders since the goods can be sold while still in the warehouse;
4. Goods are insured against some risk like damage by fire and theft;
5. Traders can rent space to store their goods;
6. The warehouse can offer additional services;
7. The trader can access short term loans with the goods in the warehouse as collateral.
8. The goods in the warehouse can be used as a collateral for a loan;

Disadvantages of Public Warehouses

1. Hiring space can eventually be more costly than constructing premises in the long run;
2. Space allocation is not a guarantee, it depends on availability;
3. The hirer may lose customer contact since they purchase directly from the premises;
4. The presence of other suppliers in the warehouse brings in some competition;
5. The presence of several hirers may lead to a complication and prolonged
documentation and receipting process;

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 6. Inconveniences emanate from the distant location of the warehouse from the hirer’s
presence;
2. Warehouse Types Based on Goods Stored
These types of warehouses are categorized on whether they house goods awaiting tax or tax
free goods.
a) Bonded Warehouses
They store imported goods prior to payment of the duties. The warehouse owner’s offers
cash guarantee to assure that the goods will not be released before clearing the duties.
Goods under transit to another country may not attract duties, including those that are
packaged outside the warehouse. The goods may be sold inside the warehouse and the new
owner undertakes the payment of the taxes. Once cleared, the owner is issued with a
warrant of release.
Features of Bonded Warehouses
1. Goods can be sold while inside the warehouse;
2. Goods are released only upon production of the warrant of release;
3. Storage charges are made on all the goods under storage;
4. Goods can be bonded till custom duty is paid;
5. Goods can be inspected or prepared for sale while still in the warehouse;
6. Goods can be re-exported while in the warehouse.

Advantages of using Bonded Warehouses to the Importer

1. Relieves the importer the burden of securing the goods;
2. Some goods lose weight while in the warehouse an advantage to those whose amount
of tax depends on the weight;
3. It offers an opportunity to prepare the goods for sale;
4. Some goods improve in quality while in the warehouse due to maturation duration;
5. The importer transfers the burden of paying the duty onto a buyer who buys the goods
while still in the warehouse;
6. The importer can look for the market of the goods even before paying the tax.

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 Disadvantages of using Bonded Warehouses
1. The importer pays rent for the space of goods;
2. In case the importer fails to pay the duty, the custom authorities may be auction the
goods;
3. Withdrawing goods from the warehouse in bits ends up with a higher total tax than a
one off fee.

b) Free Warehouses
Goods in these types of warehouses are not under the control of the custom authorities. The
goods do not have any pending tax. These include locally manufactured goods or imported
goods whose duty has been cleared.

Advantages of Free Warehouses

1. Cheaper than bonded warehouse since no duties charges;
2. Goods do not risk auctioning since there are no taxes charged;
3. The warehouses are usually conveniently located for the goods’ owners;
4. Release of goods cannot be not delayed by complicated protocols of having to produce
signed release warrants

Disadvantages of Free Warehouses

1. Inspection of goods is relaxed and therefore it is susceptible to habour illegal goods;
2. The storing activity does not earn the government any revenue since no tax is paid;
3. Hoarding of goods can occur in these uninspected warehouses.

Current Trends and Emerging Issues in Warehouses

Driven by technological inventions, warehouses are undergoing revolutions such as:
1. Computerized monitoring systems are tracking the goods inside and outside the warehouses;
2. Conveyor belts and other mechanisms are replacing manual movement of goods in the
warehouses;
3. Newer designs with improved storage capacities are coming up;
4. Better storage facilities like the use of racks is being employed in the warehouses;

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 MONEY AND BANKING
Introduction
The limitation experienced in barter trade led to the search for and the development of commodities
that could be used to facilitate trade and exchange. Commodities such as cowrie shells, hides and
skin, ivory and beads increasingly started to be used as a medium of exchange and thus were
accepted as means of settling debts.
Barter trade: This is a form of trade where goods and services are exchanged for other goods and
services.
Benefits of Barter Trade
1. Satisfaction of wants: And individual is able to get what he or she needs.
2. Surplus disposal: an individual or country is able to dispose off its surpluses.
3. Social relations: it promotes social links since the communities’ trade together.
4. Specialization: some communities shall specialize in a particular commodity.
5. Improved living standards: this is enhanced by receiving what one is unable to produce.
Limitations of Barter trade
1. Lack of double coincidence of wants: - it is difficult to find two people with the need for
each other’s product at the same time.
2. Lack of store of value/ perishability of some commodities:- some goods are perishable thus
their value cannot be stored for a long time for future purposes e.g. one cannot store
vegetables for exchange purposes in future.
3. Indivisibility of some commodities: - it is difficult to divide some products like livestock into
smaller units to be exchanged with other commodities.
4. Lack of standard measure of value: - It is not easy to determine how much one commodity
can be exchanged for a given quantity of another commodity.
5. Transportation problem: It is difficult to transport bulky goods
especially when there is no faster means of transport.
6. Lack of a standard deferred payment: - The exchange of goods cannot be postponed since by
the time the payment is made, there could be fluctuation in value, demand for a commodity
may not exist and the nature and quality of a good may not be guaranteed.
7. It may be therefore difficult what to decide what to accept for future payment.

