Commerce

M. O. Odedokun
3
P. C. Udokogu
C. O. N. Oguji


Longman Nigeria Plc
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© Longman Nigeria Plc 1990, 2011

First published 1990

New edition 2011

ISBN 978 978 026 754 4

ii
Chapter 1 Capital 1
Concept of capital 1

Chapter 2 Profit 6
The nature of profit 6
Revenue and capital items 6
Types and uses of profit – Gross profit and net profit 7

Chapter 3 Turnover 10
Turnover and profitability relationship 10
Profit and turnover ratios 11
Uses of the ratio and taking into account variations in
different types of business 13

Chapter 4 Credit 15
Types and sources of credit to a business 15
Credit instruments 18
Functions of credit to wholesalers and retailers 19

Chapter 5 Business law 21

Meaning and scope of business law 21
Contract in general 21
Principles of agency 27
Contract of employment: Rights and obligations of the employer
and the employee 30
Sale of goods 32
Hire purchase 34
Government regulation of business through patent/trademark and copyright 35
Government regulation of business through registration of business 41

Chapter 6 Structure of business 46

Nature of business organisation and bureaucracy 46
Centralisation and decentralisation 47
Delegation, authority, power and responsibility 48
Span of control 50
Organisation levels 50
Specialisation, departmentalisation and organisation structures 52
Line, staff and functional relationships among departments 55
Inter and intra-departmental communications 58

Chapter 7 Introduction to business management 62

Business: Its resources and objectives 62
Management of business 64
Business environment and social responsibility 71

iii
Chapter 8 Introduction to marketing 75
Nature of marketing 75
The marketing mix – an overview 77
Price 82
Place or distribution 85
Promotion 86

Chapter 9 Consumer protection 92

Need for consumer protection 92
Consumerism 93
Consumer rights, and responsibilities 93
Legislative instruments instruments or mechanisms for protecting consumers 95
Regulatory measures for protecting consumers 100
Organisational measures for protecting consumers 101
Government-owned institutions or organisations for protecting consumer
rights in Nigeria 102
Non-governmental institutions that promote and protect consumer rights 105

Chapter 10 Business documents 108

Essential documents in buying and selling of goods 108
Price of goods 112
Terms of payment 120
Means of payment 122
Plastic card-based and mobile phone electronic payment mechanisms 129
Payment through money transfer service organisations: Western Union,
Money Gram and others 135
Online money transfer through non-banks 137
Electronic money and electronic funds transfer 137
Nature of negotiable instruments and documents of title 138
Types of negotiable instruments 139
Bills of exchange 139
Cheques – A special form of bills of exchange 148
Promissory notes 150
Other negotiable instruments 151

Chapter 11 Government reform policies – Commercialisation 155

Meaning of, and reasons for commercialisation 155
Advantages and disadvantages of commercialisation 156

Chapter 12 Government reform policies: Privatisation and public-private

partnership (PPP) 159
Introduction 159
Privatisation 159
Public-private partnership (PPP) 162

Chapter 13 Government reform policies – Deregulation 167

Meaning of deregulation 167
Rationale for, and scope of, the initial imposition of deregulation 167
Rationale for, and scope of, the subsequent deregulation 168
Genesis of deregulation – A case study of the petroleum products sector 169
Advantages and disadvantages of deregulation 171

iv
Chapter 14 History of the Nigerian capital market 173
Introduction 173
Evolution of stock exchanges in Nigeria 174
Evolution of capital market regulatory authorities 177
Adjudication and arbitration in the capital market 178
Evolution of other major players 178
Reasons for the evolution of the Nigerian capital market 179
Challenges facing Nigerian capital market development 180

Chapter 15 Nigerian capital market and stock exchange 182

Meaning and structure of the capital market 182
Exchanges in the capital market 182
Capital market adjudication/arbitration 184
Regulatory authorities 184
Capital market operators 185
Transparency agencies 189
Procedures for trading in, and methods of raising funds
from the primary market 190
Procedures and mechanisms for trading in the secondary market 193
Instruments or products traded on the stock exchange 196
Some concepts on stock market trading and performance indicators 202
Functions and importance of stock exchanges and capital markets 293

Chapter 16 Second-tier securities market and other softer windows

of the stock exchange 207
Introduction 207
Why some companies are not listed on the main exchanges 207
Alternative measures of availing companies of limited stock exchange listing 208
Practices and experiences outside Nigeria regarding creation of
softer windows for smaller enterprises – The alternative investment
market (AIM) of LSE as a case study 209
Features and operating regulations of the defunct Nigerian
Second-tier Securities Market (SSM) 210
Advantages and disadvantages of creating softer windows, like the defunct
second-tier securities market, for small companies 211

Chapter 17 Economic groupings of West Africa 214

The Economic Community of West African States (ECOWAS) 214
Niger Basin Authority (NBA) 218
The Lake Chad Basin Commission (LCBC) 219
The Mano River Union 220
The West African Monetary Agency (WAMA), successor of the
defunct West African Clearing House (WACH) 220


vi
Chapter 1

Capital
Much about business capital has been discussed can also be in the form of floating or circulating
in Book 2 (in connection with sole proprietorships, capital which, in this sense, refers to stock (i.e.,
partnerships and limited liability companies). The inventory), money balances, and other current
student is advised to revise the three chapters of assets. In Economics, money balances (i.e., cash
Book 2 where business capital is discussed before in bank and in hand), are regarded as productive
continuing with this chapter. input as far as businesses are concerned.
In essence, the economist’s idea of business
capital refers to the items on the asset side of the
Concept of capital balance sheet of a business, namely the fixed and
current assets. For the economy as a whole, as
Capital is often used to mean different things, opposed to an individual business, an economist
depending on whether it is being used in a may also be referring to social overhead capital,
layman’s, an economist’s, or an accountant’s called infrastructure (e.g., road networks and
language. We are now going to examine each of power supply). The economist also talks of
these three concepts of capital. human capital, by which he particularly refers
to the health and education of the workforce that
The layman’s understanding of serve to make workers productive in the same
manner that physical capital enhances workers’
capital productivity. These types of capital (i.e., social
capital and human capital), however, are outside
The layman uses the term capital to mean several the scope of business capital, which is our concern
things. For example, it may refer to money. here.
Sometimes, it refers to tools. In yet another sense,
it refers to the money with which a business was The accountant’s understanding
started.
of capital
The economist’s understanding
Capital, here, either refers to the items on the
of capital liability side of the balance sheet of the business
alone, or to a mixture of the items on both assets
Economists refer to capital as that factor of and liability sides of the balance sheet. What
production that has been produced, not for economists refer to as capital is referred to as
consumption, but for further production. For asset by accountants. Thus, accountants often
a business, it can be in the form of fixed capital speak of share capital, owned capital, debenture
which, in this sense, refers to fixed assets. It capital, etc., all of which are confined to the items


on the liability side of a business’s balance sheet. ratio is also sometimes called current ratio.
Similarly, they often speak of working capital, It should be distinguished from liquid ratio
which is derived from items on both the assets which is the ratio of liquid assets to current
and liabilities sides of the balance sheet. It is this liabilities. Liquid assets refer to current
form or concept of capital that we are now going assets other than stock, i.e., current assets
to examine. from which the value of inventory has been
deducted.
As an illustration, let us assume that
Various types of accountants’ idea of Current liabilities = $20 million; Current
capital assets = $120 million; while Stock value =
$40 million. Then, Working capital is $100
The commonest types of capital in accounting million while Current ratio = $120:$20 or
terminology are as shown in Figure 1.1. 6:1. On the other hand, liquid ratio = $80:$20
or 4:1, because liquid assets amount to $120
Various concepts of capital in the accounting sense million minus inventory of $40 million,
which is $80 million.
We are now going to explain each of these types 2 The need for working capital. Working
of capital shown in Figure 1.1, starting from the capital represents the capital used in
left. meeting the day-to-day or running expenses
of the business, i.e., what is called revenue
Working capital expenditure. Thus, the amount should be
This is the excess of current assets over current adequate to meet the revenue expenditures.
liabilities. In addition, the ability of a business to pay off
current liabilities as they mature is indicated
1 Calculation of adequacy of working capital. by the size of the working capital, or more
The excess of current assets over current precisely, the working capital ratio. Finally,
liabilities does not tell much as to whether since the working capital is a measure of
or not the working capital is adequate. the ability of the business to realise its
For example, $5 million working capital assets in the form of cash, a business will
may be enough for a very small business, often find it easy to meet advantageous but
whereas $20 million working capital may unforeseen payments by simply liquidating
be insufficient for a large business. current assets.
What is therefore often calculated is the However, too much working capital is not
working capital ratio, which is the ratio good for a business, as this means that too
of current assets to current liabilities. This

Debenture capital Own capital Short-term capital

Working capital or networth

Borrowed capital Long-term capital

Capital employed Share employed
or loan capital
- Own Capital - Authorised
- Others - Issued
- Called-up
- Paid-up

Fig. 1.1 Tree diagram showing types of the accountants’ capital


 much fund is being tied down to current
2 Issued share capital. This is the par value
assets, or that the business is not being
of the shares issued or sold by a company.
adequately financed by suppliers in the
In the limiting case where the company
form of trade credit.
has issued all the shares contained in its
memorandum of association, the issued
Capital employed
share capital equals the authorised share
This can have several meanings. For example, it
capital. As the company cannot issue more
can mean long-term capital. It can also mean the
than the authorised capital, the issued
sum total of the sources of finance, i.e., networth
shared capital cannot exceed the authorised
plus external abilities. A fairly common meaning,
share capital.
however, is the one that is synonymous with the
3 Called-up share capital. This is the part of
networth.
the issued share capital that the company
has asked the subscribers to pay for. In some
Debenture capital
cases, a company may not immediately
This simply refers to the nominal or par value of
need all the proceeds of the issued share
debentures.
capital. In such a case, it is likely to require
the shareholders to pay only a fraction of the
Borrowed capital
issued share capital at the time. The portion
This can also be called loan capital, and simply
that the company requires the shareholders
refers to external liabilities. Debenture capital
to pay so far constitutes the called-up
is obviously a component of borrowed capital
capital.
and, at the same time, a component of long-term
4 Paid-up share capital. This is the part of the
liability.
called-up share capital that the subscribers
have so far paid. Where no shareholder
Owned capital
defaults, the paid-up share capital equals
This refers to the networth.
the called-up share capital. The excess of the
called-up share capital over the paid-up share
Long-term capital
capital constitutes the amount of payments
This refers to the networth plus the external
that the shareholders are defaulting. It
capital that is of long-term nature, i.e., all sources
should be noted that the amount of paid-up
of finance except current liabilities.
share capital or, sometimes, the called-up
share capital, represents the amount to be
Short-term capital
added with the reserves in the balance sheet
This refers to current liabilities.
to arrive at the networth of the business.
Share capital
This refers to the par value of the shares of the An arithmetical illustration
company and the following are some types that
can be referred to: The balance sheet of a company, AB Ltd, as at
1 Authorised or registered share capital. the end of a period, say December 31, 20-1 is
This is the par value, i.e., face value of the presented below. Study it and carefully observe
maximum amount of shares that a company how the equations which follow were answered.
is allowed to issue by the constitutional Balance sheet of AB Ltd as at 31 December, 20-1
document called the memorandum of Calculate or indicate:
association that is registered with the
Corporate Affairs Commission (CAC). The
authorised share capital can also be referred
to as the registered share capital (because
it is what is contained in the documents
registered with the CAC), or the nominal
share capital.


 $ $ $ $ $
Share capital and reserves Fixed assets
Share capital Land & buildings (at cost) 45,000
50,000 N1 ordinary shares, Less: Depreciation 9,000 36,000
authorised, issued and fully paid 50,000 Plant & machinery (at cost) 64,000
100,000 10 kobo 15% preference Less: Depreciation 14,000 50,000
shares, authorised, issued and
full paid 10,000 60,000 86,000

Reserves Current assets

Share premium 15,000 Stock (i.e. ) 30,000
General reserve 25,000 40,000 Debtors 65,000
100,000 Cash 15,000 110,000
Liabilities
Long-term liabilities
80,000 20 kobo 8% debentures 16,000
ordinary loans 30,000
46,000
Current liabilities
Trade creditors 30,000
Other current liabilities 20,000 50,000 96,000
196,000 196,000

1 Working capital
2 Working capital ratio
3 Liquid ratio authorised, issued and fully paid +
4 Debenture capital Preference shares authorised, issued
5 Borrowed capital and fully paid + Reserves.
6 Owned capital = $50,000 + $10,000 + $40,000 = N100,000
7 Long-term capital 7 Long-term capital = Owned capital +
8 Short-term capital Longer-term liability = $100,000 + $46,000
= $146,000
Solution 8 Short-term capital = current liability =
1 Working capital $50,000
= Current assets – current liabilities =
$110,000 - $50,000 = $60,000 Revision questions
2 Working capital ratio = Current assets:
current liabilities = $110,000: $50,000
= 11:5. Essay questions
3 Liquid ratio = (current assets – stock): 1 Distinguish between the economist’s notion
current liabilities and the accountant’s notion of capital.
= $110,000–30,000:50,000 = $80,000:$50,000 2 Distinguish between the Authorised, Issued,
= 8:5 Called-up and Paid-up share capital.
4 Debenture capital: This is the borrowed 3 The Memorandum of Association of a
amount which has a fixed interest rate. company permits the company to issue a
= 80,000 x 20k = 80,000 x $0.2 = $16,000 maximum of 400,000 10k Ordinary shares.
5 Borrowed capital = Long-term liability + The company has issued 300,000 shares
current liability and only 8k per share has been required to
= $46,000 + $50,000 = $96,000 be paid by the subscribers. The proceeds
6 Owned capital = Ordinary shares


 amounting to $1,500 are outstanding to
be collected from the subscribers. You are
required to calculate or indicate the:
a) Authorised share capital
b) Issued share capital
c) Called-up share capital
d) Paid-up share capital

Multiple choice questions

1 To an economist, business capital refers to:
A Current liabilities.
B Items on the asset side of the balance
sheet.
C Stock.
D Money.
E Share capital.
2 Working capital is:
A Current assets minus current
liabilities.
B Current assets plus current liabilities.
C Current assets minus long-term
liabilities.
D Current assets multiplied by current
liabilities.
E Fixed assets minus current assets.
3 The networth of a limited liability company
is the same as the:
A Share capital.
B Share capital and reserves.
C Shareholders’ funds.
D All of the above.
E None of the above.
4 Which of the following is true of
debentures?
A They are a part of the company’s
authorised capital
B Debenture holders receive dividends
C Debenture holders receive interest
D Debenture holders own the company
(WAEC)
5 The part of the authorised capital which
the directors of a company have asked
the public to subscribe for is the:
A. Called-up capital.
B. Issued capital.
C. Paid-up capital.
D. Nominal capital.
E. Reserve capital.


 Chapter 2

Profit Revenue and capital items

Revenue and capital
The nature of profit expenditures
In a trading business, two concepts of profit are
Revenue or current expenditures are those
applicable. These are the gross profit and the net
expenditures the benefits of which are expected
profit. Gross profit simply refers to the excess of
to be used up in the business within a short
the value of sales, that is, turnover, over the cost of
period, e.g., within a year. Capital expenditures,
goods sold before taking other expenses incurred
on the other hand, are those whose benefits
in the business into account. Net profit, on the
are expected to last relatively long (above a
other hand, is the excess of all sources of income
year) within the business. It is the accumulated
(sales value plus other incomes) over all expenses
capital expenditures that appear as fixed assets
(often called revenue expenditures). Thus, before
in the balance sheet. Revenue expenditures,
we consider each of these two concepts of profit
on the other hand, feature in either the Trading
further, we need to distinguish between revenue
Account (where gross profit is ascertained) or in
expenditures and other forms of expenditure. The
the Profit and Loss Account (where net profit is
same will be extended to revenue receipts and
ascertained). We present below a list of common
other forms of receipts.
revenue expenditure items and common capital
expenditure items.

Common revenue expenditure items Common capital expenditure

which appear in either the Trading items, the accumulated amounts of
account or in the profit and loss account which feature as fixed in the balance sheet

Items to appear in the trading account

1 Opening stock of good less the closing 1 Goodwill and expenditure on
stock (in the Trading account) other fictitious assets
2 Cost of the goods purchased during the 2 Land and building
period (in the Trading account) 3 Motor vehicles
Items to appear in the Profit and loss account 4 Office equipment
5 Plants and machinery
3 Wages and salaries 6 Furniture, fixtures and fittings
4 Rent incurred
5 Advertisement cost incurred
6 Electricity bills
7 Travelling and postage expenses
8 Cash discounts allowed customers
9 Bad debts, i.e., defaults by customers
10 Insurance premium
11 Telephone expenses
12 Interest on borrowed capital
13 Depreciation (i.e., wear and tear of fixed
assets during the period)


 Common revenue ‘receipts’ which should Common capital receipts which appear in
either the Trading account or in should not appear in either the
the Profit and loss account Trading account or the Profit and
loss account

1 Sales turnover (in the Trading account) 1 Sale (scrapping) of fixed assets
[The following items (2 to 4) appear in the i.e., on second-hand basis
Profit and loss account:] 2 Proceeds from borrowings
2 Cash discount received from suppliers 3 Proceeds from issue of shares
3 Rent received from let property
4 Interest received on bank deposit and other
investments

Revenue and capital receipts Cost of sales

These represent the cost price of all the goods sold
during the period. Costs of goods sold should not
Revenue or current ‘receipts’ are the incomes be confused with the costs of goods purchased
earned during the period. Capital receipts, on during the period. This is because not all goods
the other hand, are not in respect of current purchased are likely to have been sold during the
income. Revenue ‘receipts’ should feature either period, as some might still remain in the store or
in the Trading Account (in the case of sales, i.e., warehouse in the form of closing stock. Secondly,
turnover) or in the Profit & Loss Account (in the some goods sold during the period might be
case of any other income). Capital receipts, on those that were not purchased during the period,
the other hand, should not appear in either the but which were already in the warehouse at the
Trading Account or in the Profit & Loss Account. beginning of the period in the form of opening
We present below a list of common revenue stock. Therefore, the cost of goods sold can be
‘receipts’ and common capital receipts. calculated as in the following example:

Types and uses of profit – Format of the Trading Account

Gross profit and net profit
Trading Account for a Period
$ $
Gross profit Opening stock 15,000 Sales 38,750
Add: purchases 37,000
As mentioned above, gross profit is simply the 52,000
excess of sales (sometimes called turnover) over Less: closing stock 21,000
the costs of the goods sold (sometimes called cost Cost of sales 31,000
of sale). Gross profit
(38,750 minus 31,000) 7,750
Sales 38,750 38,750
These represent the price at which all the goods
have been sold during the period. Net sales,
which constitute the gross sales less the goods
returned by customers, are being referred to in
this context. The sales figure is often presented on
the right side of the Trading Account.


Trading Account equations Trading Account for a Period
From the Trading Account just presented and our
preceding discussion on it, we have established $ $
the following two relationships or equations: Wages & salaries 3,200 Gross profit 7,750
Electricity bills 500 Discount received 120
1 First equation: Cost of Sales = Opening
Bad debts 200 Interest received 130
stock + Purchases – Closing stock
Depreciation 850
2 Second equation: Gross profit = Sales minus Discount allowed 150
cost of sales (Net profit (8000 - 3200 -
These two equations can assist in solving most 500 - 200 - 850 - 150 = ) 3,130
arithmetical problems concerning Trading 8,000 8,000
Account items.

The net profit

As mentioned earlier, the net profit is the excess of Uses of profit
all sources of income (referred to earlier as revenue The primary reason for carrying on most
or current ‘receipts’) over all expenses (referred businesses is to make profits or, even, to maximise
to earlier as revenue or current expenditures). In profit. Even for those businesses (like cooperative
other words, net profit is the excess of revenue societies and public corporations) that are not
‘receipts’ over revenue expenditure. primarily motivated by profit, they, too, strive
The figure for the net profit can be calculated to make some profits to enable them to survive.
by simply deducting all the expenses from all the Thus, profit is very important and useful. Some
incomes. However, this method is not normally specific uses of profit include the following:
adopted. In practice, the net profit figure is 1 Profit is a reward to entrepreneurs. As
calculated from the gross profit figure, and this discussed in Chapter 4 of Book 1, the reward
means that all the expenses (cost of sales) and to entrepreneurs (as providers of a factor
incomes (sales) that have been taken into account of production called entrepreneurship) is
in calculating the gross profit, should not be taken profit. This takes the form of dividends for
into consideration (for the second time) in order shareholders of a limited liability company
to calculate the net profit. and profit withdrawals in the case of sole
Thus, net profit is calculated as the excess of proprietors and partners in a business.
gross profit and sources of income (except sales) Without profit, there would be no basis or
over all the expenses (except the costs of sales). incentive for entrepreneurship. So, profit
The gross profit and other sources of income are serves to keep entrepreneurs ‘happy’
presented on the right side of the Profit & Loss and motivated to provide entrepreneurial
Account while the expenses (including gross loss, services that would lead to an increase in
if there is any) are presented on the left side. The output.
difference between the two sides (which is the net 2 Profit provides funds or finance. Profits are a
profit) is then inserted on the smaller side (i.e., source of funds, particularly the portion that
the left side), so as to make the two sides equal is retained in the business instead of being
(or to balance the Profit & Loss Account). In the distributed to the owners or entrepreneurs.
illustration below, the gross profit N7,750 in our This portion, which is called ploughed-back
earlier example is assumed. or retained profit, is a permanent source of
funds for financing long-term expansion of
the business and for undertaking risky, but
profitable activities.
3 Profit for the long-run survival of business.
Profit is needed for a business to survive in
the long run. No loss-making business can
continue in operation for a long time.
4 Profit is useful for the people and the
government. It is from the profit made


 by a business that profit tax is paid to the
3 Which of the following arithmetical
government. Without profit, such taxes
relationships is/are correct:
would not accrue to the government to
A Cost of Sales = Opening stock +
finance its expenditure.
Purchases – Closing stock
B Cost of Sales = closing stock +
Revision questions Purchases – Opening stock
C Cost of Sales = Opening stock +
Essay questions Purchases + Closing stock
1 Discuss four uses of profit. D Cost of Sales = Opening stock -
2 The following is the summary of the Purchases + Closing stock
transactions of a business for the year ended E None of the above.
June 30, 2011. 4 Which of the following arithmetical
relationships is/are correct:
A Gross profit = Sales plus cost of sales
$ (million) B Gross profit = Sales minus cost of
Purchases 50,000 sales
Stock (July 1, 20-7) 12,000 C Gross profit = Sales divided by cost of
Stock (June 30, 20-8) 18,000 sales
Turnover 80,000 D Gross profit = Sales multiplied by cost
Depreciation of fixed assets 2,000 of sales
Wages & salaries 15,000 E None of the above
Office expenses 5,000 5 Which of the following items should not
General expenses 4,000 appear in the Trading, Profit and Loss
Income received from let Property 3,000 Account of a business for a period?
You are required to: A Expenses on staff salaries.
a) Calculate the gross profit, the net profit, the B Proceeds of the loans raised from the
rate of stock-turnover, the net bank during the period.
profit as percentage of sales, and the general C Cost of buying a fixed asset during
expenses as percentage of sales. the period.
b) Prepare a Trading Account as well as a Profit D a and b.
and Loss Account for the year ended E b and c.
June 30, 20-8

Multiple choice questions

1 The selling price of an item is 150% of the
cost price, which is N600 each. The
gross profit is therefore:
A $150.
B $300.
C $750.
D $400.
E None of the above.
2 The selling price of an item is 120% of the
cost price, which is $1,000. What is
the unit selling price?
A $400
B $300
C $750
D $400
E None of the above


 Chapter 3

Turnover Rate of stock turnover

Meaning
This is also sometimes called the rate of stockturn,
Turnover and profitability and is a measure of the number of times that a
given item of stock (i.e., inventory of goods) in
relationship the warehouse is deemed to have been replaced
during a particular period, e.g., during a year.
As mentioned earlier, turnover simply refers to Thus, if the annual rate of stock turnover is 6, it
the value of sales. On the other hand, profitability means that each unit of good in the store is being
is a measure of profit in relation to sales, capital replaced 6 times in a year in the process of supply
employed, etc. of goods to customers. If the annual rate of stock
turnover later falls to only 4 times, this means
that sales have dropped, that inventory holding
Importance of turnover has risen, or both.

Turnover is the mainstay of any business. It is from Calculation

the turnover that both gross profit and the net The rate of stock turnover is calculated as the
profit come. In addition, businesses often pursue costs of sales divided by the average stock held
the objective of high turnover not only because it during the period. The average stock, on the
can increase profit, but also because it determines other hand, is half of the sum of the opening and
the importance and reputation accorded the closing stocks. That is:
business in the eyes of most members of the
Rate of stock turnover = Cost of sales
public. 1 (Opening stock + closing stock)
Businesses often have the objective of sales 2

or turnover maximisation. There is also the If we use the figures in our examples of the
business objective of increasing market share, previous chapter€ (where the cost of sales is
the indicator or yardstick of which is the volume $31,000, opening stock is $15,000 and closing
of sales of a product recorded by the particular stock is $21,000), then, we have:
business in relation to the total volume sold in
the market by all its competitors put together. A Rate of stock turnover =
31,000
=
31000
high market share is suggestive of the importance
1
2 (15000 + 21000) 1
2 (36000)

of the business and its ability to intimidate its

31000
competitors. = = 1.72 times
€ 18000

Determinants of turnover Determinants of the rate of stock-

turnover €
The rate of stock-turnover is determined by those
Turnover is a product of two things, namely the
factors that influence the cost of sales to either a
quantity (or physical units) sold, and the average
greater or to a smaller extent than it influences
price at which each unit is sold. Therefore, the
the average stock. A factor that increases the cost
higher the average price, the greater the turnover.
of sales more than it increases the average stock,
Also, the higher the quantity sold, the greater the
would lead to an increase in the rate of stock
turnover.
turnover, just as a factor that decreases the average
stock more than it decreases the cost of sales. On

10
the other hand, a factor that reduces the cost of desirable, the rate of stock-turnover should
sales more than it reduces the average stock, or be high. But if the business decides to hold a
a factor which increases the average stock more substantial inventory of goods in the warehouse,
than it increases the cost of sales would lead to a the rate of stock turnover would be low. The
reduction of the rate of stock-turnover. All these goods in the warehouse could be held in order
generalisations are based on the commonsense to meet the requests of customers, or because it
law of arithmetic which requires a ratio (i.e. the is considered as a way of beating a future rise in
rate of stock-turnover in this case) to increase if price which is being envisaged.
the numerator (cost of sales in the present case)
rises more than the denominator (average stock
in the present case), or if the denominator falls
Profit and turnover ratios
more than the fall in the numerator. The reverse
would be the case should the numerator fall more Gross profit
or rise less than the denominator.
Specifically, an increase in sales, by increasing Gross profit can be expressed as percentages of
the costs of sales without a corresponding increase other items as follows:
in the average value of inventory of goods, or by
even reducing the average value of inventory of 1 Gross profit as percentage of sales
goods, is a very common reason that serves to This is also gross margin. It is calculated as
increase the rate of turnover of stock. A fall in sales
Gross profit
has the opposite effects because of two factors ×100
Selling price
that are simultaneously in operation, namely
falling cost of sales coupled with inventory of If the figures in our example of the previous
goods that is accumulating. For this same reason, chapter (where gross profit is $7,750 and
the rate of stock turnover varies from business € sales value is N38,750) are used, the gross
to business. For example, the rate is likely to be margin would be
higher for a distributive trade (which is mainly 7750
oriented towards selling of goods with relatively = ×100
38,750
little inventory holding) than for a manufacturing
concern (which holds much of inventory of goods) 1
and is less oriented towards selling. = 20% or
5
Another specific factor is the gross profit or 2 Gross profit as percentage of cost of goods sold
gross margin. The higher the gross profit or gross This percentage is sometimes called the
margin, the less the cost of sales that accompanies gross mark-up percentage, and is calculated
a given sales value and, hence, the lower the rate € as:
of stock-turnover. In an extreme situation where Gross profit
zero gross profit (or even a gross loss) is being ×100
Cost of goods sold
made, each sales value would have a maximum
impact on the cost of sales and, hence, on the rate If the figures in our example of the previous
of stock turnover. Thus, by reducing the selling chapter (where gross profit is $7,750 and
price, the rate of stock-turnover should go up € cost of goods sold is N31,000) are used, the
even if total earnings from sales drop as a result. gross mark-up percentage would be
In fact, what matters much is not the revenue 7750
derived from the sale but the physical quantity of ×100
goods being sold – it is this that affects the cost of 31000
sales. 1
Another important factor is the inventory = 25% or
holding policy of the business. If the business 4
adopts the policy of holding just a small quantity 3 Relationship between gross margin and
of inventory, probably because it can easily and gross mark-up percentage
most immediately replenish the inventory when There is a straightforward arithmetical
€
11
 relationship between these ratios. Rate of return on capital employed
In particular, we have the following
relationships: Net profit
= ×100
First: Gross margin =
Mark - up percentage Capital employed
100 + mark - up percentage
This ratio is the usual measure of the
Gross margin in percentage profitability of a business.
Second: Mark-up =
€ 100 - gross margin in percentage

We can verify these by substituting the

Expense
€ ratio
figures in our€example as follows:
Each type of expense may be expressed as a
20
First: Gross margin
= percentage or turnover. The ratio or percentage
100 - 25 is given as
25 Expense ratio
Expense item
= = ×100
125 Sales
1 Using the figures in our example of the previous
€ = 20% or
5 chapter (where wages & salaries are N3,200, bad
debts are N200 and sales value is N38,750), we
25
Second: Mark – up = have€the following expense ratios in respect of
100 + 25 wages & salaries and bad debts:
€
20 3200
= Wages & salaries ratio = ×100 = 8.26%
80 38750
€ 1 200
= 25% or Bad debts ratio = ×100 = 0.52%
4 38750
The importance of the above is that if we €
know just one of these two percentages, we can
easily calculate the second one. Relationship of capital
€
investment to turnover: Asset
€
Net profit turnover ratio

The common net profit ratios are: If assets are effectively utilised, a given amount of
1 Net profit as percentage of sales. This is given assets should generate a reasonably high volume
as: of sales. The effectiveness with which the assets
Net profit are invested is often measured by the ratio of
×100 turnover to either total assets or just fixed assets.
Sales
The resulting ratio is called asset turnover ratio.
Using the figures in our example of last
chapter (where net profit is $3,100 and sales
Sales
Asset turnover ratio = ×100
€ value is $38,750), we have: Assets
Net profit as percentage of sales
3100 The higher the ratio, the greater the
= ×100 = 8% effectiveness with which assets are utilised in
38750
generating sales.
2 Rate of return on capital employed. This is €
the net profit as percentage of capital
employed (e.g., networth). That is:
€
12
 Worked example Net profit as percentage of sales
Below is the summarised list of the transactions
6,000
of a business for the year ended on December 31, = ×1000 = 12.5%
20-5. 48,000
Stock as at January 1, 20-5 $8,000 4. Trading Account for the year ended
Stock as at December 31, 20-5 12,000 December 31, 20-5
Purchases 40,000 $ $
Wages & salaries 3,000 Opening stock 8,000 Sales 48,000
Depreciation 2,000 Add:
€ Purchases 40,000
Cash discount allowed 1,500 48,000
Cash discount received 500 Less: Closing stock 12,000
Cost of goods sold 36,000
The gross profit made by the business is 25%
Gross profit 12,000
of turnover. You are required to: 48,000 48,000
1 Calculate the gross profit as a percentage of
cost of sales.
2 Calculate the cost of sales, the gross profit, $ $
the turnover, and the net profit. Wages & salaries 3,000 Gross profit 12,000
3 Calculate the rate of stock-turnover and the Depreciation 2,000 Discount
net profit as a percentage of sales. received 500
4 Prepare the Trading Account as well as the Cash discount
Profit and Loss Account allowed 1,500
5 Calculate the wages and salaries as a Net profit 6,000
12,500 12,500
percentage of turnover as well as discounts
allowed as a percentage of turnover.
5. Wages & salaries as percentage of sales
6 Calculate the rate of return on capital
employed by assuming that capital 3,000
= ×100 = 6.5%
employed is $60,000. 48,000
7 Calculate the effectiveness of using the
Discount allowed as percentage of sales
fixed assets in generating sales ratio,
assuming the end-December net book value 1,500
= ×100 = 3.125%
of fixed assets is $24,000. 48,000
6.€ Rate of return on capital employed
Solution
1. Gross profit as percentage of cost of sales 6,000
= ×100 = 10%
25 25 1 60,000
= = = 3 or 33.33% 7.€ Effectiveness of using fixed assets in
100 - 25 75
generating sales, i.e., fixed asset turnover
ratio
2. Cost of sales = 8,000 + 40,000 – 12000 = 648,000
$36,000
€ = ×100 = 200%
Gross profit = 33.33% of $36,000 = $12,000
24,000
€ Turnover = $48,000 (i.e., $36,000 +
$12,000) Uses of the ratio and taking
Net profit = ($12,000 + $500) minus ($3,000
+ $2,000 + $1,500) = $6,000
into
€ account variations in
3. The rate of stock-turnover different types of business
36,000 36,000
= = = 3.6 times
1 (8,000 +12,000 10,000 Each ratio does not tell much on its own. It becomes
2
very useful only when the ratio is compared with
another ratio. This permits the variation to be

13
€
detected and investigated or analysed.
D $70,000
Each ratio can be compared with
E $90,000
1 the corresponding ratio in the same business
2 Gross profit during the period is:
during each of the past periods;
A $40,000
2 the corresponding ratios in other (similar)
B $50,000
businesses; and
C $80,000
3 the budget or plan previously prepared for
D $70,000
the period.
E $90,000
In making comparison with other businesses,
3 The rate of stock turnover is therefore:
it should be realised that the nature of businesses
A 20.5 times
counts. This is because ratios that are too high
B 1.5 times
for a particular business may just be good or
C 4.8 times
even too low for another business. For example,
D 3.2 times
a manufacturing business of a particular size
E None of the above
typically has a high value of fixed assets and a
4 Net profit during the period is:
low value of turnover when compared with a
A $20,000
retailing business of about the same size. Thus,
B $60, 000
the ratio of sales to assets may seem too low
C $50,000
for a manufacturing firm when compared with
D $25,000
a retailer, whereas this low ratio may not be a
E None of the above
problem for the manufacturing concern despite
5 To properly interpret accounting ratios, we
the fact that it would be a matter of serious
should compare them with
concern for a trading business. So, the ratio
corresponding ratios in
analysis should only be taken as something that
A the budget or forecast for the
should make us probe further into the nature of
business.
the business, and not what would make us jump
B previous period ratios for the
into a rash conclusion.
business.
C ratios for other similar businesses
Revision questions around the same period.
D all of the above.
Essay questions E none of the above.
1 Discuss the uses of accounting ratios and
how to properly interpret them.
2 The selling price of an item is 125% of the
cost price which is $80 each. What is
the gross price per unit and the unit selling
price?

Multiple choice questions

Use this information to answer questions 1 to 4
below. Opening stock is $20,000, Closing stock
is $30,000, purchases amount to $70,000, while
Sales amount to$120,000 for a particular period
and total expenses outside the trading account
items amount to $20,000.
1 Cost of sales during the period is:
A $40,000
B $50,000
C $80,000

14
 Chapter 4

Credit Bank credit

Business credit refers to the source of finance
The following forms of credit, in addition to
other than what the proprietor(s) of a business
issuance of debentures, are available from the
provide. As discussed in the previous chapter, the
banks. These banks are often referred to as finance
sources of finance provided by the proprietor are
houses or financial institutions. In fact, since the
referred to as the networth. Thus, business credit
word ‘house’ or ‘institution’ technically refers to
embraces all the items that appear on the liability
a firm or a business, finance house can as well be
side of the balance sheet except the networth.
used in describing any other financial institution,
In addition, there are some aspects of business
including an insurance company.
credit which are not conventionally reflected in
the balance sheet, as in the case of equipment on
lease discussed below. This means that business Loans
credit refers to all forms of indebtedness of the Loans can be secured from various banks, namely
business to those who are not acting as owners of commercial banks, microfinance banks, primary
the business. mortgage banks and development banks. In order
to secure bank loans, the intending borrower
should provide evidence of willingness and
Types and sources of credit ability to repay the loans when due and to make
to a business periodic interest payments. For this purpose, the
bank would often require some collateral as well
as some evidence of the creditworthiness and
Figure 4.1 is a tree diagram of the types and character of the intending borrower. These are
sources of credit that are available to a business. called triple C because the three words (collateral,
We are now going to examine each of the sources creditworthiness and character) start with letter
of credit identified in diagram. C.

Types of credit

Insurance company Lease, namely, Instalments

Venture
• Policy loans • Ordinary credits, namely:
Bank credits, namely, capital
• Other loans • Sale & lease back • Hire purchase
• Loans funds
• Credit sales
• Overdrafts
• Conditional sales
• Discounts
• Debt factoring Trade credits, namely,
Cooperative Others, namely:
• Acceptance credits • Purchase of goods
Credits from society loans • Public borrowing
& services before
specialised payment • Borrowing
government • Collections of from
institutions payments acquaintances
in advance
Fig. 4.1 Types and sources of credit

15
 An advantage of bank loans is that they shortfall being the implicit interest charges. For
normally constitute a medium-term source of example, $1,000 being owed by customers may
credit. In addition, loans from development banks be sold to a bank for immediate $900 cash so
are often accompanied by technical assistance that the implicit interest is $100. As the amounts
designed to ensure effective utilisation of the owed by customers have now been transferred to
loans. However, the interest rates (especially on the banks, the burden of receiving the proceeds
commercial and merchant bank loans) are often from the debtors when payments mature is now
relatively high. placed on the bank.
It should be noted that a loan can sometimes When a bank factors book debts, it may be
entail the borrower issuing a debenture to the referred to as a factor. It should be noted that debt
bank if the borrower is an incorporated business. factoring is similar to discounting, with the only
main difference being that the book debts are
Overdrafts not in the form of bills of exchange. Commercial
These are available from commercial and banks are the main institutions that provide this
microfinance banks. The distinction between form of credit to businesses. In fact, this form of
loans and overdrafts has been made in Book 2. credit is yet to be popular in Nigeria.
The student may now refer to that book to refresh
his or her mind. Acceptance credit
One advantage of overdrafts is that interest This refers to the practice whereby a bank allows
is payable on only the overdraft actually utilised, a customer to draw a bill of exchange, which is
unlike loans that attract interest charges whether then accepted by the bank. The customer can
or not they are utilised or are just idle in the then discount the bill with a discount house or
bank account. But an overdraft facility has the another bank. As will be explained in detail in a
disadvantage of being legally repayable whenever subsequent chapter on Business documents, the
the bank requests for repayment, although this commonest of this form of bill of exchange is called
strict legal position is not normally enforced. accommodation bill, i.e., to accommodate the
credit need of a business. When a bank performs
Discounts this role, it is referred to as an Acceptance House.
The meaning and mechanism of providing Commercial banks are the major acceptors of bills
discounts will be discussed in a subsequent of exchange drawn by businesses.
chapter on Business documents. Meanwhile,
discounts can be understood to mean the sale, in Credit from other specialised
cash, of the book debts represented by financial
assets called bills of exchange, at less than the
government institutions
face value of the bills. By this method, cash is
made available to the seller. Thus, a business In addition to the development banks referred
can obtain cash from banks by selling bills of to above, which are government–owned,
exchange to the banks. Specialist discount houses governments (both federal and state) also own
and commercial banks are the main financial public corporations, the functions of which include
institutions that provide this form of credit. provision of credit to business. These have various
The cost of this form of credit is the excess designations like Finance Corporation, Industrial
of the face value of the bills over their sale Development Corporation, Agricultural Credit
proceeds. Corporation, and Loans Board.
The requirements for securing loans from
them are generally the same as those for securing
Debt factoring bank loans. The loans may or may not be in the
This refers to the sale, for immediate cash, of trade form of debenture loans.
debts (i.e., amounts being owed by the customers)
to the banks for an amount which is less than the
actual collectible book value of the debts, the

16
Insurance company credit Lease of fixed assets

The following types of loan can be secured from Ordinary lease

insurance companies: Instead of borrowing money with which a certain
1 Policy loans. These are provided to those fixed asset can be purchased, an outright rent or
who have policies in insurance companies, lease of such an asset is possible. This is often
i.e., those who are insured. referred to as equipment leasing. The required
2 Other loans. Insurance companies also piece of equipment is leased for an agreed period
provide loans to those who do not and it is even possible for the lessee to have an
necessarily insure with them. Unlike policy option to buy the asset after this agreed period.
loans, these can sometimes be provided Specialist firms, including commercial banks
by purchasing debentures issued by the and finance companies, exist for the purpose of
borrowers in a situation where the borrowers providing common equipment like motor vehicles,
are incorporated business units. and office equipment on lease to intending
lessees. The leased assets do not normally feature
in the balance sheet of the lessee, just as the future
Cooperative society loans obligations or liabilities to pay the rentals on the
assets.
Cooperative societies, especially the thrift and
credit type, do provide medium-term loans to Sale and lease back
their members. A business can raise finance by selling some of its
property and then lease back such property from
Trade credit the buyer. In this way, immediate cash proceeds
are made available for more profitable uses than
the ownership of the sold property can justify.
Trade credit can come from either suppliers or
even customers.
Credit from venture capital
Trade credit from suppliers funds (VCF)
This is sometimes referred to as suppliers’
finance. It is simply the value of goods supplied
As explained in Book 2, venture capital funds
and services rendered on credit, i.e., goods which
(VCF) are firms that operate essentially as
the business is yet to pay for. This form of credit
development banks except that they are privately
has the advantage of being interest free. However,
owned, they operate for the purpose of making
the usually higher costs of securing supplies of
or maximising profits, and they normally do not
goods and services on credit represent an implicit
confine their operations to just a particular sector
interest on this form of credit. In addition, there is
like agriculture or industry. They invest either
the disadvantage of the business being vulnerable
through equity finance or loans or both, in those
to further supplies being disconnected if regular
enterprises, that are usually smaller and risky, and
payments are not made.
so that are not able to easily raise bank loans, or
access the capital market. So, their credit facilities
Credit from customers are open to qualified enterprises.
In some cases, customers do obtain advance
payment (or progress payment or ‘mobilisation
fees’ from clients in the case of a contracting Instalmental credit
firm) with which the eventual supply of goods or arrangements: Hire purchase
rendering of services can be financed.
Many forms of fixed asset can be acquired
through instalmental credit arrangements. There
are three main sources of these arrangements:

17
Hire purchase, Credit sale and Conditional sale Instalmental credit arrangements:
arrangements. Here, it is hire purchase agreement
Conditional sales
that is discussed, while others are discussed
subsequently. A conditional sale also has most of the features
Hire purchase transactions have the following of a hire purchase transaction, the only difference
main features: being some rather complicated legal processes
1 The hire purchaser pays the initial deposit that hardly need to concern us here but which are
as part-payment and collects the goods discussed in a later chapter on Business law.
for use.
2 If the seller, vendor or dealer (as he is Other sources of credit
variously called) does not wish to part with
Other miscellaneous sources of credit that exist
the goods until full payment, the intending
include the following:
hire purchaser will be directed to a finance
1 Public borrowing. Loans can be raised by an
company, which will buy the asset from the
incorporated business (especially, a public
dealer and hire it out to the intending hire
company) through the issue of debentures
purchaser. Several finance companies exist
or bonds to members of the public.
for this purpose.
2 Borrowing from acquaintances. The
3 The possession of the goods immediately
proprietors of a small-scale (especially,
passes to the hire purchaser who can start to
unincorporated) business can secure credit
use it. However ownership (i.e., legal title to
for the business by borrowing from friends,
the property) is still vested in the dealer or
relatives, and other acquaintances. As a last
the finance company, as the case may be.
resort, traditional moneylenders can be
4 The balance of the hire purchase price is to be
approached.
paid according to the agreed instalments. If
3 Borrowing from finance companies. Finance
the hire purchaser fails to pay an instalment
companies are financial institutions that can
when due, the owner (i.e., the dealer or the
extend credit facilities to other businesses
finance company) will often repossess (i.e.,
and consumers. But they are no banks
seize) the goods.
because the law forbids them from accepting
5 Having paid the agreed amount of
deposits from the public. As mentioned
instalments, ownership of the goods can
in Book 2, finance companies lend money,
now pass to the erstwhile hire purchaser.
lease assets and finance hire purchase
6 The excess of the hire purchase price over
transactions. The main disadvantage of
the cash price is the implicit interest on this
their credit facilities, however, is the very
form of credit. (The cash price is the amount
high interest rates they often charge.
for which the goods are being sold in cash.)
Credit instruments
Instalmental credit
Credit instruments, which are also known as
arrangements: Credit sales financial assets, are written agreements between
creditors (or lenders) and debtors (or borrowers).
A credit sale has most of the features of a hire It is normally the borrower that issues and sells
purchase transaction. However, in respect of these financial assets in exchange for money paid,
credit sale, ownership of the goods immediately or goods transferred, by the buyer of the financial
passes to the buyer upon payment of the initial instruments, who thereby becomes the creditor.
deposit. This means that if the buyer fails to pay In those cases where there exists adequate
an instalment when due, the seller is not entitled confidence and intimacy between the lender and
to repossess the goods. borrower, credit may be granted on the basis
of verbal agreements alone. Examples of this
are trade credit and loans from acquaintances
referred to earlier. But in most other cases, there
would be the need for formal written agreements,

18
as in the case of bank loans. When such written or secondary producers). It sometimes
documented agreements are taken a step further happens that the wholesaler would need to
to become very formal and standardised, they finance the producer by making payments
become credit instruments. to him in advance, and the wholesaler may
The commonest forms of credit instruments need to augment his own financial sources
include bills of exchange, promissory notes, IOUs with credit.
and debentures, all of which will be explained 3 Financing of retailers. Wholesalers may
and examined in later chapters. need to sell to retailers on credit, and the
An important form of debentures is the one wholesaler may need to borrow to be able
called mortgages. Generally, a mortgage refers to to do so.
the transfer or pledging of a piece of property in 4 Bulk purchasing. Since the wholesaler
order to secure the repayment of a debt. A debtor usually purchases in bulk from the
becomes the mortgagor when he has transferred producer, it may be impossible for him to do
the property to the creditor who is known as so without seeking some external sources of
the mortgagee. The property is not normally credit.
transferred in physical form, i.e., it is still normally 5 Inventory holding for speculative and other
retained by the debtor. If the debt is not repaid purposes. When a wholesaler anticipates a
when due, the mortgagee is then entitled to sell likely rise of prices in future, he normally
the property in order to recover the debt. rushes to make advantageous purchases
Thus a mortgage debt (sometimes simply now so as to have much quantity to sell at
referred to as ‘mortgage’) is the one secured in the anticipated high prices in future. This
this manner. In most cases, such debts are often speculative inventory holding may make
evidenced by the issue of debentures, and the him seek credit with which the inventory
debt would then be referred to as a mortgage holding could be financed.
debenture. Debentures that are not secured, on
the other hand, are often called naked or floating
debentures.
Functions of credit to retailers

These are similar to the functions of credit to the

Functions of credit to wholesalers as discussed above. Briefly, they are
wholesalers and retailers as follows:
1 Acquisition of facilities
2 Financing of wholesalers
Both wholesalers and retailers often need credit in
3 Financing of consumers
order to finance the expansion of their businesses
4 Bulk purchasing
as well as the day-to-day operations or activities
5 Inventory holding for speculative and other
of these businesses. We shall now examine some
purposes
specific functions of credit to businesses.

Functions of credit to Revision questions

wholesalers
Essay questions
1 What do you understand by the word
1 Acquisition of facilities. Wholesale credit? Of what uses is credit to the
businesses need a lot of facilities in the middleman?
form of fixed assets, establishment of new 2 Briefly discuss the sources of credit available
branches or depots, and so on. The networth to a retailer from Finance Houses.
of the wholesalers may be inadequate to 3 What do you understand by credit
finance these, and credit would therefore instruments? Explain the following terms:
be needed. a) Debt factoring
2 Financing of suppliers (i.e., primary and

19
 b) Equipment leasing usually for less than the face value of
4 Discuss the main features of hire purchase the debt,
as a source of credit. In what ways does it D a and b
differ from credit sales? E a, b and c.
5 Write brief notes on each of the following:
a) Government-owned sources of credit
b) Borrowing from members of the
public
c) Borrowing from acquaintances
d) Co-operative society loans
6 Explain the advantages of hire purchase to:
a) The seller
b) The buyer (WAEC)

Multiple choice questions

1 In which of the following does ownership
remain with the seller until the final
instalment is paid?
A Hire purchase
B Credit sale
C Auction sale
D Trade fair sale
2 Which of the following is not true of
credit?
A It increases the volume of sale.
B It discourages bad debts.
C It helps in the acquisition of
expensive goods.
D It leads consumers to mortgage their
income
3 A company that lends money to businesses
and individuals is called:
A A bureau de change
B A finance company
C A public corporation
D A hire purchase firm
4 Reasons why a retailer could need credit
include:
A Acquisition of facilities
B Financing of wholesalers
C Financing of consumers
D a and b
E a, b and c
5 Debt factoring refers to:
A Factoring into account the possibility
of late payment by debtors
B Urging the debtors to pay promptly
C Selling, for immediate cash, of trade
debts before the due payment date,

20
 Chapter 5

Business law Contract in general

Meaning and scope of Nature of contract

business law A contract is an agreement that is enforceable in
law. This means that the parties to a contract must
Meaning of business law have the intention that the agreement would
result in legal relations. As a result, a breach of
Business law is the branch of law that deals with an agreement of social character (e.g., somebody
the establishment, operation and termination of who agreed to lend his motorcar to a friend but
the life of businesses. subsequently failed to do so) does not constitute a
breach of contract, as it cannot be enforced in law.
Similarly, a breach of an agree­ment that takes the
Scope of business law form of a domestic arrange­ment (e.g., a parent
that promised to give pocket money to the child
Business law, following the definition given but later failed to do so) does not amount to a
above, encompasses a very wide area. Because breach of contract, as it is unenforceable in law.
of this, and to prevent the study of business law In addition, an agreement does not result in
from being unwieldy, some areas (like what is a contract unless it is either supported by what is
called Company Law) are conventionally ex­ called a consideration, or it is under seal (as will
cluded. Those areas that are now conventionally all be explained later).
regarded as the components of business law Thirdly, the parties to an agreement must
include the following: have capacity to contract. For example, minors
1 Contract in general (i.e., underage children), insane individuals, etc.
2 Agency are deemed to be incapacitated to be parties to
3 Employment contracts in most areas.
4 Sale of goods Finally, an agreement must not be affected by
5 Hire purchase circumstances that make it voidable, void, illegal,
6 Government regulation of business through etc. All these will be explained later.
patent, trade mark, and copyright
7 Bankruptcy, but its discussion is outside the Stages involved in the
scope of this book.
8 Guarantee, indemnity, bailment, pawn and formation of a contract
lien – but their discussion is also outside
the scope of this book. The stages involved in the formation of a con­tract
9 Others—carriage by land, sea and air, nego­ can be described as:
tiable instruments, partnership, insurance, Invitation to make an offer Offer Acceptance
etc. Because the legal aspect of each of
these has been fairly discussed somewhere This means that an invitation to make an offer
in a previous chapter, we are not going to sometimes (though, not always) precedes an
discuss them in this chapter. offer. An offer, in turn, must always precede an
acceptance. We shall now examine each of these
briefly.