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 8. Lack of specialization:- Everyone strives to produce all the goods he
or she needs due to the problem of double coincidence of wants.
9. Lacks unit of account: - It is difficult to assess the value of commodities and keep their
record.

Meaning of Money
Money is defined as any commodity that is generally accepted and used as a means or medium of
exchange in paying for goods and services and settling debts.
Money facilitates trade i.e. the exchange of goods and services from one person to another.

Characteristics/Features of Money
For any commodity to play the role of money effectively, it must possess certain characteristics,
namely:
1. Acceptability: - for a commodity to serve effectively as money, it must be generally accepted
by the involved community i.e. it should have a common consent.
2. Portability: - the commodity serving as money should be easily transportable from one place
to another, i.e. it should be neither be heavy nor fragile, thus it can be and easily moved from
one place to another.
3. Divisibility: - the commodity should be capable of being sub-divided into smaller units i.e.
smaller denominations without loss of money.
4. Homogeneity: - the commodity used as money should be made of material of the same quality
and texture such that two pieces of the same value should be identifiable to each other in every
aspect, thus enhancing their acceptability of the commodity. This guarantees the value of each
unit of money received in exchange of goods and services and thereby facilitating exchange.
5. Stability in value: - the value of the commodity should not change drastically over an
extended period of time, this maintains acceptability and credibility of the commodity as
money
6. Durability: - money should not deteriorate over a short period of time i.e. it should not tear
or wear out within a short period of time; this ensures the cost of replacing the money not
exceeding the cost of producing it.

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7. Cognisability: - the commodity should have distinctive features that distinguish it from all
other commodities; this makes the commodity easily recognized. Money can be recognized
and identified in form of size, texture, shape, colour, impression, weight and security marks.
8. Malleability: - this refers to the ease with which impressions or designs can be stamped onto
a commodity. The material used to make money should be easy to mould into different shapes
and sizes and to stamp impressions.
9. Scarcity: - the commodity used should not be readily available i.e. it should be limited in
supply

Forms of Money
Different commodities have been used as a medium of exchange. These commodities can be
classified into the following categories:
1. Commodity Money: - this refers to the use of commodities such as hides and skin, ivory,
cowrie shell and beads as money.
2. Metallic Money: - this refers to the use of precious metals as money i.e. copper, nickel,
bronze, silver and gold.
3. Paper note: - this refers to the written note issued by goldsmiths and silversmiths representing
the amount of precious metals deposited with them for safe custody.
4. Bank notes: - this is paper money issued by the Central Bank of a country. It is the form of
money people within the country of issue are compelled by law to accept in settlement of
debts and payment for goods and services.
5. Coin Money: - this refers to the metallic coins issued by the central bank of a country to serve
as money.
6. Legal tender: - this is the money issued by the central bank or other issuing authority of a
country. It is the form of money people within the country of issue compelled by law to be
accepted in settlement of debts and payment for goods and services.
7. Bank Deposits: - refers to the money held by commercial banks in form of current accounts,
it is readily used in settlement of debts and payment for goods and services through the use
of cheques.
8. Quasi money: - refers to other instruments which have been developed to serve the functions
of money though they are not legal tender. These instruments have been developed to

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 eliminate the risk of theft and robbery involving physical movement of large amounts of
money inform of legal tender e.g. cheques, credit cards, travellers cheques, money order,
bankers cheques, postal orders etc.

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Functions of Money
1. As a medium of exchange: - as a medium of exchange, it encourages and promotes
specialization leading to more goods and services being produced. It makes it possible to
compare the value and prices of different goods and services.
2. Store of value: - since money is stable in value over a fairly long period of time, it is
therefore used as a store of value for wealth. One who has a surplus of perishable
commodities can convert them into their money value and store them in form of money, thus
the money can be used in the future to buy other goods when required.
3. Measure of value: - money serves as a unit of account for measuring value, quantity and
quality of goods and services can be expressed by their money value, thus we can compare
the value of different goods in view of their prices.
As a measure of value and unit of account money makes it possible;
a) To determine or measure the value of goods and services
b) To assign value to goods and services
c) To compare the value of different goods and services
d) To be used as a basis or unit of account for recording value of goods and services as
well as keeping accounting records.
4. Standard of deferred payment: - money facilitates credit transactions, it is used as a
measure of goods and services bought or sold on credit.
The value is to be paid in settlement of a credit transaction, thus this function makes it
possible:
a) To carry out credit transactions
b) To borrow and lend
c) To settle debts
5. Serves as a means of transfer of immovable wealth: - money facilitates the movement of
immobile property such as land and buildings from one location to another, inform of money
value of the property. Therefore money makes it possible to transfer immovable property to
once location choice.

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Meaning of Banking
The concept of banking originated from the activities of goldsmiths and silversmiths with the
advent of the use of precious metal as money.
Due to the risk of security of the precious metals, goldsmiths and silversmiths rendered owners of
such precious metals, the services of accepting deposits of their precious metals, providing security
and making them available to the rightful owners on demand.
Banking involves:
a) Accepting money deposits from individuals and organization
b) Providing safe custody of the deposits
c) Making the deposits available to the right owners on demand
d) Providing other financial services based on the deposits such as lending
Banking may therefore be defined as the accepting of money deposits from individuals and
organizations, providing safe custody of the deposits received and making the deposits available
to the depositors as and when demanded as well as providing other financial services such as
lending to businesses and individuals at an agreed rate of interest.
Banking may also be defined as the process by which banks accept deposit from the public for safe
keeping and lending out the deposits in form of loans.
A bank is a financial institution that accepts money deposits from the public for safe keeping and
lending out in terms of loans.

Types of Banks
Banking financial institutions can be classified into three major categories:
a) Commercial Banks
b) Non-bank Financial Institutions
c) Central Banks

a) Commercial Banks
These are financial institutions authorized by the law to provide cheques clearing services in
addition to provide other banking services, thus they are usually referred to as clearing banks. They
provide a wider range of services than non-bank financial institutions e.g. accepting deposits,
issuing cheques and clearing cheques.

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 Most commercial banks are owned by limited companies; hence they are also referred to as joint
stock banks.

Functions of commercial banks

 Accepting deposits: - they accept money deposits from individuals and organizations, thus
providing safe custody for the money and avail it to the depositors on demand.
 Lending: - they advance loans to individuals as personal loans and business firms as business
loans.
 Transfer of Money: - they provide facilities for money transfer from one person to another
and from one place to the other.
 Collecting money on behalf of their customers: - they undertake to collect money on behalf
of their customers for the credit of their accounts.
 Remitting payments on behalf of their customers: - they undertake to make and remit
payment on behalf of their customers when requested.
 Providing custodies for valuable items e.g. title deeds, certificates, wills and jewellery.
 Agents of stock exchange markets
 Providing business advice
 Act as trustees and executors: - sometimes they act as trustees of account holders on request;
they do this on behalf of individuals and organizations.
 Acting as guarantees

Types of accounts offered by commercial banks

i. Savings Account: - it is a form of account designed to promote savings by individuals and
organizations. The account is designed to encourage depositors to save or build up savings.

Features of Savings account

 There is minimum initial deposit that varies from bank to bank.
 A minimum balance is maintained at all times.
 The withdrawals are up to a certain maximum within a given period.
Withdrawal above this maximum will require notice.

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  Account holders are not issued with a pass book or a debit card (ATM card) for deposits
and withdrawals.
 Overdraft facilities are not allowed.
 Ordinarily, withdrawals across the counter can only be done by the account holder.
 The balance on the account above a certain minimum earns some interest.

Advantages of savings account

 Interest is earned, usually calculated on the monthly minimum balances.
 There are no bank charges especially if the balance is above minimum balance
 Promotes accumulation of small sums of money at regular and irregular intervals while
earning interests
 The initial minimum deposit required is less as compared to other types of accounts.
 Deposits have no restrictions.
 Withdrawals are controlled through restrictions.

Disadvantages of savings account

 Advance notice is required for withdrawals involving large sums of money, above a
certain level.
 The account holder must physically visit the bank for every withdrawal
 A minimum balance must be maintained.
 Bank charges are usually levied on balances that fall below the set minimum.
 Overdraft facilities are not allowed in savings account.

ii. Current Account: - it is a form of account designed to meet the needs of individuals and
organizations who must have ready access to the money deposited to the bank for safe custody.
This means that money can be withdrawn at any time during the official working hours so
long as the account has sufficient funds.