21
 rescind the contract. He can only claim damages
Invitation to make an offer
for any losses he has suffered as a result of the
This is sometimes referred to as an invitation to
breach.
treat, i.e., an invitation for negotiation. A trader
who displays wares in his shop with price tags
is just making an invitation to treat, just as a com­ Formalities of a contract
pany that advertises the issue of shares in a pro­
spectus. The formalities of a contract concern whether a
contract can be oral or must always be in writ­ing
An offer and, if it must always be in writing, whether or
This refers to the proposal of a contract. That is, not it must be made (i.e., executed) under a seal.
one party to the contract is playing his own part We shall now examine each of these briefly.
by making an offer. Thus, in our example above,
a customer who tenders a price in exchange for Contracts that must be executed un­der seal
the goods being sold by a trader is making an Another name for such a contract is deed, e.g., a
offer, just as an intending shareholder who ap­ deed of partnership (see Book 1), and is a con­tract
plies for allotment of shares in response to an which is not only in writing but which is also
advertisement in the prospectus. The person who signed, sealed, and delivered.
makes the offer is known as the offerer while the • It is signed when the grantor (i.e., the party
person to whom the offer is made is known as intending to be bound by the contract)
the offeree. affixes his signature.
The offer lapses on the death of either the of­ • It is sealed when a legal seal (a small wafer
feree or the offerer before the acceptance. It also sold in stationery stores) is affixed onto the
lapses if it is not accepted within the time pre­ contract document.
scribed for acceptance by the offerer, or any other • It is delivered when the grantor intends to
reasonable time. be unconditionally bound by the contract.
Also, the offerer can revoke (i.e., cancel) the He does not need to physically deliver the
offer before it is accepted. docu­ment to the other party, i.e., he may
choose to retain it in his possession.
Acceptance All other forms of contract other than deeds
A contract is completed when the offeree accepts are referred to as simple contracts. Deeds are
it. re­quired for all contracts in which no considera­
tion is involved. They are also necessary in con­
Terms of contract veyances of any interest in land, i.e. a transfer of
ownership of land from one person to another.
This is often called deed of conveyance. It is a con­
The promises con­tained in a contract constitute veyance that must be a deed.
the terms of the con­tract. The terms can be
express or implied. Ex­press terms are those Contracts which must always be in
undertakings specifically stated in the contract, writing to avoid being void
while the implied terms are those that are deemed
to be rather too obvi­ous that they are not stated
specifically. The following contracts will normally be void
The terms of a contract can be classified into unless they are in written form:
conditions and warranties. Conditions are the 1 Bills of exchange and promissory notes
fun­damental and important terms such that a 2 Contracts of marine insurance
breach of one of them entitles the injured party to 3 Contracts in respect of hire purchase and
even rescind the contract and claim damages for conditional sales
non-performance. On the other hand, a warranty 4 Transfer of company shares (i.e., on a ‘sec­
is subsidiary and relatively unimportant, so that ond-hand’ basis)
a breach of it does not entitle the injured party to 5 Others

22
Contracts that need to be proved with Capacity to contract
written evidence
In order to enforce some contracts (especially, in A party to a contract may be incapable of enter­ing
the law court}, there must be a written note or into a valid contract. As will be discussed later, an
memorandum in respect of such a contract. The invalid contract can be unenforceable, voidable,
note should normally contain the names of the void or illegal. Some categories of per­sons that
contracting parties, the signature of the person may have no capacity to enter into a valid contract
against whom the action is to be brought, the are now going to be discussed briefly.
consideration, and the essential terms of the
contract. Such contracts are: Minors
1 Contracts of guarantee These are underage children (below 18 years).
2 Contracts for the sale of land The only valid contracts that can be made with
It should be noted that unlike what we have minors are contracts for the supply of necessit­ies
under the above heading, these contracts are not (i.e., food, clothing, accommodation, educa­tional
void. They are merely unenforceable. books, medical services, legal advice, etc.) to the
minors, as well as contracts whereby the minor
Contracts that can take any form is made to undergo education or appren­ticeship.
All other contracts that do not fall into the above Other forms of contract will normally be invalid.
three categories can take any form; that is, they
can be oral, written or executed under a seal. Drunkards and those suffering from
mental disorder
Consideration Contracts with this category of persons are valid
if and only if the other party is unaware that they
A consideration is what is actually given or ac­ are what they are, i.e., that they are drunkards or
cepted in exchange for a promise, and it can be mental patients. But if the mental disorder is so
either: pronounced that the mental patient is deemed
1 The reward received by a party who actu­ to be unable to manage his own affairs, a con­
ally performs an act or promises to perform tract with him ceases to be valid, no matter how
an act, or ignorant of his condition the other party may be.
2 The detriment or disadvantage suffered by
a party who received the actual reward, or Invalid contracts:
received the promised reward.
As each party to a contract (except a deed) Unenforceable, voidable, void
must contribute something in return for some and illegal contracts
other thing, the ‘price’ paid for the other party’s
promise constitutes the consideration. For exam­ Unenforceable contract
ple, if a trader receives $5,000 in exchange for This is a contract which is otherwise valid ex­
his promise to deliver goods to a customer, the cept for the fact that it cannot be enforced in a
$5,000 constitutes the customer’s consideration law court, because of some technical defect. An
for the promise to deliver the goods. Let us take example is the absence of a written note required
another example. If an employee works for an in support of some contracts (as discussed ear­
employer in exchange for the employer’s promise lier).
to pay $100,000 wages, the performance of the An unenforceable contract can be made en­
task constitutes a consideration as it is a deemed forceable simply by rectifying the defect.
detri­ment suffered by the employee in exchange
for the promised $100,000. Voidable contract
As mentioned earlier, a consideration is re­ This is a contract whereby one of the parties to the
quired for all simple contracts, i.e. contracts not contract has the option of putting an end to it. That
executed under a seal. is, he can, if he so wishes, treat it as void. He also

23
has the option of treating it as binding. Instances other party either knows or ought to know that
of voidable contracts are those in which one of the such a mistake exists. A particular case of this is
parties is induced to enter the agree­ment through a mistake by one party as to the identity of the
misrepresentation, or through duress or undue other party to the contract. As an exam­ple, if Mr
influence. (We shall explain these later.) The party X, who intends to contract with Mr Y, mistakenly
so induced can eventu­ally elect to repudiate the contracts with Mr Z, the contract would be
contract or affirm it. As an example, suppose a void if the identity (i.e., personality) of Mr Y is
trader, through inno­cent misrepresentation, an important element of the contract and Mr Z
induces a customer to purchase an article. Then, knows this. (Mr Z should have informed Mr X
the customer has the option to set the contract that he is not Mr Y.)
aside or to affirm it, whereas the trader does not
have this option. Bilateral common mistake
This occurs when the two parties to a contract
Void contract mean the same thing which is, however, differ­ent
This is a contract that has no legal effect, i.e., it is as from the actual things, e.g., if, in their contract to
if the contract does not exist. However, collateral sell a pen, both Mr A and Mr B mean a red pen
contracts, i.e., any other contracts connected but, in fact, the pen is actually blue.
with the void one, may be valid and, hence, en­
forceable. Bilateral mutual mistake
This occurs when the two parties to a contract
Illegal contract mean different things, e.g., if in their contract to
This is an agreement that is contrary to the law. sell a pen, Mr A means a red pen while Mr B had
As a result, the contract itself is not only void, a blue pen in mind.
but any contract that is collateral to it is also void. Any other mistake outside the four catego­ries
Some instances of illegal contracts include hir­ing identified above is unlikely to affect the va­lidity
of vehicles to carry smuggled goods, contract to of a contract.
commit a crime, etc.
Misrepresentation
Mistake
Some types of mistake exist that affect the valid­ A contract is often preceded by negotiations
ity of a contract. Such mistakes, which make the whereby one party, because he is eager to woo
contract void, can be classified into mis­takes as and induce the other reluctant party to enter into
to the nature of the contract, unilateral mistake, that contract, makes a statement that is designed
bilateral common mistake, and bilateral mutual to encourage the reluctant party to conclude the
mistake. They all constitute what is called contract. A statement of fact made in this man­
operational mistakes. We shall now exam­ine each ner by the eager party is referred to as represen­
of these briefly. tation. But if the statement is false, it is called a
misrepresentation.
Mistake as to the nature of the con­tract A distinction should be made between the
itself terms of a contract (which are embodied in the
This occurs when a person signs a contract concluded contract) and representations or mis­
because he mistakenly believes that he is signing representations which are made before the con­
a document which is in fact materially and sub­ tract is entered into (i.e., concluded).
stantially different from the one he is signing. Representations or misrepresentations do not
This mistake is called non est factum. include the following:
1 Statements of future intention,
Unilateral mistake 2 Most statements of opinion,
This occurs when one party is mistaken as to 3 Mere claims (e.g., ‘our product is the best
some fundamental fact about the contract and the model in the world’ that is often included in
advertise­ments), and
24
4 Silence (except in some few cases, e.g., when Duress and undue influence
the contract is that of utmost good faith
when silence on a material fact amounts to
Duress and undue influence are said to occur
a misrepresentation).
when the action of the eager party to a contract
The remedies availableto the
prevents the consent of the rather reluctant party
misrepresented party include a claim for
from being freely given in the process of con­
damages for any loss suffered because he has
cluding the contract. The contract that results then
been fooled or deceived. This remedy is not
becomes voidable at the instance of the party that
available, however, in the case of innocent and
has been subject to duress or un­due influence.
non-negligent misrepresentation as explained
Examples of duress and undue influence are
below. In addition to any damages claimed, the
violence or imprisonment (whether threatened
victim can rescind the contract as well as refuse
or actual), threatened criminal proceedings, and
to perform the contract. Of course, he still has the
threatened seizure of property.
choice of affirming the contract, i.e., the contract
is only voidable and not void.
Misrepresentations are often classified into Discharge of contract
three, as follows:
1 Fraudulent misrepresentation. This occurs Discharge of a contract refers to the manner by
when a party makes a statement with the which a contract can be brought to an end. The
deliber­ate aim of misleading the other party, methods of discharge are through agreement,
or makes the statement without believing it performance, breach, frustration, and lapse of
to be true, or makes the statement recklessly time. Each of these will now be discussed.
and fails to care whether or not it is true.
2 Innocent but negligent misrepresentation.
Agreement
In this case, a party makes a statement
First, before any of the two parties has performed
honestly and sincerely believes it to be true,
his own side of the contract, they may agree not
but failed to make a reasonable investigation
to perform it.
which would have led him to discover
Second, if one party has partly or wholly
otherwise (i.e., to discover the actual
performed his own side of the contract, he may
truth). Reasonable care and diligence would
release (i.e., excuse) the other party (that is yet
have altered his false though innocent
to perform his own side). However, this release
belief. Unlike in the case of fraudulent
must either be in the form of a deed (i.e. executed
misrepresentation, law courts normally
under a seal) or must be supported by a fresh
treat the party that is guilty of negligent
consideration.
misrepresentation with more leniency.
Third, a new agreement that replaces (i.e.,
3 Innocent and non-negligent
terminates) the existing one may be entered into
misrepresentation. This occurs when
by the parties, provided that none of the parties
the party making the state­ment not only
has performed the existing one.
honestly and sincerely believes it to be true
Finally, a contract itself may provide for a
but also has a reasonable ground (i.e.,
condition for termination of the contract, e.g., a
justification) for holding the belief. That is,
contract of employment that requires a notice of
he has made what may be deemed to be a
three months by either the employer or employee
reasonable examination and investigation
for purpose of termination.
on which the belief is based. Law courts
also nor­mally treat the party that is guilty of
this of­fence with more leniency. In addition, Performance
and as mentioned earlier, the misled party A contract is automatically brought to an end if
has no right to claim damages against the each party has performed his own side of it.
offender.
Breach
A contract may be terminated if one party fails

25
to perform his own side of the contract. How­ formance, injunction, and quantum meruit. These
ever, in the case of part-performance (as dis­ are each briefly discussed below.
cussed earlier), the other party can treat himself
as discharged only if the failure constitutes a Damages
breach of the condition and not just a breach of The injured party can claim for damages. The
warranty. main aim of this remedy is to place the injured
party in the same position as if the contract were
Frustration not breached. He should not be placed in a posi­
This occurs when the performance of a contract tion to profit from the situation, based on what
by one party is rendered impossible due to fac­ is called the principle of restitution. However,
tors that are not only beyond his control, but also even if he has not suffered a loss, he might still
beyond the contemplation of the two parties (i.e., be awarded some token amount called nominal
outside the circumstances envisaged by any of damage—a mere recognition of the fact that his
the parties). This serves to discharge the contract. right has been infringed.
Some instances of frustration are:
1 Subsequent death or ill-health on the part of Refusal of any further performance
one party, which may frustrate a contract for In this case, the injured party meets ‘fire for fire’.
personal services, e.g., contract of employ­ That is, he is now using the earlier breach by the
ment. other party as a defence (i.e., excuse) in case a
2 Subsequent legislation which may render a litigation is brought against him for non-com­
concluded contract retrospectively i l l e g a l , pletion of his own part of the contractual obliga­
e.g., a contract by an importer to supply tion. However, he still has an extra remedy of
some articles which are subsequently placed rescission as discussed below.
on an embargo by the government.
Rescission
Lapse of time The contract can be rescinded. That is, the law
Under the Limitation Act of 1939 bequeathed to court can set the contract aside and order that
Nigeria by Britain, it becomes too late to bring an the status quo (i.e., the original pre-contract situ­
action to enforce a contract after the periods laid ation) be restored. Money and property that had
down in this legislation. Such an action is said to earlier changed hands would then have to be
be statute-barred, i.e., legally too late. As a result, returned to where they emanated. Rescission is
the contract becomes discharged. The periods so commonly granted by courts in case of a breach
specified are as follows: or a misrepresentation.
1 Actions brought to recover land should not
normally exceed twelve years after the earli­ Specific performance
est period when the action could have been A court may order the parties to a contract to carry
brought. out their respective obligations; i.e., the court may
2 Actions in respect of a deed (i.e., contracts insist that the contract still be ex­ecuted.
executed under a seal) should also not
exceed twelve years.
3 Actions in respect of other contracts should Injunction
not exceed six years. In this case, the court may give a prohibitory
in­junction against the party that intends to com­
mit the breach. This means that the court is now
Remedies for a breach of prohibiting or forbidding him from a continued
contract breach of the contract. For example, an employer
that dismisses an employee may be prohibited
from filling that particular vacancy for a period.
The remedies that are available to the injured
This will likely have the effect of reinstating the
party are a combination of damages, refusal of
dismissed employee so as not to leave the posi­
any further performance, rescission, specific per­
tion vacant.

26
Quantum meruit:
This refers to a claim for the value of goods sup­ Implication
plied or work done by a party. An example is This happens when somebody is placed in a
when a buyer has been supplied a lesser quan­tity position whereby it is normal and expected that
than what was ordered in the case of a contract such a position (or office) holder should enter
for the sale of goods. If the buyer then commits into certain contracts on behalf of the person
a breach, the supplier can claim for the value of appointing him. This means he has automatically
goods supplied before the breach on a quantum become the agent of the person that appointed
meruit basis. him despite the fact that he was not given the
express mandate to act as an agent. Agency by
Principles of agency implication can also arise where the previous
actions of the principal prevent him from deny­
ing that an agency relationship ever existed. This
Nature and types of agency concerns estoppel discussed below.

Meaning of an agent
An agent is a person engaged for the purpose of
Necessity
This arises when a person deals with (e.g., sells)
bringing the person engaging him into contrac­
the property in his possession, but which belongs
tual relations with third parties. The person that
to another, without any prior permission from
so employs him is referred to as the principal.
the owner. This should be because of reasonable
Thus, agency is the relationship between an agent
circumstances that warrant this and the fact that
and a principal.
it was not possible to obtain permission from the
owner. The person, who has now become the
Capacity to contract agent, must have acted with a good intention,
As an agent is just an intermediary, he need not e.g., in an emergency situation that might dam­
have the contractual capacity as explained ear­lier. age the goods.
This means that he can as well be a minor (i.e.,
an underage person), a drunkard, or a men­tally
disabled person. It is the contractual capacity of
Ratification
This occurs when somebody purports (i.e., falsely
his principal that counts.
claims) to be making a contract with a third party
on behalf of a principal. To bail such a person
Types of agent out of legal liability (called breach of warranty of
In Book 1, we discussed the main types of agent. authority) towards the third party, the purported
As a recapitulation, these include auc­tioneers, principal may ratify the contract retroactively. By
factors, brokers, and del credere agents. The stu­ this action, the false agent is converted into an
dent may make reference to relevant sections of actual agent.
this book for discussions on these kinds of agent.
Estoppel
Creation of agency According to the principle of estoppel, if a per­
son deliberately or carelessly gives the impres­
An agency may come into existence as a result sion that another person is acting on his behalf,
of express agreement, implication, necessity, he is estopped (i.e., legally prevented) from later
ratification and estoppel. We shall now briefly denying the authority of that person to act on his
examine each of these. behalf. For example, if Mr A passively watches Mr
B telling Mr C that he (Mr B) is act­ing as Mr A’s
Express agreement agent, then, Mr A would be bound by a contract
An agent may be appointed orally, in writing, negotiated by Mr B with Mr C. To forestall this,
or under a seal (i.e., through a deed). An agent Mr A ought to have earlier dis­claimed Mr B’s
needs to be appointed through a deed in order to authority.
ex­ecute a deed on behalf of his principal.

27
Authority of the agent an action called breach of warranty of authority.
This self-appointed agent is liable whether or not
Actual and ostensible authority he has acted honestly—even if his authority as
An agent’s actual authority is that conferred on an agent has been terminated without his knowl­
him by the principal through express agreement, edge, e.g., as a result of the death or mental dis­
through necessity, or through ratification. The ability of his principal of which the agent is not
agent’s ostensible authority, on the other hand, yet aware before contracting with a third party.
is the authority of the agent as it appears to
others. That is why it is also referred to as ap­
parent authority. While ostensible authority some­ Effects of contracts made by
times coincides with actual authority, ostensible agents
authority may as well exceed actual authority.
For example, the Board of Directors may limit the
actual authority of the managing director to the The effects of contracts made by agents depend
award of contracts not exceeding N200,000. But on whether or not the identity of the principal has
by virtue of his position as the chief execu­tive, he been disclosed to the third party as follows:
is likely to appear to others as being able to award
contracts of much greater value. His ostensible or When the agent has disclosed the
apparent authority therefore ex­ceeds his actual identity of the principal
authority. That is, he can com­mit the company In this case, the agent has informed the third party
with an outsider in a contract that exceeds of the identity of the principal on whose behalf
N200,000 in value, as the outsider is legally the agent is executing the contract. As a result,
entitled to rely on this apparent author­ity. Thus, the agent normally has no right or obli­gation
estoppel and apparent authority are related. concerning the performance of the con­tract. It is
the third party and the principal that have any
Special, general and universal author­ity such rights and obligations in most cases.
of agents
1 Special agent. This is the agent whose author­ When the agent failed to disclose the
ity is limited to the performance of a specific identity of the principal
act, e.g., to buy and sell certain goods. In this case, although the agent informed the
2 General agent. This is the agent whose third party that he was executing the contract
authority extends to the performance on behalf of his principal, he failed to inform the
of all those du­ties that are customarily third party who the principal is. The legal impli­
associated with his position (e.g., the cations are generally similar to the case when
managing director we have just used for an the identity of the principal was disclosed as we
illustration). have seen above. However, if the agent executed
3 Universal agent. This is the one whose the contract in his own name without explicitly
authority, as conferred by the principal, stat­ing that he was acting as an agent, he may be­
has no limit. He can perform any act on come liable to the third party in the performance
behalf of his prin­cipal. of the contract.

Breach of warranty of authority When the existence of the principal is

A person may profess to act as an agent whereas not disclosed
he has not been so authorised by the alleged prin­ Here, the agent does not inform the third party
cipal. If he enters into a contract on behalf of the that he is acting on behalf of any principal. As a
purported principal, he is liable to the third party result, it is the agent who is liable to the third party,
unless the alleged principal, as discussed earlier, and is also entitled to enforce the rights by taking
comes to the rescue of this self-appointed agent by legal action against the third party. However,
ratifying his contract retroactively. Otherwise, the the third party is placed in a disadvantageous
agent be­comes liable to the ignorant third party for

28
position, in that while he is not entitled to enforce 5 He must render an account (i.e., of his
the contract against the principal, the existence stewardship) to the principal when so
of which he should not know, the principal can required.
usually reveal his existence and identity and 6 He must not make any secret gain beyond the
enforce his own rights against the third party. In commission and any other remunerationau­
other words, while the third party can take legal thorised by the principal. In pursuance of
action against only the agent, both the agent and this, the agent is accountable to the principal
the principal can usually take le­gal action against for any gain he made without the principal’s
the third party. con­sent out of:
a) any property entrusted to him by the
Non-existent principal principal.
If the agent purports to act on behalf of a princi­ b) any information or knowledge which
pal that does not exist or that has no legal capac­ he has acquired for the use of his
ity to enter into a contract, the agent becomes principal, e.g., the knowledge which
personally liable on the contract. he has been em­ployed by the principal
to discover or col­lect. This is because
such information or knowledge
Duties of an agent to the constitutes the property of the
principal principal.

Among the principal duties of an agent are the If an agent makes a secret profit or takes a
following: bribe when contracting with the third party, the
1 He must obey any lawful instructions by his principal has the right to:
principal. a) recover the secret profit;
2 He has to exercise reasonable care, skill b) refuse to pay the agent his remunera­
and diligence in performing his duties. tion, including the commission;
For exam­ple, if he is employed to sell some c) dismiss the agent without giving him
goods, he should do his best to obtain the notice;
most advan­tageous price that is reasonably d) sue both the agent that receives the
obtainable. Also, he must disclose to the secret profit and the third party that
principal any­thing which he knows that gives it in respect of any loss that the
is likely to influ­ence the decision of the principal will have sustained from the
principal whether or not to enter into the contract; and/or
contract. e) repudiate (i.e., disown) the contract.
3 He must act in good faith and honesty for 7 If he simultaneously acts as the agent for two
the benefit of the principal. To this end: or more principals whose interests are in con­
a) He must not compete against the flict, he must fully disclose this to all the prin­
principal. cipals, and he must also obtain permission
b) He must not misuse the confidential from each of them to enable him to claim
in­formation in respect of the affairs of the double (or multiple) remunerations
his principal. that would result. Otherwise, he may not
4 He must act personally, i.e., he must not del­ be able to recover the double (or multiple)
egate his duties as an agent to someone else. remunerations.
This is referred to as delegatus non potest
delegare. The only few exceptions are when Rights of an agent against the
delegation is necessary (e.g., giving a part principal
of the work to his e m p l o y e e ) , w h e r e
delegation is a norm (e.g., when he uses the
services of some experts), and where the The agent has a right of lien, if this is applicable
principal au­thorises delegation. as in the case of auctioneers and factors who may
be in possession of the goods of the principal.
29
The right of lien simply means the authority to Contract of employment:
‘sit tight’ on the goods that belong to the princi­
pal who has failed to perform a part of his own
Rights and obligations of the
obligation. employer and the employee
The agent also has the right of stoppage of
goods in transit in a situation where the agent Nature of contract of
has assumed the liability to pay for the goods
and provided that he is not indebted to the prin­ employment: Distinction
cipal. between contract of service
and contract for service
Duties of a principal to the
agent A contract of employment is a contract of service.
This should be distinguished from a contract for
1 He must pay the commission or any other service whereby an independent contractor or
re­muneration that is due to the agent. business agrees to perform a task for a person.
2 He must also reimburse the agent for any For the purpose of illustration, if I want a build­
expenses, losses or liabilities incurred ing erected, I can accomplish this through self-
by the agent on his (principal’s) behalf. supervision whereby I employ the bricklayer,
carpenter, etc. Those so engaged are in a contract
of service with me. Alternatively, I can get the
Termination of agency building erected by entrusting all the activities to
an independent contractor who is then said to be
An agency may be terminated by actions of the in a contract for service with me.
parties, operation of the law, or completing of the There are, however, some cases in which the
agreement as follows: line of demarcation between the two is blurred. In
1 Acts of the parties themselves. Both parties such a situation, the following factors may assist
may agree to terminate the agree­ment. in clarifying the situation:
Also, a party may unilaterally terminate 1 Method of payment, which is often more regu­
the agency, although it is possible that he lar in the case of contract of employment.
be­comes liable to pay damages to the other 2 The integration of the person’s work into
party. the employer’s organisation is common
2 Operation of law. An agency is terminated with a contract of employment, unlike the
by operation of law in the following contract for service which is often ancillary
cases: to the employer’s organisation.
a) Death of either the principal or the 3 Income tax in the form of PAYE (i.e., Pay As
agent. You Earn) as well as contribution to pension
b) Bankruptcy of the principal (but not schemes is often deducted at source from the
that of the agent). payments in the case of contract of service.
c) Insanity of either the agent or the 4 The employer often provides the tools and
principal. equipment in the case of a contract of serv­
d) When the substance of the agency ice.
agreement is frustrated, i.e. 5 The extent of control by the employer (in
rendered impossible to per­form the form of what to do and how to do it) is
due to circumstances not previously nor­mally greater in the case of a contract of
envisaged by either party. serv­ice.
3 Completion of the agreement. This happens The distinction between the two is very
when the period agreed upon has elapsed important because many rights and duties of
or the specific purpose of the agreement has the employer and employee depend on it. For
been achieved. example, if the relationship is a contract of
service, the employer is normally under a vi­

30
carious liability for the offences committed by Duty to indemnify the employee
the employee in the performance of the duties If the employee incurs an expense, a loss or a
of his office. This is not normally so in the case liability on the employer’s behalf, the employer
of a contract for service. (Vicarious liability is is bound to reimburse him of this unless the con­
liability that arises from delegation of authority, tract of employment provides otherwise.
in which the one that delegates the authority,
e.g., the employer, becomes re­sponsible for the Duty to provide work
actions of the person, e.g., the employee, to whom The employer is under a duty to provide work to
authority has been delegated). In our subsequent an employee in the following circumstances:
discussion, we will be concerned with only the 1 In a situation where the remuneration of the
contract of service. employee depends on the amount of work
done, e.g., under a piecework system.
Duties of employer to employee 2 In the case of those who perform in public as
a result of which they need the opportunity
Payment of wages to work in order to boost and sustain their
Failure to pay an employee’s remuneration is reputation.
often deemed to be a fundamental breach of a 3 In a situation where, for a long time, the em­
term of the contract (i.e., breach of the condition ployee has not been assigned any work to
and not just a breach of warranty). As a result, this per­form and which would therefore suggest
entitles the employee to leave without no­tice. the employer’s unwillingness to carry out
If the contract of employment is silent con­ the contract.
cerning the payment of wages when the em­ployee
is absent because of sickness, and the employer Safety
has not terminated the contract through proper Every employer is bound to take reasonable care
notice, then, the employer has to continue paying to ensure the safety of his employees. Failure to
the wages. do so renders the employer liable to pay dam­ages

Fig. 5.1 Workers signing for their wages

31
to an injured employee or his relative. This duty Sale of goods
also includes provision of a safe system of work,
including adequate supervision.
Meaning of sale of goods
Respect contract, implied terms, etc.
The employer has the duty to respect the em­
ployees. Gone are the days, at least in law, when In a subsequent chapter on Consumer protection,
the employer-employee relationship was re­ we will define a sale of goods contract as one in
garded as that of a master-servant relationship. A which the seller transfers, or agrees to transfer, the
gross insult to an employee by the employer can property in goods to the buyer for a price. There,
amount to a fundamental breach of the con­tract, we will also distinguish between a contract of sale
i.e., a breach of condition and not just a breach of and a contract of agreement to sell. In addition,
warranty. we will discuss the implied terms of a sale of
goods contract.
Duties of the employee to his Here, we should note that an attempt to
exclude any of the various implied terms is
employer legally void (i.e., disallowed) in the case of
consumer sale. However, in the case of sale to
Duty of care non-consumers, only the first implied term (i.e.,
The employee is required to be reasonably care­ful that one which requires the seller to have the right
and diligent in performing his duties. to sell the goods) cannot be legally excluded. The
seller can exclude his liability in respect of any
Duty of cooperation other. In such a case, the buyer needs to beware,
The employee should always cooperate as much i.e., caveat emptor or the ‘buyer beware’ rule
as reasonable with the employer in order to en­ applies. A consumer sale is the sale of what is
able the employer to accomplish his (the employ­ ordinarily a consumer good to somebody who
er’s) legitimate purposes. should be presumed as a consumer rather than
a middleman. For this purpose, auction sales and
Duty of obedience sales by competitive tender cannot be consumer
The employee is required to carry out all reason­ sales.
able and legitimate instructions of his employer.
Transfer of property between
Duty of respect seller and buyer
As the employer should respect the employee, so
also should the employee respect the em­ployer.
By property is meant the ownership of (i.e., legal
title to) something. It is very important to know
Loyalty or fidelity when the property in a good passes from the
The employee is required to be faithful to his seller to the buyer. One reason for this is that in
employer. As a result, he should do his best to the case of the goods being destroyed acciden­
promote his employer’s business and abstain tally, the owner bears the loss. Another reason is
from anything that may injure the business. To that in the case of bankruptcy of either seller or
this end, a skilled employee may need to abstain buyer, only the goods in ownership of the bank­
from assisting a business rival of his employer— rupt can pass to his trustee.
notwithstanding the fact that the assistance is The following are the main relevant rules
given in the employee’s spare time. Even, some­ that govern the period when the ownership of
times, after the employee has left (i.e., resigned goods passes from seller to buyer, if the contract
from) the employment, he should still not dis­close is si­lent on this. Otherwise, the ownership passes
any confidential information he had ac­quired when the seller and buyer intend and agree that
about his former employer. it should pass.

32
1 In the case of specific goods the true owner of a good stands by, watching
a) If the goods are in a deliverable state an innocent person buying the good from a
at the time of executing the contract, third party who purports to have the right
the ownership passes at this time of to sell the goods, this innocent buyer will
making the contract—whether or not not be obliged to give the article (i.e., the
the goods have been paid for. good) to the true owner.
b) If the goods are not yet in a deliverable 2 Sale by factors. A factor is an agent who is
state when the contract was made, not in ownership of the goods being dealt
the ownership passes when the seller with, although he is nor­mally in possession
has completed putting the required of them. He can sometimes sell such goods
finishing touches on the goods and and thereby give a non-defec­tive title to the
has notified the buyer of this. buyer.
c) If the seller is supposed to weigh, 3 Sale by a possessor of goods or docu­ments
mea­sure, or test the goods in order of title. If a person is in possession of goods
to ascertain the price, the ownership and/or documents of title to the goods,
does not pass until he has done all he may be able to sell to an innocent
these. buyer who now acquires a non-defective
d) If the goods are delivered on approval title on the goods. For example, if Mr A sells
or on ‘sale or return’, the ownership a motorcar to Mr B who is yet to take actual
passes to the buyer when he signifies delivery of the car, Mr A may sell the same
his acceptance, or does anything that car again to another buyer, say, Mr C. In
signi­fies an adoption of the transaction, this case, although Mr A had ceased to be in
or retains the goods beyond an agreed ownership of the vehicle, he is able to pass
or a reasonable time—whichever of a good (i.e., non-defective) title in respect of
these occurs earliest. the car to the second buyer, Mr C. (However,
2 In the case of unascertained goods, i.e., Mr A is liable to being sued by Mr B.)
goods defined by description rather than 4 Sale by a person with voidable title. If the
those identified and agreed on at the time seller has a voidable (as opposed to a void)
of executing the contract (e.g., 50 exercise title to a good, he can sell it and pass a non-
books of a par­ticular type), the ownership de­fective title to an innocent purchaser.
does not pass to a buyer until the goods are However, the sale has to take place before
unconditionally appropriated to (i.e., set the seller’s title is voided by the person who
aside for) the contract by the seller (with has the right to do so.
the buyer’s consent) or by the buyer (with
the seller’s consent). Rights of the unpaid seller
Sale by non-owners If the seller is not paid when payments are due
according to the terms of the contract, the fol­
There is a general rule that only the owner of a lowing courses of action are available to him:
good (or the authorised agent of the owner) can 1. Rights against the goods. These rights apply
pass a non-defective property in the good to an­ despite the fact that the own­ership m i g h t
other person. The true owner is entitled to get have passed to the defaulting buyer. They
back the good from a buyer that acquired it from a are:
defective title seller. In other words, the principle a) Lien. This is a right to retain the
of nemo dat quod non habet (which means that possession of the goods. This right
a person cannot give what he does not have or would be lost if the goods have ceased
own) applies. The only main exceptions to this to be in the possession of the seller.
rule in a sale of goods contract are as follows: b) Right of stoppage in transitu. This is
1 Estoppel. We have earlier explained what another way of referring to the right
this word means. In the present context, if of stoppage of the goods while in

33
 transit to the buyer. This is to enable ahead on Consumer protection). In particular,
the seller to regain and then re­tain hire purchase regulations in respect of consumer
possession of the goods. protection will be discussed in the chapter on
c) Right of resale. Neither the lien nor Consumer protection. That discussion concerns
the right of stoppage in transitu hire purchase transactions of small values. The
enables the unpaid seller to resell the discussion in the present chapter is in respect
goods to somebody else. However, he of hire purchase transactions in general, not just
would normally be entitled to resell of those involving small val­ues or just of goods
the goods that are perishable or where being sold to consumers.
the contract gives the unpaid seller A hire purchase contract is one under which
the right to resell the goods. Also, he goods are delivered by a person to somebody
is entitled to re­sell the goods when he who hires the goods and undertakes to pay pe­
has so notified the de­faulting buyer
riodically for the hire. The hirer, in addition, has
who, despite this, has still failed to the option of purchasing the goods after a stipu­
pay within a reasonable time. lated number of instalments have been paid.
2. Rights against the buyer himself. In There is an additional option of returning the
addition to the rights against the goods as goods to the owner before the maturity period
discussed above, the seller has the right to when the hirer should have been entitled to ex­
sue the buyer for the price if the buyer ercise the option to purchase the goods. There is
has obtained title to the goods. He can also no contract to purchase the goods until the hirer
sue the buyer for non-acceptance of has exercised his option to do so. Thus, three
the goods, if this is applicable. separate parts of a hire purchase contract are in­
volved. These are as follows:
Remedies of the buyer 1 Contract of bailment. Under this contract, the
hirer has posses­sion of the goods to enable
The following remedies are available to the him to use them. But the goods are not in
buyer. his ownership yet. The hirer constitutes the
1 He is entitled to sue for non-delivery of the bailee while the owner is the bailor.
goods, if this is applicable. 2 Option granted by the owner to the hirer.
2 He may sue for recovery of money already This entitles the hirer to buy the goods after
paid to the seller. pay­ing the stipulated instalments. For this
3 He may sue for specific performance, as option to be exercised, the hirer is often
ex­plained earlier under the general required to pay a certain token (i.e. nominal)
principles of contract. amount.
4 If the seller has breached a condition 3 Contract of sale. This gives the hirer a title
(as op­posed to just a warranty) of (i.e., ownership) to the goods which are
the contract, the buyer can repudiate the already in his possession.
contract. Whereas a hire purchase contract does not
compel the hirer to buy the goods, a credit sale
contract does. In fact, the ownership of the goods
Hire purchase passes to the buyer in a credit sale agreement
when the contract is entered into, i.e., before the
Nature of hire purchase, credit completion of the instalmental payments. In the
case of a conditional sale contract, it is similarly
sale, and conditional sale legally compulsory for the buyer to purchase the
transactions goods, unlike the hire purchase contract. How­
ever, the conditional sale agreement resembles a
These three instalmental credit arrangements are hire purchase contract in the sense that the prop­
the obvious types, and they have all been briefly erty (i.e., ownership) does not pass to the buyer
discussed elsewhere in this book (in a previous until he has paid all the instalments, quite un­like
chapter on Business credit and another chapter the case under a credit sale arrangement.

34
Hire purchase contract and the Termination of agreement
The termination of an agreement can be in ac­
finance company cordance with the provisions of the hire purchase
contract, or it can be in the form of a breach of the
In many cases, especially where hire purchase
contract.
transactions on motor vehicles are involved, the
owner of the goods (the dealer) does not want to
provide the credit facility entailed, i.e., he pre­fers Termination according to the provi­sions
to sell in cash. It is then left to a finance com­pany of the contract
to buy the goods in cash from the dealer and hire This occurs when the hirer exercises the option
them out to the hirer. The resulting na­ture of of returning the goods to the bailor (i.e., the
transactions is as follows: owner). Sometimes, the contract also confers the
1 The original owner (the dealer) sells the right on the owner to terminate the agreement if
goods to the finance company in a pure certain events occur, e.g., if the hirer dies, is sent
contract of sale so that the finance company to prison, or becomes bankrupt.
im­mediately becomes the owner.
2 The finance company then enters into a usual Termination due to a breach of the
hire purchase contract with the intending contract
hirer. That is, the finance company becomes This normally occurs when the hirer defaults
the bailor. in paying the instalments when due. In such a
3 While neither a contract of sale nor a case, the owner, usually after a period of notice,
contract of hire purchase exists between re­possesses the goods. In addition, he would usu­
the dealer and the hirer, it is possible ally claim a certain minimum payment as dam­
for what is called a col­lateral contract ages. Contracts often provide for this provision
of warranty to exist between the two. which is known as minimum payment clause.
A collateral contract of warranty, in this
context, exists if the dealer (with a view to
inducing the intending hirer to enter into Government regulation of
a hire purchase contract with the finance business through patent/
company) had given a warranty to the
intending hirer that the goods are in certain trademark and copyright
conditions. The dealer may therefore be
liable to the hirer if the goods do not conform Introduction
to the warranty.
4 There may be an additional contract, called Copyright is a form of intellectual property
recourse agreement, between the dealer and for authors, artistes, etc. that is accorded legal
the finance company. Under a recourse agree­ protection by copyright law which, in Nigeria, is
ment, the dealer undertakes to indemnify the Copyright Act of 1999.
(i.e., to be liable to) the finance company if In addition to copyright, there is what is called
the hirer defaults in his obligations. industrial property, which comprises patents,
industrial designs, and trademarks. Patent laws
protect inventions, which refer to new products
Right of cancellation of hire and processes that contribute in some practical
purchase contract manner to existing knowledge.
Industrial design laws similarly protect
There exists the right to cancel certain types of shapes, patterns, designs and other features that
hire purchase contracts within a few days after enhance outward appearance or aesthetic value of
the contract has been entered into. The aim is to a product. In Nigeria, the same enactment, Patent
protect hirers from intensive persuasions by deal­ and Design Act of 1990 (as amended), provides
ers or finance companies, which would other­wise for both patents and industrial designs, which are
have deprived the hirers of enough time to decide both another form of intellectual property, just as
on whether or not to enter into the agree­ment. copyright.
35
 Trademark, on the other hand, comprises for further research and development activities
symbols, names, labels, drawings, numerals and that could take the invention to even a higher
other marks that seek to identify a product and level by improving upon it, thereby promoting
differentiate is in the eye of buyers. Trademark technological development.
protection in Nigeria is provided for by the
Trademark Act of 1990. The major responsibility Statutory requirements for an invention
for the administration of industrial property law to be patentable
in Nigeria is on the Trademarks, Patents and The Patent and Design Act of 1990 provides the
Designs Registry, a Federal Government agency conditions that have to be met for an invention
located in Abuja. It is this agency that, among other to be patentable. Specifically, it provides that
functions, receives and processes applications the new product or new process of producing
for registration, renewals and collection of fees
an existing product has to be new, result from
in respect of patents, industrial designs and inventive activity, and be capable of industrial
trademarks. application. These constitute three separate criteria
Below, the nature and statutory provisions in of (1) newness, (2) being an outcome of inventive
respect of all the above are reviewed. activity, and (3) being capable of industrial
application. These are explained below.
Patent 1 Newness. For an invention to qualify for a
patent, it must be new, in the sense that it
Nature and meaning of patent must not have been known or disclosed to
A patent is an official document that describes an the public prior to application for a patent.
invention and creates a legal condition that enables Once the information about the invention
the patented invention to normally be exploited had been communicated to members of the
(i.e., manufactured, sold, used, or imported) only public (other than through unauthorised
with the authorisation of the owner of that patent. people under the obligation of secrecy
In short, it is an official document that confers of divulging it), such an invention will be
an exclusive right or privilege to an invention. deemed to have failed the test of newness,
This is done to give the inventor protection from and will therefore not be patentable.
imi­tation by others. Thus, a business that has 2 Being an outcome of inventive activity.
produced something new, or has found a new This means that the extent of the difference
method of producing something, can pro­tect between the existing knowledge and what is
itself from unauthorised imitation by getting the being claimed to be a new invention should
invention registered with government. be substantial. The claimed invention should
The right against imitation is usually granted not be a mere cosmetic or inconsequential
for only a limited period of time. addition to what was previously known. The
claimed invention should be an outcome of
Rationale for patent protection sufficiently creative and ingenious activity.
The legal protection of invention against 3 Being capable of industrial application.
imitation is to reward the inventors for the efforts, The Act provides that an invention is
creativity, and ingenuity as well as to encourage capable of industrial application if it can
or provide an incentive to would-be inventors be manufactured or used in any kind of
to follow suit. It is also to promote technological industry, including agriculture.
development and prevent inventors from keeping
secret their inventions for the fear of imitation. Statutory disqualifications of some
This is because a precondition for getting a inventions from being patentable
patent registered is to submit the description that The Act also provides a list of those inventions
discloses the invention in a sufficiently clear and that are not patentable, even if they meet the above
complete manner for the invention to be put to three tests of newness, inventive activity, and
use by others. This submission would then be put industrial application. These inventions include:
into the public domain. This is to provide a basis 1 Plant/animal varieties and biological

36
 processes (e.g., crossbreeding and cloning). to preclude any other person from making,
This is for ethical reasons – including importing, selling, or using the invented product
refraining from encouraging materialistic or the product made from the invented process or
conception of life and tampering with method. The Act provides for remedies (including
sanctity of human life. damages, injunction against further infringement,
2 Immoral or offensive inventions. and making the infringer account to the patentee
3 Principles and discoveries of a scientific for profits made due to the infringement) that can
nature. To make these patentable, be granted to a patentee whose rights have been
the discoverer is to take the extra step of infringed. However, the patent protection does
applying the principle or discovery for not cover such things as the use of the products,
inventing a useful product or process that is for example, for research or experiment and other
capable of industrial application. private non-commercial or non-industrial uses,
which would not constitute an infringement.
Distinction between the true inventor
and the statutory inventor Modes of exploiting the rights conferred
The right to patent an invention is available to on the patentee
what is called the statutory inventor, who is the The patentee may exploit the patent by himself or
first person to file an application to patent the in joint venture with those that have the capital
invention. The statutory inventor need not be and experience of running a business that can
the actual inventor, as the actual inventor may exploit the patent. Instead, he may assign or sell
not be the one to first file the application. The the patent to a willing buyer. He can also license
law recognises the first to file and not the first the patent in the form of permitting others to use
to invent. A reason for this is to guard against the invention without relinquishing ownership to
conflicts that may sometimes arise regarding them.
who the first inventor is. Another reason is to
encourage inventors to file patent applications Duration of patent
promptly, before they are beaten to it by another The duration of patent is for a limited period, as
person who is not the actual inventor. By this, the patent expires at the end of 12 years from the
dissemination of technological information date of filing the application for it, after which the
would be enhanced and secrecy of inventions invention becomes available to be used freely by
discouraged. Nevertheless, the true inventor must members of the public. The patent can also lapse
still be named in the patent, even if the statutory prior to the expiration period of 12 years due to
inventor is different. failure to pay the annual fees.

Application for registration of a patent Industrial design

The Act provides that every patent application
shall be made to the Registrar, containing such Nature and features of industrial design:
things as applicant’s name and address, and Industrial design is similar to patents in many
especially, a full description of the relevant respects except for the fact that, while patents
invention, with appropriate plans and drawings, concern the substance, industrial design is
that is to be patented. As pointed out above, about the outward appearance and cosmetic. It
the full description of the invention is required is this similarity that causes both of them to be
to enhance dissemination of technological statutorily provided for in Nigeria by the same
information. Patent and Design Act of 1990.
The Act defines industrial design as any
Scope of rights conferred on the combination of lines or colours or both, and any
patentee and remedies applicable for three-dimensional form, whether or not associated
with colours, that is intended by the creator to be
infringement on the rights
used as a model or pattern to be multiplied by
The patent confers on the patentee the right
industrial processes and is not intended solely

37
to obtain a technical result. From this statutory
definition and other definitions that have been Rights conferred following the
provided in the literature, one can deduce the registration, how the rights may be
following as characteristics of industrial designs:
1 An industrial design may be ornamental exploited and remedies for infringement
or decorative design, made up of Industrial design protection is granted following
pictures, drawings, patterns or ornaments. the registration of the design. The registered
An example is textile design. It may also owner has the right to preclude any other person
consist of the shape that is incorporated into from reproducing the design in the manufacture
an article, as in the case of the shape of sole of a product; from importing, selling or utilising
of a shoe. for commercial purposes a product reproducing
2 The design must be reproducible by industrial the design; and from holding such a product
means, e.g., printing or embroidery, whether for the purpose of selling it or utilising it
through a mechanical process or through for commercial purposes. The right may be
manual application. Artistic designs that are exploited by manufacturing, importing, selling
not so reproducible would not come under, and otherwise commercially utilising a product
or qualify as, industrial design but should, reproducing the design. The design may also be
instead, come under copyright protection. assigned. Infringement of the design also attracts
3 The design need not be useful or add utility civil remedies similar to those of patents.
to the article to which it is applied since, if it
is primarily to obtain a technical result or add Duration of the right
utility to the article (e.g., to make the product The duration of the protection is for 5 years from
more durable), the applicable protection the date of application for registration, but this
should be patent protection, instead of can be renewed for 2 further consecutive periods
industrial design protection. of 5 years each, making a total of a maximum
period of 15 years.
Statutory requirements for a design to
be registrable Trademark
For a design to be registrable, it should meet the
requirement of newness, as in the case of the Nature and features of trademark
patent. In other words, the design should not A trademark is a brand name or symbol, used in
have been published anywhere prior to the date of identifying goods or services from a particular
application for registration. Also, to be registrable, source, that has been officially registered as
the design must not be contrary to public order belonging to a given individual or firm—with
or morality, thereby disqualifying immoral or a view to preventing others from using the
indecent designs. In addition, the Act provides same name or symbol without consent of the
that works of sculpture (other than models to trademark owner. Trademarks enable customers
be multiplied by any industrial process), wall or consumers to identify the source or origin
plaques and medals, and printed materials that of goods they buy and thereby make informed
are primarily of a literary or artistic character are buying decisions. Trademarks are also used in
not registrable designs. advertising and related forms of promotion.
Trademark in Nigeria is as provided for by
The ‘first to file application’ rule also the Trademark Act of 1990. Based on the statutory
applies definition provided in this Act, a trademark must
have certain features, as follows:
As in the case of patent, the right to register an
1 It must consist of a device, brand, heading,
industrial design is vested in the statutory creator,
label, ticket, name, signature, letter, numeral
i.e., the first to file an application.
or a combination of these.
2 The registration of a trademark may be
based on existing use or, if not already in

38
 use, on intention to use it. Thus, the fact that deceptive or scandalous marks, names of chemical
the mark had long been in use would not substances, Nigerian Coat of Arms and similar
invalidate its registration. symbols of the country’s sovereignty, and those
3 There must be a link between the goods and that are identical to, or that resemble existing
the proprietor of the trademark, thereby trademarks.
requiring that the use of the mark must be
in the course of trade. The proprietor of the
Unlimited duration of trademark
mark can be the manufacturer, importer,
Registration of a trademark does not lapse,
wholesaler, retailer, or any other person
provided it is being renewed every 14 years. That
involved in the commercial process.
is, once registered and it is renewed every 14
years, the business can continue to hold on to the
Rights conferred through registration of trademark in perpetuity.
patent
The Act also provides for the process of registration Infringement of trademark is a civil
of trademark. While it is not compulsory to
wrong and can also be a criminal wrong
register a trademark, registration confers on the
trademark owner the legal right or ownership to it, if deception is involved
as there can be no statutory infringement against Like any other property, a trademark can be
an unregistered mark, because the Act states transferred by assignment (or sale) to a willing
that no person shall be entitled to institute any buyer. Infringement of trademark is a civil wrong
proceeding to prevent, or to recover damages for, that can entitle the trademark owner to civil
the infringement of an unregistered trademark. remedies like claiming of damages, getting a court
It also provides that registration confers on the injunction to prevent (continued) infringement,
person registering the exclusive right to the use getting the infringer (especially, an innocent
of that trademark in relation to the goods. In one) to account to the trademark owner for the
addition, it states that the right shall be deemed profit made through the infringement as well as
to be infringed by any person who uses a mark delivering up of the infringing materials. There
identical to it or so nearly resembling it as to be are also criminal sanctions against forgery of
likely to deceive or cause confusion, in the course trademarks and false application of trademarks
of trade, in relation to any goods in respect of to goods.
which it is registered. Concerning unregistered trademarks, the
owner can also take action against the infringer
for passing off his own goods as goods of the
The register of trademarks trademark owner. Passing off, in general, is a
The Act provides for the office of a civil servant
legal wrong of misrepresentation, whereby efforts
called the Registrar of Trademarks, who is to
are made to benefit from the goodwill of another
register trademarks and keep and manage a record
(usually, more reputable) person. So, the use of an
called the register of trademarks. In the register
unregistered trademark also constitutes a sort of
of trademarks shall be entered all registered
goodwill which, though unregistered, should not
trademarks with the names and addresses of
have been made use of by another person.
their proprietors, the date on which applications
were made for their registration, notifications of
assignments and transmissions, the names and Copyright
addresses of all registered users and such other
matters relating to registered trademarks as may Nature, features and types of copyright works
be prescribed. The person intending to register It is the ex­clusive right to a work originated by
a trademark has to apply to the Registrar in the either an author or an artiste (i.e., a composer
prescribed manner. of music or any other artistic work) and any
person author­ised by him to publish, broadcast,
Unregistrable marks or otherwise reproduce any part of that work.
Certain marks are not registrable. They include Copyright is a form of intellectual property.