Features /characteristics of current accounts

 Deposits of any amount can be made at any time.
 Balances in this account do not earn any interest.

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  The account holder is not required to maintain a minimum cash balance in this account
 Withdrawals can be at any time without giving an advance notice as long as the customer
has sufficient funds.
 Cheque books are issued to the account holder to be used as a means of payment/ cheques
are usually used to withdraw money from the account.
 Monthly bank statements are issued to the account holder.
 Overdraft facilities are offered to the account holders’ i.e. the bank can allow customers
to withdraw more money than they have in their accounts.

Advantages of current account

 Money can be withdrawn at any time or any amount in the account on demand provided
there are sufficient funds.
 Overdraft facilities can be arranged with the bank to enable the account holders to access
more funds.
 There is no minimum balance to be maintained hence the account holder can access all
his/her money
 The account holder does not need to physically go to the bank to withdraw cash.
 Transactions are made easier by use of cheques for example; one does not have to go to
the bank in order to make payment.
 It is possible to deposit any amount at any time during the office hours

Disadvantages of current account

 No interest is paid on the balance of current account no matter the amount of money
deposited.
 The bank levies charges and fees on the account known as bank charges for maintaining
the account.
 The initial deposit required to open the account is high in most banks.
 Customers are not encouraged to save since they can access their money at any time

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iii. Fixed deposit account: - it is a form of account designed to meet the needs of individuals and
organizations who have large sums of money with no immediate need or plans to spend the
money in the near future.
Advantages of Fixed deposit account
 The interest rate paid is higher than the rate paid in savings account
 There are no bank charges on the amount deposited
 Where the amount involved is high the depositor can bargain with the bank for a better
rate of interest depending on the period.
 The amount on fixed deposit can be used as security for other credit facilities.

Disadvantages of Fixed deposit account

 The minimum deposit required is generally very high
 Part withdrawal is not allowed nor can the amount be increased
 Withdrawal is only allowed on maturity of the fixed period.
 Where the deposit is withdrawn before the maturity, the bank may refuse to pay interest
for the period or charge a commission from the customer.

b) Non-bank Financial Institutions

These are business organizations which offer financial services other than current accounts.
They are not members of the clearing house; they don’t operate current accounts and therefore
do not issue cheques books.
They are established to provide certain specialized financial services to the society.
Functions of non-bank financial institutions
 Accepting deposits: - they accept money deposits from the public I two major ways; savings
and fixed deposits accounts.
 Lending: - they provide lending services to the public which is carried out on the basis of
the objectives for which the given institution was established.
 Providing investment advice: - they specialize in specific areas of economic activities;
therefore they employ technical specialists in such areas who provide specialized business
investment advice to their customers.

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  Provision of extension services: - those which operate in sectors where extension services
are required e.g. agriculture and manufacturing.
 Provision of specialized financial services: - they provide specialized financial services to
the business community e.g. financing international trade, financing large scale business and
underwriting and undertaking to sell shares of businesses which want to become public
limited companies.
Types of non-bank financial institution
i. Savings Banks: - it is a financial institution which accepts money deposits from the
public, mainly inform of savings accounts, they also offer other forms of schemes
designed to attract savings from the public.
ii. Finance Companies: - they are also known as finance houses; they accept money
deposits from the public inform of savings accounts and they also specialized in lending
mainly for medium and long – term period, for the purchase of capital assets.

iii. Development Banks: - are financial institutions either wholly owned by the
government or partly by the government and partly by investors. They usually do not
accept money deposits from the public, thus they raise their funds for lending through
government contributions, their own operations and borrowing from other external
sources.

iv. Merchant Banks: - this originated from the practice where certain imports and exports
trade merchants, who were wealthy, reliable and credit worthy, were approached by
other merchants who were less wealthy and therefore could not easily get credit to accept
their bills of exchange.

v. Building societies: - they are registered under the building societies’ act but they are
controlled and supervised by the central bank. They are formed with an aim of enabling
their customers to buy real estate, thus they provide finance to individuals to buy land
and build residential houses or buy residential houses directly.

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 vi. Housing finance companies: - they are registered under the banking act with the aim
of facilitating the purchase and construction of residential houses by individuals. Their
activities are supervised and controlled by the central bank.

vii. Co-operative societies: - there aim is to improve the economic welfare of their
members, and to achieve this, they enable their members’ access credit facilities where
they can borrow money to finance their activities.