39
A major objective of copyright protection is Duration of copyright
to reward authors for their efforts and also to The protection given to the author or creator of
provide an incentive for would-be authors, by copyright material is not absolute. First, the legal
assuring them that they would be allowed to reap protection is not for ever but lasts for only 70
the fruits of their efforts. years after the death of the author or creator. For
Copyright in Nigeria is as provided for by cinematograph films and photographs, sound
the Copyright Act of 1990 (as amended in the recordings and broadcasts, their copyright lasts
Copyright Act of 1992 and Copyright Act of1999). for fifty years after the end of the year when they
According to the Act, provided sufficient effort first took place. Second, while the legal protection
has been expended on making the work to give lasts, the work can be put to a number of qualified
it an original character, the following shall be uses (which must not be for a commercial purpose)
eligible for copyright: without obtaining the consent of the copyright
1 Literary works–novels, stories, poetical owners, for academic critique, or discussion.
works, plays, stage directions, film scenarios,
broadcasting scripts, choreo- graphic works How copyright can be infringed
(like a composition of movements for Outside such exceptions, any use or exploitation
dancing), computer programs textbooks without the consent of the owner would
treatises, histories, biographies, essays, arti- constitute a copyright infringement. Such acts of
cles, encyclopedias, dictionaries, directories, infringement include the following:
anthologies, letters, reports, memoranda, 1 Doing or causing another to do any of the
lectures, addresses, sermons, etc. acts within the exclusive right of control
2 Musical works. of the copyright owner without his licence
3 Artistic works–paintings, drawings, or authorisation.
etchings, lithographs, woodcuts, engraving, 2 Importing or causing to be imported into
prints, maps, plans, diagrams, works of Nigeria any copy of the work.
sculpture, works of architecture in the 3 Exhibition in public any article in respect of
form of building models, works of artistic which the copyright is infringed.
workmanships, etc. 4 Distribution by way of trade, offers for sale,
4 Cinematograph works– including recording hire, etc. any article in respect of which
of a sound track associated with the cinema- copyright is infringed.
tograph film. 5 Making or having in one’s possession
5 Sound recording. plates, master tapes, machines, equipment
6 Broadcasts– sound or television broadcasts. or contrivances used for the purpose of
making infringing copies of the work.
Manner of exploiting the copyright 6 Permitting a place of public entertainment
In respect of each of the above, the author or or of business to be used for performance in
creator of the work is granted the exclusive public of the work, where the performance
right to control the exploitation of it. The author constitutes an infringement of the copyright
may exploit it by himself. He may also assign or in the work..
transfer (i.e., sell) his right to exploit it on mutually 7 Performing or causing to be performed for
agreed terms to willing buyers (who now become the purpose of trade or business any work
the owners), meaning that people can become in which copyright subsists.
owners of copyright by purchasing it instead of
being the creator or author of it. The author (or Infringement can be a civil or criminal
a subsequent purchaser through assignment) can wrong
also grant a licence or permission to co-exploit Some acts of infringement are only civil wrongs,
it (i.e., without the owner relinquishing his with civil remedies like payment of damages to
ownership) to those that are willing to pay for the copyright owner, obtaining by the copyright
such licences on mutually agreed terms. owner of a court injunction to prevent (further)

40
infringement, the infringer (especially, an innocent to enable members of the public to know those
one) accounting to the copyright owner for profit that are true owners of the business that is being
made on the infringement, etc. But some other run under a name that differs from the names
acts of infringement are both civil and criminal of the owners. To further strengthen this and
wrongs, making those found guilty liable not only prevent a mischievous hiding of the identity of
to civil sanctions but also to criminal sanctions in business owners through the use of a business
the form of fines, imprisonment, or both. name that is different from owners’ names, the
legislation goes further to make it mandatory for
the names of the sole proprietor or partners or
Government regulation of (in the case of a corporation being a partner) the
business through corporate name to be mentioned or indicated in
all trade catalogues, trade circulars, show cards
registration of business and business letters issued by such a business,
and not just the business names.
Businesses, whether sole proprietorship,
partnership or limited liability companies, and Procedure for applying for registration
even not-for-profit organisations, like cooperative The Corporate Affairs Commission’s Assistant
societies and clubs, are supposed to be registered Registrar in each State, acting on behalf of the
with the government. This is to enable the Registrar-General in Abuja, handles registration
government to monitor the business enterprises of business names. Every individual, firm or
and, if applicable, collect taxes and levies from corporation in Nigeria that carries on business
them as well as provide necessary assistance to under a business name (as opposed to the names
them. of the individual sole proprietor or partners that
own the business) shall, within 28 days after
Registration of business names commencing a business under that name, furnish
to the Assistant Registrar, at the registration
office in the State in which its principal place of
For both sole proprietors and partnerships, the
business is situated, a statement in the prescribed
business name is supposed to be registered.
form, containing the following particulars:
The summary of the procedure for registering a
1 The business name.
business name consists of identifying a suitable
2 The general nature of business.
name, submission of duly completed statutory
3 The full postal address of the principal and
forms with two passport sized photographs of the
any other places of business.
applicant attached to the form, and payment of
4 In the case of a sole proprietorship or a
filing fee at the Corporate Affairs Commission.
partnership consisting of only individuals,
particulars (names, nationality, age, sex,
Businesses required to register their usual residence, etc.) of the individual
names partners or the sole proprietor (as
Registration of business names is provided for in applicable) and copies of their certified
the CAMA of 1990 not only in respect of companies passports. If the partnership is between
but also in respect of sole proprietorships and corporations (as opposed to individuals),
partnerships. The registration of a business name the corporate name and registered office of
is required only if the name of the business differs each corporation that form the partnership
from the names of the proprietor and, in the case shall be provided instead. If it is a company
of a partnership, the names of the partners and, that seeks the registration, the name and
in the case of a corporation (i.e., an incorporated registered office of the company shall be
company, especially a limited liability company), provided instead.
the business name differs from its corporate There are some names that are not allowed.
name. Otherwise, registration of business name These include those that are misleading or
is not required. The rationale for this provision is give a wrong impression about the connection

41
of the business with the government. After of sharing profits and losses among partners.
ensuring that the name is in order and that all While there is a standard or statutory partnership
the submissions have been made properly, the ‘deed’ in the partnership law for those that want
Assistant Registrar shall first enter in the register to adopt this standard, a partnership agreement,
the business name, with the identification whether oral or written, supersedes the provisions
letters of the State in brackets at the end of the of the Partnership Act. If a partnership agreement
name. Then, the Assistant Registrar shall issue a is silent on any issue, the relevant provision in
certificate in the prescribed form containing the the partnership law (i.e., the standard ‘deed’ of
business name, together with the distinguishing partnership) applies. We also pointed out in Book
State identification letters in brackets at the end 1 that a partnership can only conduct its business
of the name, which shall form part of the business under the name of the partners. If any other name
name. is to be used, then such a name must be registered
with the Registrar of Business Names, and
Requirement to deliver ‘annual returns’ the real names of the partners indicated on the
letterheaded papers used by the partnership. This
to the CAC
is a very sensible precaution aimed at protecting
The business is also obliged to deliver, not later
the public who are entitled to know the identity
than June every year, to the CAC a return in a
of the partners.
prescribed form showing the particulars of the
business, including its financial affairs during the
preceding period of January 1 to December 31. Cooperative society registration
When a sole proprietorship or partnership In chapter 2 of Book 2, we also discussed the
that should register its business name fails to formation procedure of a cooperative society. As
do so, the legal implication is that its rights pointed out there, a joint application, along with
arising out of any contracts (or legal agreements) the bylaws of the society (that should contain
entered into by it shall not be enforceable either details about the name, address and objectives
in the business name or otherwise, whereas of the society, names and contact particulars of
the rights of the other party to the contract to its members, share capital and its division), has
enforce such contracts against the defaulting sole to be submitted to the Registrar of Cooperative
proprietorship or partnership are still preserved. Societies of the appropriate agency or Ministry
of the State where the cooperative is to be based.
After scrutiny of the application and the bylaws
Registration for the formation by the registrar who ensures that all is in order,
of a business the Cooperative Society Registrar would issue
the Certificate of Registration.
Partnership registration
In Book 1, we discussed ‘Partnership’ and its Limited liability company registration
formation procedure. There, we pointed out that In the same Book 2, we described the formation
what is called a deed of partnership that embodies procedure of a limited liability company. There,
the partnership agreement has to be submitted for we pointed out that the formation procedure is
its registration. As pointed out there, a partnership governed by the Companies and Allied Matters Act
agreement may be made orally or in writing. The (CAMA) of 1990. The summary of the procedure
agreement may also be implied from the conduct for incorporating a company consists of choosing
of the parties involved. However, contracts are a suitable name that no existing company uses,
best made in writing to serve as safeguards in the payment of the prescribed stamp duty fee at the
event of a disagreement. Federal Board of Internal Revenue, submission
A formal written agreement for a partnership of Memorandum and Articles of Association
is called a partnership deed, and contains such together with statutory forms for verification and
things as the names of the partners, the nature of assessment, and payment of statutory fees at the
the business, the amount of capital each partner Corporate Affairs Commission.
should contribute to the business, and the manner Specifically, to register a company, certain

42
documents prescribed by the Act have to be
tendered with an application to the registrar of Revision questions
Companies, together with a stipulated registration
fee. The Memorandum of Association is one Essay questions
of the documents that must be tendered, and it 1 What do you understand by a contract?
must be signed by a minimum of two subscribers, Write short notes, by way of explanation,
who then become the foundation members (i.e., on each of the following in relation to a
shareholders) when the company comes into contract:
existence. a) Invita­tion to treat
Another document that has to be tendered to b) Offer
the Registrar is the Articles of Association. If no c) Acceptance
Articles of association is tendered, it follows that 2 In relation to a contract, explain your under­
the proposed company will automatically adopt standing of:
the already-prepared and rather commonplace a) Implied terms
one called ‘Table A Articles of Association’. b) Express terms
In addition to the Memorandum and Articles c) Conditions
of Association, there shall also be delivered to the d) Warranties
CAC the following four documents: 3 With examples, discuss the various formali­
1 The notice of the address (other than the ties that can be required in order to execute
postal box or private mail bag) of the a written contract. Is it possible to execute
registered office of the company and the a valid contract orally? If so, give some in­
head office, if different from the stances in which this is true.
registered office. 4 Explain your understanding of consideration
2 A statement in the prescribed form in relation to a contract. Describe the formal­
containing the list and particulars together ity that would be required to execute a valid
with the consent of the persons who are to contract that is not supported by a consid­
be the first directors of the company. eration.
3 A statement of the authorised share capital 5 To what extent do minors, drunkards, and
signed by at least one director. the insane have the capacity to enter into a
4 Another form which gives a statutory valid contract?
declaration in the prescribed form by a 6 Distinguish between unenforceable,
legal practitioner that all the requirements voidable, void, and illegal contracts, and
of the CAMA of 1990 concerning company give an exam­ple in each case.
registration have been complied with. 7 What types of mistake can invalidate a con­
On receiving the registration fee and the tract? Explain duress and undue influence
required documents, the Registrar vets them and their effects on the validity of a
to ensure that the statutory requirements have contract.
been complied with, e.g., that the company is 8 What do you understand by misrepresenta­
not being formed for an illegal purpose, that the tion? Discuss the various forms
Memorandum of Association is signed by not that misrep­resentation can take and the
less than two persons, and that the name of the appropriate rem­edies that are available to
proposed company is not the same with that of an the misrepresented party in each case.
existing company. If the Registrar is satisfied that 9 State, and briefly explain, the various ways
everything about the proposed company is in by which a contract can be brought to an
order, he would first register the Memorandum end.
and Articles of Association, and then get the 10 State, and briefly explain, the various rem­
company registered, and issue the Certificate edies that can be available to the injured
of Incorporation to the company. The life of party where there has been a breach of
the company starts from the date stated on this contract.
certificate.

43
11 Explain your understanding of agency. In other main types of instalmental credit
what ways can an agency relationship arrangement.
be cre­ated? 23 Discuss the role of a finance company in a
12 Write short notes, by way of explanation re-purchase contract and the extent to which
and in relation to agency on: presence relieves the dealer of liabilities in
(a) Actual and osten­sible authority respect of the transaction.
(b) Special, general, and uni­versal agents 24 Explain each of the following: patent,
(c) A breach of warranty of authority trademark, and copyright.
13 Compare the effects of a contract made by
an agent when:
(a) The identity of the principal is disclosed
Multiple choice questions
1 A contract whereby one of the parties to the
by the agent to the third party.
contract has the option of putting an
(b) The existence but not the identity of
end to it is called
the principal is disclosed by the agent
A an unenforceable contract.
to the third party.
B a voidable contract.
(c) The existence of the principal is not dis­
C a void contract.
closed by the agent to the third party.
D a vacuum contract.
(d) The ‘agent’ falsely claims the existence
E an illegal contract.
of a principal.
2 Which of the following is not how a contract
14 Discuss the rights and duties of the agent
can be brought to an end?
and the principal in relation to one another.
A Agreement
15 In what ways may an agency agreement be
B Performance
brought to an end?
C Breach
16 Distinguish between a contract of service
D Use of force
and a contract for service. In the former
E Lapse of time
case, what are the rights and duties of an
3 The expression nemo dat quod non habet
employer and the employee to each
means that
other?
A buyers and sellers should show respect
17 Distinguish between a contract of sale
to each other.
of goods and a contract for work and
B a person cannot give what he does not
materials. Discuss the implied terms or a
have or own.
sale of goods contract and the ability of a
C employees should respect their
seller to exclude his liability in respect of
employers.
each of the implied terms.
D the principal and the agent should
18 Distinguish between possession and
cooperate with each other.
ownership of goods. What rules guide the
E none of the above is right.
passing of ownership of goods from the
4 Which, if any, of the following are/is a
seller to the buyer in the sale of:
requirement(s) for an invention to be
(a) Specific goods?
registered for patent protection under
(b) Unascertained goods?
Nigerian law?
19 To what extent is the principle of nemo dat
A Newness of the invention
quod non habet inapplicable in a sale
B The invention being an outcome of
of goods contract?
inventive activity
20 Discuss the remedies available to an unpaid
C The invention being capable of
seller of goods.
industrial application
21 Discuss the remedies available to a buyer in
D All of the above
a situation where the seller has committed a
E None of the above
breach.
5 In addition to its Articles and Memorandum
22 Explain the nature of a hire purchase
of Association, which of the
transaction and distinguish between it and
following are/is other/another document(s)

44
to be submitted to the Corporate Affairs
Commission in order for a company to be
incorporated?
A The notice of the address of the
company’s registered office
B A statement in the prescribed form
containing the list and particulars
together with the consent of the
persons who are to be the first directors
of the company
C A statement of the authorised share
capital signed by at least one director
D a and b
E All of the above

45
Chapter 6

Structure of business
Nature of business ones in turn, and so on, until the lowest level of
authority and status is reached.
organisation and The responsibilities, duties and authorities are
bureaucracy prescribed either in writing or by the prevailing
and mutually understood norms (or both) for each
such level, just as the nature of interrelationships
Nature of a business between and within various levels. All these can
organisation be illustrated by organisation charts, as presented
later in this chapter in Fig. 6.1 to Fig. 6.5.
An organisation can be conceived as a social en­
tity such as a company, hospital, and school. It Bureaucracy
is a system of interdependent human beings. It
therefore has what could be called a nature or Meaning
character and this includes the following: The word ‘bureaucracy’ is sometimes used to
1 Efficiency. The structure of an organisation mean excessive paper work and rules which re­
facilitates efficiency in the allocation sult in inefficiency. It is also sometimes used
of hu­man and material (including financial) in describing the working procedure of local,
re­sources of the organisation. state, and federal governments. In our present
2 Communication. An organisation facilitates discus­sion, however, bureaucracy refers to an
formal communication among its organi­sational form in which roles, tasks and
members. relation­ships are dearly defined and controlled in
3 Job satisfaction. An organisation specifies ac­cordance with formal authority. This is the tech­
the relations among various tasks, people nical definition of thee word. Bureaucracy is thus
and po­sitions. This is designed to provide present in most organisations, and is not confined
job satis­faction for the members. to describing the way government offices oper­
4 Identity. An organisation makes its presence ate.
known through its name, titles, location,
physical facility appearance, product brand­
ing, advertisement, public relations, etc.
Features of bureaucracy
Eight main features of a bureaucracy are as
These make it recognisable to its customers,
follows:
suppli­ers and other members of the public.
1 An arrangement of authority and levels of
organisation in the form of a hierarchy.
Organisational set-up 2 Specialisation of functions and
responsibility.
An organisation has to be maintained and 3 Appointment to various offices on grounds
governed, so that the different segments and of technical competence. (There exist pre­
individuals comprising it can be made to work scribed qualifications for holding of offices
together and be in harmony. Such a governance by individuals.)
structure, in turn, entails a hierarchy or stratum 4 Distinction between official positions and
of authority. There must be a head, those that holders of those positions.
immediately follow the head in terms of authority 5 Clear distinction between office holders and
and status, and those that would follow those owners of the organisation.

46
6 A system of rules that exist for maintaining on cost centre and profit cen­tre below.)
discipline and control. 3 A greater scope of decisions is made down
7 The recording of rules, decisions, etc., in the management hierarchy, e.g., decisions
writ­ing. on engagement of employees, borrowing,
8 Measures designed to protect officials pro­curement of supplies and selling of
against arbitrary termination or dismissal. products.
4 There is less vetting and checking of deci­
sions.
Centralisation and Decentralisation is high when no such
decentralisation checks exist, low when superiors have to
be informed after every decision, and least
Meaning when superiors have to be consulted before
every decision.

Centralisation and decentralisation refer to the

extent to which the authority to employ or make Forms of decentralisation
use of an organisation’s resources, namely people,
finance and other materials, is spread or dispersed Two main forms of decentralisation are ‘cost cen­
through various levels of the organisation. We tre’ and ‘profit centre.’ We shall discuss them
can say that an organisation is decentralised if briefly.
the authority to employ and utilise resources is
dispersed and diffused through various cadres or Cost centre
hierarchies (in the organisation). If, on the other This is a unit (i.e., department) in an organisa­
hand, such authority is concentrated in only the tion that has the autonomy to incur various costs
topmost management cadre, there is a situation for the purpose of running the department. This
of centralisation. means that the department has freedom to bor­
Thus, it can be seen that centralisation and row funds, employ workers and purchase inputs
decentralisation have nothing to do with the (i.e., raw materials and capital goods). If the de­
degree of physical spread of an organisation. For partments or units of an organisation are run as
example, an organisation may have branches cost centres, the organisation can be said to be
located in different places, and the branch heads decentralised.
may, at the same time, have to take directives on
almost every issue from the head office. In this Profit centre
case, there is a physical or geographical disper­ This is a unit in an organisation that has the au­
sal, despite the high degree of centralisation. On tonomy not only to incur costs in the process of
the other hand, all the divisions of an organisa­ running itself, but also to generate revenue (i.e.,
tion may be located in the same place, whereas sell the products). This means that the depart­
divisional heads are vested with authority to take ment has the freedom to pursue policies that
decisions on their own. In this case, there is little enable it to contribute an identifiable profit to
or no physical dispersal but decentralisation ex­ the organisation as a whole. This is because the
ists. department has the freedom to borrow funds,
Where there is a great degree of decentralisa­ engage employees, and purchase supplies, just
tion in an organisation, the following obtain: as it is autonomous in selling the departmental
1 A larger number of decisions are taken at the products to either other departments in the or­
lower levels of the management hierarchy. ganisation or to outside customers.
2 Relatively more important issues We can therefore see that a profit centre is
are decided on at lower levels of the even more autono­mous than a cost centre. Where
management hierar­chy. For example, greater the departments in an organisation are run as
capital expenditure can be incurred by a profit centres, the organisation can be said to be
departmental head with­out seeking prior extremely decen­tralised.
approval from the top. (See the discussion

47
Advantages of decentralisation 2 Inconsistency and lack of standard. There
can be wide disparities in the qualities of
goods produced or services rendered to
These can also be referred to as disadvantages of
custom­ers of the same organisation because
centralisation, and include the following:
each unit may be operating on different
1 Relief to top and middle level man­agement.
standards.
Top management is relieved of the need to
3 ‘Empire-building’ or self-interest. The
at­tend to tactical and operational decisions.
scope for individual sub-units to pursue
It can, therefore, have more time to devote
self-interests that are detrimental to the
to strategic issues. The middle level
organisation as a whole is widened when
management cadre can also be similarly
there is decentrali­sation. Each sub-unit head
relieved of the need to attend to operational
may be tempted to promote the interests
decisions. It can now squarely face its tactical
of his or her own sub-unit, even if such
responsibilities.
an act is against the interests of the whole
2 Flexibility to local conditions. The
organisation.
grassroots or local management can re­spond
4 Ineffectiveness in motivating some
appropriately to changes in local circum­
employees. Usually, it is not all employees
stances. Since local management is in close
that are responsi­ble and trustworthy.
con­tact with local happenings, it is in the
As a result, decentralisation might serve
best position to react to such happenings.
to vest authority in those who have not
3 Speed. Timely decisions are facilitated if
been rigorously tested and found worthy.
operational is­sues are dealt with at lower
As a result, decentralisation may not
levels. Delays are likely to occur if such
only fail to motivate those who are not
matters have to be referred to higher levels.
interested in chal­lenges, it could also
4 Motivation. Staff at the lower cadre are likely
promote inefficiency and abuse of office.
to be motivated (i.e., their commitment is
likely to be more forthcoming) if they are
given challenges and responsibilities. Delegation, authority, power
5. Management training. By giving greater
authority to employees at the lower levels,
and responsibility
they are being exposed to or initi­ated into
managerial activities. An organisation Delegation
should not wait until the employees are
pro­moted to the senior management cadre This is the transfer, by a superior officer, of a part
before giving them some responsibility. of his authority to his subordinate(s) without
abdicating (i.e., abandoning) the responsibility
Disadvantages of of his office to the subordinate(s). In other words,
only the authority, and not the responsibility, has
decentralisation to be so transferred for there to be delegation.
The delegator, i.e., the superior, is ultimately re­
These can also be referred to as advantages of sponsible for the consequences of the exercise of
centralisation, and include the following: the delegated authority by the delegatee, i.e., the
1 Need for greater coordination. The more subordinate, just as if that authority were never
decentralised an organisation is, the greater delegated at all.
the need for top management to spend much The subordinate is responsible or accountable
of its efforts in ensuring that the activities of to the delegator alone in the exercise of the del­
the various sub-units are coordi­nated, i.e., egated authority. The superior, in turn, is ac­
made to balance with one another. In the countable to the organisation for the actions of
absence of such coordination, the activities such subordinates. This means that the office
of the sub-units may not be in harmony holder must take full responsibility for the du­ties
with one another. of his office. If something goes wrong with the

48
exercise of authority, the superior officer, rather are rights, duties and responsibilities that
than the subordinate(s), is accountable for the go with various offices. The authority that
wrong. attaches to any such office is automatically
The advantages and disadvantages of delega­ assumed by the office holder irrespective of
tion of responsibility are similar to those of de­ his personal qualities. Thus, it is the rules
centralisation which we have earlier studied. and procedures of each organisation that
confer this type of authority.
Authority
Power
This refers to the right to give instructions (i.e.,
orders) and the power to get the instructions While power is connected closely with author­ity,
complied with. It is the acceptance of the legal they do not mean exactly the same thing. Power
rightness of rules by those over whom the rules specifically refers to the ability of some­one to
are to be exercised. This definition implies that force another to do certain things whether by
the use of force or power to get certain instruc­ means of strength, punishment or even re­ward.
tions complied with does not imply the existence It is thus the possession of authority, con­trol
of authority, in so far as the giver of such instruc­ or influence through which one is able to exact
tions has no (legitimate) right to give the instruc­ (i.e., get) obedience from others. This defi­nition
tions. An example would be a superior who gets implies that authority is only one of the various
junior employees to do certain things that are sources of power.
outside the scope of his authority, e.g., through Concerning sources of power, five major
the use of force and threats. Similarly, where a sources that are often iden­tified are as follows:
superior does not possess the power to enforce his 1 Legitimate power. This is power that derives
orders or instructions, we may say that he does from authority as has just been discussed.
not possess the required authority. It then follows 2 Reward power. This consists of the ability to
that a person’s authority must be sup­ported by give various rewards like money, praise,
such power as would enable him to discipline and pro­motion to subordinates.
any stubborn or disobedient subordi­nates. 3 Coercive power. This refers to the ability to
Concerning the types of authority, the punish or withhold rewards, e.g., the ability
three main types that are often identified are as to reprimand, query, demote, or dismiss
follows: one’s subordinates.
1 Traditional authority. In this case, the author­ 4 Referent power. This is the ability that derives
ity derives from custom and tradition, e.g. from the personality or charisma of
re­spect for elders. the power holder, including his physical
2 Charismatic authority. This arises from the per­ might.
sonal qualities of the person exercising the 5 Power from expertise. This derives from the
au­thority. This is sometimes referred to as knowledge and expertise of the power
authority from knowledge, and is author­ity holder.
often exercised by experts in various fields,
including professionals. Expertise confers Responsibility
au­thority on those who have it because those
that do not have it risk making wrong deci­
sions if they do not take the instructions or This is the requirement to do those things that
advice of experts. In this sense, for exam­ple, constitute the duties of a post or position. It is
a medical doctor who advises his patient the obligation that an office holder owes the or­
to stop smoking is said to be exercising au­ ganisation that confers the authority on that of­
thority. fice. The office holder, as we have earlier seen,
3 Positional authority. This is the type of author­ can perform his duties by himself. Alternatively,
ity that obtains in a bureaucracy as earlier he can get some of his duties performed by his
dis­cussed. In this form of authority, there subordinates by delegating sufficient authority

49
to them. In any case, the boss would still be re­ control are common at top management
sponsible or accountable for the performance of and professional levels because of the need
these duties. for close involvement by the superiors.
Suppose, for example, it is the duty of the On the other hand, at the lowest end of
principal of a school to discipline students. The the or­ganisational hierarchy, wider spans
principal can, if he chooses, delegate this author­ of control are often found because the
ity to classroom teachers. In this way, he is per­ routine tasks that are being performed by
forming the duty through the teachers. However, the subordinates do not re­quire very close
if anything goes wrong concerning discipline in supervision.
the school, it is the principal that is held respon­ 2 Complexity of job. The more complex the
sible or accountable (e.g. to the parents, the gov­ tasks to be performed, the smaller the span
ernment, the school proprietor or the commu­nity of control is likely to be because of the need
at large). for greater supervision.
3 Competence of the subordinates. The more
Span of control competent the subordinates are judged to
be, the greater the span of control, while the
span of control is smaller if they are judged
Meaning to be less competent and therefore in need
of frequent supervision.
This refers to the number of subordinates directly 4 Effects of mistakes. The more costly a mistake
under a particular boss. For example, if a supe­ on the part of subor­dinates is likely
rior has ten immediate subordinates, his span to be, the smaller the span of control, as the
of control is said to be 10. Similarly the span of luxury of making mistakes would not
con­trol of a school principal, where there are no be condoned.
heads of departments, is the number of teaching
and non-teaching staff in that school. The span of
control is therefore wide or narrow, depending
Organisation levels
on the number of subordinates under the direct
supervision of a boss. Nature

Advantages and disadvantages ‘Organisation levels’ refers to the number of lay­ers

or hierarchies in an organisation. An organisation
of a wide span of control is said to be ‘flat’ if there are few hierar­chies, but
is said to be ‘tall’ if there are many hi­erarchies.
An advantage of a wide span of control is that Both of these are shown in Fig. 6.1.
it economises on the number of supervisors or As we can see from the ‘flat’ organisation
superiors. Another advantage is that it creates chart in Fig. 6.1, there are only four levels of au­
fewer communication and coordination prob­ thority (if the workforce is counted as being one).
lems. Finally, it can facilitate delegation of au­ On the other hand, there are six such levels in the
thority by the superiors. This is because the tall organisation chart.
greater the number of subordinates to be directly The flatter an organisation is, the more cen­
controlled, the greater the tendency to delegate tralised it is likely to be, and the wider is its de­
authority. However, a wide span of control has gree of span of control.
the disadvantage of making close supervision It is easy to see that there would normally be
difficult. long lines of communication, coordination and
decision-making in a tall organisation. On the
Factors that determine the span of control other hand, it has the advantages associated with
The main factors that determine the extent of the decentralisation and narrow spans of control.
span of control include the following:
1 Management hierarchy. Narrow spans of

50
 Managing Director
(Chief Executive)

Managing Director Divisional Heads

(Chief Executive) (Directors)

Departmental Heads
Departmental Heads (Managers)
(Directors)

Section Heads
(Senior Supervisors)
Supervisors

Sub-section Heads
(Supervisors)

Workforce or
Operatives
Workforce or
Operatives

Flat Organisation
Tall Organisation

Fig. 6.1 Flat and tall organisation charts

51
Specialisation, diagram is presented in the organisation chart
presented in Fig. 6.2. As can be seen from Figure
departmentalisation and 6.2, all sales and advertising experts, for instance,
organisation structures are concen­trated in one department, just as are all
finance experts, production experts and personnel
ex­perts grouped into their different departments.
Nature of specialisation and As a result, the department and sub-department
departmentalisation to which an employee is assigned are determined
by his occupation or profession.
Specialisation, in this context, refers to the group­ The arrangement that has just been described
ing of tasks together and assigning of different and illustrated in Fig. 6.2 is usually applica­ble
task groups to different units in an organisation. to a manufacturing concern. It could, how­ever,
In a way, it refers to the division of labour within be appropriately modified to suit other kinds of
the organisation, in which each group of tasks is business such as large-scale retailing, wholesaling,
assigned to a department in the organisation. and service enterprises.
Types of organisation structure and forms of
spe­cialisation are interwoven. For our purpose Product-based organisation
in this chapter, we can identify occupational (i.e.,
func­tional), product, and geographical forms
structure
of spe­cialisation. Corresponding to these, we
can also have occupational, product-based, and Some large organisations deal in a wide range
geographical-based organisation structures. We of commodities. Such organisations are said to
shall discuss these now. be multi-product. A suitable organisation struc­
ture that reflects the multi-product nature is the
one called product-based organisation structure.
Functional organisation Under this arrangement, each product group
structure is under a separate primary department. This
means that the head of a product-group depart­
Functional organisation structure refers to the ment, who is usually designated as general
grouping of activities in an organisation in ac­ man­ager, is directly responsible to the chief
cordance with the functions performed, in order execu­tive (or managing director) just as other
to enable the organisation to attain its goals. primary departmental heads like finance director,
These functions may include production, mar­ human resources & administration director, and
keting, personnel, general administration, fi­ marketing direc­tor, are under the chief executive.
nance, etc. Thus, departmentalisation is based on Some­times, however, the product-based
these functions. Each function, in turn, would be departmen­tal head may be lower in status than
sub-divided into sub-functions, each of which is other de­partmental heads. This is especially so in
assigned to a sub-department. We shall use the the few cases where he is not directly responsible
expression, ‘functional organisation structure’ to the managing director.
to refer to a situation where the primary level of In any case, each product-based departmen­tal
the organisation struc­ture and other derivative head is in charge of all the activities (e.g., fi­nance,
levels are arranged on a functional basis. (The marketing, and personnel and adminis­tration)
primary level is the or­ganisation structure that that relate to his product-group. As a result, his
is immediately below the post of chief executive department is normally organised on a functional
or managing director. We will reserve the word basis as if it were an autonomous business
‘department’ for this level. Units below the organisation of its own. This means that in each
department will be re­ferred to as derivative department there would be separate pro­duction,
levels.) marketing, finance, human resources and ad­
This form of organisation structure has been ministration, and other functional sub-depart­
illustrated in Fig. 6.1. A modified form of this ments or derivative levels of the organisation.
The various sub-departmental heads are then
52
 Managing Director

Production Director Marketing Director Financial Director Human Resources &

Administration Director

Manufacturing Production Financial Management

Manager Planning & Accounting Accounting
Technical Control Controller Cashier Controller
Manager Manager
Manufacturing
Supervisors Chief Chief
Technical Production Accountant Accountant
Supervisors Planning &
Control
Supervisors

Human
Resources Legal
Manager Officer
Sales Manager Market Advertising Public
Research Manager Relations
Manager Manager

Administration
Manager

Sales
Representatives
Advertising
Market Officers
Research Administrative
Officers Officers

Human
Resources
Officers

Fig. 6.2 Functional or occupational organisation chart

53
re­sponsible to him (i.e., as his subordinates). Geographically-based
He thus constitutes a mini-’managing director’
within his domain.
organisation structure
Each of the product-based departments is
therefore operated as a mini-firm in this manner. Some organisations spread their activities all
In a textile production organisation, for ex­ample, over the country and even outside the country.
the cotton department has its own pro­duction, In this case, it may be desirable to structure the
marketing, finance, and human resources and organisation on a geographical or regional ba­
administration sub-departments. See Fig. 6.3, sis. Each regional unit is usually referred to as a
which not only illustrates this, but also shows branch.
the usual situation where each product depart­ The geographically-based organisation struc­
mental head or general manager has an equal ture resembles the product-based type discussed
status with marketing, finance, and personnel above and an organisation chart that reflects this
and administration directors, as he is also directly is shown in Fig. 6.4. The chart is for a mar­keting
responsible to the managing director. company with three branches or area of­fices,
where each office has its own marketing, finance,
as well as human resources and administration
units just as the head office has.

Managing Director

Company Secretary

Operations Departments Marketing Director Finance Director Human Resources &

Administration Director

NYLON SILK COTTON

General General General
Manager Manager Manager

Human Resources &

Production Marketing Chief Administration Manager
Manager Manager Accountant

Fig. 6.3 A product-based organisation structure

54
 Managing Director

Company Secretary

Operations Departments Marketing Director Finance Director Human Resources &

Administration Director

NORTHERN WESTERN EASTERN

Area STATES STATES
Manager Area Area Manager
Manager

Marketing Chief Human Resources &

Manager Accountant Administration Manager

Fig. 6.4 A geographically-based organisation structure

Line, staff and functional Unity of command

relationships among
departments Strictly interpreted, unity of command means
one person, one boss. A liberal interpretation of
the term, however, is that no one should report to
We shall study this topic through an examina­tion more than one boss on any single function. The
of the following concepts: main object of this is to prevent the confusion that
would result if instructions or directives on the
Scalar chain same matter emanated from more than one boss.

This is the unbroken line of authority from the Line–authority relationship

top of the organisation’s hierarchy to the bottom.
It presents the line of authority from the chief This is the superior–subordinate authority rela­
executive to the workforce or the most junior tionship that is sometimes referred to as chain
employees. of command. It refers to the channel through
which authority flows from its origin or source
to the level of action down the hierarchy. Line

55
authority is the authority which every superior It is also often thought that the functions ren­
exercises over his own subordinates. Thus, a dered by departments that do not exercise staff
sales manager exercises line authority on the authority are close to the primary objectives of
sales departmental staff, in the same way that the the enterprise. Such functions include produc­
pro­duction manager exercises line authority over tion, marketing, and sometimes, finance. They are
staff in the production sector. Similarly, it is line deemed to constitute the basic activities in a busi­
authority that the chief accountant and the human ness organisation and are therefore often referred
resources manager exercise over the accounting to as ‘line functions’ because the departments
de­partmental staff and personnel departmental in charge of them exercise only line authority,
staff respectively. whereas other departments often exercise staff
authority and functional authority (discussed be­
low) in addition to line authority.
Staff authority relationship It is also usu­ally contended that line functions
contribute di­rectly to the provision of goods and
This is the authority that arises from the knowl­ services, and are thus regarded as being primary.
edge, speciality, and expertise possessed by some On the other hand, staff functions (that is, those
departments in the organisation that enable them functions exercised only by the departments that
to provide expert advice to other departments mainly exer­cise staff authority), merely support
in the organisation. The departments that line functions rather than contribute directly to
exercise staff authority render services which the the provision of goods and services. So, they are
beneficiary departments should have otherwise sometimes referred to as secondary functions.
pro­vided on their, own but for the fact that the ex­ An example of the staff department is the human
pertise required is beyond them. In other words, resources and ad­ministration department which
this is a form of charismatic authority. does not directly supervise employees other
However, unlike line authority, staff author­ity than those that work in that particular (human
is constrained by the fact that it lacks the right resources and administration) department. As
to direct or command; it only advises, recom­ human resources matters are sometimes too
mends and assists. Instead of issuing orders, staff complex to be handled by other departments in
authority operates by planning, thinking, study­ addition to their main functions, the author­ity
ing, suggesting, persuading, selling ideas, rec­ and expertise of the human resources and adminis­
ommending, informing, etc. The main distinctions tration department are usually relied upon.
between line authority and staff authority are
shown in Table 6.1.

Table 6.1 Main distinctions between line

authority and staff authority

Line Manager (and authority) Staff Manager (and authority)

Directs subordinates Assists
Bears final responsibility Renders services
Trains subordinates Possesses special expertise
Employs sanctions Lacks ability to command
Commands Investigates and examines
Uses veto power Helps in solving special problems
Delegates authority Supports line activities

56
Functional authority authority enables a specialist (e.g., in ac­counting,
legal and human resources departments), to give
Functional authority, like staff authority, de­ binding directives to those in other depart­ments
scribes the authority of officers in a business that (or sections) of the organisation.
provide specialist advice and assistance to other The flow of line authority and functional
departments in the organisation. But, unlike staff au­thority is illustrated in Fig. 6.5. In the figure,
authority, functional authority confers on the it can be seen that the production director has
authority holder the right to command in respect line authority over the manufacturing manager
of those matters relating to that prescribed func­ and the production planning & control manager.
tion. In respect of this ability to command, func­ Similarly, the finance director has line authority
tional authority resembles line authority. But, over the chief accountants in the same way that
again, unlike staff authority, functional author­ity the human resources director has authority
is limited to a particular area; its scope is not as over the human resources managers. On the
wide as that of line authority. other hand, the fi­nance director has functional
Functional authority is exercised by manag­ers authority over the production director (who is
(or those in charge) of designated staff func­tions his co-director, peer or colleague). For example,
not only over other managers, but also over their the finance director can insist or instruct that
own subordinates. In other words, func­tional the production depart­ment adhere to certain

Managing Director

Company Secretary

Production Director Finance Director Human Resources

Director

Manufacturing Production Planning &

Manager Control Manager

Chief Accountant Chief Accountant

Represents Line Authority

Represents Functional Authority

Fig. 6.5 Line authority and functional authority

57
financial procedures. The finance director can formed by staff departments involve functional
even bypass the production director and issue authority. Some services are rendered by staff
such instructions directly to the subordinates of departments in the form of advisory services
the production director (pro­duction planning without any authority to command whatsoever.
& control manager in the dia­gram). As we have For example, the human resources department
earlier indicated, the func­tional authority of the may as­sist other departments in recruiting staff
finance director in our example is limited to his just as the finance department can provide
specialist area, i.e., on matters relating to finance. financial assistance to other departments. In
Because the produc­tion department performs such cases, the human resources and finance
line functions, it has no functional authority over departments have no authority to command over
other departments. As shown in the diagram, the the recipients of their advice.
finance director can exercise similar functional
authority over the human resources director
and his subordinates, e.g. on matters relating
Inter-and
to wage payments. Although it is not shown in intra-departmental
the diagram, the human resources di­rector, too,
can exercise functional authority over both the
communication
production director and the finance di­rector, e.g.,
on employment, discipline, and ter­mination of Communication media
appointments of the employees in the production
and finance departments. The communication media within a business
From the above discussion, it is obvious that organisation could be written or oral.
the line authority which a boss has over his sub­
ordinates could be limited by functional author­ity
Written media
from outside the department.
These consist of letters, memos, computer print­
It should be noted that not all the roles per­
outs, reports, etc. Communication in writing has

Fig. 6.6 Document files (written communication)

58
an advantage of providing a permanent record. and disadvantages of written media, except that
In addition, the person sending out the commu­ the messages now move faster than in the case
nication has a relatively ample chance to think of written media, i.e., assuming the computer
over his message and make necessary corrections network does not break down and there is
before the message is dispatched. However, writ­ electricity supply.
ten communication is often more costly than oral
communication. It is also liable to misinterpre­
tation as there is little or no opportunity for the Gestures and actions
receiver to ask questions on any aspect that ap­ It is often said that ‘action speaks louder than
pears ambiguous. In addition, written commu­ words’. The same can be said of gestures also.
nication usually takes a longer time for action
on it to be effected. Again, it sometimes does not
adequately convey some of the moods and emo­ Flow of communication
tions of the parties that are communicating, such
as their gestures and facial expressions. The flow of communication in an organisation can
be vertical or intra-departmental communication,
Oral media which can, in turn, be either downward or
These consist of face-to-face discussion, meetings upward.
and telephone conversations. The advantages of 1 Downward communication. These consist
oral media of communication are the same as the of messages sent by manage­ment and
disadvantages of the written media, in the same various superiors in the form of poli­
way that the disadvantages of the oral media are cies, plans, instructions, queries, etc. to
the advantages of the written media which we their sub­ordinates. The media for such
have earlier seen. communications can be briefing groups,
staff meetings, bulletins, memos, notices,
circulars, etc.
Electronic media
2 Upward communication. These
These consist of e-mail messages, particularly
consist of the messages passed by the
over the intranet. These have the advantages

Fig. 6.7 Electronic media

59
 subordinates in the form of suggestions,
Multiple choice questions
comments, complaints, etc. to their
1 Which of the following is not a feature of a
immediate bosses or to management. The
bureaucracy?
media for upward communi­cation could be
A Pre-occupation with profit-making
through participation in joint consultation
B An arrangement of authority and
committees, suggestion box arrangement,
levels of organisation in the form of a
trade unions, staff meetings, etc.
hierarchy
There is also lateral or inter-departmental
C Specialisation of functions and
communication, which serves to harmonise the
responsibility
policies of the various departments and units
D Appointment to various offices on
in an organisation. The form of such horizontal
grounds of technical competence
communication may be inter-departmental
E Distinction between official positions
committees, coordinating committees, board
and holders of those positions.
meetings, memos, etc.
2 Which of the following are the features of a
high degree of decentralisation?
A Alarger number of decisions are taken at
Revision questions the lower levels of the management
hierarchy.
B A greater scope of decisions is made
Essay questions
down the management hierarchy.
1 Distinguish between decentralisation and
C There is less vetting and checking of
delegation of authority. What are the
deci­sions.
likely advantages and disadvantages of
D a and c.
delegation of authority?
E a, b, and c.
2 Distinguish between power, authority and
3 Which of the following statements is
re­sponsibility.
correct?
3 What do you understand by the term ‘span
A Functional organisation structure
of control’? What are the likely factors
refers to the grouping of activities in
that may determine the span of control in
an organisation in ac­cordance with
an or­ganisation?
the functions performed.
4 What is the relationship between span of
B Functional organisation structure
con­trol and organisation levels? Discuss
refers to the grouping of activities in
the advantages of:
an organisation such that each product
a) Wide span of control
group is under a separate primary
b) Tall organisation structure
department.
5 Write short notes with appropriate organisa­
C Product-based organisation structure
tion charts on:
refers to the grouping of activities in
a) Functional or occupational
an organisation in ac­cordance with
organisation structure
the functions performed.
b) Product-based organisation structure
D Product-based organisation structure
c) Geographically-based organisation
refers to the grouping of activities in
structure
an organisation such that each product
6 Distinguish between staff authority, line au­
group is under a separate primary
thority, and functional authority.
department.
7 Discuss the forms which inter-departmental
E a and d.
and intra-departmental communication can
4 Unlike line authority, staff authority
take in a business organisation.
A assists.
B renders services.
C employs sanctions.

60
 D does a and b.
E does b and c.
5 Communication media within an
organisation excludes
A written media.
B oral media.
C radio and television broadcasts.
D nationwide newspaper announce-
ments.
E c and d.

61
 Chapter 7

Introduction to business
management
Business: Its resources and version of input into output. We can say that a
business is an open system because it interacts
objectives with other systems in its envi­ronment such as
government, customers and suppliers. On the
Meaning of business other hand, a system that does not interact with
its environment is called a closed system, e.g., a
The word business can have several meanings, prison or a monastery, each of which is more or
depending on the context of its usage. For ex­ less a confinement or seclusion.
ample, it can be used in a wide sense to refer to
any productive activity, whether undertaken by Business resources
the private sector or the public sector. In a nar­ These are the various kinds of input that go into the
row sense, on the other hand, it refers to com­ production process. Unlike the different kinds of
mercial activities alone. Another common way of output that are discharged into the environment,
looking at the term, business, is to view it as any input is obtained from the environment. As we
productive activity undertaken for the pur­pose can see in Fig. 7.1, business resources can be
of making a profit. This view of business, which divided into the following:
is the one that is applicable and relevant to our 1 People. These are human resources made
discussion in this chapter, excludes many public up of workers and entrepreneurs (including
enterprises, cooperatives and other non­-profit managers in our context).
organisations. Business, in this context, refers to 2 Money or finance. This refers to financial
sole proprietorships, partnerships and joint stock capi­tal.
company undertakings. 3 Materials. These refer to other forms of capi­
tal such as raw materials and fixed assets.
4 Opportunities. These are miscellaneous
Business systems and resources advantages that are offered by the
environment of the business and which
The business as an open system the business could utilise. An example is
A system is a collection of interrelated compo­ the invention of a new production method
nents. For example, the human body is a system which a business could adopt. Another
consisting of bones, flesh, etc., all of which inter­ example is where govern­ment introduces
relate or interact with one another. In the same a new restrictive policy on imports which
sense, a business consists of interrelated compo­ could reduce foreign compe­tition that the
nents like production, marketing and financial business had been facing. Opportunities
activities. This is shown in Fig. 7.1. also refer to the goodwill and reputation
Like any other system, the business system that the business already has in the eyes of
can be divided into three parts, namely input, various stakeholders (i.e., various elements
processing, and output. Those things that go into in its environment), especially customers.
the production process are called input, while
those things that emerge from there are called
output. Processing consists of the actual con­

62
 Environment

INPUT OUTPUT
People Conversion Goods
Money or finance OR Services
Materials Processing Waste
Environment Environment
Opportunities

Environment
Fig. 7.1 The business system

Business objectives 6 Social responsibility. This has to do with the

impact that a business is able to make on
The following are among the main objectives that the society in which it exists. Examples are
a business is likely to pursue: positive impacts like employment generation
1 Survival. One outstanding objective of any and revenue generation to the gov­ernment,
business is to be able to continue in existence. as well as negative impacts like pollu­tion of
Indeed, any other objective can be regarded the environment. A business should strive
as secondary or sub­ordinate to survival. to make maximum positive impacts and
2 Profitability. It used to be thought that a mini­mum negative impacts.
business had the ob­jective of maximising 7 Others. Some other objectives include
profits, i.e., making as much profit as increase in pro­ductivity, improved financial
possible, even if the result of this would and managerial resources, and expansion of
be injurious to employees, customers, and activities into other foreign and/or domestic
society at large. However, this view hardly markets.
prevails any longer. All that a business is
now assumed to aim at is to make just the Conflict of objectives
profit that would be enough for it to survive,
to finance growth, and to satisfy or appease
In practice, some of the objectives we have just
the proprietors, e.g. sharehold­ers.
seen do conflict with one another, in that the
3 Growth. A business should aspire to grow.
achievement of one negates the achievement of
The measures of growth include increase
some others. For example, a business that pur­
in sales, increase in total assets (or balance
sues the objective of social responsibility would
sheet size), and increase in employment.
likely have to sacrifice its profit objective to some
4 Market share. A business should strive not
extent. So also might the objective of mass pro­
to be beaten by its rivals or competitors. A
duction conflict with the objective of producing
greater share of the market, as measured
quality goods.
by the volume of sales in relation to the
Another form of conflict in objectives is the
total sales by all the competitors, increases
one that is likely to exist between the goals or
the status or prestige of the business and
objectives of a business as a whole, and those of
its management, and enables it to exercise
individual employees and managers engaged in
influence in the market where its sells
the business. For example, a manager may be
its products, including intimidating its
pursuing his own objective of getting promoted
competitors.
very fast, getting rich or becoming very popular,
5 Innovation. Similarly, businesses like to lead
and this might conflict with the attainment of,
in discovering new production methods. As
say, the profit objective of the business.
a result, many busi­nesses spend heavily on
research and develop­ment (R & D).