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Distinction between Commercial Banks and Non- Bank Financial Institutions

Commercial Banks Non-Commercial Banks

They accept money deposits inform of current They accept money deposits inform of savings
accounts, savings accounts and fixed deposit accounts and fixed deposit accounts only.
accounts.
They issue chequebooks hence they are They are not allowed to issue chequebooks to
members of the clearing house their customers hence they are not members of
the clearing house.
They are formed to offer a wide range of They are formed to offer specific financial
financial services; hence they are not limited in services; hence they don’t offer wide range of
the nature of services they offer. financial services.
They usually lend on short term basis, the They usually lend on medium and long term
loans they offer are usually for a maximum of basis, such as ten yrs., twenty yrs. etc.
five years.
They don’t have to open accounts with non- They have to open accounts with commercial
bank financial institutions banks of their own choice since they need a
cheque clearing services of commercial bank.
Since they operate current accounts, they offer They do not operate current accounts hence
overdraft facilities. they don’t offer overdraft facilities.
It is mandatory for commercial banks to have It is not mandatory for non-bank financial
an account with the central bank. institutions to have an account with the central
bank.
Their lending mainly aims at providing Their lending aims at providing long term
working capital funds for a business capital for investments in fixed assets referred
to as loan capital.

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c) The Central Bank
This is a bank established by the government through the act of the parliament into manage and
control the monetary matters in the country.
It was formed to perform the following functions;
 Issue currency in the country, which includes both new notes and coins to replace the worn-
out ones
 Banker to the commercial banks, by ensuring that all the commercial banks in the country
operate an account with them
 Being the government ‘s bank, by offering banking services to the government which enables
the government to operate an account with them
 Advisor to the government on financial issues in the economy
 Controller of the commercial banks on how they carry out their functions
in the economy to ensure that their customers are served well
 Provide links with other central banks in other countries, facilitating
financial relationships. It also provide a link between the country and other financial
institutions such as IMF
 Maintain stability in the exchange rates between the local currencies and the foreign ones.
 Act as the lender of the last resort to the commercial banks to enable them meet their financial
obligations when need arise
 Facilitates the clearing of cheques between different commercial banks through its clearing
house (a department in the central bank)
 Administering of the public debt by facilitating the receipt and providing a means through
which the government pays back the borrowed money
 Control of the monetary system in the country in order to regulate the economy.

Trends in Banking
These are the positive changes that have taken place in the banking sector to improve their service
deliveries to their customers. They include;
1. The use of Automatic Teller Machines (ATMs), which has made it possible for the customers
to access their money any time of the day. The ATM cards that are used for withdrawals from
the ATM machines can also be used as a debit card to make purchases.

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2. Networking all their branches, which has enable the customers to carry out their transactions
in any of the branch.
3. E-Banking, which is the banking through the internet. This has made it possible for the
customers to transact their financial businesses on-line.
4. Relaxation of some of the conditions on opening and operating some of the accounts to make
them be more attractive to their customers.
5. Offering varieties of products which includes easier credit facilities to their customers to
attract more customers.
6. Liberalization of foreign exchange dealings by licensing forex bureaus to offer services to the
customers, improving the accessibility to the service.
7. Improving the customers care services, with some bank setting up a departments known as
the customer care department to offer detailed assistance to their customers.
8. Allowing non-bank financial institutions to offer banking services to the members of the
public, for example; KWFT, SACCOs, FOSA, Faulu Kenya, etc
9. Mobile Banking services (M-Banking), which allows the customers to carry out their financial
transactions over their mobile phones.
It has brought about several benefits/ advantages to their customers which includes;

Advantages of m-banking
 Easy transfer of funds from one account to the other in the same bank (inter account transfer)
 Easy transfer of money from ones account to his mobile phone for other transactions.
 Ability to check ones account balance in the bank with ease.
 Easy to monitor your financial transactions by checking your transaction details over the
phone
 Easy payment of the bills such as electricity bill, Dstv bills, etc and other wages
 Ability to transfer money from one mobile number to other in collaboration with the service
providers
 Easy request for new cheque books and bank statements from the banks
 Able to top up air time to your mobile phones in collaboration with the service providers
 Reduced risk of carrying large sums of money in cash or cheques that may be stolen

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Disadvantages of m-banking
 Registration to enjoy all these services must physically be done in the banking hall, which
subject the customers to stress queues of the bank
 Only the registered mobile number can carry out these transactions which limits the customer
to only using one number
 Users requires a mobile phone with a screen that can display the transaction which a times
some may not a ford
 Mobile phones can easily be lost or stolen from the owner, inconveniencing him from
carrying out the transactions
 Bank transaction information may load slowly, which may makes it expensive for the user
 Possibility of transferring the funds to a wrong account, due to error in typing of the account
number

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