63
Management by objectives do one thing and abstain from doing another.
Such a situation enables the commitment of the
employees to be gained. Various ways by which
Management by objectives (MBO) is a managers can motivate their subordinates in­clude
management style that has the effect of threats of dismissal, giving of incentives like pay
harmonising or reconciling the objectives of a increase and bonus, guiding and sup­porting them,
business with those of the in­dividuals in the paying more attention to their welfare and needs,
business. as well as delegating of responsibility and giving
of some autonomy to the subordinates. These are
Management of business likely to compel or en­courage employees to give
their commitment to the business.
Definition
Control
Control is the act of measuring the progress
Many definitions of management exist. One of made in the process of plan implementation, so
these sees management as the process of plan­ning, as to be able to make corrections where it seems
coordination and organisation, motivation and that the plan might not be fulfilled. Such control
control. This definition will suffice for the scope is made easy through the establishment of stand­
of this chapter. It should be noted, how­ever, that ards of performance. Actual performance is then
management may also refer to those who perform measured and compared with earlier-set stand­
managerial functions (instead of the process by ards. If the standards are not being met, appro­
which the functions are performed). It is these priate corrective actions are then taken.
managerial functions that we shall now discuss.
Administration and management
Functions of management
Usually, administration and management are
From the definition of management given above, used as if they mean the same thing. However,
the following four functions of management can it is sometimes the practice nowadays to distin­
be isolated, namely planning, coordination and guish between the two. In this modern sense,
organisation, motivation, and control. We shall administration is reserved for just one aspect of
now examine each of these functions. management, namely the act of developing and
maintaining business procedures. In other words,
Planning administration is an aspect of coordina­tion which,
This consists of setting the objectives of a busi­ness in turn, is an aspect of management.
and outlining the appropriate means or methods
through which the objectives are to be attained.
Management hierarchy
Coordination and organisation
These two words are similar and are often used Management takes place at all levels of an or­
interchangeably. They refer to the process of com­ ganisation. It is not confined to those who are
bining human, material (including financial) and known as directors or managers. It also applies to
other resources in implementing the plans of a the duties performed by employees like sec­tional
business. Specifically, coordination and organi­ heads, foremen, supervisors, chief clerks, etc.
sation refer to the grouping of activities, assigning Broadly, levels of management can be divided
to people the roles that emanate from the activities into three as follows:
as well as the responsibility for achiev­ing results,
and devising the procedure for work­ing. Top management
This level of management is responsible for
Motivation stra­tegic or important policies, e.g., long-term
This has to do with getting people to willingly plan­ning, acquisition of, and merger with, other

64
Fig. 7.2 A board meeting

busi­nesses, appointment of middle management the company secretary is also a member of the
members, diversification into other activities, and top management cadre. He is in charge of the
liaison with top government officials. Top man­ general administration of the company. Some­
agement is especially concerned with the envi­ times, he even combines the post of the director of
ronment of the business, e.g., changes in govern­ administration with his company secretary­ship.
ment policies, the activities of business rivals, and He is also the secretary to the Board of Di­rectors.
the state of the economy. Two things should be noted here. First, not all
In a limited liability company, this level of those that are styled as directors are always Board
man­agement is usually referred to as the Board members. This means that some very junior
of Di­rectors, which consists of top (and probably, executive directors may not be eligible to attend
all) company directors. While the Board is headed Board meetings. Second, not all directors are
by a chairman, the managing director sees to the executive (i.e., full-time) directors. Some are part-
implementation of the policies of the Board. time di­rectors. Part-time directors do not head any
Essentially, as far as the day-to-day running de­partment in the company as they do not devote
of a company is concerned, the chairman is a their full time to the management of the busi­ness.
fig­urehead whose role is to chair the Board and All they need do is to attend Board meet­ings and
shareholders’ meetings. The managing director, receive only token fees as their remu­nerations for
on the other hand, is the executive head (i.e., this, as opposed to relatively big re­munerations
the chief executive) and other directors report to received by full-time directors. Logically, part-
him. In many cases, however, especially in small time directors must be Board members. Similarly,
com­panies, the two posts are vested in a single the managing director must not be a part-time
indi­vidual who is referred to as the chairman and director. On the other hand, a chairman who is
managing director. In addition to the directors, not the managing director is most likely to be a

65
part-time director. (i.e., a further division of the sub-division), etc.
In our subsequent discussions in this chap­ter The terms used in describing a department (i.e.,
(just as in the previous chapter), our reference primary department), sub-department, and sub-
to ‘director’ is pre­sumed to mean an executive sub-department vary from one organisation to
director alone. the other. So, to avoid confusion, we shall retain
the word ‘department’ and ‘sub-department’ in
Middle or tactical level management our subsequent discussions in describing primary
This level of management is responsible for and secondary departments respec­tively.
implementing the policy formulated by top
management. It is often responsible for junior Position titles
staff appointments and implementation of This refers to the titles or designations given to
policies on production, marketing, sales, etc. In various office holders. Such designations vary
a fairly large company, middle-level manage­ from one organisation to another. The overall boss
ment members are often designated as manag­ers of an organisation, who, as we have seen, has the
or controllers. Otherwise, they can bear vari­ous generic name of chief executive (or chief executive
titles like supervisors, chief accountants, and officer, CEO), is called several specific names. In
chief purchasing officers. limited liability com­panies and other incorporated
business organi­sations, the chief executive is
Operational management often called man­aging director, general manager,
This level deals with the day-to-day operations president (especially, in countries like the US), etc.
or activities of a business. It normally imple­ments The titular (i.e. ceremonial) head is often called
the middle management policies. Members of this the chairman. The departmental heads may be
management cadre bear such titles as foremen, referred to as directors, managers, controllers,
supervisors and chief clerks. etc. The sub-departmental heads, on the other
hand, may be called foremen, supervisors, su­
perintendents, managers, etc. The variation in the
Organisation chart, position designations used for management posts at lower
titles and departments in a levels (i.e., below the sub-departmental level) is
business even much greater.
Again, in order to avoid confusion in our sub­
sequent discussions, we shall use the expression
Departmentalisation ‘managing director’ in describing the chief ex­
This term refers to the division of a business ecutive, ‘director’ or ‘senior executive’ in describ­
or­ganisation into various segments, with each ing a departmental head, and ‘manager’ in de­
seg­ment being generally called a department. scribing a sub-departmental head.
The division of a business into departments is
also known as horizontal segmentation. Each Vertical segmentation
department is assigned a specialised set of tasks. This refers to how the various units in an organi­
Usu­ally, all the tasks (e.g., production, administra­ sation are placed in a hierarchy, i.e., with some
tion, finance and marketing) that are being units being placed above some others in terms of
performed in a business would be divided into authority. Those units that are placed below are
groups, with each group being allocated to each subordinate and responsible to the one placed
horizontal segment or department. ‘Department’ immediately above which, in turn, is subordi­nate
is a generic (i.e., collective) name, which can refer to the one placed higher still, until we get to the
to a division, branch, section, regional unit, sub­ Board of Directors, which is placed highest. As
sidiary, etc. already discussed in the previous chapter, this
A department (sometimes called primary unbroken line of authority from the topmost
department) also normally consists of sub-de­ position to the lowest is called a scalar chain. Fig.
partments or secondary departments, each of 7.3 illustrates vertical segmentation, while the
which, in turn, comprises sub-sub-departments scalar chain is illustrated in Fig. 7.4.

66
 Chief Executive Officer or
Managing Director
A
Strategic
Senior Executive Officers or
Management
B Departmental Heads or Director

Tactical or Middle
Management Sub-Departmental Heads
C

Operational or
Supervisory D Heads of
Management Lower Units

Workforce

Fig. 7.3 Vertical segmentation-Organisational pyramid

Board of Directors

Chief Executive Officer

Senior Executives

Middle Level Management

Supervisory Management

Non-Managerial Employees or Workforce

Fig. 7.4 Scalar chain

67
Organisation chart 3 A properly constructed organisation
chart can serve to highlight any strengths
and weaknesses in the structure of
This is a representation, in the form of a diagram, an organisation. It therefore facilitates
of the formal organisational structure. Such a organisational changes.
diagram shows the position titles and the rela­ However, the use of organisation charts has
tionships among them. It shows both the verti­ some disadvantages, some of which are as
cal and horizontal segmentations in an organi­ follows:
sation as well as the lines of communication, 1 It presents the organisational structure only
the reporting responsibility, and the network of at a point in time. This means that there is
au­thority. A typical organisation chart is shown always the need to prepare new charts in
in Fig. 7.5. or­der to properly reflect the dynamic and
Some organisations, especially business en­ ever-changing structure of an organisation.
terprises, usually prepare organisation charts This process, however, is not only
either for the organisation as a whole, or only expensive, but is also very difficult. The
for some segments (of the organisation). The result is that since an organisation chart
advan­tages that may be derived from having an cannot be continuously updated, it does
or­ganisation chart include the following: not always properly or cor­rectly reflect the
1 The process of constructing an organisation organisational structure.
chart makes the management conscious of 2 An organisation chart often causes unpleas­
the formal relationships among the various ant feelings to those who are greatly
sec­tions of the organisation and clarify any concerned about their relatively low position
vague relationships that might be detected. and status.
2 Once an organisation chart has been con­ 3 It only shows the formal relationships
structed, it becomes an easy and quick among various positions. It fails to indicate
means of acquainting new employees and actual re­lationships—whether formal or
outsiders with the nature and structure of informal.
the organisation.

Managing Director
Company Secretary

Human Resources &

Administration Director
Production Director Corporate Planning & 1 Human Resources Manager
1 Manufacturing Management Services Director 2 Administration Manager
Manager 1 Corporate Planning Manager 3 Public Relations Manager
2 Technical Manager 2 Management Services Manager 4 Legal officer
3 Production Planning Research &
& Control Manager Development
Director
1 Research Manager
Marketing Director 2 Development Manager
1 Sales Manager
2 Market Research Manager
3 Advertising Manager
Finance Director
1 Financial Accounting Controller
2 Management Accounting Controller
3 Cashier
Fig. 7.5 An organisation chart

68
Functions of major departments by the manu­facturing manager. Under this
in a business organisation sub-depart­ment, there are normally some
sections (e.g., preparation and finishing
sections) each of which may be headed by a
There is some diversity as regards the number supervisor or fore­man.
of departments and their functions in a business 2 Technical. This is concerned with the
organisation. As a result, what is discussed be­low engineering aspects of production, and
is just a likely situation in a limited liability com­ is headed by the technical manager,
pany. This means that many companies may not who is often desig­nated as chief engineer.
precisely conform to it. It should also be noted that This sub-department designs the varieties
the departments in other forms of busi­ness units of goods to be produced in response to
such as partnerships and sole proprietorships customers’ needs. It is likely to consist of
would greatly differ because they are often small various sections, each being headed by a
in size and the proprietors often constitute the supervisor.
managers, so that there are no directors in the 3 Production planning and control. This is respon­
legal sense of the word. (Our discussion is based sible for preparing production programmes
on the organisation chart shown in Figure 7.5.) and for ensuring uninterrupted supplies of
human and material resources for the produc­
Production department tion process. In addition, it is concerned with
This department, which is usually headed by the quality control, that is, it ensures that goods
production director, usually consists of three sub- produced are not defective. It is headed
departments as follows: by the production planning and control
1 Manufacturing. This has the work of manager under whom there are usually
manu­facturing as well as maintenance of sectional heads.
manufac­turing equipment, and is headed

Fig. 7.6 A company factory (run by the production department)

69
Marketing department Company Secretary
This is usually headed by the marketing direc­tor The role of this office has been discussed earlier.
and comprises the following sub-depart­ments: Except in very large companies, the company
1 Sales. This deals with actual selling, and secretary is often made the human resources &
often includes distribution as well. It is administration director.
headed by the sales manager under whom
there are likely to be some sectional heads, Corporate planning and management
e.g. sales representatives. services department
2 Market research. This undertakes research or This department usually consists of the follow­ing
fact-finding activities in respect of customers’ sub-departments:
preferences, effectiveness of advertisement, 1 Corporate planning. This is in charge of
etc. It is headed by the market research man­ prepa­ration or formulation of programmes
ager under whom there are some sectional or plans for the company as a whole. It is
heads. headed by the corporate planning manager,
3 Advertising. This undertakes advertising who might also have sectional heads under
and other promotional activities, and is him.
headed by the advertising manager under 2 Management services. This sub-
whom there are likely to be sectional department provides information for the
heads.

Fig. 7.7 A billboard advertisement

70
 use of the vari­ous departments. and consists of the following sub-departments:
Various tasks like systems analysis and 1 Human resources. This is in charge of human
computer applications come under this resources (formerly called personnel) serv­
sub-department. Under the man­agement ices including recruitment, industrial rela­
services manager, who heads the sub- tions, training of workers, discipline, and
department, there are usually some sec­ manpower planning. (The terms human
tional leaders. resources is the recent or modern equivalent
of what used to be referred to as personnel,
Finance department which is now seen as being too narrow and,
The finance department is headed by the finance hence, is gradually falling into disuse.) The
director and usually has the following sub-de­ manager in charge would normally have
partments: such subordinates as recruitment officer,
1 Financial accounting. This is in charge of ac­ staff welfare officer, and industrial relations
counting information that is especially meant officer to assist him.
for outsiders. The head of this sub-depart­ 2 Administration. This is often in charge
ment can be designated financial controller. of the registry (record keeping
Under him, there are sectional heads like and documentation) as well as other
chief accountants or just accountants. establishment mat­ters.
2 Management accounting. This takes care of ac­ 3 Public relations. This undertakes the task of
counting information meant for internal use, enhancing and projecting the image of the
i.e., within the firm. Examples are budget company outside. It assists in making profit­
preparation and control reports. The head able contacts with outsiders who might
may also be designated financial controller, have dealings with the business. The head
with some sectional heads like chief account­ may be called public relations manager or,
ants or just accountants under him. more of­ten, public relations officer (PRO).
3 Treasury. This is in custody of the organisa­ 4 Legal. This provides legal advice to the com­
tion’s funds (i.e., money) and takes responsi­ pany, including its various units. It also rep­
bility for the collection and disbursement resents the company in litigation.
of money. It is headed by the cashier or
treasurer, who is likely to have subordinates
under him.
Business environment and
social responsibility
Research and development department
This department, under the headship of the Nature and types of business
research & development director, may be split
into the following sub-depart­ments:
environment
1 Research. This is responsible for original
in­vestigation for the purpose of gaining As discussed earlier, business can be viewed as
scien­tific information on facts or processes an open system which, therefore, interacts with
that concern the company’s business. its environment. That is, a business has to react
The sub-department may be headed by a or adjust to changes that are occurring outside
research manager. it. A business does this by adjusting its input,
2 Development. This is responsible for the ap­ processes and output as appropriate.
plication of research findings to production. The business environment can be broadly
This too may be headed by a manager who classified into four, namely economic, techno­
would have some subordinates under him. logical, social, and political/legal. Each of these
four classes can also be sub-classified. We shall
Human resources and administration now examine each of them and their constituent
sub-classes.
department.
This department is usually headed by a director

71
Economic environment activities which, in turn, affects other
This consists of those economic factors that af­fect economic forces discussed earlier that affect
the input and output of the business. Im­portant business decisions.
elements of these are as follows: 8 Government economic policies. These can
1 Suppliers. The capital goods as well as be fis­cal policies in the form of changes in
raw materials used in a business are often govern­ment expenditure, taxes and public
pro­cured from suppliers instead of being debt. It can also be in the form of monetary
self-produced. The availability, quality and policy such as changes in money supply,
price of such input that emanates from the changes in the level and composition of
suppli­ers can affect business decisions. credit availabil­ity, and changes in the
2 Present and potential shareholders. These level and structure of interest rates. There
con­stitute the suppliers of ownership are also changes in for­eign exchange rate
capital (i.e., finance) to the business. policy, changes in incomes policy (namely
3 Present and potential lenders. These consist wage freeze, dividend control and price
of the suppliers of borrowed capital (i.e., fi­ control). Other economic policies in­
nance). The availability and types of capital clude nationalisation, commercialisation,
supplied by them, as well as the cost of privatisation, public-private partnership,
capital (i.e., interest rate) charged have a and deregulation.
strong effect on business decisions.
4 Present and potential employees. The
Technological environment
availabil­ity of skilled staff (present and
Technology, in this context, refers to the ways of
potential) as well as their remunerations
doing things, that is, the way by which existing
also constitutes an environment of the
commodities are being produced, distributed
business, as this factor usually affects
and sold. It also refers to the production of new
business decisions.
types of commodities. Some specific examples of
5 Actual and potential customers of the
changes in the technological environment are:
business. These consist of wholesale
1 Greater ease in communication through im­
customers, retail customers, industrial users
provements in transport and telecommuni­
and final consum­ers. The activities of each
cation media.
of these can affect the quality, quantities,
2 Mechanisation (i.e. automation), which
and prices of the goods produced by a
refers to more capital-intensive production
business.
tech­niques. This facilitates division of
6 Competitors. The activities of competitors
labour.
in the financial market, for instance, do
3 The introduction of information technology,
affect the costs, types, and availability of
that is, computers, the Internet, etc. which
finance to a particular business, in the same
have substantially assisted human mental
way that com­petitors in the labour market
abilities and facilitated communication.
influence the wage rates, skill-types, and
the availability of skilled workers. The
competitors in the mar­kets for capital Social environment
goods and raw materials also influence the This is interwoven with the political environ­ment,
availability, types and costs of such goods. which is discussed below. Nevertheless, we can
Of equally important concern to a busi­ness now explain the social environment as con­sisting
are the activities of the competitors in the of social attitudes, beliefs, and values. Ex­amples
market for its products. These affect the of what constitute the social environment of a
quantities, quality and prices of the goods business are:
produced by the business. 1 The attitude of employees to work.
7 Level of economic activities as measured by 2 Religious beliefs which affect, for example,
the GDP. The level of the Gross Domestic the consumption pattern of the
Prod­uct (commonly abbreviated to GDP) is populace.
a measure of the level of domestic economic

72
3 The status of women in relation to that of men
in society and, hence, in the workplace. Social responsibility to society at large
4 Attitude to elders in society. This refers to the public relations activities of a
business, such as:
Political and legal environment 1 Provision of such social amenities as pipe-
This largely has to do with the activities of gov­ borne water and health centres.
ernment. The main elements in this environment 2 Donations to hospitals, motherless baby
include the following: homes and charitable organisations.
1 The political system or ideology—whether 3 Scholarship awards.
there is capitalism, mixed economy, 4 Sponsoring of educative programmes on
socialism, etc. This affects the degree of radio and television.
government in­tervention in business 5 Sponsoring of beauty contests, quiz
activities. competitions and sporting activities.
2 The type of government, e.g.,whether mili­ 6 Sponsoring of research activities in academic
tary or civilian. and research institutions.
3 Foreign policy, which determines which 7 Control of environmental pollution.
countries a business can sell to and procure 8 Reduction of unemployment through
supplies from. the use of labour-intensive methods of
4 Various economic policies of the production as much as feasible.
government as mentioned earlier, namely In each of these cases, the business normally
fiscal, monetary, ex­change rate and incomes strives to get its social responsibility activities
policy, among others. Various laws, e.g., widely publicised in order to ‘blow its trumpet’ or
on consumer protection, advertisement, showcase itself as being socially responsible. So,
expatriate employment quotas, foreign it is usually a part of public relations and, hence,
remittance, and profit repatriation. overall marketing programme, as discussed in
5 Various government decisions, some the next chapter on marketing.
of which are designed to provide
incentives to businesses or to dissuade Social responsibility to suppliers
businesses from taking some actions. Such Many businesses endeavour to pay their suppliers
decisions include government tax reliefs promptly.
and subsidies.
Social responsibility to lenders
Social responsibility of a Good businesses endeavour to meet their interest
business (i.e., Corporate social payments and capital repayments when they fall
due.
responsibility, CSR)
Social responsibility to proprietors
As we have seen earlier, social responsibility is (shareholders)
a common objective of many businesses. It is an A business should earn satisfactory returns,
attempt to cater for the need of the environment i.e., profits for its shareholders, and ensure
in which they operate. Social responsibility is that proprietors’ funds are safely invested as
therefore the series of activities consciously and reasonably as possible.
deliberately undertaken by a business in order to
impress upon people that it is making a positive
impact on society, especially the segment that
Social responsibility to employees
A business should pay fair remuneration
constitutes its environment.
to workers, embark on employees’ welfare
Social responsibility activities are usually seen
programmes, and provide good conditions of
in the following areas:
service generally.

73
Social responsibility to customers Multiple choice questions
Businesses should not provide goods and services 1 The following are business resources:
that would endanger the lives of consumers. Also, A Money or finance
consumers should not be made to pay exorbitant B People
prices. C Competitors
D a&b
Social responsibility to government E a, b & c
Businesses should endeavour to: 2 Common business objectives include:
1 Comply with the laws of the land. A Profitability
2 Generate revenue (in the form of taxes) to B Survival
the government, where possible. C Connection with political leaders
3 Earn foreign exchange by producing for D a&b
exports (if possible) and also save foreign E a, b &c
change by using domestic (i.e., local) input 3 Which of the following is not a function of
(as opposed to foreign input), as much management?
as possible. A Planning
B Control
Revision questions C Motivation
D Purchase of stationery for use in the
business
Essay questions E Coordination.
1 Discuss your understanding of a business 4 In a typical manufacturing company, the
system and examine what the likely production department is responsible for
objectives of such a system are. A manufacturing.
2 What do you understand by management? B production planning and control.
Explain the main functions that C human resources management.
management performs. D sourcing of funds for carrying out
3 With a suitable organisation chart, discuss operations.
the roles of: E. a & b only.
a) Top level management; 5 The economic environment of a business
b) Tactical management; and includes
c) Operational management. A suppliers.
4 State as clearly as you can the functions of B competitors.
the following divisions in a typical limited C present and potential lenders.
liability company: D present and potential employees.
a) Marketing E all of the above.
b) Production
c) Finance
d) Personnel and general administration
e) Corporate planning and management
services
f) Research and Development
5 What do you understand by the business
en­vironment? Discuss the types that
exist.
6 Discuss how businesses could cater for the
needs of their environment through
social re­sponsibility policies.

74
 Chapter 8

Introduction to marketing
Nature of marketing In this exciting age of change, marketing
is the beating heart of many operations. It
must be considered a principal reason for
Several definitions of marketing have been given
corporate existence. The modern concept
by many experts in marketing. One of such
of marketing recognises its role as a direct
definitions has been provided by the Institute of
contributor to profits, as well as sale
Marketing in the UK as follows:
volume.
Marketing is the management function
No longer can a company figure out
which organises and directs all those
how many widgets (or units of output) it can
business activities involved in assessing
produce and then go ahead and turn them
and converting customers’ purchasing
out. To endure in this highly competitive
power into effective demand for a specific
change-infested market, a company must
product or service and moving the product
first determine what it can sell, how much it
or service to the final consumer so as to a
can sell, and what approaches must be used
achieve the profit target or other objectives
to entice the wary customer. The President
of the company.
[or Managing Director] cannot plan; the
From this definition, it can be seen that:
Production Manager cannot manage; the
1 Marketing can be viewed as a management
Purchasing Agent cannot purchase; the
function.
Chief Financial Officer cannot budget; the
2 The management function of marketing
Engineer and Designer cannot design until
acts upon the business activities that intend
the basic market determinants have been
to convert customers’ ability to buy (i.e.,
made.
purchasing power) into effective demand
Thus, the roles of marketing in an organisation
(which is willingness coupled with ability
can be spelt out as follows:
to buy). In other words, marketingis seen as
1 A starting point of business decision and
a method of making those who can afford to
planning. The budget or plan of a business
buy interested or willing in making actual
is based on and thus affected by what it can
purchases.
sell or market. Thus, marketing decisions
3 Marketing also involves those business
on the quality, packaging and branding,
activities directed at conveying commodities
distribution, pricing, and promo­tion (as
to the buyers. That is, distribution is an
will be explained later) serve to deter­mine
aspect of marketing.
purchasing, financing, employment, and
other decisions to be made by a business
Functions and roles of organisation.
marketing in a business 2 A means of accomplishing most busi­ness goals.
Marketing is very important for a business in
accomplishing its objectives. The following
These concern the importance of marketing to are the ways in which this is done in respect
business enterprises, and could be more easily of some objectives:
understood by considering the following extract a) Survival. A good marketing strategy
from a statement by the American National is an important means by which a
Association of Manufacturers: business can sur­vive, especially when
there is a situation of abundance
75
 and alternatives facing the poten­tial Training grounds for entrepreneurial
buyers. If a business produces what talents
po­tential buyers do not require, the Marketing activities nurture a merchant class in
business would be ruined, as there the economy. The merchant class can constitute a
would be little or no market for such pool of entrepreneurs that are available for other
products. (non-marketing) activities to utilise.
b) Profit goal. Since profits derive from
the value of sales, the marketing Export promotion
components, espe­cially the product Successful marketing activities can enable
prices, are a main determi­nant of domestic business enterprises to compete
business profit. effectively in the world market. Examples of
c) Maintenance or improvement of market such marketing activities include advice on
share. Marketing strategy (in the form the production of quality products, personal
of pricing, product quality, promotion, selling, and advertising (including organisation
etc.) constitutes an effective way of of international trade fairs and exhibitions
launching an attack in the competitor’s domestically and abroad).
domain as well as a way of warding
off any incursions by competi­tors. Import substitution
d) Diversification into new markets. Strong marketing activities can also enable
Marketing has an important role to domestic business enterprises to replace some
play in the establishment of new lines foreign suppliers, where such foreign suppliers
of production. are overtaken in terms of product quality,
e) Growth. The growth objective, promotional campaigns, etc.
especially growth in sales value (i.e.,
revenue), is mainly dependent on Overall industrial and commercial
marketing strategies. growth
Since progress of an enterprise depends, in part,
on its marketing effectiveness, marketing can
Importance of marketing to the promote the overall industrial and commercial
economy development of a country and, hence, overall
economic growth and development.
Provision of employment
A sizeable proportion of the labour force is en­ Marketing concept
gaged in marketing activities. This includes those
employed in retailing, wholesaling, transporta­
tion, warehousing, etc., as well as those em­ployed
Orientation in marketing
in the marketing departments of various business Orientation in marketing refers to the various
enterprises. By this, it also provides a source of perspectives, philosophy or ideas from which
income to many. a business may view its existing and potential
customers, i.e., the various assumptions about
Promotion of large-scale production and customers on which a business might base its
economies of scale decisions. Principal among these perspectives are
Marketing serves to increase the market size, the following:
thereby enhancing large-scale production
which, in turn, is likely to result in economies Production orientation
of scale (which are the sum total of advantages This refers to the viewing of customers from
of large scale production, after netting off any the production perspective. In other words,
disadvantages). businesses that have this orientation feel that it is
the efficiency in their production and distribution
that would attract customers to them, especially
as the resulting costs passed to the customers

76
would most likely be low. This orientation would It is this perspective that often prompts mar­
be correct when lower costs (and, hence, prices) keting to be defined in some literature as ‘the
are the main factors that attract customers’ whole business seen from the point of view of
patronage. its final result, that is, from the customer’s point
of view’. That is, the satisfaction of consumers’
Product orientation wishes or wants is regarded as the sole justifica­
This can also be referred to as quality orientation, tion for a firm’s existence. It takes the view that
since it stems from the belief by a business that ‘The customer is king’ and that a business ‘will
the best way to enter into customers’ hearts is to not be satisfied until its customers are satisfied.’
improve upon the quality of the goods being of­ Business organisations that subscribe to the
fered to the market. Thus, a business that views marketing concept not only make customers’
customers from the perspective of being quality wants the springboard or the basis of their poli­
conscious would focus attention on the quality cies, they also see marketing as an activity that
of the goods produced. This orientation would permeates the whole organisation and not the
be in the right direction only if the business can marketing department alone. In other words, the
precisely know what customers’ needs are. Oth­ marketing concept implies that marketing activi­
erwise, high quality products may be produced ties should be performed by the finance, produc­
for only a few customers. tion, personnel and other departments, in addi­
tion to the marketing department.
However, the marketing concept may be ei­
Sales orientation
ther inapplicable or unnecessary in the follow­ing
This orientation stems from the belief by some
cases:
businesses that the best way to attract custom­ers’
1 Sellers’ market. Where there exists scarcity in
patronage is by applying persuasion on them.
the market, the sellers have little or no urge
Such a business would therefore focus on the
to please the buyers beyond a certain mini­
skill of selling through persuasion. However,
mum extent.
this view would be correct only if customers are
2 Monopoly. Where there is a single producer,
gullible, and can be persuaded to buy irrespec­
i.e., monopolist, such as a cartel or govern­
tive of whether or not they actually like or need
ment monopoly (e.g., PHCN for a long
the commodities.
time), there exists scope for the producer not
to exert itself a lot to please the consumer.
Market orientation 3 Other market imperfections. Factors like igno­
Also known as the marketing concept, this ori­ rance on the part of the buyer enable pro­
entation contends that customers’ patronage can ducers to deceive the buyers and, especially,
be secured by producing what they need and want. refrain from seeing customers as ‘kings’ and
This orientation, which focuses on the needs and still survive in the business.
wants of customers, is likely to be more effective
on most occasions than other orientations. As a
result, it is the marketing con­cept that we will
now discuss in some detail. The marketing mix—An
overview
Meaning of marketing concept
Meaning of marketing mix
The marketing concept takes the view that the
satisfaction of customers’ wants constitutes the A combination of those variables (i.e., factors)
main justification for the existence of a business which a marketer can use as a strategy is called
organisation. As a result, the efforts of the busi­ the marketing mix. That is, a marketing mix is the
ness should be directed at identifying what cus­ combination of variables offered to the mar­ket at a
tomers like or need and how best to satisfy such particular time. It is the characteristics or features
identified needs. of a product that are offered to the market. Such

77
characteristics can be in the form of the product, costly, soft-texture and highly fanciful textile
price, place and promotion. The importance of materials to the market meant for high-income
time element should be noted, as the group of earners. This would then constitute market seg­
variables offered to the market de­pends on the mentation.
point in time that is being consid­ered. In this way, market segmentation enables the
seller to make that appropriate set of product
Types of marketing mix mix, product quality, price, advertisement, sales
promotion, etc. to reach various categories of
customers.
Each of the product, price, place and promotion
aspects of a marketing mix can be sub-divided
Criteria for market segmentation
further as shown in Fig. 8.1. We will now discuss
The following are the common criteria on which
the various components of the marketing mix as
segmentation can be based:
shown in Fig. 8.1 under the broad classifications
1 Geographical characteristics. These include do­
of product, price, place and promotion. But before
mestic versus foreign sub-markets, regions,
then, let us examine the application of the mar­
cli­mate, and population.
keting mix to market segmentation.
2. Buyer-behaviour. This includes brand prefer­
ence, lifestyle, etc.
Marketing mix and market 3. Demographic characteristics. Examples are
segmentation age, family size, sex, social class, and
occupation.
4. Usage. This refers to such factors as whether
Meaning of market segmentation the market is made up of industrial custom­
Market segmentation refers to the division of a
ers or final consumers.
market into identifiable sub-markets for the pur­
pose of reaching each sub-market with the most
appropriate marketing mix. Difference between market segmenta­tion
Thus, market segmentation arises from the and product differentiation
fact that a given marketing mix is suitable for a Unlike market segmentation, product differen­
particular sub-market (i.e., a buyer-group) but tiation refers to the attempt at creating in the
less suitable for others. Each marketing mix is buyer an awareness of the differences between
then assigned to and matched with the sub-mar­ the products of one business and similar prod­
ket where it is most effective. As an example, a ucts offered by its competitors. The strategy
textile firm may offer cheap, hard-texture and less has the objective of reducing competition. This
fanciful textile materials to the textile sub-market can be accomplished through unique colouring,
meant for low-income earners, while it offers branding, packaging, etc.

Product Promotion
1 Variety 1 Personal selling
2 Quality 2 Advertising (Informative, persuasive, etc.)
3 Branding 3 Sales promotion (free samples, clearance sales, etc.)
4 Labelling 4 Public relations
5 Packaging
6 After-sales services
7 Warranties and guaranties
8 Technical advice
9 Home deliveries, etc

Marketing Mix
(At a point in time)

Price Place (i.e., distribution)

1 Catalogue
1 Channel of distribution
2 Trade discounts
2 Physical distribution
3 Credit terms (including cash discounts)

Fig. 8.1 Ingredients of the marketing mix

78
 buying something a business’s product and also
Market versus marketing, the series of commercial functions involved in
and market research versus transferring goods from the producer to the
marketing research consumer.

Market versus marketing Market research versus marketing

A market is a collection of existing and potential research
buyers and sellers of a product or service. It Research refers to a study or an examination of
may be spread over a local, regional, national or a problem with a view to finding solutions to
international area. It is also thought that marketing the problem. It can also refer to efforts aimed
can be classified according to its characteristics. at a discovery or creation of new knowledge.
For example, we may classify it by products, by The process of research often entails systematic
industry, by localities, etc. Thus, we can speak gathering and analysing of information.
of the automobile market or housing market, Market research refers to the research
which would refer to a collection of existing and (involving gathering and analysing of relevant
potential buyers and sellers of automobiles or data, facts and information) which is carried out
houses respectively. In most cases, a market has a on the market for a specific product in a specific
physical location, as in the case of grocery stores, market, particularly about existing and potential
malls, traditional night markets, etc. But this is customers or consumers (and their preferences),
not necessary, as financial markets (e.g., foreign competitors, industry in general, market trends,
exchange or stock market) are just network price of the product and prices of related
arrangements that link buyers and sellers. Even products. It deals specifically with the gathering
in the ordinary case of commodities, buyers of information about a market’s size, trends and
and sellers meet through e-commerce over the growth. It tries to seek answers to questions like:
Internet to finalise transactions so that, instead who are the players? What’s the competition?
of a marketplace, we now have marketspace, This would enable the business to understand its
alluding to cyberspace, over which a market may target market, and be able forecast or anticipate
be defined. the future size of the market, and anticipate
Marketing, on the other hand, is a set of reactions of competitors.
functions and processes that enable a business Marketing research, on the other hand, is
to serve the market effectively, efficiently the one undertaken by a business to enable it to
and profitably. It is in this connection that the find out best ways to serve existing customers
American Marketing Association has recently and attract new ones through various marketing
defined marketing as strategies, especially the 4 Ps. It is an evaluation
an organisational function and a set of of the company’s marketing process or research
processes for creating, communicating, and about marketing. It has the objective of enabling
delivering value to customers and for managing the company to figure out what’s going on in
customer relationships in ways that benefit the the minds of existing and potential customers
organisation and its stakeholders. of the product, for example, those who buy
Thus, marketing has to do with how to dishwasher soap, and use a lot of psychology to
best meet customers’ needs and communicate try and convince these people that a certain brand
effectively with the targeted group of customers. is much better/safer, even when in reality only
This, in turn, has to do with how to properly use small differences exist. It is to enable a business
the 4 Ps (product, place, physical distribution and to identify the needs and preferences of its target
promotion) in order to compete successfully in customer group, and how best to meet those
the market. In other words, marketing refers to needs.
various methods such as pricing, product design, Marketing research tries to shed light on
advertising, point-of-purchase displays, and direct which product design, pricing strategies, physical
mail, as strategies for serving and communicating distribution and promotion techniques are most
with existing and potential customers. It is the suited to the circumstances of the business. This
process of trying to get people interested in is with a view to providing the facts and direction

79
for a business to make its more important Product
marketing decisions. It tries to provide answers
to such questions as: Who buys what and why?
Where are they located? How often do they buy
Meaning of product as a
and how much do they spend? How sensitive component of the marketing
are they to slight variations in product prices? mix
What types of product design do they prefer?
Its goal is to enable the business to understand
which marketing strategy will work for it best. Product, in our context, refers to a combination
As compared with market research, marketing of benefits offered to final consumers and/or
research may also encompass market research. industrial users. It is a set of tangible features
This means that marketing research is wider than (like physical size) and intangible features (like
market research. packaging, colouring, odour, after-sales service,
manufacturer’s reputation, and distributor’s pres­
tige) that are offered the buyers.
Pull and push promotion
strategies Major forms which a product
can take as part of the
In marketing, a distinction is made between two
promotional strategies called ‘push’ and ‘pull’ marketing mix
ones. In a push strategy, the producer promotes
the product to wholesalers, the wholesalers Variety
promote it to retailers, who, in turn, promote it The variety of products offered by a business is
to consumers. That is, the direction of promotion referred to as the product mix. For example, a tex­
runs from the producer, to the wholesaler, to the tile wholesaling concern may sell men’s clothes
retailer, and, finally, to consumers or buyers. as well as women’s clothes. Both, then, constitute
Personal selling and trade promotions are often the product mix of this business. Product line
used more under this strategy, and the seller directs should, however, be distinguished from prod­uct
these strategies down along the distribution chain mix. A product line is the group of products that
to those involved (wholesalers and/or retailers) are essentially for the same or similar use (e.g.,
to carry the product, to earmark shelves for it, men’s shirts and trousers). In our example, men’s
and/or promote it to final consumers. clothes then constitute a product line, while
A pull strategy, on the other hand, is the one that women’s clothes constitute another product line.
aims directly at stimulating consumer demand, Thus, a product mix is the set (i.e., combination)
resulting in consumers asking their retailers for of various product lines offered for sale by a
the product, the retailer asking the wholesaler, business.
and the wholesaler asking the producer. In other
words, it is the buyers or customers that ‘pull’
the product, instead of the seller ‘pushing’ it Quality
to the buyer along the distribution chain. To This refers to the technical or intrinsic character­
implement this strategy, consumer promotions istics of a product, e.g. durability, possibility of
and advertising, as well as public relations, are breakdown, reliability, and presence or otherwise
the more appropriate promotional tools, as of faults.
these would more effectively build up consumer
demand for the product. Attempts are thus made to Branding
reach consumers directly through advertisement An organisation brands goods by affixing its
and other promotions aimed at them. ‘thumbprint’ and/or ‘signature’ to its products
as an indication of the identity of the organisa­
tion. Such indications of identity may be brand
names, i.e., words, letters or numbers that can be
pronounced. The use of names is what we have

80
just referred to above as the organisation’s ‘sig­ After-sales services
nature’. Alternatively, the indications of identity Under this arrangement, the seller provides serv­
may be brand mark, i.e., symbols, designs, etc. icing and repairing facilities (including spare
The use of brand marks is what we have just re­ parts) for the goods. This is usually peculiar to
ferred to above as the organisation’s ‘thumbprint’. durable goods such as motorcars, refrigerators
Any form of brand, whether name or not, that is and electronic appliances. With after-sales serv­
given legal protection from imitation (i.e., that ices, the subsequent need by the buyer to repair
has been registered with government), is known the goods and replace worn-out parts is catered
as trademark. for and constitutes an important factor often con­
sidered by buyers in making their purchase de­
Labelling cisions.
Labelling is that part of a product that conveys
verbal information about the product. The label Warranties and guarantees
can be in the form of a tag attached to the main These consist of the assertions by the seller that
product, or it can be a part of the package itself the goods being sold are in good condition, as
(discussed below). well as his undertaking to compensate the buyer
should there be any defects in the goods. Thus,
the buyer is assured that the goods are in good
Packaging condition, and that any defects would be made
Packaging serves to protect goods, especially good by the seller. Examples of warranties and
delicate materials, contaminable goods, etc. It guarantees are those used by mail order firms,
also constitutes a device through which brand­ whereby dissatisfied customers are allowed to
ing is effected. This is in addition to the pleasant return the goods at the seller’s expense. Simi­larly,
appearance that it may give to products. dealers in motorcars sometimes give war­ranties
to replace faulty parts.

Fig. 8.2 Various product labels

81
Technical advice Major factors that may affect
In this case, the seller provides the customer with
advice on how to use and maintain the goods. pricing policy
For example, sellers of computers often provide
training facilities to their customers. Costs
Changes in the costs of production are likely to
Home deliveries change the prices of products in the same direc­
Some sellers assist their customers in conveying tion.
the goods to the place where the goods would
be used. Such places are usually the customers’ Demand
homes (in the case of consumer goods). An increase in demand usually gives the seller a
greater scope to increase the price, while a fall in
demand usually has the opposite effect.
Price
Nature of price and pricing Sensitivity of purchase decisions to
objectives changes in price
In Economics language, this is referred to as
Meaning of price the degree of price elasticity of demand, which
Price is the amount of money paid in order to is an indication of responsiveness of quantity
acquire a product. As a component of the mar­ demanded to price changes. In a situa­tion where
keting mix, pricing policy can be in the form of the quantity that customers purchase is not
changes in the basic (i.e., catalogue) price, trade sensitive to changes in price (i.e., where demand
discounts and/or cash discounts. is not price elastic), it normally pays a business
to raise its price. This will not only in­crease the
Pricing objectives total revenue, it will also increase the profit. This
The goal of pricing policies pursued by a busi­ness is because the increase in total revenue, i.e., total
often consists of a combination of the fol­lowing: sales, and an in­crease in price is a function of
1 To ‘maximise’ profit, i.e., to attain a satisfac­ price elasticity of demand.
tory profit performance.
2 To achieve a target rate of return on capital Need to avoid price fluctuations
employed and/or a target rate to return on Businesses do not often like frequent changes in
sale (i.e., turnover). This is related to the the prices of their goods, as this could adversely
profit motive just mentioned above. affect their reputation or goodwill. It could also
3 To stabilise prices, i.e., to contain price fluc­ result in price wars among rivals. As a result,
tuations. temporary changes in costs and other factors are
4 To promote growth—especially of sales. not often reflected in the prices being quoted.
5 To sustain or improve upon an existing mar­
ket share. New markets
6 To cope with competition. This is related to The decision on what pricing policies to pursue
the market share objective just mentioned often depends on whether or not a business is
above. producing for new markets. Unusually low or
7 To launch new product lines, i.e., to diversify even high prices may be charged when a busi­ness
into new markets. is entering a particular market for the first time
(as discussed later).

Goals being pursued

A business that aspires to sell as much as possi­ble
in order to maintain a target market share is likely

82
to charge a lower price, than if it is pre­occupied Regulatory control on prices
with only the objective of making prof­its. Regulatory controls on prices (e.g., maximum
price control measures) influence the pricing
Need to attract customers to other policies of businesses.
goods
The price quoted for a particular line of goods Some pricing policies
may be low in order to attract customers to other
goods. An extreme case of this is the below-cost
prices at which ‘loss leaders’ are sold. Pricing policies when entering a new
market
Need to create entry barriers to poten­ As we have indicated earlier, different pricing
strategies are often used when entering a new
tial producers market, as opposed to when the existing market
In order to thwart the efforts of potential entrants
is still being served. Some of the pricing strate­
into the market, existing businesses in the mar­
gies used when a market is just being entered are
ket may begin to charge deliberately low prices.
those called penetration and skimming meth­ods.
(This is referred to as predatory pricing.) Since
1 Penetration strategy. This involves the
prospective entrants should also sell for about
quoting of very low prices in order to
the same price, they would not find it profitable
effectively pen­etrate the market. After the
to enter the market.
buyers have been sufficiently exposed to the
intrinsic qualities or benefits of the product,
Availability of substitute components in normal prices can then be charged.
the marketing mix 2 Skimming strategy. Under this method,
If suitable substitute strategies to the price (e.g., very high prices are initially quoted. It is
branding, advertising, and after-sales services) especially applicable where buyers find it
are available in the marketing mix, a business difficult in knowing the technical qualities
could resort to them instead of effecting changes of the good and thereby use the price as a
in price. For example, in order to ward off com­ measure of the quality. That is, to make the
petitors, a business may simply need to embark buyer rate the product as being of a high
on non-price competition measures like adver­ quality, a high price is charged initially. Later,
tising, sales promotion and after-sales services, as the buyers start to appreciate the true
without resorting to a change in price. But in a worth of the product through continued use
situation where these non-price components of and familiarity, the price could be lowered
the marketing mix are not likely to work, espe­ to a normal level.
cially if it is only the price that enters into cus­
tomers’ reckoning, frequent resort would then be Pricing policies when supplying an
made to changes in price.
existing market
Prices charged by competitors
The common alternative pricing policies when
When the competitors of a particular business
supplying an exiting market are as follows:
lower their prices, that business may have to
1. Full cost pricing. This is practised if the
fol­low suit, so as to avert a possible loss of its
price quoted is the sum of total unit cost
customers.
(i.e., aver­age cost) plus some predetermined
allowance for profit. This means that only
Non-price competition embarked upon the produc­tion (including distribution) costs
by rivals and desired profit are taken into account in
The competitors of a business may embark upon arriving at the product price. This is also
non-price competition when the business is often called the cost plus approach.
disadvantageously placed to do so. As a result, 2 Target rate of return pricing. This is full
the business may have no option but to reduce cost pricing, whereby a predetermined
its prices. allowance for profit is made, in order to

83
 achieve profit as a stipulated percentage of those sub-markets where the quantities that
capital em­ployed. For example, if capital buyers are willing to buy are less sensitive to
employed is $900,000, and it is desired to price changes, i.e., where the price elasticity
achieve 10 per cent rate of return on capital of demand is lower. Price discrimination is
employed, then $90,000 profit would be a form of market segmentation discussed
made. Thus, the product price would be the earlier.
average cost (i.e., total unit cost) plus the 6 Resale price maintenance. This is not
profit element per unit. This profit element a method of setting product prices as
is arrived at by spreading the $90,000 over such. Instead, it is the policy whereby a
the physical units that are likely to be sold manufacturing concern prescribes and
(i.e., by dividing $90,000 with the physical enforces the prices at which its products
units likely to be sold). have to be sold by middlemen. That is,
3 Marginal cost pricing. In this case, not all middlemen have to sell at the prices fixed
costs are taken into account. Only those by the manufacturer.
costs (called variable costs) that vary with
the out­put level are reckoned with. Other Product life-cycle and pricing policy
costs (called fixed costs) are disregarded. The Product life-cycle is the various stages that a
price is then set to equal the variable costs product usually undergoes, right from the time it
(often, with some allowance for profit). is introduced, until it is later withdrawn from the
4 Pricing of loss leaders. This consists of setting market. Five such stages have been identified, as
the price of a product (called loss leader) be­ shown in Fig. 8.3.
low the cost in order to attract customers to 1 Introduction stage. Unit (or average) costs
other products on which profits would be are high because of the initial costs of
made. launching the product and the fact that
5 Price discrimination. This consists of separat­ the production method may not have been
ing or segmenting the total market into two perfected. Also, sales and profits are low
or more sub-markets with a view to charging despite the fact that competitors are few.
different or discriminatory prices in the sub- This stage is characterised by high prices.
markets. Higher prices would be charged in

Introduction Growth Maturity Saturation Decline

Time
Stage I Stage II Stage III Stage IV Stage V

Fig. 8.3 Product life cycle

84
2 Growth stage. Unit costs are falling. Sales 4 Producer–wholesaler–retailer channel,
increase fast and competition is on the which is a complete channel of distribution.
increase. Profits attain the peak while prices
tend to fall.
3 Maturity stage. Sales are still rising but not Physical distribution
as fast as in the previous stage. Profits still
re­main at the peak. Competition is highest. Physical distribution concerns the movement of
Prices are still falling. materials from the suppliers to industrial users,
4 Saturation stage. Sales attain the maximum and movement of consumer goods from the sup­
value. Profits start to fall. Prices are low pliers to the consumers. The activities involved
partly as a result of fierce competition. in physical distribution are conventionally
5 Decline stage. Sales and profits continue to grouped into four, namely transport, inventory,
fall, and profits may turn to losses. warehousing, and communication. Let us exam­
There is no specific duration for each of the ine these four groups very briefly.
above stages, as this depends on the type
of products being considered, among other Transportation
factors. Main decisions on transportation usually centre
on whether to use rail, road, water or air and
Place or distribution the type of each to use. The various factors that
in­fluence the decisions have been discussed in
Book 2.
Nature of place as a
component of the marketing Inventory
mix Inventory holding is necessary for a business. This
may be for the purpose of meeting antici­pated as
well as unanticipated requests of cus­tomers, for
As defined at the beginning of this chapter, mar­ ensuring smooth (i.e., uninterrupted) production,
keting has to do with the management function etc. On the other hand, carrying in­ventory entails
concerned with conveying commodities to buy­ some costs in the form of money being tied down,
ers. This is what place is about when mentioned storing space, etc. Inventory policy, therefore,
in connection with marketing mix. Another name centres on how to strike a proper balance between
for place, in this context, is distribution. the benefits and the costs of inventory holding.
Distribution has two main aspects, namely
channels of distribution, and physical distribu­
tion. We are now going to examine these two Warehousing
aspects in turns. As has been discussed in Book 2, products are
stored in warehouses or depots, and decisions on
warehousing centre on the number of warehouses
Distribution channel to establish, where they should be located, the
product-type to keep in each warehouse, etc. All
This has been discussed at length in Book 1 where these decisions are made with a view to satisfying
we identified the following distribution channels, the market.
among others:
1 Direct sales by (primary or secondary) pro­ Communication
ducers to the consumers, in which case Transmission of information is required for ef­
middlemen are completely bypassed. fective implementation of the other aspects of
2 Direct sales by producers to retailers, in physical distribution policies, i.e., transportation,
which case wholesalers are completely by­ inventory, and warehousing. Decisions have to
passed. be made on the communication media to use,
3 Direct sales by wholesalers to consumers, e.g., whether to use the telephone or mail. The
in which case the retailers have been elimi­ various factors to consider in this regard have
nated. been discussed in Book 2.
85
 maintaining a sales force entails a relatively
Promotion permanent or long-term cost commitment,
because sales force cannot be laid-off or fired
Nature of promotion based on short-term budgetary pressure, unlike,
say, an advertising budget, which is largely
Promotion is the act of bringing a product and discretionary, and can be scaled down relatively
its benefits to the attention of the prospective quickly and easily.
customers. It concerns all forms of persuading
and informing the target customers, and it serves Public relations
to arouse the consciousness of customers right, The news, stories, events and features that public
from a state of ignorance to a state where they relations deal with look more real and believable to
might effectively adopt the product. The stages the audience when compared with advertisement.
through which this is accomplished are often The audience often perceive the information as
described as follows: ‘news’ rather than the less credible information
1 First stage - Customers are unaware aimed at promoting sales. Like advertisement,
of the product. public relations can dramatise a product.
2 Second stage - Customers are just
aware of it. Sales promotion
3 Third stage - Customers’ interest It can be used to boost sagging sales. It
in it is aroused. invites and rewards a quick response. While
4 Fourth stage - Customers have a advertising has a general objective of making
desire for it. people buy the product, sales promotion has
5 Fifth stage - Customers’ a more specific objective of making people buy
conviction about now or immediately. However, the effect of
the value of the sales promotion is often short-lived and, unlike
product exists. advertising and personal selling, it is not suited
6 Sixth stage - Customers purchase to building long-run brand preference.
the product.
Advertising
Comparison of different forms It enables the seller to repeat a message many
of promotion times. If done on a large-scale basis, it can also
signal something positive about the seller’s size,
acceptance and success. Consumers tend to regard
There are four main types of promotion. These well advertised products as being legitimate. It is
are personal selling, public relations, sales pro­ also highly expressive, allowing the advertiser
motion, and advertising. Here, we will compare to dramatise and display his product through a
their salient features and merits. In the following skilful employment of a combination of visuals,
sub-sections, we further explain each of these print, sound and colour. In addition, it is best
forms in turn. suited to building of long-term images and brand
for a product. However, advertising has a
Personal selling disadvantage of being impersonal, thereby being
It involves personal interactions between the sales unsuitable for addressing specific information
force and would-be buyers, thereby permitting needs of individuals. Also, in most cases, it
the characteristics, needs and preferences of amounts to one-way information traffic from the
the would-be buyers to be observed and quick seller to the audience, with little scope for reverse
adjustment made to suit such features of would- information traffic from the audience to the seller.
be buyers. Also, would-be buyers usually have In addition, as compared with other promotion
a greater desire and need to listen and respond, strategies like public relations, advertising is
even if only to say, ‘No, thank you.’ However, more expensive.

86
Personal selling 2 When the market is not geographically dis­
persed but concentrated.
Nature of personal selling 3 When personal touch or rapport is needed
This involves the face-to-face meeting of the seller to stimulate sales.
(or seller’s representative) with the buyer. Unlike 4 When physical demonstration is required.
other promotional measures that entail mass
impersonal communication, personal sell­ing Public relations
involves individual personal communica­tion.
Again, unlike advertisement and public re­ Nature of public relations
lations which are applicable to all the six stages Public relations is the set of measures pursued
of promotion identified above, personal selling by an organi­sation in order to maintain good
(just as sales promotion) involves only the last relations with the various human elements
three stages. Also, unlike advertisement that in its environment such as the customers,
is a pull strategy, personal selling constitutes a suppliers, creditors, em­ployees, shareholders,
push strategy. Finally, unlike advertising which and government. It can also be defined as the
is relatively suitable for reaching consumer deliberate, planned and sustained effort to
markets, personal selling is more suitable for establish and maintain mutual understanding
reaching industrial markets (except, of course, between an organisation and its publics or various
in the case of street hawking, which is a form of stakeholder groups.
personal selling).
Methods of public relations
Advantages of personal selling Most of the methods that are often used in pub­
1 Flexibility. Salesmen can adjust their selling lic relations have been discussed in the previous
style to the circumstances of individuals. chapter as the types of social responsibility
They can make necessary corrections and ad­ activities of a business, especially in relation to
justments on the basis of the reaction of the public at large. Some of the methods listed
each individual. below, there­fore, constitute a repetition of those
2 Selectivity. Personal selling can be selective, mentioned in that previous chapter. (This is not
in the sense that only those that are likely surprising, as any so-called social responsibility
to buy need be approached. This is unlike activity that is being pursued by an organisation
other pro­motional measures that reach all has become a part of its pub­lic relations.)
and sundry alike, thereby involving some 1 Provision of social amenities.
waste. 2 Donations to hospitals, charitable
institutions, public institutions, etc.
Disadvantages of personal selling 3 Scholarship awards.
1 High cost. The cost of engaging the sales 4 Sponsorship of educative programmes on
force or in hawking the goods is usually radio and television.
relatively high. 5 Sponsorship of sporting activities, social
2 Lack of right calibre of people. It is also ac­tivities like beauty contests, as well as re­
sometimes difficult to get the right c a l i b r e search activities in educational and research
of peo­ple to employ as salesmen or sales institutions, etc.
representatives. 6 Trade fairs and exhibitions where the prod­
ucts of the organisation would be displayed
When personal selling is appropriate or exhibited.
The following are some instances when personal
selling is more appropriate than other promo­ Activities and media involved in public
tional measures, especially advertising: relations
1 When advertising entails relatively high This is related to the methods discussed above.
costs which the business cannot easily Public relations encompasses the following
finance. activities:

87
1 Media relations and press releases, ble in reaching consumer markets than
including creating and placing newsworthy indus­trial markets, indirect advertising is
information in the news media to attract almost equally applicable in reaching both
attention to a company or its products. catego­ries of markets.
2 Editorial and broadcast material. 3 Direct advertising mainly involves the
3 Sponsorship. adoption of a pull strategy, whereas indirect
4 Publicity and stunts, including publicising advertising mainly in­volves a push strategy.
the company or its products. This is because indi­rect advertisement
5 Crisis management. aims to push sales through the incentives
6 Public affairs, including building and offered.
sustaining national or local community 4 Unlike direct advertising, which is
relations. commonly handled by advertising agencies
7 Corporate image and identity. outside the organisation, indirect advertising
8 Employee relations, investor relations, is normally handled from within the
customer relations and supplier relations. organisation. Direct advertising is therefore
9 Lobbying, including building and sustaining sometimes referred to as above-the-line
relations with legislators and government advertising, while indirect advertising is
officials to influence passage of laws and known as below-the-line adver­tising.
making of regulations.
10 Events management, including news Forms of sales promotion
conferences, events tour, grand openings, The forms taken by sales promotion depend
multi-media presentations, etc. on whether it is directed at consumers or trade
11 Corporate affairs, including annual cus­tomers (i.e., middlemen). The type of sales
reports, brochures, company newsletters promotion called consumer promotion is the one
and magazines, audiovisual materials and targeted at consumers, usually with the aim of
corporate identity materials (e.g., logos, pulling sales from them along the distribution
stationery, business cards, company cars, chain until it gets to the advertiser, often the
and buildings). manufacturer. The type of sales promotion called
12 Annual reports, including financial state­ trade promotion, on the other hand, is the one
ments. Here, an organisation tries to impress targeted at middlemen (wholesalers and/or
the public by emphasising the number of retailers, depending on whether the advertiser is
peo­ple employed, revenue generated to the manufacturer or wholesaler), usually with the
govern­ment in the form of taxes, benefits to aim of pushing sales along the distribution chain
the shareholders in the form of profits made until the product gets to the consumer. In addition
and dividends paid, employee-related to consumers and middlemen, sales promotion
welfare programmes embarked upon, etc. can also target the sales force.
The form of sales promotion directed at
Sales promotion consumers includes:
1 Free (or low-priced) samples – referring to a
Nature of sales promotion small amount of a product offered to would-
Sales promotion is a form of indirect advertising be customers for trial.
that involves the use of incentives. The main dif­ 2 Price packs, whereby customers are offered
ferences between direct advertising and sales savings off the regular price of a product,
promotion as a form of indirect advertising in­ with the reduced prices marked by the
clude the following: producer directly on the label or package.
1 Direct advertising is applicable to all the One variant of this is the two-for-the-price-
six stages of promotion as identified earlier, of-one deal, which means that the customer
whereas indirect advertising mainly applies gets two items of a product for only the usual
to the last three stages. price of one item. Another variant is selling
2 Whereas direct advertising is more applica­ jointly two related products that are banded

88
 together (like shoes and socks) at reduced ment, a manufacturer partly or wholly reim­
prices. A variant of this is the special price burses the advertisement costs incurred by
reductions that character­ise clearance sales. middlemen in selling the manufacturer ’s
3 Coupons – referring to certificates (often products.
to be clipped from newspaper and similar 6 Training and advice. The manufacturer may
media, for presentation at the point of sale conduct training programmes for the sales
or sales outlet) that give buyers a saving force employed by the middlemen as well
when they purchase a product within the as provide them some managerial advice.
stipulated time limit.
4 Point-of-purchase demonstrations, like Purposes of sales promotion
displays that take place at the point of Sales promotion purposes depend on whether
purchase or sale. the promotion is directed at consumers or trade
5 Cash refund offer or rebate – referring to an customers. Those directed at consumers can be
offer to refund part of the purchase price motivated by the intention to attract consumers’
of a product to buyers who send a proof of attention to a new product, get rid or dispose of
purchase to the seller. This operates like slow-moving items, and encourage sales during
the coupon, except that the price reduction off-peak periods. The objectives of sales promo­
occurs after the purchase, instead of at the tion directed at the trade customers, on the other
retail outlet. hand, might be to:
6 Premiums, which occur when a cheap item 1 Induce the cooperation of the middlemen in
(e.g., a plastic container) is given freeof patronising some particular goods.
charge to every buyer of a relatively valuable 2 Encourage middlemen to advertise the
item (e.g., a television). products.
7 Advertising specialty, whereby useful 3 Encourage such middlemen to devote more
articles (like vests or T-shirts, caps, pens, of their shelf-space to the particular item of
calendars, key rings, and teacups) that are goods, and so command their goodwill.
imprinted with the advertiser’s name and/
or logo are given as gifts to the buyers. This
also advertises the seller. Advertisement
8 Patronage rewards, whereby cash or
other awards are given for the regular Nature of advertisement
use of a company’s certain products As discussed above, advertisement can be direct
(e.g., airlines’ frequent flyer scheme that or indirect, with the indirect type being sales
rewards customers with points that vary promotion. So, here we are referring only to di­
with patronage of the airline, and which can rect advertisement when we simply refer to ‘ad­
be converted to free trips through the same vertisement’. A fuller discussion on advertisement
airline). is in Book 2, where a particular chapter is devoted
9 Competition, which consists of making con­ to this.
sumers that buy certain goods eligible to Advertisement can be defined as written or
take part in special competitions, including oral information about a product with a view to
raffle draws, in which some would end up encouraging purchases of the product.
winning impressive prizes.
On the other hand, sales promotion directed Types of advertisement
at trade customers (i.e., trade promotion) can be Advertisement is either specific or mass. In the
in the form of: case of a specific form of advertisement, the
1 Bonuses. Bonuses and prizes can be given to advertising information reaches just an individual,
sales representatives. e.g., when advertising circulars are sent to
2 Purchasing allowance. individual traders or retailers. Mass or general
3 Provision of display materials. ad­vertisement, on the other hand, reaches many
4 Free goods. people at the same time, as is the case when com­
5 Cooperative advertising. Under this arrange­ municating an advertisement message through

89
the press (print media) and radio and television magazines and journals, radio, television and
(electronic media). cinema, circulars and catalogues, posters or
Whether specific or mass, advertising can still hoardings, loudspeakers, trade shows and
be of the following types: informative, persua­sive exhibitions, traditional verbal or oral advertising,
and competitive. covert advertising through movies and celebrities,
1 Informative advertising. This conveys informa­ online advertising, and miscellaneous media like
tion about the price and technical qualities kiosks, backs of events tickets and supermarket
of a product, thereby making the audience receipts.
more enlightened about the product.
2 Persuasive advertising. This essentially tries Advantages and disadvantages of
to persuade the audience to purchase a advertisement
prod­uct. An example is the use of pictures
The main merits of advertisement to society
of beautiful ladies in advertising goods. (as fully explained in the chapter of Book 2 just
This type of advertising usually has little referred to) in­clude:
informa­tion content, but often appeals only 1 Provision of employment and income.
to the emotion as opposed to reason. 2 Possible price reduction as a result of large
3 Competitive advertising. This is concerned scale production it promotes.
not with the aim of increasing the market 3 Enlightenment and entertainment of
size (i.e., drawing new customers into the buyers.
market) but with snatching existing buyers The major disadvantages, on the other hand,
from the com­petitors. In principle, it is a include (as fully discussed in Book 2):
form of zero-sum game in the sense that 1 Possible waste of money.
the number of custom­ers gained by some 2 Possible increase in price due to increase in
sellers as a result of com­petitive advertising cost.
usually equals the number of customers lost 3. Making buyers make irrational or impulsive
by the competitors. This form of advertising purchases that they later regret.
can be informative or persuasive in nature. 4. Increased domination of the market by a
few sellers.
Roles of advertisement in a business
Advertisement can perform any of the follow­
ing roles from the point of view of the business Revision questions
concerned:
1 It can be used in making customers familiar Essay questions
with a product. 1 What do you understand by marketing
2 It can be used in communicating specific fea­ and of what importance can it be to a
tures of a product to consumers in order to business?
intimate them with any unique benefits to 2 Distinguish between marketing mix and
be derived from the product. mar­keting concept. In what ways is the
3 It is a medium through which branding is marketing concept superior to any other
made effective. likely perspec­tive from which a business
4 It can be used in informing the market of the may view its cus­tomers?
existence of newly introduced products. 3 Distinguish between market segmentation
5 It can be used in snatching customers from and price discrimination, and
rival businesses, and in preventing existing explain the justifica­tion for each. What
customers from patronising the rivals. are the common criteria on which market
segmentation is based?
Advertising media 4 Discuss major ways in which the product
The major advertising media include the and place aspects of a marketing mix can be
following (all of which are fully explained in ef­fected.
Book 2, chapter on Advertising): newspapers,

90
5 What factors should a seller take into B Inventory holding
account in fixing the price of his products? C Warehousing
6 Write short notes, by way of explanation, on D Insurance of the goods
the following pricing policies: E a, b and c.
a) Skimming 5 Activities involved in promotion, as a
b) Penetration component of marketing mix, include:
c) Full Cost A Personal selling
d) Marginal cost B Warehousing
7 What are the main characteristics of the vari­ C Trade discounts
ous stages of a product’s life-cycle, and what D Product branding
effect can each stage have on the pricing E Product packaging
policy of a business?
8 What do you understand by the word promo­
tion as an aspect of the marketing mix? Ex­
plain the major forms which promotion can
take.

Multiple choice questions

1 A role (or the roles) of marketing to an
economy is
A provision of employment
opportunities.
B adoption of a labout-intensive method
of production.
C promotion of competition that serves
to lower the prices, thereby reducing
inflation.
D a and b.
E a, b and c.
2 Which of the following is not an element of
production, as one of the four broad
components of marketing mix?
A Variety and quality of goods
produced
B Branding
C Trade discounts given in selling the
goods
D Labelling
E Packaging
3 Factors that are taken into consideration in
setting the price of a product include:
A Production costs
B Overall level of demand for the
product
C Prices being charged by competitors
D a and b only
E All of the above
4 Activities involved in physical distribution,
as a component of marketing mix, include:
A Transportation

91
Chapter 9

Consumer protection
Need for consumer the consumption of a commodity, e.g., innocent
protection passengers boarding a vehicle that is not
It is important to protect consumers from the roadworthy.
hazards and unwanted effects that result from
consuming some commodities for the following Branding and product
reasons:
differentiation
Essential commodities In the modern world, there exist many brands
of most commodities. In addition, the nature of
The consumption of some commodities up to most commodities is becoming very complicated
a certain minimum extent is essential. Such and rather confusing to consumers. All these give
commodities should therefore be accessible to room for adulteration of products by the sellers.
the populace. But their market prices may be so As a result, it is important that the consumer be
high that only the rich can afford them. Hence, protected from fake and adulterated products.
there is the need to protect poor consumers from
non-access to such commodities through some
Protection of consumers from
price control measures.
being deceived as to the
Advertisement quantity and quality of goods
being bought
Sellers often deceive consumers through
advertisement. In the absence of protection, Consumers are often not sophisticated enough
sellers are likely to make false claims as to to weigh and measure the goods being bought,
the quality and quantity of the products. It is in order to ascertain whether sellers’ claims are
generally difficult for individual consumers to correct regarding the weight and measures (e.g.,
ascertain most of the claims made by sellers. litres of liquids, and metres and grams of solids) of
the packaged commodity. So, without protective
Health of the consumers measures, consumers would be vulnerable
to being fooled by sellers on the weights and
measures of products. The same applies to the
The health of consumers should be protected
quality (e.g., colour, texture, precise composition
by ensuring that they do not knowingly or
of ingredients used in making the product, and
unknowingly consume those commodities that
whether the expiry date is near or has even
are lacking in purity, nutrition, sanitation, etc.
passed) of the products.

Protection of consumers from Need to keep consumers

other hazards informed generally
There is also the need to protect consumers In addition to the above reasons, consumers
from other dangers that may be associated with need to be kept informed about the nature of the
92
goods to be consumed for miscellaneous reasons. (legislature) in 1962. This Consumer Bill of Rights
For example, a Muslim should be kept informed explicitly identified four such rights, namely right
as to whether or not a particular drink has some to be informed, right to safety, right to choose,
alcoholic content, or whether or not a particular and right to be heard (each of which is explained
vegetable oil is made of materials from pork. later).
Other miscellaneous needs would be apparent Over two decades later, the UN endorsed
from our discussion below. President Kennedy’s Consumer Bill of Rights,
and expanded the list from four to eight, which
Consumerism are all reviewed below.
Meanwhile, most countries of the world,
including Nigeria, have been taking measures
Consumerism has two meanings, with only one to protect these rights. Consumerism is about
of them being relevant to us here. As defined in concern about abuse of consumer rights, and
an online dictionary, responses to such concerns through a number
In economics [consumerism] usually refers of measures, whether legislative, institutional or
to a movement which promotes the right and
organisational, or private initiative-led, aimed at
safety of the consumer which arose in the early
protecting such rights.
1900s as people grew increasingly concerned
about consumer safety and manufacturing
methods. In philosophy, consumerism refers Consumer rights, and
to a way of life in which people place a high
value on material possessions, and in which responsibilities
people tend to consume more than they
need. Critics of this way of life espouse anti- As we have just pointed out above, President
consumerism or production. Kennedy enunciated four rights (i.e., the first four
This latter definition, which we need not mentioned below) in his Consumer Bill of Rights,
concern ourselves with henceforth except just to which the United Nations, in 1985, built upon
note its existence, is only concerned with gluttony and expanded to eight. It is these eight rights that
or excesses of people’s consumption habit. It is are examined below. The consumer is also often
the first definition that is relevant for this chapter enjoined to do certain things to protect those
and which we explain further below. rights. These are called consumer responsibilities.
Accordingly, consumerism refers to both These are also mentioned below, just as the steps
the concerns and reactions by the government, that the consumer may need to take to protect
regulatory authorities and other stakeholders those rights.
on consumer well-being, such as consumer
protection advocacy groups, regarding prevalent
abuse of consumer rights (as explained below) in Consumer rights
various ways by producers. These ways include:
1 Production of hazardous goods. The following are the eight consumer rights,
2 Giving misleading information to as identified by the UN and generally accepted
consumers. internationally:
3 Limiting consumer access to goods and 1 Right to be informed. This includes the right
services. to be protected against misleading, deceitful
4 Charging excessive prices. and fraudulent information in the areas of
5 Short-changing of consumers by under- finance (whereby, for instance, the lender
measuring and under-weighing of goods. may hide certain charges), advertising,
6 Preying on consumers’ fear through labelling and packaging.
excessively persuasive advertising. 2 Right to safety. This concerns right to be
The late President of the US, J. F. Kennedy was protected against dangers or injuries arising
the first notable leader to champion consumer from the consumption of a product.
rights by getting the now famous Consumer Bill 3 Right of consumer choice. This concerns
of Rights enacted into law by the US Congress making the consumer have a range of

93
 products from different producers to to:
choose from, at fair and competitive prices, 1 Be aware of, and be alert to, the quality and
in making a purchasing decision. This safety of goods and services before buying.
right would be compromised if there are 2 Be aware of, and gather all the information
monopoly or oligopoly conditions (i.e., available about, a product or service and be
oneness or fewness of suppliers) in the up-to-date on changes and innovations in
market, as this would limit the consumer’s the marketplace.
freedom to choose. Such a situation is 3 Think independently and make decisions
fostered by the existence of patent rights on real needs and wants.
for an indefinite period, merger of similar 4 Speak out and complain and inform
producers to form a cartel, etc. That is why businesses and other consumers in a fair
governments, the world over, try to control and honest manner of one’s dissatisfaction
such practices. or satisfaction with a product or service,
4 Right to be heard. This means that fora or and communicate to manufacturers and
avenues should exist for consumers to air governments one’s expectations of the
their views and channel their complaints marketplace.
and grievances – whether to government 5 Be an ethical consumer by not engaging in
agencies or producers themselves. This also dishonest practices.
includes the freedom to form consumer 6 Respect the environment and avoid waste,
and other relevant groups or organisations, littering and contributing to pollution.
and the opportunity for such organisations 7 Be more alert and question the use, and the
to present their views in decision-making price and quality of goods and services to
processes affecting them. use.
5 Right to consumer education. The consumer
has the right to have access to education
to make him or her become a skilled and Steps to take in seeking
informed consumer, and thereby make redress
him capable of participating effectively
in the marketplace. This also includes
It has been observed that a major problem
education on the environmental, social and
militating against consumer protection in Nigeria
economic impacts of consumer choice.
is the ignorance of the average consumer about
6 Right to get restitution. This relates to the
what steps to take to seek redress. As a result,
right to redress, and be compensated for
many cases of breach go without a remedy, thereby
misrepresentation and unsatisfactory goods
serving as a further incentive for further breaches
and services.
of consumer rights by producers. The five steps
7 Right to the satisfaction of basic needs.
or channels below are therefore recommended
The consumer has the right to get basic
for consumers whose rights have been infringed
satisfaction from the goods and services
by a producer:
being bought.
1 Lodge a complaint with the product supplier
8 Right to a healthy and sustainable
or service provider.
environment. This includes the right to
2 Report to any of the regulatory agencies,
adopt sustainable consumption patterns.
e.g., Standards Organisation of Nigeria (as
Sustainable consumption includes meeting
discussed later).
the needs of present and future generations
3 Report to the relevant professional body,
for goods and services in ways that are
e.g., the Medical and Dental Practitioners
economically, socially and environmentally
Council of Nigeria.
sustainable.
4 Report to any non-governmental consumer
association (as discussed later).
Consumer responsibilities 5 Institute civil action. This is the right of the
consumer to take civil action to remedy
These have been identified as the responsibility a violation of his right. The action can be
94
 based on the law of contract if there is finance companies, and customers were
a contract between the parties or on tort in often denied the opportunity of redeeming
the case of allegation of negligence, nor the goods when money was eventually
arising from contractual relationship. available. Similarly, dealers and finance
companies normally failed to account
to customers for any profit made on the
Legislative instruments or repossessed (i.e., seized) goods. Instead,
mechanisms for protecting the agreements used to contain what was
called Minimum Payment Clause, which
consumers served to make the dispossessed customers
pay cancellation prices.
There are legislative, regulatory, organisation and The law of 1965 was directed against
other measures that are designed to protect the such exploitative practice and, in particular,
consumer. These are now going to be examined. it outlaws any hire purchase agreement,
Here, we take up the legislative measures. within its scope, that authorises the dealers
The realisation by government of the need for and finance companies to take possession of
protecting consumers has led to the enactment the goods, or that deprives the customer of
of various laws by the Federal and State the right to terminate the agreement at will.
Governments in Nigeria for this purpose. Some Upon the termination, the customer is
of these enactments have been bequeathed to required to pay only the outstanding
Nigeria from the colonial masters (i.e., the United instalment or the amount by which half
Kingdom) while others were made by Nigerian of the hire purchase price exceeds what
governments. has already been paid, whichever the
customer prefers. If half (three-fifths in the
Hire Purchase Act of 1965 case of motor vehicles) of the hire purchase
price had been paid, the dealer or finance
company would require a court action in
This law attempted to prevent the exploitation of order to repossess the goods.
hire purchasers by dealers and finance companies. 3 To render ineffective the former exclusion
The provisions of the law are in respect of hire clauses in hire purchase transactions, which
purchase transaction of small values. Specifically, enabled the dealers to supply defective
in respect of such transactions, the law has the goods to customers without being liable for
following objectives: it.
1 To put an end to the practice whereby 4 To prevent exploitative rates of interest on
dealers were tricking customers and hire purchase transactions, by empowering
making them ignorant of the rate of the Minister of Commerce to regulate such
interest implied in the hire purchase interest rates in addition to the cash
transactions. To this end, the law requires deposits and instalmental payments.
the customers to be explicitly informed of
the cash price, hire purchase price, and
the rate of interest applicable to each hire Sale of Goods Act of 1893
purchase transaction.
2 To put an end to the practice by dealers of This law was inherited from the United Kingdom.
tricking customers to enter into agreements In that country, the law was amended in 1973 and
that allowed dealers to enter the premises then consolidated in 1979 and, therefore, is now
of customers and seize the goods,no referred to in the United Kingdom as the Sale of
matter how small the instalments owed Goods Act of 1979.
by the customers might be. Before this The law deals with contracts whereby the
law was enacted, any slightest delay in seller transfers or agrees to transfer the property
the payment of instalments resulted in the in (i.e., ownership of) goods to the buyer at an
seizure of the goods by the dealers and agreed price. Simply put, it deals with buying

95
and selling of goods. Kingdom, provides for criminal sanctions or
Under this law, certain terms are implied in penalties (as opposed to civil remedies) against:
any sale of goods even if the agreement does 1 Any person who applies a false trade
not say so. Such terms are called Implied Terms, description to goods or sells such falsely
and the 1973 amendment to the law has made it described goods. For this purpose, a
difficult or even impossible for the seller to include trade description refers to an indication
any terms that would violate or contradict these of quantity, size or gauge; method of
implied terms in his agreement with the buyers. production; composition; as well as fitness
The implied terms are as follows: for purpose, strength, durability, etc. It also
1 It is implied that the seller has the right to includes the place and date of manufacture;
sell the goods, otherwise he would be liable identity of the manufacturer; and so on.
in damages to the buyers. 2 Any person making misleading statements
2 Where the goods are sold by description, it in relation to the price of goods, e.g. that the
is implied that the goods shall correspond price has just been reduced when it has not.
with what has been described. A buyer may 3 Any person making misleading statements
refuse to accept such goods that do not in relation to the provision of services;
correspond with the description, despite e.g., a false guarantee that goods sold will be
the fact that the goods are not defective in repaired free of charge during a stipulated
any other form. This, therefore, serves to period.
prevent the buyer form being fooled. Although no civil remedy exists in case of a
3 The goods, when sold in the course of a breach of the law, the court can order the offender,
business, should be of merchantable quality. in the course of a criminal prosecution, to pay
This means that they are suitable for the compensation to the misled buyer.
expected and reasonable purpose(s) for
which goods are commonly bought. Live Fish (Control of
4 The goods, when sold in the course of
business, should be fit or suitable for the Importation) Act of 1962
particular purpose for which the buyer
wants to use the goods, provided the seller This law provides that live fish can be imported
is made aware of this special purpose. only in accordance with the rules stipulated in
5 Where the sale is agreed to be by sample, the licence granted for the purpose by the Federal
the quality of the bulk of the goods must Ministry of Commerce. This has, as one of the
correspond with that of the sample, and goals, the prevention of importation of diseased
the buyer must have a chance of comparing live fish which may even contaminate the local
the bulk with the sample. Also, the seller is fish.
liable for any defect in the goods which a
reasonable examination by the buyer would
not detect. Again, this serves to prevent the
Nigerian Livestock and Meat
seller from sending superior goods as the Authority (Repeal, etc.) Act
sample to prospective customers, when 1990
the bulk from where the customers would
purchase is inferior.
6 Where the sale is by both sample as well as This law provides for the establishment of an
by description, the goods must correspond institution for research into livestock and meat
with both the sample and the description. generally. This institution is responsible for:
1 Undertaking research into the production,
marketing, slaughtering as well as
Trade Description Act of 1968 preparation for sale of animals.
and 1972 2 Prescription of the grade of livestock
and other meat products for both
domestic and foreign trade. In other
This law, which was enacted in the United
96
 words, it designs and enforces quality Food and Drugs Act of 1990
control measures in respect of livestock as amended by Act 21 of 1999
and the meat industry.
3 Engaging in the livestock and meat industry (formerly called Food and
as well as provision of advisory services to Drugs Act 35 of 1974)
the federal and state governments in respect
of matters pertaining to livestock and meat.
This law attempts to ensure that the manufacturing,
At the state government level, there also
distribution and other processes entailed until
exist various livestock and meat laws which
foods, drugs and cosmetics get to consumers are
are designed to regulate the establishment
carried out in such a way that would preserve
and registration of slaughterhouses for cattle,
their safety and nutritional values. It forbids the
goats, fowls, etc., provided such animals are to
sale of goods and drugs that contain dirty, rotten
be slaughtered for sale. These animals must be
or poisonous materials, or that are contaminated
slaughtered in slaughterhouses if they are meant
in any other form. It also prohibits misleading
for sale.
advertisement and labelling.
The law provides for the establishment of a
The Standards Organisation of Food and Drug Advisory Council, the duty of
Nigeria (SON) Act of 1971 (as which is to advise the Health Minister on food
and drug matters relating to the scope of the law,
amended) namely:
1 Adulteration
This law provides for the establishment of the 2 Additives
Standards Organisation of Nigeria (SON), the 3 Contaminants
roles and functions of which are discussed 4 Labelling and packing
separately later in the chapter. 5 Sale
6 Food preparation
Weight and Measures Act of 7 Manufacturing and preservation
8 Storage and testing, etc.
1990 The stipulated penalties for a breach of this law
can be warning, fines, prosecution, seizure and
This law formalises the use of the metric system in disposal of the spoilt goods, as well as prohibition
place of the former imperial system. In addition, of further sales.
it provides for the maintenance of Nigerian
Trade Standards comprising both the secondary Marketing (Breast Milk
and tertiary standards. It also provides for the
appointment of inspectors whose duty it is to Substitutes) Decree 41 of 1990
enforce the standards.
Another important provision of the law is that This prohibits, amongst other things, the sale,
which stipulates that in the case of pre-packed advertisement, distribution or offer as sample
goods, they should not be offered for sale unless or gift to members of the public, of breast milk
the containers correctly indicate a true statement substitutes or infant formula, unless such
of the minimum net weight, volume or any other products have been registered with the Food And
measures of the contents. Drugs Administration of the Federal Ministry of
Health.

Public Health Act of 1990

This law contains provisions designed to control
diseases among animals to be slaughtered for
consumption.

97
 Food, Drugs and Related
The Consumer Protection
Products (Registration etc) Act
Council Act 1992 (Cap. C25)
No. 19 of 1993, as amended by
This provides for the establishment of the Act No. 20 of 1999 and Cap.
Consumer Protection Council (CPC) that F33 of 2004)
is responsible for implementation of other
provisions in the legislation. The roles and
This Act provides that that no processed food,
functions of the CPC are discussed later in the
drug, drug products, cosmetics, medical device or
chapter.
packaged water shall be manufactured, imported,
exported, advertised, sold or distributed in Nigeria
The National Agency for Food unless it has been registered in accordance with the
and Drug Administration and provisions of the Act or regulations made under
it. In other words, the Act makes registration of
Control (NAFDAC) Act 1993 every such regulated product mandatory. It also
(Cap. N1) provides that the NAFDAC is the authority to
register such products and make regulations
This provides for the establishment of the under the Act. A person (individual or, in the case
NAFDAC that is responsible for implementation of a body corporate, stipulated officers of that
of other provisions in the legislation. The roles corporate body) who contravenes a provision of
and functions of the NAFDAC are discussed this Decree or a regulation made under it is guilty
later in the chapter. of an offence and liable on conviction to a fine,
imprisonment or both.
The Decree also establishes a Drug Registration
The Trade Malpractices Committee to evaluate the formation and method
(Miscellaneous Offences) Act of preparation of drugs, drug products, cosmetics
and medical devices.
1992

The law provides against any person who:

Counterfeit and Fake Drugs and
1 Falsely labels, packages, sells, offers for sale Unwholesome Processed Foods
or advertises any product so as to mislead (Miscellaneous Provisions) Act
as to its quality, character, brand, name,
value, composition, merit or safety; or No. 25 of May 1999 and Cap.
2 For the purpose of sale, contract or other C34 of 2004
dealing, uses or intends to use any weight,
measure or number which is false or unjust;
According to this Act, which repeals the
or
Counterfeit and Fake Drugs (Miscellaneous
3 Sells any product by weight, measure or
Provisions) Act of 1989:
number and delivers to the purchaser a
1 It is an offence to produce, import,
less weight, measure or number than is
manufacture, sell, display for the purpose
purported to be sold; or
of sale, distribute or be in possession of
4 Advertises or invites subscription for any
(or to aid or abet any person to do any of
product or project which does not exist.
such things) any counterfeit, adulterated,
The legislation sets up a Special Trade
banned or fake, substandard or expired drug
Malpractices Investigation Panel to investigate
or unwholesome processed food, in any
such offences.
form whatsoever. An offender will be liable
to a fine not exceeding N0.5 million Naira or
imprisonment of between 5 and 15 years
or both the fine and imprisonment.

98
2 It is also an offence to hawk or sell or display 3 Promotion of fair competition in the
for the purpose of sale (or to aid or abet any communications industry and protection
person to do any of such things) any drug of communications services and facilities
or poison in any place not duly licensed providers from misuse of market power
or registered by the appropriate authority, or anti-competitive and unfair practices
including any market, kiosk, motor park, by other service or facilities providers or
road-side stall or in any bus, ferry or any equipment suppliers.
other means of transportation. An offender 4 Development and monitoring of performance
will be liable to a fine not exceeding $0.5 standards and indices relating to the quality
million Naira or imprisonment of not of telephone and other communications
less than 2 years or both the fine and services and facilities supplied to consumers
imprisonment. in Nigeria having regard to the best
3 Where any of the above offences has been international performance indicators.
committed by a body corporate, every 5 Examination and resolution of complaints
person who at the time of the commission and objections filed by and disputes between
of the offence was a proprietor, director, licensed operators, subscribers or any other
general manager, secretary or other person involved in the communications
similar officer, servant or agent of thebody industry, using such dispute-resolution
corporate (or a person purporting to act in methods as the Commission may determine
any such capacity), he, as well as the from time to time including mediation and
body corporate shall be deemed to be guilty arbitration.
of the offence and may be proceeded against To complement and strengthen the
and punished accordingly. performance of the above function, the Act also
4 The Tribunal established under the directly makes provisions (in its Sections 104 to
Special Tribunal (Miscellaneous Offences) 106) explicitly for protection of consumer rights
Act of 1984 (as amended), shall have the and quality of service as follows:
jurisdiction to try offenders under the Act. 1 It enjoins that all service providers shall
The Act also provides for a Federal Task meet such minimum standards of quality
Force charged with the overall responsibility of service as the NCC may from time to
for enforcing the provisions of the Act, time specify and publish; deal reasonably
assisted by Task Forces at the State (or group with consumers; and adequately address
of States) level as well as a Nigeria Police consumer complaints.
Force specially established for the purpose. 2 It states that the NCC may use any of its
powers under the Act in the resolution
Nigerian Communications of complaints received from consumers
in relation to matters of customer service
Commission Act 2003 and consumer protection including but not
limited to quality of service or the failure by
The statutory functions of the Nigerian a licencee to comply with a consumer code
Communications Commission (NCC) under the prepared under the Act.
Act in include the following, among others: 3 It mandates the NCC to establish
1 Protection and promotion of the interests procedures or guidelines for the making,
of consumers against unfair practices receipt and handling of complaints
relating to such things as tariffs and charges of consumers regarding the conduct or
for and the availability and quality of operation of licencees and may, at its
communications services, equipment and discretion, institute alternative dispute
facilities. resolution processes for the resolution
2 Ensuring that licencees implement and of the complaints or disputes provided
operate at all times the most efficient and that the licencee’s dispute resolution
accurate billing system. procedures shall first have been exhausted
by the consumer without resolution of

99
 the complaint before presentation of the Regulatory measures for
complaint to the NCC.
4 It permits the NCC to designate an
protecting consumers
industry body to be a consumer forum
and to prepare, subject to the prior Regulatory measures derive directly or indirectly
approval of and ratification by the NCC, a from the legislative measures discussed above.
consumer code for the purposes of the Some of the regulatory measures are as follows:
Act. The NCC may also require licencees to
prepare, subject to its prior approval Regulations on motor vehicles
of and ratification, individual consumer
code for their respective customers. A
consumer code prepared by a consumer Vehicles on the road are required to conform to
forum, the NCC or licencees shall include certain standards of roadworthiness, so as to
model procedures for reasonably meeting ensure the safety of passengers (i.e., consumers)
consumer requirements, the handling and other members of the public. There must
of customer complaints and disputes, also be a form of insurance cover against the risk
including an inexpensive arbitration to which passengers and other members of the
process other than a court, procedures for public are exposed. The Police, Vehicle Inspection
the compensation of customers in case Officers (VIOs) and Federal Road Safety Corps
of a breach of a consumer code, and the members are assigned the role of enforcing this
protection of consumer information. Other regulation.
matters which the consumer code shall
address include but are not limited to further Licensing of professional and
recourse available to a consumer who is vocational practices
dissatisfied with the licencee’s complaints-
handling procedures together with specific
details of compensation and refund schemes Professionals like lawyers and medical doctors
offered by the licencee to its customers; need to be licensed or certified as being competent
the provision of information to customers by the relevant professional bodies before they
regarding services, rates and performance; can practise. In the same vein, those engaged in
the provisioning and fault repair of services; vocations like vehicle driving are supposed to have
the advertising or representation of services; been licensed by the motor licensing authority.
customer charging, billing, collection and Artisans like tailors, barbers, photographers,
credit practices; and any other matter etc. also form associations which, among other
which, in the opinion of the NCC, may be activities, license prospective practitioners of
of concern to consumers. their respective trades.
All these measures are designed to protect the
consumer against quacks and impostors.
State Government Criminal
Code and Penal Code Destination inspection of
imported goods
In the southern states, there exists the Criminal
Code, the equivalent of which is the Penal Code
in the northern states. Sections 243 and 244 of As has been discussed in Book 1, a central objective
the Criminal Code and Sections 184-189 of the of the destination inspection is to forestall the
Penal Code contain provisions against offences importation of sub-standard goods. When imports
like short-weight, deception in the quality of arrive, Customs officials, in collaboration with
food, food poisoning and adulteration, noxious NAFDAC staff and others, ensure that the imports
food etc. and diseased meat, i.e., meat of animals conform to the laid-down standards, thereby
that died through causes other than normal reducing the chance of consumer good imports
slaughtering. being injurious or unsuitable for consumption.

100
 3 Protection of consumers from the avarice
Herbal Medicines and of unscrupulous traders through the
Related Products (Labelling) use of unjust weights or measurers or
Regulations 2005 made by the misrepresentation.
4 Ensuring that pre-packed goods conform to
NAFDAC the standard metric quantities as prescribed
by law.
In exercise of the powers conferred on the 5 Approval of newly manufactured measuring
NAFDAC by Section 8 of the Drugs and Related instruments through the issuance of the
Products (Registration, etc.) Act 1993, as amended, ‘Certificate of Approval of Pattern.’
the NAFDAC has issued the above 2005 set of 6 Prosecution of those who go contrary to
regulations on labelling of herbal medicines. The the law on matters relating to weights and
regulations cover virtually all facets of herbal measures.
medicine labelling. It makes labelling mandatory 7 Seizure and detention of weighing and
and requires the labelling to be adequate and measuring equipment that do not conform
clear, to be informative and not promotional or to the provisions of the law, as well as sealing
persuasive, not to be false or misleading, etc. The of premises used for such contravention in
name and address of the manufacturer, packer appropriate cases.
or distributor must also be indicated, just as the 8 Monitoring of crude oil export in
ingredients used in preparing the herbal medicine collaboration with other government
as well as the NAFDAC Registration Number. It agencies.
also stipulates penalties of fines (of not more than 9 Standardisation of indigenous measures.
N0.1 million), imprisonment (of not more than
2 years) or both fine and imprisonment, for any Organisational measures for
person (whether individual or body corporate)
found guilty of contravening the regulation, and protecting consumers
that an officer of a contravening body corporate
is liable to being culpable as the body corporate Various organisations exist for the purpose of
itself. enforcing the various legislative and regulatory
provisions discussed above. In addition, others
Weight and Measures Unit of have been established on the basis of private
or non-statutory arrangements. Some of these
the Ministry of Commerce organisations are as follows:

Weights and Measures is a division in the Federal Government agencies or

Ministry of Commerce. Its main objective is to
ensure accurate weights and measures, weighing institutions
and measuring equipment used for trade
within the economy. It enforces Weights and 1. Rent Tribunals. These exist in order to
Measures Laws through its state offices, located settle any disputes between a landlord
in the various state capitals, with Abuja as the and a tenant. (The tenant constitutes the
headquarters. Its functions include: consumer.) In particular, the tribunals serve
1 Maintenance of the standard of weights and to prevent the exploitation of tenants by
measures in the country. their landlords.
2 Verification and certification of weights, 2. Environmental Protection Agency. There is the
measures, weighing and measuring Federal Environmental Protection Agency
instruments used, through visits to petrol (FEPA), which is under the supervision of
retail outlets, petrol depots, supermarkets, the Federal Ministry of Environment. Its
open markets, grocery shops, factories, roles and functions are discussed fully later
airports, etc. in this chapter. Similar organisations exist at
the State level also.

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4 Health & Sanitary Inspection Agency. This is Standards Organisation of
an organ of the Ministry of Health of each
state that enforces the various regulations
Nigeria (SON)
on hygiene and sanitation, especially on the
sale of consumer goods. The Standards Organisation of Nigeria (SON) is
the sole statutory body that is vested with the
responsibility of standardising and regulating
Independent organisations the quality of all products in Nigeria. It was first
established through Act 56 of 1971 and changed
1 Associations of producers (or suppliers). its name to the present one from the National
Producers and suppliers of particular Standards Organisation (NSO) in 1984. The 1971
commodities often form associations Act establishing it has gone through subsequent
whose objectives include protection of amendments (namely in 1976, 1984 and 1990). It
the consumers of their products. Such is under the supervisory authority of the Ministry
associations in respect of the supply of Industry (presently, Ministry of Industry and
of services (e.g., by legal, medical, and Commerce).
vocational services) have been referred to The SON is established to be the main
earlier and will be alluded to again later in reference point in matters of standardisation as
the chapter. But similar organisations also well as quality and technical competence needed
exist (although in a less developed form) in to launch Nigerian products into the competitive
the case of supply of physical goods. These global market. Specifically, its objectives are to
are discussed further later in the chapter. provide industries with up-to-date information
2 Consumer associations. As discussed further on standardisation and its benefits, encourage
below, there are a number of consumer participation of the organised private sector (OPS)
associations in the country, seeking to raise in standardisation and review, ensure improved
awareness by consumers of their rights, competitiveness of Nigerian goods at home
protecting consumers whose rights have and abroad by encouraging quality assurance
been violated, and canvassing with the practices, provide information, advice and
government on protection of consumer assistance to industries on quality management for
rights. improved cost effectiveness, and ensure adequate
technical support for Nigerian industries to
match the quality required for competitiveness in
Government-owned global trade. In meeting these objectives, its main
institutions or organisations statutory functions, in a paraphrased form, are as
follows:
for protecting consumer 1 Investigation of the quality of facilities,
rights in Nigeria materials and products in Nigeria, and
establishment of a quality assurance system,
including certification of factories, products
There are a number of government-owned
and laboratories.
institutions or organisations for protecting
2 Ensuring reference standards for calibration
consumer rights. Discussed below are the main
and verification of measures and measuring
four out of these, namely Standards Organisation
instruments.
of Nigeria (SON), National Agency for Food and
3 Compilation of an inventory of products
Drug Administration and Control (NAFDAC),
requiring standardisation.
Consumer Protection Council (CPC), and the
4 Promotion of interest in the recommendation
Federal Environmental Protection Agency
and maintenance of acceptable standards by
(FEPA).
industry and the general public.
5 Development of methods for testing
materials, supplies and equipment.
6 Registration and regulation of standard

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 marks and specifications. drugs, cosmetics, medical devices, bottled water
7 Preparation and distribution of standard and chemicals’. They are not fully written just for
samples. brevity.
8 Provision of advice to State and Federal 1 Regulation and control of the importation,
Government departments on specific exportation, manufacture, advertisement,
problems relating to standards. distribution, sale and use of the stipulated
products.
National Agency for Food 2 Conduct of appropriate tests, and ensuring
compliance with standard sp e c i f i c a t i o n s
and Drug Administration and designated and approved by it for the
Control (NAFDAC) effective control of quality of the stipulated
products.
3 Investigation into the production premises
The National Agency for Food and Drug
and raw materials for, as well as inspection
Administration and Control (NAFDAC) is a
of imports in respect of, the stipulated
Federal Government agency, under the Federal
products and establishment of a relevant
Ministry of Health, which is responsible for
quality assurance system, including
regulating and controlling the manufacture,
certification of the production sites and of
importation, exportation, advertisement,
the stipulated products.
distribution, sale and use of foods, drugs,
4 Compilation of the standard specifications,
cosmetics, medical devices, chemicals and
regulations, and guidelines for the
prepackaged water. It was established by Decree
production, importation, exportation, sale
No. 15 of 1993, thereby replacing the Directorate
and distribution of the stipulated products.
of Food and Drug Administration and Control in
5 Registration of the stipulated products.
the Ministry of Health.
6 Control of the exportation and issuance
Its main statutory functions, in paraphrased
of quality certification of the stipulated
form, are as stated below. ‘Stipulated products’
products.
referred to in these functions refer to ‘food,

Fig. 9.1 NAFDAC officials on factory inspection

103
7 Establishment and maintenance of relevant 2 Seeking ways and means of removing or
laboratories or other institutions as eliminating from the market hazardous
may be necessary for the performance of its products and causing offenders to replace
statutory functions. such products with safer and more
8 Pronouncements on the quality and safety appropriate alternatives.
of the stipulated products. 3 Publishing, from time to time, a list of
9 Ensuring that the use of narcotic drugs and products whose consumption and sale
psychotropic substances are limited to have been banned, withdrawn, restricted or
medical and scientific purposes. not approved by the Federal Government
10 Authorisation of the import and export of or foreign governments.
narcotic drugs and psychotropic substances 4 Causing offending company, firm, trade,
as well as other scientific substances. association or individual to protect,
11 Collaboration with the National Drug compensate, provide relief to and safeguards
Law Enforcement Agency in measures to to injured consumers or communities from
eradicate drug abuse in Nigeria. adverse effects of technologies that are
12 Provision of advice to the Federal, State inherently harmful, injurious, violent or
and Local Governments, the private sector highly hazardous.
and other interested bodies regarding the 5 Organising and undertaking of
quality, safety and regulatory provisions on campaigns and other forms of activities as
the stipulated products. will lead to increased public consumer
13 Undertaking and coordination of research awareness.
programmes on the storage, adulteration, 6 Encouragement of trade, industry and
distribution and rational use of the professional associations to develop
stipulated products. and enforce in their various fields quality
14 Issuance of guidelines on, approval and standards designed to safeguard the
monitor of, the advertisement of the interest of consumers.
affected products. 7 Issuing guidelines to manufacturers,
15 Compilation and publication of relevant importers, dealers and wholesalers in
data resulting from the performance of its relation to their obligation under this
statutory functions. legislation.
16 Determination of the suitability or otherwise 8 Encouragement of the formation of
of the stipulated products. voluntary consumer groups or associations
17 Sponsorship of such national and for consumers’ well-being.
international conferences as it may 9 Ensuring that consumers’ interests receive
consider appropriate as well as liaising due consideration at appropriate forum and
with relevant establishments within and to provide redress to obnoxious practices
outside Nigeria in pursuance of its or the unscrupulous exploitation of
functions. consumers by companies, firms, trade
associations or individuals.
10 Encouragement of the adoption of
Consumer Protection Council appropriate measures to ensure that
(CPC) products are safe for either intended or
normally safe use.
The Consumer Protection Council (CPC) was In discharging the function of educating
established by the Consumer Protection Council consumers, the CPC keeps consumers informed
Act No. 66 of November 1992. The Act provides through making representations to various
for the functions of the CPC, the major ones of audiences, delivering of lectures and speaking
which can be paraphrased as follows: to individuals and groups in and out of office,
1 Provision of speedy redress to consumers’ conducting of workshops and seminars;
complaints through negotiations, mediation broadcasts of messages on radio and television;
and conciliations mounting of displays at events where crowds

104
of consumers are expected, like trade fairs, 5 Preventing and controlling discharges to
exhibitions, etc; putting up public notices in the air, water or soil of harmful and hazardous
print and electronic media; erection of billboards, substances.
production of journals, pamphlets, leaflets, etc. Also, many State governments have their own
Also, in performing the function of elimination environmental protection agencies performing a
of hazardous products from the market and sub-set of the above functions.
ensuring that products and services comply with
required standards and specifications, it carries
out surveillance and enforcement activities in the
Non-governmental
marketplace; conducts quality tests and analyses institutions that promote
on products and services; compels producers of
goods and services to adhere to quality standards/
and protect consumer rights
specifications; issues guidelines, regulations, etc.
to producers of goods and services; bans the sale, Consumer associations
distribution and advertisement of substandard
and defective products and services; and There are a number of consumer associations in
prosecutes offenders, when and where necessary. Nigeria. Notable among these are All Nigerian
Finally, in providing redress to consumer Consumer Movements’ Union (ANCOMU), the
complaints, it receives and acts on consumer Consumer Protection Organisation of Nigeria
complaints; negotiates, mediates and conciliates (CPON), the Consumer Awareness Organisation
consumer complaints; obtains compensation, (CAO), the Consumer Campaign Foundation
relief, safeguards, etc. for injured consumers or (CCF), and the Consumer Rights Project (CRP).
communities; and applies to court to protect the The Consumers International (CI) is a
rights of consumers. federation of national consumer associations.
The CPC has branches in each State of the The CI and its members promote consumer
Federation, through which many of the above protection all over the world. March 15 every year
functions are discharged, since Sates are more is observed as the World Consumer Rights Day,
easily reached by consumers than the head office a day set aside to protest abuses and injustices
in Abuja. that undermine consumer protection. Also, there
is the International Organisation of Consumers’
Federal Environmental Unions (IOCU) which embarks on a worldwide
advocacy for consumer rights.
Protection Agency (FEPA)
These associations are non-governmental
The Federal Environmental Protection Agency organisations (NGOs). Their functions greatly
(FEPA) was established by Decree 58 of December overlap with some of those being performed by
1988, saddled with the statutory responsibility the Consumer Protection Council (CPC), except
for overall protection of the environment. Its that they do not have statutory backing like the
statutory functions include the following: CPC. In the main, their main functions include:
1 Coordination of all environmental activities 1 Raising awareness of consumers on their
and programmes within the country. rights.
2 Serving as the national environmental 2 Educating consumers about specific
focal point, and the coordinating body for products to enable them to make informed
all bilateral and multilateral activities on choices while taking purchase decisions.
the environment with other countries and 3 Assisting wronged consumers to seek
international organisations. redress from the sellers.
3 Setting and enforcing ambient and 4 Enabling consumers air their views and
emission standards for air, water and noise grievances about products.
pollution. 5 Lobbying and canvassing with policy
4 Controlling substances which may affect makers and lawmakers on putting in place
the stratosphere, especially the ozone layer. policies and laws for protecting consumers.
105
 There are also crafts unions (tailors’ unions,
Associations of producers of goods and services barbers’ unions, etc), which, though less
Associations of producers of goods and services formal and less organised than professional
exist primarily to protect the interests of their associations, implement quality controls on the
members. Thus, on the surface, reporting cases services rendered by their members. They license
of consumer rights abuse to them against their their apprentices upon graduation only after
members may look like reporting to a biased and measuring up to their standard; they sanction
prejudiced body. However, this could be so only erring members whose services are deemed to
to an extent, because they also exist to protect the be tarnishing their image, etc. Even, members of
image of their associations, and members that are the National Union of Road Transport Workers
doing something to tarnish the image may face (which is essentially a trade union) would not
their disciplinary measures and be sanctioned, hesitate to sanction members that are very
which may be a deterrent to others. Second, they obviously abusing consumer (i.e., passengers’)
also ensure quality standard by admitting only rights.
professionally qualified people as members.
Another way by which they implement quality
control is to organise training workshops and
Revision questions
issue notices and bulletins for the purpose of
disseminating information that would strengthen Essay questions
the capacity of their existing members, and 1 Discuss the importance of consumer
updating their skills and knowledge concerning protection measures.
latest developments and best practices in the 2 Explain the roles of the following bodies in
profession or trade. relation to consumer protection in Nigeria:
Producers of goods and services can be a) Sanitary Inspection Units
broadly divided into the formal professional b) Consumers’ Associations
bodies, those that are trade associations, and less c) Producers’ Associations
formal crafts unions. These are discussed in turns 3 Discuss the main objectives and provisions
below. of the following enactments in relation
Formal and organised associations exist to consumer protection:
for various professions and have statutory a) Hire Purchase Act of 1965
responsibilities for regulating their professions. b) Sales of Goods Act 1893 as amended
Such associations include the following: c) Trade Description Act of 1968.
1 Nigerian Bar Association and Nigerian 4 List and briefly discuss the main laws in
Legal Council’ for lawyers. Nigeria that have the goal of preventing
2 Nigerian Medical Association (NMA) and the consumption of commodities that are
the Nigerian Medical Council, for medical injurious to health.
practitioners.
3 Council of Registered Engineers of Nigeria Multiple choice questions
(COREN) and similar bodies. 1 Which of the following is not a part of the
4 Pharmaceutical Society of Nigeria (PSN). internationally accepted consumer rights?
5 Institute of Chartered Accountants of A Right to be informed
Nigeria (ICAN), and Association of National B Right to safety
Accountants of Nigeria (ANAN). C Right to buy on credit
6 Similar bodies for other professions. D Right of consumer choice
Organisations also exist for selected trades. E Right to be heard
Notable among these are the Manufacturers 2 Which of the following is not a Nigerian
Association of Nigeria (MAN). Various Chambers legislation providing for protection of
of Commerce also put in place quality assurance consumers?
measures, in various ways (e.g., through A Investment and Securities Act of 2007
updating the knowledge of their members on B Hire Purchase Act of 1965
latest developments in their trades).

106
 C Standards Organisation of Nigeria Act
of 1971 (as amended)
D Consumer Protection Council Act of
1992
E Nigerian Communications
Commission Act of 2003
3 Which of the following government agencies
are/is created to protect consumers?
A Economic and Financial Crimes
Commission (EFCC)
B Securities and Exchange Commission
C Federal Environmental Protection
Agency
D Nigerian Export Promotion Council
E Independent National Electoral
Commission
4 According to the Consumer Protection
Council (CPC) Act of 1992, the CPC’s
functions include:
A Provision of speedy redress to
consumers’ complaints through
negotiations, mediations and
conciliation
B Taking measures to promote consumer
awareness
C Arresting and prosecuting in court
those selling to consumers at
exhorbitant prices
D a and b
E a and c
5 The statutory functions of the National
Agency for Food and Drug Administration
and Control (NAFDAC) do not include:
A Regulation and control of the
importation, exportation, manufacture,
advertisement, distribution, sale and
use of food, drugs, cosmetics, medical
devices and bottled water
B Making sure the prices of foods, drugs,
cosmetics, medical devices and bottled
water are affordable to the poor
C Provision of financial assistance to the
needy to enable them to buy food,
drugs, cosmetics, medical devices and
bottled water
D a and b
E b and c

107
 Chapter 10

Business documents
Usually where sellers and buyers come face to has learnt of from trade journals or through
face in buying and selling, it is possible for the other means. While a visit has the advantage of
transactions to involve no documents. In many facilitating on the spot visual inspection of the
cases, however, one type of document or the other goods, it may be too costly and time-consuming.
is involved in the buying and selling of goods. As An alternative is to contact the seller through the
buying and selling of goods is not complete until telephone, where one exists, but this also has a
the goods are paid for, documents involved in disadvantage, in that no record of the telephone
making payments can also be regarded as a part conversation would be available for future
of business documents. We will now study the reference.
main documents in use in buying and selling as Thus, it is common for a buyer to send a letter
well as in making payments. of enquiry to the seller. This letter simply asks
the seller to supply more information about the
Essential documents in goods to augment the knowledge that the buyer
has acquired from trade journals or other sources.
buying and selling of goods A specific request for price quotation may also be
made in the letter, or a request for price quotation
Fig. 10.1 lists the essential documents used in may be sent on a stand-alone basis, either in
buying and selling in domestic trade. Documents addition to, or as a substitute for a general letter
used in foreign trade, which include some that of inquiry.
are used in domestic trade, are discussed in
Book 1 under the chapter on Foreign trade. Fig. Sequence of documents used in domestic trade
10.1 shows the usual sequence followed by these
documents in trading.
1 Trade journals
Trade journals
2 Letter of inquiry and request for price quotation
Trade journals are booklets that contain articles
or write-ups as well as advertisements in respect
3 Price quotation, catalogue and price list
of some trades. Thus, it provides information
to new potential buyers on various items. It
also keeps existing customers informed of new 4 Ordering for the goods by the buyer
developments in the trade. It often serves as a
starting point from which a buyer makes further 5 Reference letter sought by supplier
enquiries about a particular good.

6 Pro forma invoice sent by supplier

Letter of enquiry and request
for price quotation 7 Supplier prepares and sends invoice and
advice note
In some cases, an intending buyer can visit the
seller to make further inquiries about what he

108
 8 Delivery note from supplier’s carrier, or Purchase order
consignment note from independent carrier
If the reply received by the prospective buyer in
9 Receipt from the supplier, acknowledging response to his inquiry satisfied him, the next
collection of payment thing for him to do is to place an order for the
goods, often in writing. In doing so, the buyer
may use any of the following:
10 Credit note from the supplier or debit note from 1 The order form supplied by the seller
either the buyer or the supplier 2 His own order form
3 A written letter (usually on the letterheaded
paper) of the buyer
11 Periodic statement of account sent by the
supplier
In either case, the order form should indicate
the type, quantity, and price of each item.
Fig. 10.1 Documents used in domestic trade
and their sequence Reference letter

Response to letter of inquiry: The order is not often accompanied with cash
payment. If the buyer has not established enough
Price quotation and catalogue confidence in the seller, especially where the buyer
or price list is a new one, the buyer may need to indicate,
while placing the order, a person who can attest
As part of the response to the letter of inquiry, to his character as well as his creditworthiness
there would be a catalogue or price list. A separate (e.g., other sellers previously dealt with, or his
price quotation may also be sent, particularly to banker who the seller can refer to).
update the prices contained in the catalogue or The seller could then write such referees, and
price list. such a letter is called reference letter. If the seller
A catalogue is simply the list of goods dealt finds the reply to the reference letter satisfactory,
in by a seller. Usually, the catalogue contains he can decide to sell (and send) the goods to
the photographs or illustrations of goods, and the buyer. But if the seller is not satisfied, for
descriptions as to the size, colour and other one reason or the other, with the character and
measures or indications of quantity and quality. creditworthiness of the intending buyer, he may
It is also possible to indicate prices in catalogues. issue a pro forma invoice (discussed below) to
Alternatively, it may be found more appropriate this intending customer as an indication that he
to list the goods against their respective prices in has to be paid before selling.
a separate document or booklet called price list.
Whether the prices are included in the Pro forma invoice
catalogue or the price list, it is the gross price (i.e.,
the price before deducting any trade discount) that
This is very much like an ordinary invoice
should be stated, so that any subsequent changes
(discussed below), except that the expression ‘pro
in the actual prices can be catered for by simply
forma’ is written across its face (usually, in red ink
adjusting the rate of trade discount accordingly.
to make it conspicuous), to indicate that it is not
Otherwise, if the net price (i.e, the price after the
an ordinary invoice. As has just been mentioned,
trade discount has been deducted) is quoted in
it is issued when the seller wants to be paid before
the catalogue or price list, there would be the
selling the goods, because he is not convinced of
wasteful need for a new catalogue or price list
the creditworthiness or trustworthiness of the
to be produced each time there is a price change.
intending buyer. It can also be issued when goods
Thus, the gross price is also referred to as the
are sent for the customer’s inspection.
catalogue price or the list price.
Two copies are usually produced, with the top
copy being sent to the intending buyer and the

109
duplicate being retained by the seller. Advice note

Invoice This is the document from the seller’s warehouse

to notify the customer that his goods are on the
This is a document or bill sent or issued to the way. It is received by the store department of
buyer by the seller when a decision to sell has the customer for record purposes. Sometimes, a
already been made. An invoice should contain copy of the invoice can serve as an advice note.
the following information: At other times, especially if invoice preparation
1 Names and addresses of both the seller and is not yet completed, a separate advice note can
the buyers and signature of the seller. be prepared, in which case only the types and
2 Date of sale. quantities of the goods dispatched need to be
3 Description of the goods as to type, quantity stated, i.e., the price, terms of sale, etc. that are
and price. contained in an invoice are dispensed with. In
4 Terms of sale, including trade discount and the main, an advice note is prepared to notify the
cash discount. buyer in advance that his goods are on the way.
5 A serial number for the sake of reference.
Delivery note
Number of copies
A minimum of two copies of an invoice should be This is the document used by the seller’s carrier
produced, with the original copy sent to the buyer, (i.e., deliveryman) so as to obtain the signature of
while the duplicate (carbon copy) is retained by the customer, acknowledging that the goods have
the seller. Sometimes, however, about five copies been received in a stipulated condition. Thus, the
may be produced and distributed as follows: use of delivery note is normally applicable when
1 Top copy or the original copy, to be sent to goods are delivered to the buyer by the seller
the buyer. (or seller’s carrier). Again, sometimes, a copy of
2 Second copy, to be retained by the seller for the invoice can serve as a delivery note. At other
record purposes. times, especially if the invoice preparation is not
3 Third copy, to be used as a delivery note yet completed, a separate delivery note can be
(discussed below). prepared. This separate delivery note does not
4 Fourth copy, to be used as an advice note normally indicate the price, terms of sale, etc. that
(discussed below). an invoice contains. Instead, the delivery note
5 Fifth copy, called Representative’s Copy, essentially indicates the quantities and the types
to be kept by the Sales Representative of the goods. It is normally a substitute for the
of the seller. It is the duty of the Sales advice note – which is the one sent to notify the
Representative to liaise or deal directly buyer that the goods are being sent separately, or
with the buyer. This fifth copy serves to are on their way.
inform the Representative that his previous
order for that customer has been satisfied.
The term ‘E. & O.E.’, which is an abbreviation Consignment note or waybill
that means Errors and Omissions Excepted is
sometimes written at the bottom of an invoice. In the case of foreign trade, we have come across
This serves to indicate that if an error is contained the use of consignment note or waybill (in Book
in the invoice the seller will correct it. However, 1). The use of the consignment note in domestic
this expression has now become not only outdated trade serves the same general purpose as the air
but also redundant. This is because it has been consignment note, sea waybill, rail waybill, road
recognised in commercial law that a mere slip of waybill, bill of lading and charter party in the
the pen of an invoice may still be corrected by the context of foreign trade. Thus a consignment note
seller when the error is detected. is a contract of domestic affreightment (or carriage
of goods) and serves the following purposes:
1 It is an acknowledgement by the carrier

110
 same as those of an invoice. However, the top
that the goods have been received from
copy of a credit note is usually red in colour so
the sender in the condition stated in that
as to be easily distinguished from an invoice. In
document.
addition, two copies of a credit note are normally
2 It is the evidence of the carriage of goods
required, with the duplicate being retained by the
contract between the carrier and the seller
seller and the top copy (coloured in red) sent to
dispatching the goods to the buyer.
the customer.
3 However, unlike a bill of lading, it is not a
document title to the goods.
It should be noted that a consignment note is Debit note
used when an independent carrier or transporter
(whether by rail, road, air or water) is used, while A debit note can be issued by the seller to the
a delivery note is normally used when the seller buyer when the seller is acknowledging that he
uses his own means of transport. Unlike a delivery has realised that the customer had earlier been
note that is issued by the sender of the goods, a undercharged, so that the correct amount could
consignment note is issued by the carrier. Three not have been fully debited to the customer’s
copies are normally prepared by the carrier – first account in the seller’s record. Through a debit
copy is given to the sender of the goods, second note, the seller informs the buyer that the extra
copy accompanies the goods, and third copy is amount required to correct this error will be
retained by the carrier. debited to his account in the seller’s account.
This type of debit note can then be regarded as a
Credit note ‘supplementary invoice’.
A debit note can also be issued by the buyer to
inform the seller that the
This document is issued by the seller to the buyer
1 goods bought from the seller have been
in any of the following instances:
returned to him, either because they are
1 When the seller is acknowledging the
defective, or for any other reason, or
receipt of goods returned by the buyer,
2 packages or containers supplied by the seller
either because the goods are defective, or
with his goods, and for which the buyer had
for any other reason.
been charged, are being returned to him.
2 When the seller is acknowledging that he
Thus, a debit note issued by a buyer
has realised that the customer had earlier
to the seller can be regarded as a ‘reverse
been overcharged.
credit note’, and is often issued when
3 When the seller is acknowledging the
the seller delays issuing the credit note in
receipt from a customer of packing cases
acknowledgement of returned goods or
or containers with which goods had earlier
containers.
been sold to the customer and for which the
The party issuing the debit note retains the
customer had earlier been charged as per
duplicate, sends out the top copy, and uses his
the invoice.
copy in debiting the account of the other party in
Thus, the credit note serves to inform the
his own (issuer’s) records.
customer that his account with the seller has been
credited (i.e., that the seller has made an entry in
favour of the buyer). When the goods were sold Statement of account
to the customer initially, the net price or amount
(including charges for containers) stated on the This is regularly sent by the seller at the end of ,
invoice has been debited to the buyer’s account say, every month, to the buyer. It usually serves
in the records of the seller. A credit note therefore to request the customer to whom it is sent to
serves to inform the buyer that an opposite entry settle his debt and, at the same time, informs the
has now been made in the seller’s records in customer of the amount that the seller deems him
favour of the buyer, i.e., the account of the buyer to be owing.
has been credited in the seller’s record. A statement of account often has three columns
The contents of a credit note are generally the for recording money. Under the first column

111
(called Debit or ‘Dr’ column), the goods and Price of goods
containers charged to the customer are entered
together with any amount owed by the customer
at the beginning of the period. Under the second
Introduction: Incorterms as the
column (called Credit or ‘Cr’ column), payments worldwide basis for quoted
by the customer, cash discount already allowed prices, especially in foreign
the customer, and goods or containers returned
by the customer are entered. In the third column trade
(called ‘Balance’ column), the moving-balance
(i.e. the excess of the Debit column total over Meaning, purpose and uses of Incoterms
the Credit column total at the end of every entry Incoterms, the acronym for International
on the statement) is recorded. The last figure Commercial Terms, are rules developed by the
at the end of a period under this third column Paris-based International Chambers of Commerce
represents the amount owed by the customer. (ICC) to standardise international trade
(See Table 10.1 for an illustration.) In a fairly large practices as well as facilitate trade and minimise
organisation, the statement is often prepared misunderstanding over commercial terminology.
with the aid of a computer. As in the case of an The ICC codifies the terms used in foreign trade
invoice, the abbreviation ‘E. & O.E.’ is sometimes contracts, and defines which parties incur the costs
written at the bottom of the statement to indicate and bear risks over goods, at what specific point
that any error detected in the statement would be the costs are incurred, and the risks borne, and
corrected. publishes these in relevant editions or revisions
of Incoterms. They are used to divide transaction
Receipt costs and responsibilities between buyer and
When a customer makes a payment other than seller in line with state-of-the-art transportation
through a cheque, he will often require to be and commercial practices. They constitute a sort
issued a receipt by the seller in acknowledgment of shorthand definitions of shipment and delivery
(i.e, as evidence) of the payment. But if the responsibilities of sellers and buyers in sales
customer pays by issuing a cheque, the Cheque contracts for tangible goods. As stated by ICC
Act of 1957, enacted in the United Kingdom and itself, the purpose of Incoterms is ‘to provide a set
inherited by Nigeria, makes it unnecessary for of international rules for the interpretation of the
the seller to issue a receipt unless the customer most commonly used trade terms in foreign trade.
insists on getting one. In most cases, a customer Thus, the uncertainties of different interpretations
is not likely to insist on this, as the cheque issued of such terms in different countries can be avoided
constitutes a receipt or evidence of payment, as or at least reduced to a considerable degree’.
long as it has been stamped ‘Paid’ by the banker. The terms are accepted by governments, legal
Table 10.1 Specimen statement of account

Statement of account for the month of April

Mr Buyer

Date Details Debit Credit Balance

(Dr) (Cr)
$ $ $
April 1 Balance as in the last statement 15,000 15,000
April 5 Payments received 9,000 6,000
Cash discount 1,000 5,000
April 12 Goods charged (including containers) 12,000 17,000
April 23 Containers and goods returned 3,000 14,000
E & O.E

112
authorities and practitioners worldwide for the unit of the goods.
interpretation of most commonly used terms in 3 Dock or port dues and costs of customs
international trade. formalities necessary for exportation as well
as all duties, taxes and other official charges
Origin and evolution of Incoterms payable upon exportation. Let us assume
The publication of Incoterms started in 1936. Since this to be $8 per unit of the goods.
then, there have been many revisions, usually 4 Cost of moving the unloaded goods to place
at an interval of 10 years. The latest revision is them alongside the vessels (whether ship,
that of 2010, which takes effect from January aircraft, train or truck). Let us assume this
2011 and supersedes the previous revision that to be $5 per unit of the goods.
occurred in 2000. The 2010 revision, which took 5 Costs of loading the goods, from alongside
cognisance of a number of recent developments vessel, into, or on board of, the vessel
like containerisation in foreign trade, reduces the (whether ship, aircraft, train or truck). Let
number of trade terms to 11, from 13 that was us assume the cost to be $12 per unit of the
contained in the 2000 revision. It also differs from goods.
the previous revisions by providing guidance 6 Freight charges for shipping the goods from
on the use of the trade terms in the context of the port of embarkation (whether seaport,
domestic trade. Specifically, the rules contained in airport, railway station or truck garage) to
the 2010 revision provide explicitly that the rules the port of destination. In the case of multi-
may be used not only for international trade but modal transport (i.e., transport involving
also for domestic trade, thereby widening its area trans-shipment from one mode of transport
of application. This 2010 version of Incoterms is to another), this also includes such costs of
available on the ICC’s website and the official trans-shipment needed to bring the goods
publication ‘Incoterms 2010’. Another revision to the destination. Let us assume the cost to
is likely due in around 2020 (i.e., another decade be $40 per unit of the goods.
after 2010), to take effect from 2021. 7 Insurance of the goods while in transit
between the port of embarkation and the
port of destination. Let us assume this to be
Identifiable 10 categories of $5 per unit of the goods.
components of the price of 8 Cost of unloading from the arriving means
goods in foreign trade of transport (whether ship, aircraft, train or
truck) and placing the goods at the disposal
of the buyer at the agreed terminal at the
To suit the 11 trade terms identified in the Incoterms named seaport, airport, railway station or
2010, we can group the make-up or components garage (as applicable). Let us assume the
of the costs involved in bringing export goods to cost to be $9 per unit of the goods.
the place in the importing country, at the specific 9 Costs of duties, taxes and other official
place chosen by the importer, into 10 categories, charges as well as the costs of carrying
in the usual sequence of the cost incurrence, as out customs formalities payable upon
follows: importation of the goods and, where
1 Ordinary cost of the goods in the exporter’s necessary, for their transit through another
warehouse, factory or production point. Let country. Let us assume the cost to be $7 per
us assume the cost to be $100 per unit of the unit of the goods.
goods. 10 Cost of evacuating and transporting the
2 Packing cost and also cost of collection goods from the port of destination (usually,
or transportation from the exporter’s in trucks or possibly in trains) to the
warehouse or factory (including cost of importer’s or buyer’s place, ready to be
unloading) to the place of embarkation (but not yet) unloaded at the buyer’s place.
(whether seaport, airport, train station, Let us assume the cost to be $4 per unit of
or truck garage) or simply to the carrier’s the goods.
place. Let us assume the cost to be $10 per

113
The 11 types of quoted prices exportation. This means that the seller bears the
first three cost items, i.e., items (1) to (3) identified
and trade terms in foreign above, as also shown in Table 10.2. In addition,
trade he bears the risk of loss or damage to the goods
up to the point of delivering the goods to the first
The 11 trade terms are as explained below, using the carrier named by the buyer. This term is suitable
above 10 categories of cost components. It should for all modes of transport, including carriage by
be noted that after naming each term, expressions air, rail, road, and containerised/multi-modal
like ‘named place’ are put in parentheses to make transport. It is more appropriate to use than FOB
it formal and complete, since the particular name (that applies only to sea and inland waterway
has to be inserted in practice, and it also appears transport) when the ship’s rail serves no practical
in parentheses like that in the Incoterms 2010. purposes such as in the case of roll-on/roll-off
Also, it should be noted that the Incoterms 2010 or container traffic (i.e., even for sea or inland
emphsises the distinction between those four waterway transport).
terms that apply only to sea and inland waterway In this context, the word carrier means any
(viz: FAS, FOB, CFR and CIF) and the remaining person who, in a contract of carriage, undertakes
seven terms (EXW, FCA, CPT, CIP, DAT, DAP and to perform or to procure the performance of
DDP) that apply to all modes of transport. carriage by rail, road, sea, air, inland waterway
or by a combination of such modes, while
‘transport terminal’ means a railway terminal,
EXW or Ex-works (named place)
a freight station, a container terminal or yard,
The seller makes the goods available at his
a multipurpose cargo terminal, or any similar
premises (works, factory, warehouse, plant or
receiving point. Also, it should be understood that
factory). The buyer is responsible for all charges,
Roll-on/roll-off or ro-ro ships are vessels designed
including cost of packing the goods and loading
to carry wheeled cargo such as automobiles,
them into the inland transport vessel as well as
trucks, semi-trailer trucks, trailers or railroad cars
transportation costs, and bears the risks of loss
that are driven on and off the ship on their own
or damage to the goods from the warehouse or
wheels. They are so designed to allow the cargo to
factory until the goods are brought to the final
be efficiently ‘rolled on’ and ‘rolled off’ the vessel
destination in his own country. This trade term
when in port. As a result, they do not require
places the greatest responsibility on the buyer
cranes to be loaded or unloaded, but the rolling-
and minimum obligations on the seller. The Ex
stock cargo is driven on and off the ship’s decks.
Works term is often used when making an initial
This is in contrast to lo-lo (lift on-lift off) vessels
quotation for the sale of goods without any costs
which use a crane to load and unload cargo.
included. This term can be used across all modes
Since the seller bears the cost for items (1)
of transport. This is equivalent to what used to
to (3) identified earlier, it follows that the price
be previously referred to as Loco, which has now
the seller should quote per unit of the goods
become obsolete and old-fashioned.
should be $118, made up of the $100 basic cost
Based on the cost information provided above,
plus $10 packing, loading and unloading plus
the price that should be quoted by the seller is
$8 for the cost of all dock dues, export customs
simply the basic cost of the goods at the seller’s
taxes and charges. This is, however, without
place, which is $100 per unit.
taking cognisance of additional risk he bears,
further along the transportation chain up to
FCA – Free Carrier (named place) when the goods are delivered to the carrier, for
The seller hands over the goods, cleared for loss or damage to the goods. Otherwise, if this
export, into the custody of the carrier (or first additional risk is taken into account, the cost of
carrier, if there are subsequent carriers before having to take the implied increased insurance
the goods get to the destination) named by the cover should be added.
buyer at the named place. The seller also pays the
costs of customs formalities as well as all duties,
taxes, and other official charges payable upon

114
Fig. 10.2 Ships at a busy port

FAS – Free Alongside Ship (named loading port) insurance cover and, hence, pay a higher
The seller must place the goods alongside the insurance premium.
vessel on the quay or in lighters at the named port
of shipment. But it is the buyer who has to clear FOB – Free on Board (named loading
the goods for export. The buyer also bears all port)
costs and risks of loss of or damage to the goods The seller must load the goods on board the ship
from that moment. It should not be used when nominated by the buyer, cost and risk of loss or
the buyer cannot carry out directly or indirectly damage to goods being divided when the goods
the export formalities. It is applicable to sea and are put on board. This means that the seller
inland waterway transport only. delivers the goods on board the vessel named by
Going by the various cost items identified the buyer at the named port of shipment on the
above and summarised in Table 10.2, it means date or within the period stipulated and bear all
the seller bears cost items (1), (2) and (4), while risks of loss of or damage to the goods until such
the buyer bears cost items (3) and (5) to (10). time as they have been put on board at the named
Thus, the price that the seller should quote will port of shipment. Also, the seller must clear the
be $115 (which is made up of the $100 basic cost goods for export, meaning that he pays, at his
plus $10 packing, loading and unloading plus own expense, port dues and export taxes and
$5 cost of putting the goods alongside the ship. charges. It applies to sea and inland waterway
But, again, this ignores the added risk, further transport only.
along the transportation chain up to when the Going by the cost items identified earlier and
goods are delivered alongside the ship, that the illustrated in the Table 10.2, it means that the
seller assumes of damage or loss of the goods, seller bears cost items (1) to (5). This means that
for which the seller may have to take increased the price that the seller should quote to reflect

115
this extended cost he is responsible for should be the agreed destination). ‘Carrier’, in this context,
$135. This is made up of the $100 basic cost plus has the same meaning as explained above while
$10 packing, loading and unloading plus $8 for discussing the FCA term.
the cost of all dock dues, export customs taxes As the term is the same as for the CFR (except
and charges plus $5 cost of putting the goods that CPT applies to all modes of transport, instead
alongside the ship, plus $12 cost of putting the of just sea and inland waterway transport), it
goods on board from alongside the ship. But, means that the price that the seller should quote
as before, this does not recognise the increased will be the same $175 that applies under the CFR
risk the seller is responsible for up till when the terms. (The only minor difference between CFR
goods are placed on board of the vessel, for which and CPT terms is that, under CFR terms, the
he may have to be charged a higher insurance seller delivers the goods on board the ship while,
premium in order to insure against the risk up to under CPT terms, he delivers it just to the carrier
this stage. and it is left for the carrier to handle putting the
goods on board the ship, aircraft, train or truck, as
CFR – Cost and Freight (named applicable.)
destination port)
The old-fashioned way of writing this is c & f, CIF – Cost, Insurance and Freight
instead of CFR. Under this, in addition to the (named destination port)
FOB cost, the seller must pay the costs and freight The old-fashioned way of writing this is c.i.f.,
to bring the goods to the port of destination. instead of CIF. This is exactly the same as CFR
However, risk of loss or damage is transferred to except that the seller must, in addition, procure
the buyer once the goods have crossed the ship’s and pay for insurance against the buyer’s risk of
rail. In other words, the seller’s risk is exactly loss or damage to the goods during transit. As the
the same as under the FOB terms. As in the case risk of loss or damage is transferred to the buyer
of FOB terms, CFR terms also apply to sea and once the goods have crossed the ship’s rail, it
inland waterway transport only. means that it is the buyer that assumes the risk
Going by the cost items identified earlier and while the goods are in transit from the port of
further illustrated in Table 10.2, it means that the origin to the port of destination. In all cases, it is
seller bears all the cost items applicable under the party that is responsible for the risk of loss
the FOB terms and, in addition, also bears the or damage that should, if the party so chooses,
cost of actually shipping the goods to the port of take an insurance cover against the risk. The CIF
destination in the importer’s country, which is terms constitute an exception to this, as it is now
cost item (6). This means that the price that the the seller that takes insurance against the risk that
seller should quote should be $175, made up of is the responsibility of the buyer to bear. It applies
the $135 quoted under the FOB terms plus the to sea and inland waterway transport only.
$40 per unit cost of shipping the goods to the Going by the cost items identified earlier and
destination. further illustrated in Table 10.2, it means that the
seller bears all the cost items applicable under
CPT – Carriage Paid To (named place of the CFR terms and, in addition, bears the cost of
destination) insuring the goods while in transit (i.e., the marine
This is the general/containerised/multi-modal insurance premium), which is cost item (7). This
equivalent of CFR. It is more appropriate to use means that the price that the seller should quote
than CFR when the ship’s rail serves no practical should be $180, made up of the $175 quoted
purposes such as in the case of roll-on/roll-off under the CFR terms plus the $5 per unit cost
or container traffic (i.e., even for sea or inland of insurance for the goods while in transit to the
waterway transport). The seller pays for carriage destination.
to the named point of destination, but risk of loss
or damage to the goods passes when the goods CIP – Carriage and Insurance Paid To
are handed over to the carrier (or first carrier, if (named place of destination)
subsequent carriers are used for the carriage to This is the containerised transport/multi-modal

116
equivalent of CIF. It is more appropriate to use under the CPT terms plus the $9 per unit cost of
than CIF when the ship’s rail serves no practical unloading the goods at the destination terminal
purposes such as in the case of roll-on/roll-off and placing them at the buyer’s disposal.
or container traffic (i.e., even for sea or inland However, this ignores the fact that the seller
waterway transport). The seller pays for carriage now takes further risks along the transportation
and insurance to the named destination point, chain, from when the goods are put on board or
but risk passes when the goods are handed over delivered to the carrier in his own country up till
to the first carrier. As the risk of loss or damage when goods are placed at the buyer’s disposal.
is transferred to the buyer once the goods have For this, he would take an additional or extended
been delivered to the carrier, it means that it is insurance cover at his own expense, and the
the buyer that assumes the risk while the goods additional insurance premium would need to be
are in transit from the port of origin to the port of reflected in the price quoted to the buyer.
destination.
Thus, the CIP terms constitute another DAP - Delivered At Place (named place)
exception to the logic that the party that is The seller delivers the goods when they are
responsible for the risk should be the one to get an placed at the disposal of the buyer on the arriving
insurance cover against the risk. As the terms are means of transport, ready for unloading (but yet
the same as for the CIF (except that CIP applies to be unloaded, as in the case of DAT terms) at
to all modes of transport, instead of just sea and the named place of destination. This presupposes
inland waterway transport), it means that the that the goods will have arrived at the ports and
price that the seller should quote will be the same terminal in the importer’s country, unloaded and
$180 that applies under the CIF terms. (Here also, then re-loaded or trans-shipped into truck or
the only minor difference between CIF and CIP train (or any other mode of transportation) and
terms is that, under CIF terms, the seller delivers transported to the buyer’s place. Risks for loss
the goods on board the ship while, under CIP of or damage to the goods are transferred at this
terms, he delivers it just to the carrier.) point (i.e., when placed at the buyer’s disposal)
from seller to buyer. The terms are applicable
DAT - Delivered At Terminal (named to any mode of transport, and not sea or inland
terminal) waterway transport alone. The importer, and not
The seller delivers when the goods, once unloaded the exporter, is responsible for effecting customs
from the arriving means of transport, are placed clearance, and paying any customs duties and
at the disposal of the buyer at a named terminal at charges.
the named port of destination. ‘Terminal’ includes This means that the difference between DAP
quay, warehouse, container yard or road, rail or and DAT terms is due to the additional cost to the
air terminal. The buyer bears all costs and risks seller under the DAP terms of packing the goods
of loss or damage from the terminal, while the into, and transporting them in, a truck, train or
seller bears the costs and risks up to that point. whatever from the port of destination to the place
The importer is responsible to clear the goods for named by the buyer. This additional cost relates
import, arrange import customs formalities, and to cost item (10), which is assumed to be $4 per
pay import duty. The terms are applicable to all unit of the goods, identified earlier and illustrated
transport modes. in Table 10.2. This means that the price that the
Going by the cost items identified earlier and seller should quote should be $188, made up of
further illustrated in Table 10.2, it means that the the $184 quoted under the DAT terms plus the
seller bears all the cost items applicable under the $4 per unit cost of evacuating the goods from the
CPT terms (or CIF terms) and, in addition, bears port to the place named by the buyer. However,
the cost of unloading the goods and placing them this ignores the fact that the seller now takes
at the disposal of the buyer at the agreed terminal further risks along the transportation chain up till
of the particular port, which is cost item (8). This when goods are taken to the place named by the
means that the price that the seller should quote buyer, for which the seller may have to incur the
should be $184, made up of the $155 quoted cost of local insurance premium to cover the risk

117
from the point or port of arrival until the goods should be $195, made up of the $188 quoted
get to the place named by the seller. under the DAP terms plus the $7 per unit cost of
import clearance, customs duties and other entry
DDP – Delivered Duty Paid (named charges.
destination place):
The seller is responsible for delivering the goods Tabular summary of the 11
to the named place in the country of importation,
including all costs and risks in bringing the goods foreign trade terms and the 10
to import destination. This includes duties, taxes classes of cost components
and customs formalities. This term means that the
seller pays for all transportation costs as well as The relationship between the 11 foreign trade
customs duties in the country of destination and terms and the 10 categories of cost components are
bears all risks until the goods have been delivered. as shown in Table 10.2. It is to be noted that ‘Yes’
This term may be used irrespective of the mode of or ‘No’ is indicated in each cell of the Table. In
transport. The term is also used interchangeably respect of each trade term, ‘Yes’ indicates that the
with the term ‘Free Domicile’. It constitutes the seller has the responsibility to provide the service
most comprehensive term for the buyer. It is included in the price while ‘No’ indicates it is
equivalent to what used to be previously referred the buyer’s responsibility. With the exception of
to as Franco, which has now become obsolete or the CIF and CIP terms whereby the seller insures
old-fashioned. the goods during transportation from point of
This means that the difference between DDP origin to the point of destination, the decision as
and DAP terms is due to the additional cost to the to whether to take insurance against the risk of
seller under the DDP terms of clearing the goods damage to (or loss of) goods is the responsibility
at the port and paying import duties and other of the buyer or the seller, depending on who is
entry charges. This additional cost is related to responsible for the risk of loss of (or damage to)
cost item (9), which is $7 per unit of the goods, the goods up to or from that particular point
identified earlier and illustrated in Table 10.2. This along the transportation chain.
means that the price that the seller should quote
Table 10.2 Relationships between the 11 trade terms and the identified 10 classes of cost components
Type of cost
components 1 2 3 4 5 6 7 8 9 10

Cost of Cost of Export Cost of Cost of Cost of Insurance Cost of Entry Cost
the goods loading duty placing delivery freight of goods unloading duties, of
in the goods and goods or loading to the while in at the taxes loading

Trade terms factory to truck other alongside goods on port of transit to port and into
and costs vessel at board at (or country (or any customs vehicle
trans- of the port the port or terminal of other clearance and
porting export of shipment any other point at) destination terminal trans-
to the de- clearance terminal destination point) porting
parture point at the goods
terminal country to the
point and of importer’s
unloading destina- place
of the tion in the
goods at destin-
the ation
terminal country
point

1 EXW – ex
works Yes No No No No No No No No No

118
2 FCA – Free
carrier Yes Yes Yes No No No No No No No

3 FAS – Free
alongside
ship Yes Yes No Yes No No No No No No

4 FOB – Free
on board Yes Yes Yes Yes Yes No No No No No

5 CFR – Cost
& freight Yes Yes Yes Yes Yes Yes No No No No

6 CPT –
carriage
paid to Yes Yes Yes Yes Yes Yes No No No No

7 CIF – Cost,
freight
& insurance Yes Yes Yes Yes Yes Yes Yes No No No

8 CIP –
Carriage &
insurance
paid Yes Yes Yes Yes Yes Yes Yes No No No

9 DAT -
Delivered
at terminal Yes Yes Yes Yes Yes Yes No Yes No No

10 DAP -
Delivered
at place Yes Yes Yes Yes Yes No Yes No Yes

11 DDP –
Delivered
duty paid Yes Yes Yes Yes Yes Yes No Yes Yes Yes

Components of the price of Accordingly, the make-up of the price quotes

in domestic trade can be split into the following:
goods in domestic trade 1 Ordinary cost of the goods in the warehouse
(or production point, if applicable).
As pointed out above, the 2010 Incoterms, for the This will normally be borne by the seller.
first time, clearly state (on the front page for that 2 Packing cost plus collection cost (loading
matter) that these 2010 rules are meant for ‘both cost and transportation cost) from the
domestic and international trade’. Thus, with warehouse (or manufacturer’s place) to the
time, these new Incoterms rules would be widely railway station, garage, airport, or seaport.
used for domestic trade also. Nevertheless, 3 Cost of loading the goods into the train,
below, we still discuss the existing terms and motor vehicles, aircraft, or vessel as
abbreviations that are used in domestic trade appropriate (The cost of loading into the train
price quotes. As done earlier for foreign trade, is the commonest and mostly emphasised in
we will first identify the relevant components of domestic trade.)
costs that should reflect on the price quotes by 4 Cost of transporting the goods that have
the supplier before discussing the various trade been loaded to the buyer’s place.
terms and abbreviations. The greater the number of cost items or cost
components borne by the seller, the higher the
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price the buyer would have to pay. 3 f.o.r. = $12.50 + $0.50 = $13.00
4 Carriage Paid =$13.00 + $2.40 = $15.40
Types of quoted prices in
domestic trade Terms of payment

Corresponding to the above five cost components ‘Terms of payment’ refers mainly to the timing
are five types of prices that are often quoted. of payments as well as to the applicable cash
These are discussed below. discount, if any. As cash discount is sometimes
confused with another type of discount called
trade discount, we will explain and distinguish
Ex-warehouse or Ex-works
between the two types.
This is the lowest price and is quoted when the
seller bears only the minimum cost, i.e. only the
cost of the goods at the warehouse or production Cash discount
point. It is sometimes called loco, particularly
outside English-speaking countries. Cash discount is the amount that the customer
is allowed to deduct from the net price (i.e., the
Carriage forward (c.f.) gross price from which any trade discount has
This is the price quoted when the seller is been deducted) if he settles payment on the goods
responsible for not only the cost of packing, but within a stipulated period of time. For example,
also for the cost of collection from the warehouse the terms of payment on the invoice may show
(or the production point, if applicable) to the that the customer is entitled to deduct 10% from
railway station, garage, airport or seaport i.e., any amount paid within one month from the date
when the seller foots the first two cost elements on the invoice and 5% from any amount paid
identified in (5) above. thereafter, but not later than two months from
the date on the invoice. Let us assume that the
Free On Rail (f.o.r.) value (net of trade discount) of the goods bought
This is the price quoted when a train is used, and is $15,700 and, out of this amount, $8,000 was
it is the seller who bears the cost of loading the settled by the customer within one month and
goods into the train in addition to the first two $5,000 thereafter but not later than two months,
cost items listed in (5) above. while the balance was paid after two months,
then the cash discount to which the customer is
Carriage paid entitled is 10% of $8,000 plus 5% of $5,000, i.e.,
This is the price quoted when the seller is $800 plus $250 or $1,050. This means that the
responsible for all the costs identified earlier customer actually paid only $7,200 (i.e., $8,000
in (5), i.e., all the costs entailed until the goods minus $800 cash discount) as the first instalment
are delivered to the buyer. (This should not be and only $4,750 (i.e., $5,000 minus $250 cash
confused with the Carriage Paid To or CPT terms discount) as the second instalment. The $2,700
of the Incoterms that were discussed earlier). balance paid after the two-month period was not
Let us illustrate these types of prices with the eligible for cash discount and would have to be
following: paid fully.
Thus, it could be seen that the main purpose
A seller charges $10.00 per unit of each article in of granting cash discounts to customers is to
his warehouse. It takes $2.50 per unit to pack the induce them to pay promptly.
items and transport them to the railway station,
N0.50 each to load into the train and $2.40 each to Trade discount
transport the goods to the buyer’s place.
The various prices would be as follows: Trade discount is the amount that is allowed to
1 Ex-warehouse or Loco = $10.00 be deducted from the gross price called catalogue
2 c.f. = $10.00 + $2.50 = $12.50 price or list price in order to arrive at the net price,

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which is the price actually charged the customer. price list (which normally does not say anything
For example, let us assume an invoice shows that about trade discount) as the prices of the goods
the Gross Price of 10 television sets is $10,000 change. Variations in the prices of goods can
while the trade discount (at the rate of 15%) is then be catered for simply by changing the rates
$1,500. This means that the net price becomes of discount on the Invoice – the rate of discount
$8,500. Similarly, let us assume that on the same could be reduced to reflect an increase in the net
invoice, the gross price of a second product, price while it could be increased to cater for a fall
16 radio sets, bought is $8,000 while the trade in price. The gross price (called catalogue price or
discount (at the rate of 10%) is $800. This means list price) could therefore be left intact.
that the net price to charge the same customer on
this second product would be $7,200. Cash payment
There are two types of trade discount, namely
cumulative trade discount and non-cumulative
trade discount. A cumulative trade discount is Cash payment refers to payment in cash or by
one in which the rate depends on the amount or some similar means (e.g., cheque and postal
quantity of previous purchases during a period. order) before or soon after a contract of sale
For example, a customer who had previously has been concluded, or the goods have been
bought $50,000 goods in the last 12 months delivered. Cash payments may be made in any of
may enjoy 20% rate of trade discount on extra the following ways:
purchases (above the $50,000), while a customer 1 Payment in advance. This is where the buyer
who had previously bought only $20,000 goods pays for goods in advance of receiving them,
during the same period, may enjoy just 12% rate with the supplier still retaining title to, or
of trade discount on additional purchase. Thus, ownership of, the goods. This technique
it pays a customer to make his purchases from a is usually used only when the goods are
single seller so as to get a very high rate of trade built to order, when small purchases are
discount. In the case of a non-cumulative trade involved, when the buyer is yet to establish
discount, the rate of trade discount depends a track record of creditworthiness, or when
on the amount of goods bought each time a the political or economic environment of his
customer patronises the seller, whether or not the country is unstable. While this is the safest
customer had been buying previously from him. and most advantageous to the supplier, it
For example, a $10,000 order may attract 15% puts the buyer at the greatest risk, as there
discount while a $2,000 order may attract just 9%. may not be full assurance that the goods
Thus, it pays a customer to buy in large quantities will be supplied or, if supplied, the goods
as opposed to numerous purchases each of which would meet the pre-agreed specification.
involves a small quantity. It should be noted that, in both methods
One main purpose for which trade discount of payment in advance and open account
is given is to retain the customers, especially, in (discussed below), the buyer pays the seller
the case of cumulative trade discount. Another directly, via cheque or money transfer, so
reason is to encourage the buyers to buy in large that the bank’s role is just to move the funds
quantities so as to minimise the various fixed from buyer to seller.
costs incurred by the seller in respect of every 2 Cash With Order (C.W.O.). This describes
order. A third reason is to enable the seller to the method in which the intending buyer
charge various buyers differently. A wholesaler, has to include payment with the purchase
for example, may effect this by granting retailers order, i.e., before the goods are sold to him.
a higher rate of discount than that ranted the This is usually the case where the seller has
consumers. But it may be relatively difficult to little confidence in the buyer.
charge different prices in the absence of a trade 3 Cash On Delivery (C.O.D.). This term
discount. A fourth reason, which is probably describes the situation whereby the buyer
the most important one, is that the use of has to pay for the goods before the goods
trade discount prevents frequent and wasteful are delivered to him by the deliveryman
reproduction or reprint of the catalogue or the or any other carrier. Unlike in the case of

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 C.W.O., the goods must have already been make any payment at all, for instance by giving
sold to the buyer before the requirement to one invented excuse or the other about the quality
pay. and specification of the goods supplied to him.
A C.O.D. service used to be operated
by the Post Office or NIPOST, although this
is no longer the case. NIPOST has since
Means of payment
discontinued with this.
4 Spot Cash. This refers to a situation Nature of means of payment
whereby the buyer pays on the spot before
heis given the goods by the seller. Spot Means of payment refers to the paper, notes or
cash is the equivalent of the C.O.D. when documents that a buyer gives to the seller either
there exists a direct contact between the in acknowledgement of the indebtedness arising
seller and the buyer. In other words, while from the transaction (as in the case of bills of
C.O.D. normally applies when goods have exchange, promissory notes, and IOU), or in the
to be sent to the buyer, spot cash applies final settlement of such indebtedness (as in the
when the buyer is physically present at the case of legal tender and the use of post office
seller’s place to collect the goods. facilities).
5 Prompt Cash. Under this mode of payment, Figure 10.3 shows the major means of payment
the buyer is allowed some days (usually at a glance. These are explained below.
less than a week) after the goods have been
delivered to him. In other words, some
short period of credit is allowed the buyer. Legal tender
6 Net Cash. This method allows a longer
period of cash payment – about two weeks The meaning and nature of legal tender has been
than in the case of prompt cash. discussed in Book 1. Payment in legal tender
7 Monthly Account. This refers to the applies only to domestic trade and is common
arrangement in which the buyer makes when the buyer and seller have direct personal
payment for purchases at the end of every contact and/or when a small amount of money
month. is involved.
8 Deferred payment and open account
trading. Deferred payment refers to Post office facilities
payment made long after the goods have
been delivered to the buyer, i.e., payment
in arrears. Typical examples of deferred Post offices have facilities for making payments.
payment in domestic trade are purchases However, most of them are no longer as popular
of goods and services on credit and and widely used as they used to be some decades
instalmental credit arrangements, namely back. Nevertheless, we still briefly discuss them
hire purchase, credit sales and conditional below.
sales, all of which have been discussed in
Chapter 5, that is, on Business law. Postal order
A variant of deferred payment is open account
trading, which is the arrangement whereby the
This is a document issued by the post office on
buyer pays for the goods after receiving them,
which an order to pay a stated sum of money
without the buyer being required to arrange for
(i.e., the face value of the document) to a specified
letters of credit or accept bills of exchange drawn
person is written (although its use has now
on him by the supplier. This normally occurs
declined greatly). The postal order is purchased
when the seller greatly trust the buyer, probably
from the post office at a price which is slightly
due to the buyer’s reputation and impeccable
higher than its face value. This excess of the price
track record. While this is the most beneficial for
paid over the face value is called the poundage
the buyer, it puts the seller at a great risk, as the
or commission and represents the charge for the
buyer may not make full payment or may not

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 Means of payment

Legal tender Post Office facilities Money transfer Online money Others
1 Bank notes 1 Postal orders transfer 1 Scrip
organisations & 2 Private currency
2 Coins 2 Money orders through
individual 3 Bills of exchange
3 Stamps non-banks
1 Western Union 4 Promissory notes
4 Remittance services
2 MoneyGram 5 I.O.U
5 C.O.D.
3 Others
6 Giro

E-payments mechanisms Banking facilities

based on plastic cards & mobile
phone
1 Credit cards
2 Charge cards
3 Debit cards Domestic payments
1 Cheques Domestic & foreign
4 Store-value cards
2 Electronic cheque payments
5 ATM cards
3 Bank’s draft 1 Telegraphic transfer
6 Pre-paid debit cards Foreign payments 2 Mail transfer
7 Cheque guaranteed card 4 Certified cheque
1 Bill of exchange
8 Smart card 5 Credit transfer
2 Documentary credit facility
9 Electronic wallet 6 Direct deposit
3 Bank’s draft
10 Mobile payment 7 Direct debit
4 Traveller’s cheques
(via mobile phones) 8 Standing order
5 Wire transfers’ including SWIFT

Fig. 10.3 Means of payment

service rendered by the post office in providing order should it get lost in transit.
this facility. Let us discuss the features of a postal 4 If the payee has a bank account, the sender
order briefly. can cross the postal order by simply drawing
1 The expression ‘Not Negotiable’ written two parallel lines across its face. A crossed
on the postal order shows that it is not a postal order can be paid by the post office
negotiable instrument (to be discussed only through a bank, i.e., the bank will now
later). act as the collecting agent to the payee. This
2 The name of the payee (the person for whom ensures that the identity of the person being
the sender authorises payment) should paid is known.
be written in the space provided, and the 5 On receiving the postal order, the payee
post office where the payee is (expected) to is required to sign (or thumbprint, if he is
cash it should also be indicated in the space illiterate) the space provided for this. He can
provided. cash it at the post office written on the postal
3 The counterfoil section of the postal order order by the sender. But the post office
is to be completed, detached and retained would require identification to ensure that
by the sender. It is separated from the main the presenter is the true owner of the postal
postal order by some perforation to facilitate order.
detachment. The postal order number is also Collection should not be delayed much as it
contained in the counterforil and spaces for lapses six months after the date of purchase of the
essential information about the postal order postal order. Collection after this period involves
are provided on the counterfoil. This serves a very complicated procedure which only few
as a memory aid about the main postal order persons would undergo.
and can be of assistance in tracing the postal

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Money order allow those in possession of postage stamps to
This is a document which, like a postal order, is convert them to cash. Also, stamps are used by
issued by the post office and on which an order to post offices in giving change to customers when
pay a stated sum of money to a specified person there are inadequate coins.
is written (Again, its use is now rare.) The money
order is purchased from the post office at the face Remittance through the NIPOST
value, and a commission is paid to the post office The NIPOST has recently started to provide
for their services in connection with the money money transfer services within Nigeria. To
order. transfer money, the money would need to be
While a money order looks very much like taken to the Post Office and a form filled to
a postal order, it is usually used in remitting indicate the identity and location of the intended
relatively large sums of money since it has bigger beneficiary. The Post Office would collect the
denominations. Secondly, it appears to be a money, plus a fee for the service, and provide
cheaper and safer method of remittance. information as the Post Office of collection,
A money order is obtainable as follows: which would be close to where the intended
The sender obtains a requisition form from the beneficiary is located. The sender would then
post office and indicates on it the amount to be notify the beneficiary via telephone or any other
remitted, his own name and address, the payee’s suitable means of the Post Office of collection.
name and address and the particular post office The beneficiary could then go to the Post Office
where the payee is to obtain cash. A post office of collection, with evidence to identify himself or
clerk then collects from the sender the requisition herself, and collect the proceeds. As will be seen
form, the desired remittance, and the commission, later in the chapter, this operates much like other
and issues the sender a money order for him to forms of money transfer services as provided by
deliver or forward to the payee. the Western Union and MoneyGram.
For security reasons, the name of the payee is
not to be indicated on the money order. It is for Cash on Delivery (C.O.D.)
the issuing post office to send a message to the The operation of this as a means of payment has
post office of destination, advising that the payee earlier been mentioned in the chapter, where
be allowed to cash the money order. When the it was pointed out that the service is no longer
payee receives the money order and goes to cash provided by the NIPOST.
it at the post office, he would be asked to name
the sender to ensure that he is the true payee (or
The Giro system
owner) of the money order. Failure to give the
This method of payment is popular in only
sender’s name is deemed to be evidence that he is
advanced countries like the UK. Under the
not the genuine payee and the post office would
arrangement, which is referred to as the National
therefore refuse payment. The money order may
Giro in the UK, some banking facilities are
be cashed at the bank through the payee’s bank
provided by the post office. These facilities
account. If the money order has been crossed,
include transferring of funds from one account
this becomes the only course of action available
to another just as the credit transfer system
to him.
through commercial banks. They also include
acceptance of lodgements of deposits, whether
Postage stamps the lodgements are made by the account holder
In cases where very small sums are involved, or by non-account holders. Also allowed are
some sellers can accept postage stamps in lieu payments in cash up to a particular amount at a
of money as they can use the stamps in sending stipulated post office. The use of cheques as well
their own mails. This, then, would become a form as standing order facilities is allowed under the
of trade by barter. However, the number of sellers Giro system. In addition, each customer is linked
that would be ready to accept postage stamps for with the international Giro with which enables
payment is very small – hardly in present day some forms of payments abroad to be effected.
Nigeria! But in some countries, post offices do

124
Banking facilities: Domestic information to make it unreadable to anyone,
except those possessing special knowledge or
payments key to decipher the encrypted information, so
as to safeguard the integrity of the information
If payments are through the banks within a against interception or unauthorised access until
country, the following means are available: it gets to the intended recipient (or until the time
comes for the information to be used), when the
Cheques (which the buyer issues to the encrypted information would be deciphered and
seller) re-converted into the original plaintext.
This is discussed later in the chapter. Generally, an electronic cheque can be used
to make payment for any transaction that a paper
cheque can cover and, in a number of countries
Electronic cheque (or e-cheque) like the US, it is governed by the same laws that
An electronic cheque, or e-cheque, is a way of apply to paper cheques. Even the US Treasury
automatically paying for goods or services as uses it for making large online payments.
well as making transfers that works much like
direct deposit in reverse. It refers to several types
of electronic payments and transfers that entail Banker’s draft or bank draft (which is a
debiting a bank current account. It is a form of cheque drawn by the bank on itself)
payment made via the Internet that is designed To pay a seller, the buyer who requires a draft
to perform a similar role as a conventional paper would give either cash or cheque to the bank and
cheque. But, due to the fact that the cheque is the bank would issue its own cheque drawn on
in an electronic format, it has some advantages itself (i.e. signed by its official) and make it payable
over the conventional cheque, including the to the intended seller. Since the seller would have
fact that it can be processed in fewer steps and no reason to believe that a bank would issue a
also has more security features than a standard dishonoured cheque, a banker’s draft is almost
paper cheque. Such security features offered as good as pure cash. This makes sellers insist on
by electronic cheques include authentication, banker’s drafts (as opposed to personal cheques,
digital signatures and encryption. Encryption which may bounce) when dealing with customers
refers to transforming (using cipher) plaintext in whom they do not have much confidence.

Fig. 10.4 Sample bank draft

125
Certified cheque Direct debit
Similar to a bank draft is the certified cheque. This is an arrangement that enables the bank to
This is a cheque which the customer’s bank has pay on behalf of its customer, and at the request
vouched for as being fully backed by funds in of the beneficiary, in accordance with an earlier
the customer’s bank account and which would mandate or instruction given to the bank. The
not, therefore, be dishonoured on the ground of bank waits for the persons to be paid to make
inadequate funds. The bank would make sure requests before making payments. Thus, it is an
before certifying a cheque for a customer that arrangement by which a bank customer gives
the customer has enough amount (i.e., up to the someone else permission to claim payments of
value written on the cheque) in his account and any amount from his account and simultaneously
that amount would also be frozen, to ensure that gives an instruction to his bank to honour or
the customer is unable to withdraw the amount allow such claims. This is often due to the fact
for any other purpose. The operation of certified that the exact amounts involved as well as the
cheques is also similar to that of guaranteed frequency of payment will not have been known
cheques, except that a guaranteed cheque is not until the payee’s requests are received, e.g., in
a paper cheque but a plastic one, and is more the case of electricity or other utility bills. This is
popularly used in advanced countries. unlike a standing order whereby fixed amounts
and frequency are involved. Thus, direct debit is
Credit transfer like giving a blank cheque to somebody to fill in
This is an arrangement by which funds are the amount. It is prone to being abused, as the
transferred from the account of one person beneficiary may be tempted to claim more than is
to the account(s) of other(s). When a buyer due to him. In practice, some safeguards are put
wants to pay several sellers (or an employer wants in place to check such abuse.
to pay several employees) at about the same time,
it is likely to be inconvenient to write a cheque for Standing order
each of them. This inconvenience will be avoided This is an arrangement whereby the bank pays
under the credit transfer scheme, in which only stipulated amounts at stipulated periods of time
one cheque that covers all the payments to be on behalf of its customer. For example, a customer
made would be written. The cheque, plus a list may instruct his bank to pay regular annual
containing the names, bank account numbers, subscriptions on his behalf. In other words, both
and bank branches of all the sellers (or employees, the exact amount and the frequency of payment
as appropriate) to be paid as well as the amount (e.g., whether monthly or annual) are indicated in
to pay to each of them, is then submitted to the standing order given to the bank. Also, unlike
the buyer’s (or employer’s) banker. It is for the in the case of direct debit where the beneficiary
banker to ensure that the funds are transferred has to initiate the payment by making the claim,
to the various sellers’ (or employees’) accounts as it is the payer that instructs his bank to make the
requested. standing order payment, while the beneficiary
has to passively wait and do nothing.
Direct deposit
Direct deposit refers to a payment that is Banking facilities: Foreign
electronically deposited (often by a third party)
directly into an individual’s savings or current
payments
account at a bank. A common form of direct
deposit is an electronic transfer of funds (salaries, Payments to customers in foreign currencies
bonuses, etc.) from the employer to employees’ through the banks can be made with bills of
bank accounts, thereby avoiding the need for a exchange as follows:
paper pay cheque. Thus, direct deposit is just as 1 Banks accept bills of exchange (discussed
credit transfer, except that direct deposit is always in detail below) on behalf of importers, in
done electronically. order to facilitate discounting of the bills
by exporters. Sometimes banks accept bills

126
 of exchange on behalf of importers where Bank wire transfer is a form of credit transfer
exporters (i.e., foreign suppliers) insist on whereby money is transferred from one
this as a condition for selling the goods. person’s or organisation’s bank account to
Banks also act as agents for presenting another’s bank account. The transfer can
bills of exchange to importers, either for be domestic (between banks in a particular
acceptance or for payment. country) or international (between banks in
2 Banker’s drafts, which are a special form different countries).
of cheque and, hence, a special form a) Nature of SWIFT, as the most widely
of bill of exchange, are used in making used form of international wire transfer.
international payments just as in the case Most international transfers are
of domestic trade. executed through what is called
3 Documentary credit facility (which also is a the SWIFT, which is a sort of
form of bills of exchange, as described later), cooperative arrangement or society
is also used in making foreign payments. (with its headquarters in Belgium)
4 Traveller’s cheques, which are the special that has members of well over 7,000
cheques issued by a bank to its customers banks in virtually all countries
to enable them to make payments while of the world. It operates a global
outside the country, are another network to promote the transfer of
meansof making foreign payments (e.g., financial messages. With the use
to pay hotel and restaurant bills or taxicab of these messages, banks can exchange
operators). It is a preprinted, fixed-amount data or information for funds transfer
cheque that the person signing uses to among themselves.
make payment to someone else as a result As the SWIFT money transfer
of having paid the issuer for the privilege. mechanism is the most widely used
Traveller’s cheques are available in several form of international wire transfer,
currencies like US dollars, British pounds, it is the one that is discussed below.
Euro and Japanese Yen, and are sold in pads Other forms of wire transfer are not
of 10 or 5 cheque leaflets. Unlike ordinary materially different from the SWIFT,
cheques that become stale six months after so that the SWIFT mechanism is
being drawn, traveller’s cheques do not get illustrative of others too. The process
stale. and mechanism entailed in effecting a
The organisation that produces SWIFT money transfer are as provided
traveller’s cheques are called the issuer below.
or the drawee, with Thomas Cook Group b) Information to be provided a bank to effect
being the most renowned issuer in the a SWIFT wire transfer. The transferor
world. The bank or other place where that of funds gives his bank the instruction
sells it to users are the agents; the purchaser to make the transfer from his account
is the traveller that wants to use it to make to the bank account of the transferee
payment; while the person or organisation and provides the particulars of the
to whom the purchaser writes the cheque is transferee’s or recipient’s account. The
the payee. The traveller, while purchasing particulars should include the name
the traveller’s cheques, should immediately of the recipient of the funds, his bank
write his signature on each leaflet. When account number, the bank branch
making a purchase (e.g., paying hotel bills), where the account is maintained,
he should, in the presence of the payee, date and the Bank Identifier Code (BIC)
and countersign (i.e., sign again) the cheque or SWIFT Code of the recipient’s
to enable the payee to compare this with bank (as each bank has its own
the earlier signature as an assurance against SWIFT Code). For transfers involving
forgery. European banks, the International
5 Wire transfers, with particular reference Bank Account Number, or IBAN
to the SWIFT money transfer mechanism. (which each European bank has), also

127
 has to be supplied. which the transfer travels deduct fees
c) How banks actually effect the transfers from the money being transferred,
among themselves. The sending bank thereby making the recipient receive
transmits a message, via a secure less than what the sender sent. It is
system, to the receiving bank, asking to be noted that these correspondent
that it effect payment according to the banks that handle the transaction take
instructions given. The instruction the liberty to unilaterally take their
would give details of the amount fees directly from the money being
that should be posted and the transferred without the knowledge or
particulars of the account involved. consent of the sender or recipient, so
Either the banks involved must hold that there is little check against abuse.
a reciprocal account with each other,
or the payment must be sent to a bank Banking facilities: Both
with such an account, a correspondent domestic and foreign
bank, for further benefit to the ultimate
recipient. Thus, if money is to be sent
from Nigeria (i.e., through a Nigerian Telegraphic transfer
bank) to, say, a recipient in the US, the This is a means of wiring funds from one location
sending bank in Nigeria may need to another. Originally, telegraphic transfers
the services of its correspondent bank made use of the telegraph or cable as a means of
in the US to transfer the funds to the transferring money between the source bank and
recipient’s bank account. The actual the destination bank, which may or may not be
transfer is not often instantaneous, in the same country. However, today, the process
particularly as it may have to be of transferring money between two parties is no
routed through correspondent banks, longer through the cable or telegraph, but the use
which act as a go-between the sender’s of the term is still retained in several countries.
bank and the recipient’s bank. Funds Thus, to make a foreign payment by telegraphic
may take several hours or even days transfer, a sum of money could be transferred from
to move from the sender’s account to a bank in Nigeria to a bank in another country.
the receiver’s account. When telegraphic transfer is used, the local bank,
d) An appraisal of costs and benefits of making payment on behalf of the importer, cannot
wire transfer mechanisms. Bank-to- dispatch a specimen signature. Therefore, private
bank transfer mechanism is very codes are used in place of signatures. These private
secure and safe. It is considered codes are previously arranged between the banks.
the safest international payment Telegraphic transfer is the fastest and safest
method. Information contained in method of transferring funds abroad. Expectedly,
wires is transmitted securely through it is the most costly method of remittance.
encrypted communications methods. Mail transfer
However, it is relatively expensive. This is a form of remittance which is communicated
Banks collect payment for the service by telegram, telex or fax machine. In the context
from the sender as well as from the of foreign payment, it is an order to make
recipient, before whatever remains payment issued by a local bank to its overseas
as the proceeds are credited to the correspondents. The foreign creditor is normally
recipient’s bank account. As a result, paid by means of a letter or airmail.
recipients are often bewildered when
less money is received than expected.
The sending bank typically collects Other means of payment
its own fee, separate from the funds
being transferred. On the other hand, Scrip
the receiving bank and go-between A scrip is a certificate whose value is recognised by
(i.e., correspondent) banks through the payer and payee and, though not a currency or

128
a legal tender, is a substitute for currency and can are to be made, we will briefly explain here what
easily be converted into a currency. It can also refer the POS is and how it works. A POS terminal is
to either company money that could only be used an electronic retail payment device that reads a
at the company store or a certificate exchangeable customer’s bank’s name and account number
for cash before a specified date, after which it when a credit card or debit card is swiped (passed
may have no value. It also sometimes refers to through a magnetic strip reader), electronically
paper money (but still not legal tender) issued by contacts the bank and (if funds are available),
a government for a specific purpose, or issued by transfer the customer’s approved amount to
a merchant or other body for local circulation. the seller’s account, and prints a receipt. A POS
terminal, also called checkout (or the location
Private currency where a transaction occurs), is a computerised
A private currency is a currency issued by replacement for the cash register, with the ability
a private organisation. It is often contrasted to record and track customer orders, process credit
with fiat currency, i.e., legal tender, issued by and debit cards, and connect to other systems in
governments. Such private currency can take a network. A retail POS system typically includes
different forms that include local paper money, a computer, monitor, cash drawer, receipt printer,
computerised systems of credit and debit, as well integrated credit card processing system, and a
as electronic currencies in circulation, such as signature capture device. Point of sale terminals
digital gold currency. In many countries, the issue are the preferred way of processing credit
of private paper currencies is severely restricted cards, debit cards, checks, smart chip cards, and
or even outrightly prohibited by law. other electronically submitted transactions in a
traditional retail environment. As just pointed
Bills of exchange out, the retailer will swipe the customer’s
This is discussed fully later. card through the terminal, or key-in payment
information and the terminal does the rest.
Promissory note With the above background information, we
This is also discussed fully later. now proceed to examine the various plastic card-
based electronic payment mechanisms.
I.O.U.
This is an abbreviation for I Owe You. It is, Stored-value cards
therefore, just any piece of paper on which
there is the signature of the debtor and an A stored-value card is a plastic card with a
acknowledgement of the amount debt stated on certain amount of money already stored there
the paper. digitally, i.e., electronically. Both the amount
of money and other information are physically
Plastic card-based and mobile stored or encoded on the card. The money and
other information can be accessed with the use
phone electronic payment of a magnetic stripe that is embedded in the card,
mechanisms or by entering a code number that is printed on
the card into a telephone. The issuers are mostly
banks. They charge some amount for issuing
The plastic cards look very much like identity cards the cards, in addition to the values stored in the
on the surface. But encoded in them are different cards. For example, they may charge a buyer, say,
forms of information that enable payments $50 for a stored-value card that has $700 stored
to be made. Many are based on the smart card into it, which means that the holder will pay $750
technology. A smart card is any pocket-sized card to obtain it. The holder can then use the card to
with embedded integrated circuits. make payment of up to $700.
As the information in most forms of plastic Unlike a debit card, the money is not recorded
cards is read by a device called the point-of-sale in any external account, but recorded in the card
(POS) terminal at the checkout where payments itself for the specially-made device to read and

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 Fig. 10.5 Sample point of sale terminal

recognise when using the stored-value card to the e-cash transferred to his personal computer.
make a payment. Also, unlike a debit card that is While ordering for goods through the Internet,
issued in the name of the individual account holder, by clicking the ‘buy’ option for a particular
a stored-value card is anonymous, i.e., not issued item on the Web store, the e-cash facility would
in the name of anyone. This is a disadvantage automatically transfer from his computer to the
as the loss or destruction of a stored-value card computer of the seller of the goods. The seller
is like the loss of cash, since there is no refund would then get the funds transferred into his own
from the issuer. A loss or destruction of a debit bank account from the buyer’s bank account,
card, on the other hand, does not mean a loss of before sending the goods to the buyer.
the balance in the account with the issuing bank.
But the stored-value card has the advantage that Debit cards
one does not need a bank account to purchase it,
as banks (or any other stored-value card issuers)
merely sell to whoever wants to buy, not minding A debit card is a plastic card, issued by a bank
his identity. to its customer to enable the customer to make
payments and cash withdrawals up to a maximum
of the balance outstanding in that customer’s
Internet-based electronic cash account with the bank. The customer can use the
(or E-cash) card to make payments and withdrawals with
the card only where the sellers accept debit cards
(e.g., many supermarkets) and can use it to make
E-cash is used in making payment for goods and
withdrawals from ATM machines, meaning that
services purchased through the Internet. The e-
a debit card also serves the purpose of an ATM
cash facility user first has to open an account with
card. The mechanism and parties involved in
a bank that has links to the Internet, and then get
a typical debit card transaction are as shown
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below. the debit card holder – e.g., through the monthly
First, the customer applies to his bank (which bank statement.
is now called the issuing bank) for a debit card. Although many debit cards are of the Visa or
Before issuing him the card, the bank would Mastercard international brand, there are other
require him to have enough balance in his types that are generally accepted within specific
account, up to the maximum payment that the countries. In Nigeria, debit cards, which are also
card would entitle him. After obtaining the card, referred to as ATM cards or InterSwitch cards, are
the customer can make use of it to buy goods directly linked to the cardholders’ bank current
and services wherever that type of debit card is or savings accounts with banks that are members
accepted. Many supermarkets accept different of the InterSwitch network. (Almost all banks
types of debit cards. are members of the network.) Although the faces
When paying for the goods, the card can be of the debit cards are different for the different
processed in one or more of the three common issuing banks, all the cards have the InterSwitch
alternative methods. The first is the online logo behind them and they are all usable in
method, whereby authorisation of a transaction is the InterSwitch network and all terminals,
done electronically, with the debit being reflected irrespective of the banks that put the terminals in
instantaneously in the card holder’s bank place.
account (i.e., it instantaneously goes through the In addition to its use in making purchases,
processes in the schematic diagram in Fig. 10.6). some sellers give cashback facilities, whereby
This method would require the presence of an a customer can withdraw cash along with the
electronic authentication device at the point of goods purchased. The cardholder can also use it
sale (POS), with the buyer having to supply his as an ATM card to make withdrawals from ATM
personal identification number (PIN) that would machines. It should also be noted that a debit card
be keyed into the device. The second method is serves the same purpose as, and is equivalent to,
the offline one, whereby the customer only has a guaranteed cheque in almost all respects.
to sign a receipt to signify confirmation of the An advantage of debit card use is that it
transaction. The transaction could then take some permits a bank customer that is yet to have a good
days to be reflected in the buyer’s bank account, credit standing needed for the bank to permit
implying that it takes some days for the processes him the use of a credit card to use another type of
in Fig. 10.6 to be completed. The third method, plastic card, the debit card. Besides, there are no
called Electronic Purse Card system, is a smart interest charges on the use of debit cards as the
card-based system whereby the value is stored on customer is using his own bank account balance,
the card chip, as opposed to an externally recorded and not bank credit facility as in the case of credit
account, such that the machine accepting the cards. As compared with the use of cheques,
card does not require any network connectivity. clearing is instantaneous in most cases with the
Thus, the long process illustrated in Fig. 10.6 is use of debit cards, while it would take many days
avoided. for cheques to clear. Thus, many sellers that are
The information collected electronically or unwilling to accept cheques because of the delay
otherwise about the particulars of the card and its may be willing to accept debit cards. But there
holder would then be relayed by the seller to his is the risk of identity fraud, whereby those who
(i.e., seller’s) bank, which is called the acquiring have access to the debit card information and/or
bank, which is responsible for verification and the debit card itself can use it to make purchases
confirmation of the authenticity of particulars and withdrawals illegally.
about the card and its holder from the issuing
bank. After a positive confirmation, the issuing Credit cards
bank would deduct the value of the transaction
from the customer’s account and send it to the
seller through the acquiring bank. The acquiring A credit card is a plastic card, issued by a bank
bank would then credit the seller’s account (or, sometimes, another financial institution)
and notify the seller of the outcome while, to its customer to enable the customer to make
periodically, the issuing bank too would notify payments up to the maximum of the credit line

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 Pays money into bank account

Debit cardholder Issuing bank

Issues debit card for up to
a maximum balance in the
customer’s account.
Gives the Periodically deducts amount
card spent from the balance.
to the seller,
who Clears the transaction
Sells goods to the debit with the issuing bank;
deducts Clears the transaction,
cardholder after verification collects proceeds and
value of pays proceeds to the
of the authencity of the card pays into the seller’s
goods acquiring bank and
bought from account charge/debit customer’s
the balance account.
Maintains an account with the
acquiring bank. Sends it card
information for verification and
confirmation of authenticity.
Seller Acquiring bank

Confirms authenticity of the card; clears the

payment with the issuing bank and credits the
proceeds into the seller’s account.

Fig. 10.6 Mechanisms and parties involved in the use of debit cards

facility that the bank has granted the customer. of which is also as in the case of debit cards.
The customer can use the card to make payments The third method is acceptance by the seller of
with the card only where the sellers accept credit verbal authorisation via telephone or electronic
cards (e.g., many supermarkets). authorisation through the Internet (as in the case
The mechanism and parties involved in a of e-commerce purchases and purchases through
typical credit card transaction are broadly the mail order and the telephone), but only after
same as for a debit card transaction. First, the some security measures to ensure that the unseen
customer applies to his bank (which is now called customers are physically in possession, and are
the issuing bank) for a credit card. Before issuing authorised users of the credit cards.
him the card, the bank would make sure he is The information collected electronically or
creditworthy and determine the maximum line otherwise about the particulars of the card and its
of credit that he should be given in view of his holder would then be relayed by the seller to his
income and other circumstances. After obtaining (i.e., seller’s) bank, which is called the acquiring
the card, the customer can make use of it to buy bank, that would in turn communicate this with
goods and services wherever that type of credit the issuing bank, and so on as in the case of debit
card is accepted. Many supermarkets accept card. Eventually, the acquiring bank would credit
different types. The sellers that accept credit cards the seller’s account and notify the seller of the
(or sometimes, the credit cardholder) are liable to outcome while, periodically (normally, monthly),
pay interest on the portion of the line of credit the issuing bank too would notify the cardholder
that has actually been used (i.e., on purchases of the transaction through the monthly account
made). statement sent to him. The cardholder is required
When paying for goods, the card can be to pay the issuing bank within a stated period
processed in one or more of the three common after the date of the account statement (unless the
alternative methods. The first is the online customer is contending some items therein), the
method, exactly as in the case of debit cards. The value of total transactions indicated in the account
second method is the offline one, the operation statement, failing which he would be liable to pay

132
high interest rates on the amount. But, by paying Charge card
the amount, he would be restoring the original A charge card is similar to a credit card in virtually
maximum line of credit the bank gave him and all respects, except for the fact that, unlike a credit
which would also be available for him to spend card, all bills incurred through the use of a charge
during the ensuing period, thereby making the card must be settled in full at the end of every
credit line revolving. month, failing which a penal high interest rate
As in the case of a debit card, in addition would be charged on any unpaid balance. That
to the use of credit card in making purchases, is, roll over is not allowed. So, it merely permits
some sellers give cashback facilities whereby such bills to be deferred till the end of the month.
a customer can withdraw cash along with the This would suit many who receive salaries on
goods purchased. The cardholder can also use it a monthly basis. Its use has not been widely
as an ATM card to make withdrawals from ATM accepted in Nigeria or has probably never been
machines. used at all in the country. In some countries, this is
It would be seen that the only essential also referred to as travel and entertainment card,
difference between credit and debit cards is that most likely because the cards are often used for
a debit card is based upon the actual balance in travel and entertainment expenses, the payments
the holder’s bank account while a credit card is for which the cards would permit to be deferred
based on the line of credit granted the holder by till the end of the month.
his bank or other financial institution. The use of
a debit card can be likened to writing of cheques
against one’s own money in the bank account,
Automated teller machine
while the use of a credit card can be likened to (ATM) and card
writing of cheques against an overdraft facility.
An advantage of credit card use is that, unlike An automated teller machine (which is also
a debit card, it permits a bank customer to have known as automated transaction machine,
access to a sort of standby credit facility (i.e., line automated banking machine, or cash machine) is
of credit) that he can use as much or as little as he a computerised telecommunication machine that
chooses, within the ceiling allowed. As compared enables clients of a bank to make cash withdrawals
with the use of cheques, clearing is instantaneous and have information about account balances and
in most cases with the use of credit cards while statements in a public place, outside the bank
it would take many days for a cheque to clear. premises and without the need for a bank official
Thus, many sellers that are unwilling to accept or a bank teller. Thus, cash withdrawals and
cheques because of the delay may be willing to access to bank account statements and balances
accept credit cards. For the issuing bank, they are permitted through the ATMs.
earn more income through the fees they charge Usually, the ATM requires the customer to
and, especially, the interest they charge on the identify himself by inserting a plastic card, called
portion of the standby credit facilities that their ATM card, which has a magnetic strip or a plastic
customers actually make use of. For the sellers, it smart card with a chip that contains a unique card
promotes their businesses as credit facilities from number and some other security information. The
the issuers make buyers spend more than if there customer authenticates the card by entering the
were no credit facilities. personal identification number (PIN).
However, there is a disadvantage to credit ATMs may be located inside or near the
card owners, as the credit cards tempt them to owner-banks as well as other places where there
spend more than they otherwise would spend. exist large numbers of people, like shopping
This has led many credit card users to become malls, airports, universities, petrol stations, and
highly indebted. In addition, there is the risk of restaurants. They typically have a logo, sign and
identity fraud, whereby those who have access to name of the owner-banks. Most are connected
the credit card information and/or the credit card to interbank networks, enabling customers to
itself can use it to make purchases illegally. withdraw and access account information from
machines not belonging to the bank where

133
they have their account. In Nigeria, as already Cheque guarantee cards
mentioned above, although the faces of the ATM
cards (which are also the same as the debit cards)
are different for the different issuing banks, all This is a plastic card that looks very much like
the cards have the InterSwitch logo behind them a debit card, with the amount of guarantee on
and they are all usable in the InterSwitch network its back. It is to be used in conjunction with the
and all terminals, irrespective of the bank that normal cheque and the amount written at the
puts the terminals in place. back of the card simply indicates the maximum
amount that the card owner can write on his
cheque to make payments (i.e., the maximum
payment that he can make with his cheque). The
retailer that accepts the cheque is to write the card
number on the back of the cheque, the owner (i.e.,
the buyer) is to sign the cheque in the presence
of the retailer, who would compare this signature
with the signature on the card to ensure against
forgery.
The bank is obliged to honour the cheque that
complies with this maximum amount, even if the
cheque owner has insufficient amount in his bank
account. Cheques drawn against insufficient
funds in the bank account would only result in
an overdraft, but would still be binding on the
bank.
Cheque guarantee cards are commonly used
in advanced countries like the US. But its use is
yet to be adopted in Nigeria so far.

Smart card payment device

Fig. 10.7 An ATM

Pre-paid debit cards or reloadable prepaid cards A plastic card, which is also called a chip
Prepaid debit cards, also called reloadable debit card or an integrated circuit card (ICC), is a
cards or reloadable prepaid cards, are used for pocket-sized, credit card-like, plastic card with
making recurring payments whereby the payer embedded integrated circuits or a computer
loads funds to the account of the cardholder. In chip with memory and CPU (central processing
other words, another party can make payments unit) capabilities. That is, it has an embedded
into one’s debit card for the card owner to spend. computer circuit that contains either a memory
For example, if A wants to pay B a sum of money, chip or a microprocessor chip that enables it to
A may simply collect the particulars of B’s debit receive data input, process it (by way of the ICC
card and make payments in favour of that debit applications) and deliver an output, as if it were a
card so that the holder (i.e., B) can have more full-fledged computer. Thus, while it looks like a
to spend with his debit card. Some employers credit card in appearance, it has embedded in it,
in advanced countries use this method to pay unlike a credit card, a ‘programmable’ micro-chip
their employees, particularly those that are not or computer chip with processing and memory
within the vicinity of the employer’s head office capability. It may be used for identification or
to collect pay there – including those working for to store information, financial amounts or other
the employer offshore, i.e., abroad. This mode of forms of data. Particularly, it is often used to
making international or distant payments avoids perform financial transactions. The embedded
the delays and costs associated with international microprocessor enables the card to undertake a
cheques and bank transfers. variety of functions (including adding and deleting)

134
and store a wide range of information. Smart cards by a third party, e.g., someone making a monetary
are also used as stored-value cards and, hence, gift or remittance to the virtual account owner.
a form of electronic purse or electronic money. Mobile payment is a new and rapidly expanding
alternative payment method, particularly in Asia
Electronic wallet device and Europe. Its use is also gaining ground here in
Nigeria. Typical goods and services that are often
paid for through this means include a wide range
An electronic wallet, which is also called a digital
of services (like bus and train transportation
wallet or virtual wallet, is a software device that
fares and parking metres), purchases of digital
functions much like a physical wallet even though
or online goods (like payment of online game
the information in it is electronic and much of it
subscription), and hard or physical goods (such
is encrypted. As a wallet, it allows the user to
as books, magazines and tickets).
make electronic commerce transactions quickly
and securely. It enables the user to store and use
credit card and electronic payment information, Payment through money
thereby making it possible for a credit card holder
to conduct online transactions and manage transfer service
payments and receipts. It enables a user to store organisations – Western
and control his online shopping information, like
logins, passwords, shipping address and credit Union, MoneyGram and
card details, in one central place. Historically, the others
electronic wallet was initially devised as a method
of storing various forms of electronic money
There are many non-bank organisations that
or e-cash. But due to low acceptance of such e-
specialise in transferring money from their
cash services, the electronic wallet has evolved
customers to the recipients or beneficiaries
into what it is today, which is about provision of
intended by the customers. While such
Internet users with a convenient way to store and
organisations also make such services available
use online shopping information.
for domestic money transfer, the services are
mostly rendered in connection with international
Mobile payment mechanism or cross-border transfers. There are two such
organisations that dominate the market, while
Mobile payment, sometimes associated with what others, though numerous in number, collectively
is called mobile wallet, is a payment mechanism account for only a small portion of the market
that entails the use of a mobile phone. Instead share. The two dominant ones are called Western
of paying with cash, cheque or credit cards, Union and MoneyGram.
a buyer can use a mobile phone to make the The Western Union is a US-based money
payment. The phone network can be employed transfer service organisation (MTSO) that was
as the channel to authenticate the customer, or founded through a merger process in 1855. It
the payment can involve a debit to an account used to provide telecommunication and other
held by the customer with the mobile operator or services, and money transfer service provision
other service provider. A virtual account is loaded is just one of them, provided through one of its
or funded at a specified place, e.g. branches of departments. Presently, it provides consumer-
designated banks. It is this account that is used based wired money transfer services. It also
in making payments for bills and transfers, using provides facilities for customers to send funds
the mobile phone and, sometimes, the Internet online to recipients. To do this, the sender only
too. The mobile phone can also be used to needs to log in to westernunion.com and follow
withdraw money from the virtual account, with the instructions there.
the withdrawal being credited into one’s normal The MoneyGram International, Inc. (or,
bank account that must have been specified simply, MoneyGram) is also a United States-
earlier while opening the virtual account. Money based financial services company, like the Western
can also be paid directly into the virtual account Union, but it has a more recent origin, as it was

135
incorporated in its present form just in 2003. It the sender for the reference number (i.e., what
provides money transfer services, money orders, the Western Union calls the Money Transfer
and bill payment services to consumers. Another Control Number, MTCN) and then proceed
segment of MoneyGram International provides to the nearest paying agent with identification
financial institutions with payment processing (that is not necessarily standardised but which
services. It has also started to provide money may include a combination of passport, driving
transfer services through mobile phones. licence, national identity card or a government
Both the Western Union and MoneyGram issued identification and, sometimes, a proof of
have similar procedures for sending and receiving address, like bank statement or utility bill). If the
remittances and these are discussed below for would-be recipient does not have a satisfactory
them both. identification document, a pre-arranged password
might be used in lieu of this. In Nigeria, virtually
Steps to take in making all commercial banks are the paying agents for
either the Western Union or the MoneyGram (but
remittances not for both at the same time). Arrangements exist
by which the money paid out to the beneficiaries
The first step to follow when sending money by Nigerian banks is reimbursed to them by
through this service is to find and visit a the Western Union or MoneyGram but such
MoneyGram or Western Union agent, taking arrangements need not bother us here.
along some identification (usually one or more The next step is for the would-be recipient
of the following: passport, driving licence, to complete a simple ‘receive’ form and show
national identity card or a government issued the identification, after which he will be given
identification and, sometimes, a proof of address, the money in either local currency or in the
like bank statement or utility bill as a proof of not foreign currency used in making the remittance,
being linked with terrorist organisations). depending on the instruction given by the
Second, at the agent’s office, the sender will sender.
complete a simple ‘send’ form and hand this to
the agent along with the money to be sent and the Use of MoneyGram and
transfer fee.
Third, the agent would provide a reference Western Union services to
number (that the Western Union calls Money perpetrate fraud
Transfer Control Number, MTCN), which the
sender will communicate confidentially to the
Both the Western Union and MoneyGram have
recipient or beneficiary, through e-mail, the
earned a reputation globally for their efficient
telephone or any other suitable and quick mode.
services and very wide and extensive network of
Fourth and finally, in a few minutes (and,
receiving and paying agents, which make their
sometimes, within a day, depending on the type
services accessible.
of remittance facility opted for), the money will
However, a criticism that has been levied
be ready for the beneficiary to collect from the
against the money transfer services of the
agents at the destination (or in the destination
MoneyGram and Western Union is that online
countries, in the case of cross-border remittances).
fraudsters often utilise their services because
For international money transfers, the remittances
they can be taken advantage of relatively easily.
can be collected in the domestic currency or in the
Because the recipient of the money can pick
foreign currency that the sender uses in making
up money transfers from any MoneyGram or
the remittance.
Western Union outlet, the fraudster only has to
provide fake identification to the Western Union
Steps to take in receiving or MoneyGram agent for them to be untraceable
remittances to law enforcement agents. It appears that both
are victims of the efficiency and simplicity of their
money transfer arrangements.
The first step for the beneficiary to take is to ask
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Other money transfer service networks such as the Internet. Direct deposit is
also another form of e-money, just as some forms
organisations of electronic funds transfer (EFT). Virtually all
forms of electronic money have been discussed
As pointed out above, there are numerous other earlier. It only need be pointed out here that what
organisations that provide remittance services. is called electronic purse is a variant of electronic
But they are much smaller in size and in the money. With electronic purse, people can settle
network of agents they have. However, their bills incurred through buying at restaurants,
services tend to be cheaper and more flexible, supermarkets, etc. It can also be used to withdraw
also through provision of tailor-made remittance money at the ATM terminal.
services for the communities they specialise in.
Electronic funds transfer (EFT)
Online money transfer through
non-banks Electronic funds transfer (EFT) refers to transfer
of funds, other than through the use of cheques,
There are online money transfer facilities through drafts or a similar paper instruments, which
non-banking organisations like the PayPal online is based on or utilises an electronic terminal,
money transfer facility and Western Union online telephonic instrument, computer or magnetic tape
money transfer facility. They enable online transfer for ordering, instructing or authorising a bank or
of money through electronic mails (or e-mails). any other financial institution to debit or credit an
All a user needs is to create an online account and account. It is the electronic exchange or transfer of
fund the account using credit cards. The balance money from one account to another, either within
in this online account can then be used to make the same financial institution or across multiple
payments or transferred into any bank account institutions, with the client’s instruction to effect
immediately. The transaction charges levied by the transfer being given, not through a cheque or
these non-banking online money transfer firms any other paper medium, but through electronic
are relatively low when compared with other devices – ATM machine, mobile phone, computer
transfer mechanisms. network or Internet, telephone, etc. Thus, the
term is used for a number of different concepts
that include the following:
Electronic money and 1 Cardholder-initiated transfers, where a
electronic funds transfer cardholder makes use of a payment card
(e.g., credit card, debit card, and charge
(EFT) card).
2 Direct deposit payroll payments for a
Electronic money business to its employees.
3 Direct debit payments, sometimes called
Electronic money (or e-money), which is also electronic checks, whereby a business
variously called e-currency, e-cash, digital money, debits the customer’s bank account for
digital cash and digital money, refers to money payment for goods or services bought.
or scrip which is exchanged only electronically 4 Electronic bill payment in online banking.
or digitally. The mode of, or device for, such 5 Transactions involving stored value of
electronic exchange of money can be through electronic money, possibly in a private
digital stored-value systems, i.e., ‘stored value’ currency.
or prepaid payment mechanisms for making 6 Wire transfer via an international banking
payments via point-of-sale (POS) terminals (e.g., network.
amount of money loaded into a stored-value It should be noted that virtually all types of
card or amount of money pre-paid for a pre- EFT have been discussed above. What is done
paid debit card). It can also be through direct here is simply to explain its meaning and list its
transfers between two devices or over computer components.

137
Nature of negotiable Comparison of negotiable
instruments and documents instruments with documents of
of title title

Meaning and nature of In Books 1 and 2, while discussing transport

negotiable instruments documents like the bills of lading and waybills,
frequent references were made to whether each
type of transportation document is a document
A negotiable instrument is a financial instrument of title and, if so, whether it is a negotiable
which may be transferred from one owner to instrument. It is now an appropriate occasion to
another, such that the holder of the instrument clarify how a transport document of title differs
acquires legal title to the goods or property from the one that is not a document of title, and
irrespective of whether the previous holder had how a document of title, differs from a negotiable
a defect in his title. Thus, a means of payment is a document or instrument.
negotiable instrument if: A document of title is an order for the
1 The title of the instrument (i.e., the property delivery of goods represented by and identified
in it or its genuine ownership) passes on in the document, which is regarded as enough
delivery. This means that the person to evidence that the person in possession of it is
whom it is handed becomes its owner. entitled to receive, assign or sell the document
2 In addition, someone who holds the means and the goods it represents. In warehousing, a
of payment is not affected by any defects warehouse receipt meets this requirement, as
in the title of the previous holders, so that anyone in custody of a warehouse receipt or
it becomes unnecessary to enquire into the warrant is deemed to be its owner and, hence, the
past history of the instrument. For example goods deposited in the warehouse. Similarly, a
cash or currency is a negotiable instrument. bill of lading issued in connection with shipment
This is because if, for instance, Mr B steals of goods meets the requirement as any holder
cash from Mr A, Mr B has a defective title of the original document is entitled to claim the
to the cash because he stole it. Suppose Mr goods on arrival at the port of destination or
B pays the cash to Mr C (or any person even while in transit. Possession of a document
who later receives the cash from Mr C), Mr of title is symbolic of ownership of the goods
C or that person would have a good title to that are represented by, and described within, it.
the cash, and Mr A is not entitled to deprive Depending on the content of a document of title
him of it. (i.e., the wording contained therein), a person in
If, on the other hand, Mr B transfers a custody of a document of title can legally transfer
non-negotiable instrument to Mr C in this way, ownership of the goods covered by the document
the defect in the title of Mr B is automatically by delivering or endorsing it over to another
transferred to Mr C, so that the title of Mr C too without physically moving the goods. This
is defective. That is, because Mr B has no title to would be permissible if the original issuer makes
it, he is prevented from transferring the title to it a bearer document (by omitting to name any
another person. As a result, Mr A can get back his particular transferee there) or makes it an order
property not only from Mr B, but also from Mr C document by naming a particular transferee on
and any other person(s) to whom Mr C may have it, but with additional words that permit that
subsequently transferred the property to. transferee to transfer or endorse it to yet another
There are other features which a negotiable party of his choice (viz any of the expressions:
instrument possesses which are outside the scope ‘or order’, ‘or assigns’ immediately after the
of this lesson. transferee’s name). The transferee would then
be eligible to endorse it to another party who, in
turn, can endorse it to yet another and so on. Any
of these endorsees can even change the nature
of the document to resemble that of a bearer
138
document simply by endorsing it in blank so indicated in the schematic diagram (Fig. 10.8).
that it becomes transferable by mere delivery. In This is because of other legal characteristics of
such a situation, a document of title also becomes negotiability that such bills of lading (including
a negotiable instrument, since it transfers legal bearer type) do not have. Fig. 10.8 also indicates
rights of ownership from one person to another that marine dock, which is also a document of title,
merely by its delivery or endorsement. is not negotiable. This is for the same reason as the
Whether a document is negotiable or non- bills of lading. A marine dock is a document issued
negotiable depends upon how it identifies the by the owner of a marine dock (i.e., warehouse or
transferee and how it is transferred. A document wharf where imported merchandise is stored) to
of title is negotiable only if its terms state that an importer to certify that he is warehousing the
the goods are to be delivered to the bearer or to a merchandise specified on the document on behalf
named person and his order or assigns. In other of the importer, and that the importer is therefore
words, a document of title may also be made entitled to the goods. The document, just like a
non-negotiable. This is done simply by inserting normal warehouse receipt, is a document of title.
a statement on the face of the paper that it is not
negotiable or by a document that fails to indicate
any of the expressions, ‘or order’ and ‘or assigns’
Types of negotiable
immediately after the transferee’s name, making instruments
the transferee ineligible to validly endorse it to
another party. Nevertheless, a non-negotiable
As shown in Fig. 10.8, negotiable instruments
document of title may also be assigned or
(other than currency) include bills of exchange,
transferred. But, in such a case, the non-negotiable
promissory notes, as well as dividend warrants
document of title transfers only the actual interests
and share warrants. On the other hand, numerous
of the transferor, unlike a negotiable document
non-negotiable financial instruments like postal
of title that transfers more than the transferor’s
orders, share certificates, bills of lading (which
actual interests. In other words, the last transferee
are only quasi-negotiable, but not completely
would not be immune or protected from any
negotiable), and dock warrants also exist.
defect in the title of the previous transferees.
Thus, if B steals a non-negotiable document of
title from A and then transfers it to C (who is
unaware of the defect in B’s title to the document), Bills of exchange
A can later seek to recover the document (and the
underlying goods) from C, who is not protected Meaning of bill of exchange
from the defect in the title of B to the document.
This would not be so in the case of a negotiable
document of title. According to the UK bills of Exchange Act of 1882
which has been inherited by the Nigerian legal
system, a bill of exchange is ‘an unconditional
Why bills of lading and marine order in writing, addressed by one person to
docks are documents of title another, signed by the person giving it, requiring
but not fully negotiable the person to whom it is addressed to pay on
demand or at a fixed or determinable future time
a sum certain in money to or to the order of a
Bills of lading have been discussed fully in Books specified person, or to bearer’.
1 and 2, where it is said that the straight bill of While this statutory definition may appear
lading is merely a document of title which is not a rather complicated, the following are the
negotiable document; but other bills, while being salient features, in simpler language, of a bill of
referred to as negotiable documents because of exchange:
free transferability and freedom from the defect
of the prior transferors, are still legally just quasi-
negotiable instead of being fully negotiable, as

139
 Financial instruments

Non-negotiable instruments, e.g.: Negotiable instruments

1 Postal orders
2 Share certificates
3 Bills of lading Others, e.g.:
4 Dock warrants 1 Dividend warranties
2 Share warrants
3 Debenture payable to bearer
4 Warehouse receipts (in
connection with commodity
trading)

Promissory notes

Bills of exchange

Cheques (including Cheques (other than Foreign bills (other than cheques)
banker’s draft) cheques)

Clean bills

Documentary credit/Letters of credit

1 Simple or revocable documentary credit
2 Irrevocable (but unconfirmed) documentary credit
3 Irrevocable and confirmed documentary credit

Fig. 10.8 Negotiable and non-negotiable instruments

Parties to a bill the drawer to the drawee, signed by the drawer,

There are three parties to a bill. The first is the requiring the drawee to pay on demand or at a
person who draws (or writes) the bill called the fixed or determinable future time a certain sum
drawer. He signs, addresses and gives the bill to of money to the payee.
the second party called the drawee. The drawee is In most cases, it is the creditor (seller) who is
required to pay on demand (as in Fig. 10.9) or at the drawer while the buyer is the drawee. Also,
a fixed future time (as in Fig. 10.10) a sum certain in exceptional circumstances as in the case of
in money ($60,000 and $90,000 in Figs. 10.9 and banker’s draft discussed earlier, the drawer and
10.10 respectively) to the third party called the the drawee may be the same person.
payee. In fig. 10.9, Mr A is both the drawer and
the payee because he is requiring Mr E to pay to An unconditional order
him (Mr A) or to his order. In Fig. 10.10, on the A bill is an order or instruction and not a request or
other hand, the payee is any bearer of the bill and an appeal. Also, the order must be unconditional,
not necessarily the drawer who is Mr C. so that the word ‘if’ should not appear in an
Thus, the statutory definition of a bill of order.
exchange given above can be framed as an
unconditional order in writing, addressed by
140
Payable on demand or a fixed or obey the order of the drawer as stated on the
determinable future time bill. The drawee is then known as the acceptor.
A demand bill (see Fig. 10.9) is the one that is The accepted bill is then returned to the drawer
payable on demand, i.e. a bill that is expressed who should then forward it to the payee if the
as payable on demand or at sight. On the other payee is a different person. If the drawee refuses
hand, a bill can be made payable at a certain date to accept the bill, the bill is said to be dishonoured
in future as we have in Fig. 10.10. The latter is on acceptance.
known as a time bill.
Presentation for payment
Order bill and bearer bill
An order bill (shown in Fig. 10.9) is a bill expressed When the time stated on a bill matures, the
to be payable to order. A bill is also an order payee would present the bill to the acceptor in
bill if it is made payable to a particular person exchange for cash. This means that a demand bill
without an expression prohibiting its transfer. can be presented for payment during any normal
For example, ‘Pay Mr A’ means the same thing as working day. If the acceptor is unwilling or unable
‘Pay Mr A or order’. But ‘Pay Mr A only’ contains to pay the bill in this way, the bill is said to be
the expression ‘only’ that prohibits Mr A from dishonoured on payment, and the payee should
transferring the bill to any other person; the bill then return the dishonoured bill to the drawer,
is not, therefore, an order bill. or an endorsee should return it to the immediate
A bearer bill, on the other hand, is one that endorser before him until it eventually gets to the
is expressed as payable to bearer, or that has a payee and, then, the drawer.
blank endorsement. A blank endorsement is one
in which the endorser fails to indicate the name
of the endorsee, the person to whom the bill is
Noting and protesting of
endorsed. dishonoured bills
Another name for a bill of exchange is draft.
A dishonoured bill can be noted or protested, as
Acceptance of bills explained below.

When a bill is written, the drawer presents it to Noting of a dishonoured bill

the drawee for acceptance. The drawee is said to This is the preliminary step towards protesting of
accept the bill by simply appending his signature a bill. It entails a Notary Public (a legal firm that
on the bill. This means that he has consented to provides the service of attesting to documents)

$60,000 Lagos April 1, 2011

$90,000 Lagos April 1, 2011

Pay Mrs A or order the sum of

Pay bearer the sum of $90,000 three
$60,000 on demand. months after date.

Mrs C (signed)
Mrs A (signed) To:
To: Mrs D
Mrs B

Fig.10.9 An order bill payable on demand Fig.10.10 A bearer bill payable at a fixed time

141
presenting the dishonoured bill at the place three ways as follows:
of payment as provided for in the bill. The bill 1 Blank endorsement. A bill is endorsed in
is either a sight bill of exchange which has blank if the endorser signs on the back of
been unpaid on presentation (i.e., dishonoured the bill without indicating the name of the
on payment); or a term bill which has been endorsee. As a result, the bill automatically
unaccepted on presentation (i.e., dishonoured becomes payable to bearer, i.e., a bearer
on acceptance); or a previously accepted term bill.
bill which has been unpaid at maturity (i.e., 2 Special endorsement. A bill is endorsed
dishonoured on payment). The Notary Public specially if the endorser writes something
records any reason(s) given by the drawee for similar to ‘Pay Mrs X’ on the back of the
the dishonour on a note and attaches the note bill.
to the bill and returns the bill (with the attached 3 Restrictive endorsement. A bill is endorsed
note) to the presenting bank. Noting is relatively restrictively if further negotiation of the
informal and costs less than protesting. It also bill is made impossible by a particular
gives the drawer time to consider whether or not endorsement, e.g., by writing ‘Pay Mr X
to protest the bill at a later date, if the dishonour only’ which thereby deprives the endorsee
still persists. of the right to transfer or endorse the bill to
another person.
Protesting a dishonoured bill
As in the case of noting, the Notary Public also Discount houses and
records any reason(s) given by the drawee for discounting of bills
the dishonour. However, unlike noting, this
information is now written on a formal document
called a Deed of Protest. This formality makes The holder of a bill (whether a payee or endorsee)
the document presentable in a court as proof of is said to discount a bill when the bill is negotiated
presentation to and dishonour by the drawee, in in exchange for cash which is less than the face
the event that the drawer opts to take legal action value of the bill. The excess of the face value of
to recover the money from the drawee. the bill over the cash received is in the form of
interest on a credit facility. For example, if a $9,000
bill is to mature for payment on 30 September as
Negotiation of a bill we have in Fig. 10.10 and the payee needs funds
or cash before the maturity date, he can sell the
A bill is said to be negotiated if it is transferred bill (by negotiating it with a buyer) in exchange
by one person to another in such a way that the for, say, $8,100 immediate cash. The buyer of the
transferee now becomes the holder (i.e. ‘owner’) bill now becomes the holder (or endorsee) and is
of the bill. In the case of a bearer bill, negotiation entitled to collect the full $9,000 cash proceeds
is effected by delivery, i.e., by simply handing it from the acceptor when September 30 comes. By
over to the transferee. But in the case of an order this arrangement, he has made a profit of $900,
bill, delivery is preceded by endorsement. and is said to have provided a discounting facility
to the bill. Any business or firm that engages
in providing discounting facilities is called a
Endorsement discount house. In addition to the few specialist
discount houses in Nigeria, commercial banks
A bill is endorsed if the payee or an endorsee dominate this business and therefore constitute,
signs on it. The person who endorses the bill is the in a technical sense, discounting houses too.
endorser and the person to whom it is endorsed It should be noted that a discount house is
is the endorsee. The endorsee can be regarded exposed to the risk of the acceptor dishonouring
as a ‘secondary payee’ because he has become the bill on payment, i.e., being unwilling or
the person who is now entitled to be paid by unable to pay the bill when the discount house
the acceptor until he too endorses the bill to yet presents it for payment on maturity. In this case,
another person. Endorsement can be in, at least, the discount house will find it difficult to get paid.

142
As a result, a discount house normally hesitates be) can easily discount the bills if he needs cash
to discount a bill where the acceptor is not very before the bills mature. The discount house would
reputable. Alternatively, if such a bill is to be get paid by the acceptor. In this case, the Nigerian
discounted at all, it would be at a very high cost exporter is said to have been accommodated, and
(i.e., a high rate of discount). If the acceptor in our the manner in which the money would be made
earlier example is not creditworthy, for instance, available to the bank, in order to pay the holder
the $9,000 bill may be exchanged for just $5,400 of the bills on maturity, is a separate arrangement
immediate cash, so that the cost of discounting is between the bank and the accommodated exporter
$3,600. or, rather, the foreign customer.
It is also possible for a Nigerian importer to
Acceptance houses and be similarly accommodated. A Nigerian bank,
normally through its branch or a correspondent
accommodation bills
bank abroad, is likely to be more reputable in the
eye of a foreign supplier than a typical Nigerian
An accommodation bill is one in which one of the importer. As a result, the foreign supplier may
parties to the bill (usually the acceptor or drawee) draw a bill and insist, as a condition for supplying
receives no value for the bill. The purpose of being the goods, that the Nigerian importer should get
an acceptor of a bill for no value received is to lend a Nigerian bank (or its branch in the supplier’s
one’s good name or reputation to the bill so as to own country) to accept the bill. After a Nigerian
facilitate the discounting of the bill. As discussed bank has accepted the bills, the Nigerian importer
above, discount houses are unwilling to provide would later make available to the bank the
discount facilities to bills that are not accepted by funds with which to pay the (foreign) drawer or
reputable persons. Also, as few persons would whoever holds the bill on maturity. In the same
like to be payees or endorsees to bills accepted way, in connection with domestic trade, a seller as
by drawees of no repute, the drawer of the bill well as a buyer can get accommodated.
will find it difficult to use the bills in making A firm that specialises in accepting bills
payments to a would-be payee (in case the drawer of exchange is called an acceptance house. As
and payee are different). The payee, in turn, will indicated above, acceptance houses mainly
find it difficult to make payments with the bill to consist of commercial and merchant banks.
an endorsee who, too, will encounter problems in A bill of exchange, whose acceptor is a bank,
making payments to another endorsee with the is called banker’s acceptance and may be sold or
bills, and so on. discounted by the drawer or payee.
As a result of this, reputable organisations
are often approached to be acceptors of bills
despite the fact that they do not receive values Inland bills versus foreign bills
for the bills. Such organisations mainly consist of
commercial and merchant banks. In connection An inland bill is a bill drawn and payable within
with foreign trade, for example, a Nigerian the country, while any other bill constitutes a
bank may accommodate a Nigerian exporter foreign bill. Unlike an inland bill, a foreign bill is
by accepting the bills drawn by the exporter on often drawn in a set of about two or three copies
foreign customers whose reputation in Nigeria – the first copy may be sent by air, the second
may be nil. (In most cases, however, it is the copy by sea, and so on. This is to guard against
foreign buyers, who are the drawees, that should the possibility of a bill getting lost in transit. Each
arrange, presumably through their own banks in part (or copy) of the set should contain a reference
their respective countries, for such Nigerian banks to the others. As the acceptor becomes liable to as
to accept the bills, as it is often the responsibility many parts as he has accepted, he should make
of the drawee to provide such an arrangements sure that only one part of the set is accepted.
and Nigerian suppliers are likely to insist on such
an arrangement before agreeing to supply goods
to the foreign buyers). In this way, the Nigerian
exporter (or whoever the payee or endorsee may

143
 Thus, a documentary bill is used when there is
Foreign bills – Clean bills, little mutual trust between the exporter and the
documentary bills and importer. This method is also called collection
documentary credit arrangement, and the name is probably because
the arrangement is governed by international
regulations called Uniform Rules for the
Nowadays, inland bills (other than cheques) Collection (1995 revision that is referred to as
are very rare; most of the bills are foreign ones. the ICC 522), as laid down under the auspices of
As a result, we will discuss only how payments (and published by) the International Chambers
in foreign bills are conducted. Foreign bills, as of Commerce. Banks in the importer’s country
earlier indicated in Fig. 10.8, consist of clean bills, are normally instructed to present the bill for
documentary bills and documentary credit. the importer’s payment or acceptance before the
stipulated documents (including documents of
Clean bill title like the bill of lading) are handed over to the
This refers to a bill of exchange sent by an exporter importer to enable him to claim the goods. Most
to an importer for either acceptance or immediate banks of the world adhere to these international
payment without the bill being accompanied rules.
by such other documents as bill of lading, and A documentary bill can be a D/A bill or a
insurance certificate. These other documents are D/P bill. A D/A documentary bill is the one
sent to the importer separately from the bill of that is presented to the drawee (or importer) for
exchange. A clean bill is normally used when the acceptance while a D/P documentary bill is the
exporter has no doubt about the integrity of the one that is presented to the importer for payment
importer; otherwise there would be the fear that as in the case of a demand bill (i.e. a bill payable
the importer may refuse payment or acceptance, on demand).
especially if he has taken delivery of the goods
with such documents of titles as the bill of lading Documentary credit
prior to when the bill is sent to him. This is another method of making foreign
payments which is governed by international
Documentary bill regulations called ‘Uniform Customs and Practice
A bill is referred to as a documentary bill when for Documentary Credit, 1974’, as laid down under
it is presented to the importer for payment or the sponsorship of the International Chambers of
acceptance simultaneously with documents Commerce. Again, the rules are adhered to by
of title like the bill of lading, and insurance most banks of the world. This method operates
certificates. It is also called ‘Cash Against exclusively through banks, and it also entails the
Documents’ as it entails delivery of shipping use of letters of credit such that both expressions
documents against payment or acceptance documentary credit and letters of credit are taken
of a draft or bill of exchange. In other words, to be equivalent or synonymous. The operation
shipment happens first, then the title documents modality is explained below.
are sent to the buyer’s bank by the seller’s bank
for delivering documents against collection of
payment of the bill of exchange (if it is a sight
Documentary credit or Letters
bill), or acceptance of the bill of exchange (if it is of credit
a time bill, i.e. usance).
On the one hand, this arrangement assures Nature and meaning of letters of credit
the importer that he is either paying or accepting or documentary credit
the bill (or liability) in respect of goods which There are two types of letters of credit, the
have been duly insured and which he is now commercial and standby ones. Here, we are
entitled to collect. On the other hand, it assures concerned with commercial letters of credit.
the seller that the property in (or ownership of) Later, under the next sub-heading, we will briefly
the goods is being given to an importer who explain the standby letters of credit. Meanwhile,
has either paid or accepted to pay for the goods. it should be noted that letters of credit used in

144
international transactions are governed by the An importer would normally prefer this
International Chambers of Commerce Uniform arrangement as it gives him the time to
Customs and Practice (UCP) for Documentary inspect the goods, with the opportunity
Credit, the latest version of which is that of 1 to countermand payment if the goods are
July 2007 called UCP 600. The general provisions found to be defective. On the other hand,
and definitions of the International Chambers the method exposes the supplier to the risk
of Commerce are binding on all parties. Our of a dishonest and unscrupulous importer
discussion here reflects this UCP. countermanding payment after receiving
A commercial letter of credit is a contractual the goods. A revocable letter of credit cannot
agreement between a bank, known as the issuing be confirmed.
bank, on behalf of one of its customers (who is the 2 Irrevocable (but unconfirmed) documentary
importer and is also referred to as the applicant credit. This is the type under which the
or the beneficiary), authorising another bank, correspondent bank must not obey any
known as the advising bank (which also usually instruction from the issuing bank to
doubles as the confirming bank in the case of a countermand payment. An irrevocable letter
confirmed letter of credit), to make payment of credit may not be revoked or amended
to the beneficiary. The issuing bank, on the without the agreement of the issuing bank, the
request of its customer, opens the letter of credit confirming bank, and the beneficiary. That
in favour of the exporter (who is known as the is, the issuing bank now becomes unable to
beneficiary). By this, the issuing bank makes a unilaterally revoke the letter of credit and
commitment to honour drawings made under the supplier has some assurance that the
the credit. In essence, the issuing bank replaces correspondent bank would provide him
the bank’s customer as the payee. It should be the finance. However, this assurance is not
noted that the issuing bank works through an absolute, as the correspondent may not
agent, the advising bank, which is normally the provide the finance unless the issuing bank
issuing bank’s foreign correspondent bank. A has made the required funds available to it
correspondent bank is a bank which, within its (the correspondent bank). This, in turn, may
own country, handles the business of another depend on whether the importer has made
bank in a different country, including receiving the funds available to the issuing bank.
and making of money payments in addition to 3 Irrevocable and confirmed documentary
provision of other services on behalf of the foreign credit. This is an irrevocable type of credit to
bank. The letter of credit method applies only if which the correspondent bank has added its
the exporter and the importer opt for it in their own confirmation, i.e., the correspondent
contract. bank (or any other bank in the exporter’s
country) has undertaken to provide the
The three types of commercial letters of finance, come what may. In that case, the
credit bank that confirms the credit becomes
the confirming bank. It is the advising
Documentary credit can be of three types as
bank (whether or not it is a correspondent
follows:
bank of the issuing bank) that also usually
1 Simple or revocable documentary credit.
confirms the credit (by obligating itself
Under this arrangement, the issuing bank
to ensure payment under the terms of the
(usually on the advice of the importer)
letter of credit), thereby making it double
can countermand the payment instruction
as the confirming bank. Thus, confirmed
contained in the letter of credit at any time
documentary credit constitutes a firm
before the finance is provided the supplier.
undertaking by the correspondent bank
In other words, the issuing bank can give a
to pay the supplier provided the supplier
counter-instruction to the correspondent
presents the stipulated documents. The
bank that the finance should not be
supplier is thus assured of getting paid
provided the exporter any longer, and the
because the correspondent bank is a reliable
correspondent bank must obey accordingly.
‘paymaster’ vis-à-vis the issuing bank

145
 (located in a foreign country). A confirmed called the doctrine of strict compliance.
credit is therefore presumed to be 3 The Beneficiary is required to present bills of
irrevocable. exchange and other documents. All letters
of credit require the beneficiary to present a
Mechanism of operation of commercial bill of exchange (also called a draft),which
letters of credit can be either a sight bill or a usance (i.e.,
Below, we describe the operation of letters of time bill) and specified documents in
credit arrangements. order to receive payment. The issuing
1 Role of the issuing bank. The importer (say, bank is obligated to pay the sight bill on
a Nigerian importer) instructs the bank in presentation and to accept usance and pay it
his own country (say, a Nigerian bank), at maturity (or, alternatively, to discount the
which now becomes the issuing bank usance, if the letter of credit does not make
(because it is the one that issues or writes it the acceptor of the bill). The documents
the letter of credit), to open a credit with the requested are often many and will normally
bank in the supplier’s (say, a UK exporter’s) include a commercial invoice, a transport
country in favour of the supplier. The document such as a bill of lading or airway
issuing bank’s role is to provide a guarantee bill and an insurance document; but there
to the seller that if the stipulated documents are many others.
are presented by the exporter strictly in line 4 The role of the advising bank. But, as
with the contents of the letter of credit, the the issuing bank may be unknown in
bank will pay the seller the amount due. the exporter’s country, its standing and
The issuing bank may ask the importer reputation in the exporter’s country
to deposit the amount in his account with would hardly exceed that of the importer
the bank, with the amount being blocked himself. As a result, it would need to act
or frozen for the purpose of paying for through a bank that is in good standing in
the import eventually. Alternatively, the exporter’s country, most likely a bank
the bank can underwrite the credit if located there. This bank in the supplier’s
the customer has had a long-standing country is normally the correspondent bank
creditworthy and trustworthy relationship of the issuing bank in the importer’s country.
with the bank. The correspondent bank (which need
2 The doctrines of independence and strict not be the exporter’s bank) would then be
compliance. In making the payment to referred to as the advising bank because
the exporter, the bank deals only with it will be advising the beneficiary by
documents required in the letter of credit conveying the terms and conditions of a
and not the underlying transaction, letter of credit to him. The advising bank
whether or not they are what the importer is the agent of the issuing bank. Advising
and exporter had agreed upon, i.e., the also entails authentication, i.e., verification
bank is not liable for performance of the of the authenticity of the credit. In addition,
underlying contract between the customer the advising bank would be responsible for
and beneficiary. This is what is referred to sending the documents to the issuing bank.
as the doctrine of independence (between The advising bank has no other obligation
the documents stipulated in the letter of under the letter of credit. Particularly, if
credit and documents giving effect to the the issuing bank does not make the money
underlying transaction for importation of the available, the advising bank is not obligated
goods). Second, the documents submitted to pay the beneficiary.
by the beneficiary (i.e., the exporter) have
to strictly tally with what the letters of Three alternative ways of making
credit prescribes such that ordinary obvious finance available to the beneficiary
typographical errors in the submitted The instructions given to the advising bank,
documents may not be tolerated. This is which are contained in what is called a letter of

146
credit, would also specify the document that the of credit in favor of the seller.
supplier needs to present (e.g., bill of lading and 3 The importer’s bank (now the issuing bank)
insurance certificate) before the supplier gets approves the credit risk of the importer or
paid by the correspondent bank (and, ultimately, freezes equivalent deposit in the importer’s
by the issuing bank). The method by which the bank account), issues and forwards the credit
finance is provided the supplier would also be to its correspondent bank (the advising bank
stated in the letter of credit. Three such methods that also usually doubles as the confirming
are common. bank in the case of a confirmed letter of
1 The first method consists of the supplier credit) in the exporter’s country.
being paid (by the correspondent bank, 4 The advising bank authenticates the credit
advising or confirming bank) directly. In and forwards the original credit to the
this case, the bill of exchange drawn by the exporter (i.e., the beneficiary).
supplier to be presented to the advising 5 The beneficiary ships the goods and
bank (or confirming bank, as applicable) assembles the documentary requirements
together with other stipulated documents (like the invoice, bill of lading, and insurance
would be a sight bill or demand bill (i.e., certificate) to support the letter of credit.
the one that is payable on demand), thereby 6 The beneficiary presents the required
making acceptance or discounting to be documents to the advising or confirming
inapplicable. bank to be processed for payment.
2 Under the second method, the correspondent 7 The advising or confirming bank, acting
bank or confirming bank only accepts the as agent of the issuing bank, examines the
bill of exchange drawn by the supplier in documents for compliance with the terms
the manner discussed earlier so as to enable and conditions of the letter of credit.
the supplier to get the bill discounted easily 8 If the documents are correct, the advising
and cheaply. This means that the type of or confirming bank will claim the funds by
bills of exchange to be presented by the either debiting the account of the issuing
beneficiary together with other stipulated bank; waiting until the issuing bank
documents cannot be a sight bill, but a remits, after receiving the documents; or
usance (that is also called a term bill), which reimbursing on another bank as required in
is the one payable by the acceptor at a pre- the letter of credit.
determined future date. 9 The advising or confirming bank will send
3 In the third method, the correspondent or the documents to the issuing bank.
confirming bank discounts the bill drawn 10 The issuing bank will examine the
by the supplier by making available to the documents for compliance. If they are in
beneficiary immediate cash (of less than the order, the issuing bank will debit the buyer’s
face value of the bill) before the maturity account and then send the documents to the
date of the bill. This also means that it is importer.
the usance that the exporter must have 11 The importer can then use the documents to
presented, as opposed to a sight bill. claim the merchandise and clear the goods
with the customs authority.
Step-by-step process involved in
commercial letters of credit arrangement Standby letter of credit
Following the above explanation, the sequence of
steps involved in the procedure for executing a A standby letter of credit is issued by a bank on
letter of credit can be summarised as follows: behalf of its customer to provide assurances of
1 Importer and exporter mutually agree to the the customer’s (i.e., importer’s) ability to perform
buying and selling business, using a letter under the terms of a contract between him and
of credit to guarantee payment and delivery the beneficiary (i.e., exporter). The standby
of the merchandise. letter of credit serves as an insurance that the
2 The importer applies to his bank for a letter beneficiary that the customer would perform

147
his obligation, failing which the beneficiary can statutory definition is linked with our earlier
then draw under the credit by presenting the definition of a bill of exchange, then, a cheque
draft or bill of exchange after providing evidence can be defined as ‘an unconditional written order
that that the customer has failed to perform his signed by the drawer, requiring the banker to pay
obligation. It is usually employed to guarantee a certain sum of money on demand to or to the
the customer’s performance or to strengthen his order of a particular person or to the bearer’.
creditworthiness.
In the present context of foreign trade and Drawer and drawee
payments, a standby letter of credit can be issued
for an importer, providing an assurance to the
exporter that the importer would be settling The following should be noted in connection with
his account as and when due, failing which the cheques as a form of bills of exchange:
exporter can present the letter to the guaranteeing 1 The banker is always the drawee. The bank
bank to claim the amount that the importer is (or the branch of a bank) issues a cheque
defaulting on. By this, the exporter would be book containing several cheque leaflets.
able to sell to the importer on open account terms 2 The current account customer of the
(i.e., payment after receiving the goods). But, if bank is always the drawer. He writes his
the importer defaults in making payments when unconditional order or instruction on the
due, the exporter would present a draft (bill of cheque leaflet provided by the bank, and
exchange) and copies of invoices (and any other signs on it before handing the cheque to the
stipulated documents) to the bank for payment. payee (if he is different from the drawer).
Thus, unlike a commercial letter of credit that is Each cheque has a counterfoil that serves
presented in line with an expectation, a standby the purpose of memory aid. The drawer retains
letter of credit is presented when something has the counterfoil in the cheque book for record
gone wrong, i.e., when default has happened. purposes. In the special case of a banker’s draft
as mentioned earlier, the bank is both the drawee
and the drawer. The payee is the person to whom
Cheques – A special form of the bank customer wants to pay some money. The
bills of exchange drawer of a cheque can also name himself as the
payee, especially if he intends to withdraw money
for himself. The cheque can be an order cheque.
A cheque is another major bill of exchange. There can also be a bearer cheque, although this
According to the 1882 Bills of Exchange Act is not common because of the risk of loss and
referred to earlier, ‘a cheque is a bill of exchange theft associated with it. Acceptance as a separate
drawn on a banker, payable on demand’. If this exercise does not exist. By paying the payee or

Fig. 10.11 A sample cheque

148
endorsee, the bank is deemed to have accepted it to him directly. In other words, this form of
the cheque. A cheque is a form of demand bill crossing means that the person taking it is subject
(as opposed to a time bill) because it is payable to any defects in the title of the previous holders,
on demand. Negotiation of a cheque follows the so that it now becomes necessary to enquire into
same procedure as in the case of an ordinary bill of the past history of the cheque before taking it.
exchange, subject to the effects of cheque crossing For example, suppose Mr B stole the cheque
discussed below. The endorsement of a cheque, from Mr A and endorses it to Mr C (in payment
too, does not differ from that of an ordinary bill, for goods). Suppose also that Mr C innocently
as there can be blank, special, and restrictive accepted the cheque. Mr A can ‘deprive’ Mr C and
endorsements. any other subsequent innocent endorsees of the
benefit of the cheque until it has been cashed at
the bank. This is because since Mr B (thief) does
Open and crossed cheques not have a good title to the cheque, Mr C and
any subsequent holders cannot have a good title
An open cheque is one which can be cashed over to it either. Without this form of crossing on the
the counter of the drawee bank, i.e., it need not be cheque, Mr A can deprive only Mr B (thief) of the
paid into a bank account. It is therefore difficult to benefit of the cheque, while any other subsequent
prevent a stolen open cheque from being cashed. innocent or honest holder starting from Mr C has
A crossed cheque, on the other hand, has two lines a good title to the cheque, and cannot therefore
drawn across its face. This means that it can only be prevented from presenting it to the bank for
be paid into a bank account. It cannot be cashed payment.
over the counter. Thus, the person taking this type of cheque
should enquire into its previous history to ensure
Kinds of crossing that every person passing it to him directly or
indirectly (i.e., remotely) has a good title to it. It
should be noted that the cheque can still be passed
There are four kinds of crossing. These are: from one person to another.

General or simple crossing Account payee crossing

In this case, only two parallel lines are drawn This occurs when the expression ‘Account Payee’
across its face. Sometimes, the redundant or the abbreviation ‘A/C Payee’ is written on the
expression ‘& co’ is added. face of the cheque. This expression is an instruction
to the receiving bank (i.e. the bank collecting
Special crossing payment as opposed to the paying bank, which
This means that the cheque can only be paid into is the drawee), that the proceeds should be paid
the bank named between the two parallel lines. into the account of the payee. The collecting bank
This form of crossing serves as an extra precaution can be held liable for violating the instruction.
as only the customers of the named bank can cash This directive, however, does not prevent the
it. If another person is given the cheque, he has to collecting bank from clearing it into another
negotiate it with a customer of the bank in order person’s account as the bank will not be liable
to obtain cash. if it can prove that it made an adequate enquiry
about the authority or genuineness of the person
Not negotiable crossing into whose account the cheque is actually paid.
This is a form of crossing in which the expression Thus, the actual effect of this form of crossing is
‘Not Negotiable’ is written on the face of the to cause the collecting bank to be very cautious
cheque between the parallel lines. The effect of before paying the cheque to the credit of a person
this is to remove one of the features of a negotiable other than the payee. It should be noted, however,
instrument mentioned at the beginning of the that the effect of the expression, ‘Account Payee
chapter, that is, anyone who holds it for value Only’ differs from that of ‘Account Payee’ in the
is not affected by any defects in the title of the sense that the former prohibits the transfer of the
previous holders, including the person who gave cheque, i.e., the cheque ceases to be negotiable.
149
 The implication of what has been discussed 1 Insufficient funds in the drawer’s current
above is that the following eight forms of crossing account.
are possible: 2 Irregular signature of the drawer.
1 General 3 An alteration on the cheque that was not
2 Special signed against by the person making the
3 Not Negotiable alteration.
4 A/c payee 4 A discrepancy between the amount written
5 Special combined with Not Negotiable in figures and the one written in words.
6 Special combined with A/c Payee 5 Keeping a cheque for more than six months
7 Not Negotiable combined with A/c Payee from the date of issue before preventing it to
8 Special combined with not Negotiable as the drawee bank, thus causing it to become
well as A/c Payee stale. A stale cheque is one that is not
presented to the (drawee) bank for payment
Payments of money into a within six months after it was drawn.

current account
Clearing of cheques
When a trader receives cheques, postal orders and
money orders from customers, he may wish to A cheque is cleared when the amount specified
pay them into his bank current account. Similarly, on it has been deducted from the current account
he may wish to lodge any cash received into his of the drawer and paid to the person presenting
bank current account. To do so, he will need to the cheque. Such a payment can be made either
complete a teller or paying-in form. The completed directly over the counter of the drawee bank or
form and his lodgement are then submitted to by crediting the current account of the payee (or
the bank. The bank would normally give a pay- endorsee) with the specified amount. When the
in booklet (containing many pay-in forms) to the paying bank and the collecting bank are one and
trader so that he can take it home and complete the same branch of the same bank, the process of
a form at his convenience whenever he wants to clearing is very simple. The drawer’s account is
make a lodgment. debited and the payee’s (or endorsee’s) account
credited by the specified amount. However,
when the paying bank differs from the collecting
Stopped cheques and returned bank, a system of inter-bank clearing is brought
cheques into operation. In the modern age of e-banking,
electronic mechanisms exist for expediting
clearing between different banks and different
Between the time a drawer issues a cheque and
branches of the same bank.
the time the payee (or endorsee) presents it to
the bank for payment, the drawer has a right to
countermand payment of the cheque when the Promissory notes
payee or endorsee presents it. The drawer’s bank
is obliged to obey this instruction. A cheque, the Nature of promissory notes
payment of which has been so countermanded, is
referred to as a stopped cheque.
A returned or dishonoured cheque, on the The Bill of Exchange Act of 1882 referred to earlier
other hand, refers to a cheque which the drawee defines a promissory note as ‘an unconditional
bank has refused to pay for one reason or the other. promise in writing made by one person to
Where a bank dishonours a cheque for a reason another, signed by the maker, engaging to pay
that is not genuine, it is liable to pay damages on demand, or at a fixed or determinable future
to the drawer, i.e., its customer. Some genuine time, a sum certain in money to, or to the order of,
reasons which a bank can have for dishonouring a specified person or bearer’.
a cheque include: An example of a promissory note is shown in
Fig. 10.12.

150
 Kano
1 October 2011

I promise to pay on demand to Mrs Seller or

Order the sum of N5,000.00.

Mrs Buyer (Signed)

Fig. 10.12 A promissory note

promissory note is usually the debtor or

Similarities between a bill of buyer of goods.
exchange and a promissory 4 In the case of a bill, there may be the need
for acceptance, whereas acceptance does not
note
apply to a promissory note. This is because
the writing of the promise by the maker is
Apart from the two being negotiable instruments, already an undertaking to pay.
they also have the following in common: 5 A bill needs to be presented to the
1 Both can be made payable on demand or at acceptor in order to make him liable
a fixed or determinable future time. for payment, whereas the promissor
2 Both can be made payable to the order of automatically becomes liable on maturity of
a person or to the bearer. (The promissory the promissory note, i.e., without the note
note in Fig. 10.12 is made payable to the being presented to him for payment.
order of Mrs Seller.)
3 Endorsement for the purpose of negotiation
is similar in both cases. Other negotiable
4 Both must be unconditional and signed by instruments
the person writing it.
Share warrants
Differences between a bill of
exchange and a promissory A share warrant, also called a stock warrant,
note is a certificate giving the holder the right to
purchase, in a certain company and direct from
the company itself, a stated number of shares at a
The major differences between a bill of exchange
particular price at a particular date in the future.
and a promissory note include the following:
This is in contrast to a stock option that indicates
1 A bill of exchange is an order or instruction
how many existing (as opposed to newly issued)
while a promissory note is a promise.
shares that one can buy from the seller of the stock
2 A bill has three parties – the drawer, the
option. In other words, while a stock warrant
drawee and the payee. A promissory note, on
gives a right to buy new shares issued by the
the other hand, has only two parties, namely
company itself, a stock option offers the holder
the maker (or promissor) and the promisee.
a right or option to buy shares in future for a
(In Fig. 10.12, Mr Buyer is the promissor
certain price – although both are similar in the
while Mrs Seller is the promisee.)
sense that they are discretionary. A share warrant
3 While the drawer of a bill is normally the
is a bearer document of title and negotiable paper
creditor or seller of goods, the maker of a
(i.e., without a particular name indicated there)

151
to the underlying shares so that its ownership can 2 Describe the normal sequence of events and
pass through delivery. Share warrants are actively the documents involved in a contract of sale
traded in some financial markets. But in Nigeria, from the stage when a retailer orders for
the Companies and Allied Matters Act (CAMA) of goods from a wholesaler until the contract
1990 forbids companies to issue share warrants. is wholly executed.
3 Mention the main contents of an invoice,
Dividend warrants and discuss the uses of the various copies
that may be produced. For what purposes
may a pro forma invoice be issued?
A dividend warrant is an order of payment of 4 Discuss the reasons for issuing each of the
dividends to shareholders, having the same nature following:
and form as a cheque payable to a shareholder. a) Credit note
In effect, it is a cheque issued by a company to b) Debit note
its shareholders for payment of dividends to its c) Delivery note
shareholders. Its format or design is such that d) Advice note
it shows the gross dividend, tax paid at source e) Consignment note
by the company on the gross amount, and the 5 a) Distinguish between a trade discount
amount, net of tax. Like an ordinary cheque, and a cash discount and explain the
the wordings on the dividend warrant would reasons why a trader may grant each.
determine whether it is freely transferable or not. b) A trader receives a price quotation
For security reasons, the wordings often restrict from the wholesaler. The first
its transferability and, hence, negotiability. wholesaler sells an article for $100
each subject to 10% trade discount
Certificates of deposit (CD) and 15% cash discount if the goods
are paid for immediately. The second
wholesaler, on the other hand, sells an
A certificate of deposit is the certificate issued by
article for $100 each subject to a 15%
a bank, evidencing the time deposit (i.e., fixed
trade discount and 10% cash discount
deposit) that the owner has with that bank. It is
if the goods are paid for immediately.
not in all cases that a bank issues a certificate to
What source should the retailer opt
evidence receipt of a fixed deposit from a customer.
for (and why) if he is willing to pay
But when they do so, such a certificate would be
cash immediately?
negotiable. This means that the person that places
6 a) Describe each of the following methods
the deposit with the bank can freely transfer by
of quoting prices:
delivery the certificate to a third party, who then
i) f.o.r.
becomes the new owner of the underlying bank
ii) loco
deposit and the third party can, in turn, negotiate
iii) carriage paid
this with yet another party prior to the end of the
iv) ex-warehouse
fixed deposit.
v) c.f.
b) Indicate the amount each of the above
prices should be in a transaction on
Revision questions some goods where:
i) the selling price at the seller’s
Essay questions warehouse = $500.00
1 Write short notes on the following: ii) the packing cost = $5.00
a) Trade journal iii) the collection cost to the railway
b) Letter of enquiry station = $7.00
c) Catalogue and price list iv) loading into a train = $6.00
d) Purchase order 7 a) Explain the following timing of
e) Reference letter payments:
i) Cash payment,

152
 ii) Payment in arrears, and 17 Distinguish between an open cheque and
iii) Instalmental payment. a cheque with the name of the collecting
b) Discuss the various types of cash bank as well as the expression ‘A/c Payee’
payment arrangement. written between two parallel lines d r a w n
8 Explain the full meaning of each of the on the face of the cheque.
following abbreviations: 18 Discuss the reasons why a cheque could
a) E. & O.E. be crossed with the expressions, ‘Not
b) C.W.O. Negotiable, A/c Payee’ written on it.
c) C.O.D. 20 Writes short notes on:
d) D/P Documentary Bill a) Paying-in book
e) D/A Documentary Bill b) Returned cheque
9 Explain how payments are made with: c) Stopped cheque
a) postal order, and 21 Define and explain the term promissory
b) money order, and mention other note. Compare and contrast a promissory
methods of effecting payments note with a bill of exchange.
through the Post Office.
10 a) Discuss how each of the following Multiple choice questions
means of payment are made and give 1 Which of the following information is not
reasons for using each of them: normally on the invoice:
i) Banker’s draft A Signature of the buyer
ii) Credit transfer B Names and addresses of both the seller
iii) Direct debit and the buyer
b) In what ways can payments abroad be C Signature of the seller
made through the bank? D Date of sale
11 Distinguish between negotiable and non- E Description of the goods as to type,
negotiable instruments and give examples quantity and price
of each. What do you understand by a bill 2 The trade term DDP means
of exchange? A Duty at departture paid.
12 Write short notes on the following: B Direct debit price.
a) Parties to a Bill of Exchange C Duty at destination paid.
b) Demand Bill and Time Bill D Departure and destination payment.
c) Order Bill and Bearer Bill E Delivered Duty Paid (named
d) Inland Bill and Foreign Bill destination place).
13 Write short notes on: 3 Stored-value cards differ from debit cards
a) Negotiation because:
b) Endorsement A They are made of different plastic
c) Acceptance of a Bill of Exchange materials.
14 Explain how each of the following works: B The former are used in buying at the
a) Discount House supermarket while the latter are used
b) Acceptance House for making transfers into another
15 Distinguish between: account.
a) Revocable and irrevocable letters of C The former are issued by a bank while
credit the latter are issued by non-bank
b) Confirmed and unconfirmed letters of financial institutions.
credit D The money is recorded in the stored-
In each case, indicate which one the exporter value cards, while the money is
and the importer are likely to prefer and the recorded in external accounts in the
reasons for such preferences. case of debit cards.
16 Define and explain the word cheque. Who 4 An advantage of making a bank-to-bank
are the drawer, drawee and payee of a wired transfer of funds through the SWIFT
cheque?

153
 network is
A due to the high security of the
transfer.
B that it is a relatively cheap method.
C that it is the fastest method.
D a and b.
E b and c.
5 In a letter of credit mechanism for the
importer to pay the exporter, the role of the
advising bank is to act as the agent of
A the exporter.
B the importer.
C the confirming bank.
D issuing bank.
E all of the above.

154
Chapter 11
Government reform policies-
Commercialisation
Meaning of, and reasons for government may have to resort to deficit financing
in the form of borrowing abroad or domestically,
commercialisation including from the Central Bank, which may print
more money to lend to the government, thereby
Meaning of commercialisation causing inflation. In addition to the adverse effect
on public finances, such activities may not be run
Commercialisation refers to making a government- efficiently, knowing that the cost of inefficiency
owned enterprise or organisation operate as if it is can always be passed to the government. Thus,
a commercial, private profit-making one, despite there is no incentive to be efficient. There is only
the fact that it still continues to be government- the incentive to be in the good book of the political
owned. This means that running such enterprises leaders by dancing to their tunes. Also, the
would not be politically interfered with, but beneficiaries or consumers, by not being charged
carried out professionally, and also, beneficiaries fully for the cost of providing the services, are
of the services would have to pay sufficiently prone to be wasteful in the utilisation of resources.
enough for, at least, the costs of service provision That is, there is little or no incentive to be cost-
to be recovered so as to enable service provision conscious in the utilisation of the services, which
to be sustainable without recourse to government are likely to be over-used or abused.
for financial assistance. But, it also means that There is also the demonstration effect from
social benefits may sometimes be sacrificed to the rest of the world. Some success stories of
achieve commercial viability and sustainability. commercialisation in other countries, particularly
in the UK and US since the 1980s, have made
other countries emulate such success stories, a
Reasons or rationale for sort of ‘peer pressure’ effect. Related to this is
commercialisation Nigeria’s international development partners,
like the World Bank and the International
Usually, government activities are carried out to Monetary Fund (IMF), which either require or
achieve the objective of provision of services to cajole their member countries to commercialise
the people, without the beneficiaries necessarily those activities that have constituted a drain on
paying for the cost of providing the services. government budgetary resources.
In other words, the government does not often Commercialisation therefore has the objective
aspire to recoup the cost from the beneficiaries of of addressing such problems associated with
such services, as the government can collect taxes provision of government services on a non-
or (in the case of the Federal Government) even commercial basis.
cause the Central Bank to print more money to
enable the government to finance the provision
of services, which is a highly inflationary form
of financing government budget deficits. The
problem this entails is that this may constitute a
burden and a drain on government resources. Tax
payers may be unnecessarily burdened. Also, the

155
Advantages and interferences would be reduced. The need to be
financially viable is also a good excuse for refusing
disadvantages of some overtures from the political leadership,
commercialisation which is responsible for the commercialisation in
the first place. Thus, appointments to positions
Advantages could now be based on merit, instead of political
considerations. The same applies to award of
contracts, geographical siting, or location of
Following from the above reasons for branches of the organisation, etc.
commercialisation, the following are the main
benefits of the policy: Incentive for avoidance of waste,
Improvement in public finances and cost consciousness on the part of
The money saved by the government from customers
stoppage or reduction of subsidisation of erstwhile As pointed out above, payment of market-related
losses of commercialised enterprises can be used price or the price that is sufficient for the cost
in a combination of the following: to be recovered (called user fee) would make
1 Increase in government expenditure in the beneficiaries of such services cost conscious
more desirable areas, i.e., provision of more and avoid over-use or abuse of the services.
essential services. (Government-provided services are prone to be
2 Reduction in the burden on taxpayers. over-used or abused if they are provided free or
3 Reduction in deficit financing through only a token has to be paid due to government
external and domestic borrowing, subsidy.)
including borrowing from the Central
Bank, with its attendant high inflationary Improvement in foreign perception of
impact. the country’s economic management
Successful commercialisation would improve
Improvement in the efficiency of running the perception of the rest of the world about how
the enterprises the country’s economy is being managed by the
As financial sustainability (i.e., need to be government. This is partly because a reduction
financially independent of government in the drain on government budgetary resources
subventions) is now a requirement for continued through subsidies of government enterprises
existence, a commercialised enterprise has an is internationally recognised as an indicator of
incentive to minimise costs and/or maximise economic management efficiency. In particular,
revenue so as to, at least, break even or, preferably, the perception of the economy by international
be profitable. development partners like the World Bank and
the IMF would improve, leading to their possible
endorsement of overall economic policies of the
Improved satisfaction of beneficiaries or country. All these can facilitate inflow of foreign
customers investments to the country.
To generate adequate revenues for meeting its
operating costs, a commercialised enterprise
must satisfy its customers (i.e., beneficiaries
Disadvantages
of its services), who would otherwise resort to
Despite the above advantages, commercialisation
alternative providers of such services. Thus,
has a number of disadvantages. It is these
customer satisfaction should improve.
disadvantages that have made it an unpopular
government policy, particularly in the eyes of
Reduction in stoppage of political government enterprise stakeholders that are likely
interference losers as a result of the policy, e.g. employees. The
Because of financial independence from the main disadvantages of commercialisation are as
government, the usual day-to-day political discussed below.
156
Desirable political objectives of The anticipated objective of promoting
promoting societal benefits and efficiency may not be achieved
containment of social costs may be As a commercialised enterprise still remains
ignored in government ownership, some undesirable
It is not all political objectives that are bad or political interferences could still occur, particularly
undesirable. Some of them relate to promotion as it is the owner-government that appoints the
of societal benefits or reduction of societal costs, enterprise’s Chief Executive Officer and other
beyond the benefits accruing to or costs incurred members of the Board of Directors. Secondly, as
by the particular enterprise generating the costs the enterprise does not need to make sufficient
and benefits. Preoccupation with cost reduction profits that are comparable to a company in the
and revenue generation by an enterprise may private sector that would have to pay satisfactory
be at the expense of such desirable political dividends to shareholders (which the government
objectives. An example of such objectives does not need or insist on), it can still be prone to
includes using domestically sourced input (like some inefficiency when compared with a similar
raw materials and employees) so as to generate company in the private sector. Third, even if
employment and promote linkage with the rest the enterprise is unable to break even despite
of the economy, despite the fact that this may not its commercialisation, it would still continue in
be compatible with the cost reduction objective existence as the government would not watch
of the enterprise. Another is siting of branches of its enterprise being forced into liquidation. This
enterprises in disadvantaged (e.g., rural) areas so means that the government still stands ready to
as to boost economic activities there. Another is provide subventions to bail out such enterprises
reduction in environmental degradation. A non- instead of watching them collapse. At worst, only
commercialised public enterprise is more prone some members of the Board of Directors would
to consider and reconcile its own costs with the be replaced, instead of allowing it to die a natural
costs on the rest of society, and its own benefits death, as it should.
with the benefits to the larger society.
Political backlash could be too costly
Retrenchment of staff Like most other reform policies, commercialisation
At inception, a commercialised public enterprise is hardly popular politically. It makes the
may have to retrench its staff in conformity with government incur the wrath of many vested
its new drive to promote efficiency, even if it has interest groups, particularly those that lose out
to later replace the retrenched staff with new as a result of the policy. The resulting political
recruits that are more suitable for the vacant hostility may lead to political instability or may
positions generated. By this, unemployment may weaken the government resolve to effectively
increase, particularly as the retrenched staff may implement the policy.
not be re-trained to make them fit into other jobs.
This is related to the above disadvantage of not
considering the impact of measures taken on the Revision questions
larger society.

Prices of services of commercialised Essay questions

enterprises become less affordable, a 1 Explain what you understand by
concern for the poor commercialisation and adduce reasons for
The charging of user costs or user fees, instead it.
of just token prices formerly charged, means that 2 Discuss four advantages and three
the services would become less affordable to disadvantages of commercialisation.
low-income beneficiaries. This can be a serious
disadvantage, particularly if the services are not
luxuries, i.e., if they are essentials, as they often
are.

157
 and cost consciousness on the part of
Multiple choice questions customers.
1 Commercialisation means D a and b.
A selling government assets to investors E a and c.
on a commercial basis. 5 Possible disadvantages of privatisation
B running a former government-owned include:
enterprise on a commercial basis by A Reduction in government subsidy
its private-investor owner after payments to public enterprises
buying the enterprise from the B An incentive for avoidance of waste,
government. and cost consciousness on the part of
C running by the government of its customers.
enterprise on a commercial basis, with C Lay-off of staff in commercialised
the motive of making it break even enterprises.
or even make good profits. D All of the above.
D a and b. E None of the above.
E all of the above.
2 Common reasons for commercialisation
include:
A Promotion of employment.
B Running the public enterprise to
better promote political objectives of
the government.
C Improving the finance of the
government by reducing subsidy
payments to public enterprises.
D Reducing short-run political
discontent against the government.
E All of the above.
3 Which of the following is not a reason for
commercialisation?
A Improving the finance of the
government by reducing subsidy
payments to public enterprises.
B Reducing short-run political
discontent against the government.
C An incentive for avoidance of waste,
and cost consciousness on the part of
customers,
D Improvement in foreign perception of
the country’s economic management.
E None of the above.
4 Possible advantages of privatisation
include:
A Improving the finance of the
government by reducing subsidy
payments to public enterprises.
B Reducing short-run political
discontent against the government.
C An incentive for avoidance of waste,

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Chapter 12
Government reform policies:
Privatisation and public-private
partnership (PPP)
Introduction Privatisation is the reverse of nationalisation.
There are three main ways of privatisation,
As we will make clearer later in the chapter, which are:
privatisation is not exactly the same thing as 1 Privatisation through issue of shares to the
private-public partnership (PPP). Nevertheless, public. This entails offering for sale to the
they are closely related, as both are aimed at public through the stock market of the
enlisting greater involvement of the private sector shares being held by the government.
in the economy. Also, joint ventureship between 2 Privatisation through sale of assets. This is
the private and public sectors is a form of PPP done by selling the entire organisation (or,
which, could result from partial privatisation. in the case of partial privatisation, a part
In addition, there is a broader and rather loose of the organisation) to a strategic or core
concept of privatisation, whereby PPP is treated investor, usually through competitive bids
as its special case. Thus, there is such a linkage to be submitted by potential core investors.
between privatisation and PPP that a full 3 Privatisation through distribution of vouchers
understanding of one would be facilitated by a to citizens. This involves distribution of
reference to or some acquaintanceship with the shares, free of charge or at just a token price,
other. Accordingly, the two concepts are discussed to all citizens, who now become owners of
here, starting with privatisation. the privatised entity. This was the method
commonly used while former communist
countries (like Russia) were transiting to
Privatisation free market economies.
While the first two methods have been adopted
Meaning and methods of in Nigeria, the third has never been adopted.
privatisation
Reasons or rationale for
Privatisation refers to the transfer of the ownership privatisation
of a business organisation from the government
to the private sector. In a full privatisation, the Experience has shown that most enterprises do
whole ownership is transferred to the private not thrive well under government ownership.
sector. In a partial privatisation, on the other hand, The reasons for this include the fact that the
it is a part of the ownership that is transferred, best entrepreneurs are hardly politicians or civil
with the government still retaining the remaining servants, so that government is not best place to run
part. Partial privatisation is often done to bring business enterprises. Also, the preoccupation of
on board a technical partner, sometimes called political leaders is to promote political objectives,
core investor or strategic partner, because of his and not many sound business decisions would
expertise in running that type of business, and be compatible with attainment of such objectives.
the expertise is lacking in the government sector. The inefficiency in government enterprises has

159
made them resort to subventions from the state Making lump sum funds available to the
in order to keep afloat, and this often takes its toll government
on government finances, resulting in huge budget The proceeds from the year of privatisation would
deficits. Of course, it can be argued that the state improve finances of the state that year.
can address this by simply commercialising
such enterprises, instead of privatising them. Attraction of foreign direct investment
However, commercialisation also has its own If buyers of privatised enterprises are foreigners
challenges that may make outright privatisation or non-residents, the proceeds of privatisation
the preferred alternative in some instances. would then constitute foreign direct investment
Even if governments are able to run business inflow into the economy.
enterprises well, the initial rationale that justified
government ownership (whether or not through
nationalisation) may have become outdated Tapping foreign entrepreneurship and
and overtaken by events. For instance, strategic technology
reasons that were often used as a case for Privatisation through the sale of a government
nationalisation may have lost significance today enterprise’s assets to foreign core or strategic
as industries that were strategic some decades investors means that foreign technical expertise,
ago may no longer be strategic now. Similarly, know-how and entrepreneurial skills are being
natural monopoly is losing significance nowadays brought from abroad to augment the limited
as a major reason for government ownership domestic equivalents.
of industries that are natural monopolies, as
exemplified by power generating plants that are Boost to capital market activities
now becoming increasingly privately owned the As privatisation often entails offering for sale to
world over – a situation that was a taboo some the public of government shares in the capital
decades ago. market, activities in the capital market would be
As in the case of commercialisation, there boosted (as has been the case in Nigeria since the
is also the effect of globalisation, as a result of 1990s), with the consequential development of
which a country, including Nigeria, cannot be the capital market.
totally immune from the ‘peer pressure’ effect
of privatisation that is increasingly taking place Industrial and private sector
in the rest of the world, with many of them development
being success stories. Related to this is Nigeria’s When compared with private sector enterprises,
international development partners, like the public enterprises are, in most cases, poorly
World Bank and the International Monetary managed, inefficient, corrupt, accountability-
Fund (IMF), which either require or cajole their deficient, immune to market discipline, prone
member countries to privatise those activities to pursue political objectives to the detriment
in which they think the private sector is better of economic goals, poorly performing and loss-
placed to deliver services. making, etc. Therefore, shifting enterprises
ownership from the public to the private sector
Advantages of privatisation would reduce the number of enterprises that are
so badly run, leading to an overall development
of enterprises, the industrial sector and the private
Elimination of subsidies by the
sector. As an example, the Federal Government
government has, since 2000, made availability of power its
There is nothing like subsidisation of losses of a number one policy priority, with huge budgetary
privatised enterprise. So, government resources allocation to that effect. But a decade after, the
that could now be used in delivering more situation in the power sector was still as bad as
essential services, would be saved, thereby it was a decade earlier because the PHCN still
reducing the tax burden, reducing fiscal deficit remained under government ownership. Such a
or a combination of these. policy failure would have been avoided if PHCN
were immediately privatised.

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Improvement in foreign perception of the entire domestic market would lead to lower
the country’s economic management unit costs as compared to having many half-
As in the case of commercialisation, successful sized plants. The fallout of this line of reasoning
privatisation will improve the perception of the is that the owner of that single plant that would
rest of the world about how the country’s economic serve the entire market should be the government
management measures. This is partly because a itself, and not a private investor. It used to be
reduction in the drain on government budgetary on this ground that governments used to be the
resources through subsidies of government sole owners of power and telecommunication
enterprises is internationally recognised as an facilities (i.e., PHCN and Nitel equivalents) the
indicator of economic management efficiency. world over, until just a few decades ago. But this
In particular, the perception of the economy by line of reasoning still retains some validity up till
international development partners, like the today, thereby militating against the privatisation
World Bank and the IMF, would improve, leading of such enterprises.
to their possible endorsement of overall economic A third justification relates to the strategic
policies of the country. All these can facilitate the industry argument. It is contended that some
inflow of foreign investments to the country, industries are strategic and politically sensitive,
beyond those directly brought about through like manufacturing of ammunition for the national
engagement of foreign strategic partners to buy military (as in the case of government continued
privatised assets. ownership of Nigeria’s National Defence
Corporation). Privatisation of such enterprises
may adversely affect the security of the nation.
Disadvantages of privatisation
Some initial justifications for The privatisation process is often
enterprises nationalisation and bedevilled by corruption and lack of
establishment still remain transparency and equity
Political leaders and public servants handing
The initial justification for nationalising and
the privatisation process often collude with the
establishing enterprises that the government
intending buyers to rip off the citizens by selling
is now being called upon to privatise are still
the enterprises below their fair values. Some
valid in a number of cases. One of this is the
politicians and public servants even do corner the
market failure reason whereby there are certain
enterprises at give-away prices.
benefits and costs to society arising from action
or inaction of private enterprises, which do not
reflect to the same degrees as benefits and costs Job losses
to such enterprises. Examples are environmental Privatisation typically leads to job losses, without
pollution, use of capital-intensive methods of any retraining plan for the retrenched staff,
production that therefore fail to generate enough thereby worsening the unemployment level.
employment, use of imported raw materials as This explains the traditional hostility of existing
opposed to local equivalents, and employment employees to privatisation.
of expatriate staff instead of nationals – all of
which fail to take into account the benefits of Resistance and hostility, with
the enterprise’s actions on the rest of society. consequential political backlash
Government-owned enterprises are more likely Privatisation is almost always an unpopular policy,
to be sensitive to, and consider, such costs and causing serious disaffection for the government
benefits to the rest of society. in power. Rent-seekers (i.e., those benefiting from
Another justification is the natural monopoly illegal patronage from public enterprises) may
argument. In some activities or industries, the have the opportunity to team up with those (like
unit cost continues to decrease with the scale of employees) having legitimate concerns to foment
production, i.e. the size of the organisation, as a trouble, a situation that is more prone to political
result of what is called economies of scale. This unrest and instability.
means that having only one plant producing for

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Privatisation tends to work against the
poor, at least initially Commercialisation does not
Privatisation leads to market pricing of the augment domestic know-how and
services being rendered or goods being produced
by the enterprise. This price would be higher than entrepreneurship with foreign ones
the implicitly subsidised price when it is under Privatisation involving sale to foreign strategic
government ownership. The market price may investors implies that domestic entrepreneurship
not be affordable to the poor, a serious situation and know-how would be augmented by foreign
from a compassionate point of view, if the goods ones whereas no such augmentation applies in
or services are essential ones, as opposed to commercialisation.
luxuries.
Commercialisation is less prone
Comparison between to corruption and implementation
difficulty
privatisation and As no asset sale is involved under
commercialisation commercialisation, it is less prone to corruption.
Also, implementation challenges are less.
Both privatisation and commercialisation are
similar, in the sense that they are both reform
measures aimed at government enterprises. Public-private partnership
However, there are some differences between
the two in terms of what they entail and their (PPP)
advantages and disadvantages. These are
examined below. Meaning and features of PPP
Privatisation entails sale of government Meaning of PPP
enterprise, but not commercialisation Public-private partnership (often shortened to
Under commercialisation, the enterprise still PPP) is cooperation or working relationship
remains in government ownership. It is only between the government sector and relevant
being directed to imitate commercial enterprises private sector organisations for the purpose of
in its operation, conduct and performance. But, in delivering infrastructural and other services to
case of privatisation, the ownership, and, hence, the people. Explanation of key words or phrases
control are relinquished by the government, in this definition is provided below.
making it now irrelevant for the government to
direct the enterprise to operate as a commercial Scope of government sector and private
undertaking.
sector organisations
Commercialisation does not lead to The government sector can be ministries,
departments, parastatals, etc. at the federal,
money going back to the government state or local government level, while private
Privatisation proceeds accrue to the coffers of
sector organisations can be foreign investors,
the state. No such proceeds are involved in
local investors, non-governmental organisations
commercialisation.
(NGOs) or community-based organisations.
Commercialisation does not augment
domestic resources with foreign Services delivered
The services to be delivered most often relate
resources to provision of infrastructures (like roads,
Privatisation involving sale to foreign buyers electricity, and water), but they may also be non-
implies inflow of direct foreign investment to infrastructural service provisions like cleaning
the country, whereas no such inflow applies in services in urban areas.
commercialisation.
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Nature of cooperation between the school compound to a specialist school cleaning
services provider, who is to be paid a pre-
government and private sectors determined fee for the services. In this case, only
The ‘marriage’ or cooperation between the
one of the several tasks involved in providing
government and the private sector is often
educational services is contracted out, and it is
designed such that each partner specialises in
the government that still remains the primary
the areas of its relative efficiency and strength in
provider of the services.
the delivery of services. Thus, the government
sometimes specialises in making some or all the
financial contributions, some contributions in kind Management contracts
(by giving out the existing assets), mobilisation This is an extension of the service contract to
of political support, ensuring that the social include the management of the whole service
responsibility and environmental requirement delivery being contracted out to the private
aspects of the projects are complied with, partner in return for a pre-determined fee, which
provision of local knowledge when cooperating may or may not include the opportunity to share
with foreign partners, etc. The private investor in the profit being generated for the government.
partner, on the other hand, may contribute finance, In other words, the day-to-day management
technical and managerial sills, technology know- of the service delivery in its entirety, instead
how, innovation and creativity, etc. Thus, a PPP of performance of just one of the several tasks
is designed to ‘marry’ the areas where the public involved, is contracted out, although the ultimate
sector has superiority with those private sector’s responsibility for the service delivery is still with
own areas of relative strength. the government. As in the case of service contracts,
the private sector manager still does not provide
finance for carrying out investments, which
Types of PPP remains the responsibility of the government. The
private sector interacts with the customers but is
There are many types of PPP that have been devised, not responsible for setting the tariffs (i.e., fees)
based on the degree of risks and responsibility that customers have to pay for the services or for
sharing between the two partners. The available employment of staff, as these are to be determined
options can be divided into six categories, which by the government. The contract period is often
are service contracts, management contracts, lease between two and five years, a little longer than
agreements, concessions, build-operate-transfer that of service contracts.
and its other variants, and joint ventureships. An example would be contracting out, for
These are discussed below. In real life, hybrids of four years, management of a government-
the six categories also exist. But the six divisions owned school to a specialist school management
would make clear what the PPPs are all about. consultancy, which would be giving directives
to the government-appointed headmaster and
Service contracts teachers on what to do and what not to do,
Under a service contract, the government contracts making day-to-day rules and regulations for the
out to (i.e., outsources from) a private company school, etc. The management contactor would
the performance of a specific task, which is just be interacting with students and parents but
one of the series of tasks involved in the particular would not be in a position to change the school
service delivery by the government. The contract fees. Its own fee would be pre-determined, with
is usually for a short period of between one an opportunity to share in the profit made for
and three years. The government pays a pre- the school to act as an incentive for it to be cost-
determined fee to the company and it is left to the conscious in running the school.
company to be very cost-conscious in providing
the services so as to make profits. Lease agreements
An example of service contract would be Under this arrangement, the private sector
contracting out for two years by the authority of partner leases (i.e., ‘rents’) the whole facilities
a government-owned school of cleaning of the (building, equipment, etc) from the government

163
over the contract period, which is often as long The operator is to employ staff, run the school
as ten years or above to enable the partner to and carry out repairs and maintenance of school
recover its cost and make profits, as it is now buildings and other facilities, etc. In addition,
responsible for inadequate profits or any losses major capital expenditure like building of
incurred. Having leased the facilities, the partner additional classrooms, staff rooms, laboratories,
runs the entire business of delivering the service, playing ground, etc. is the concessionaire’s
as a normal business is run, except that the tariffs responsibility. The government’s responsibility
(i.e., user fees) have to comply with the terms of would now be limited to ensuring that education
the contract. On its own, it hires staff, manages the standard is adequate, and school fees charged
operation, carries out repairs and maintenance to are in line with the contract agreement. After the
the facilities, etc. Unlike under the management 25-year period, the school would be returned to
contract, the responsibility for service provision the government, which may decide to extend the
is now transferred from the government to the concession for another period.
private partner. The operator has to pay the
government a pre-determined rent for the lease Build-Operate-Transfer (BOT) contract
of government facilities. and its variants
An example would be leasing out, in return In all the above cases, the facilities or assets
for a pre-determined rent, by the government that the private partner manages are already
of a particular government-owned school to a in existence and they are also owned by the
private school operator to run for yen years. The government. However, under the BOT option
operator is to employ its own staff, collect school (and its variants), no such facilities previously
fees (within the limit allowed by government existed. A brand new set of facilities are to be
in compliance with the terms of the agreement) constructed under the PPP agreement. A Build-
from parents, carry out repairs and maintenance Operate-Transfer (or BOT) contract means that it
of school buildings and other facilities, etc. After is the private partner that is to build the facilities
the ten years, the school would be returned to at its own expense, operate or manage them for
the government, which may decide to extend the a period of time (often up to about 30 years),
lease for another period. after which the facilities would be transferred to
the government that now becomes the eventual
Concessions owner. In other words, the government starts
Under this type of agreement, the concessionaire owning the facilities after the end of the contract.
(i.e., the private sector partner that is given But there are other variants like the Build-Transfer-
the concession) is, as in the case of a lease Operate (BTO) and Build-Own-Operate (BOO).
agreement, responsible for the full service Under BTO, the private sector partner builds the
delivery, including operation, maintenance, facilities and transfers them to the government
construction and rehabilitation of the facilities. first before it starts operating them, i.e., the
But, in addition and unlike in the case of a lease transfer to the government is upfront, unlike in
agreement, the concessionaire is responsible for the case of BOT. In the case of BOO, the private
all capital investments needed to build, upgrade partner builds, owns and operates the facilities,
or expand the facilities. The only major role which it will never transfer to the government
of the government is now to set and enforce even after the end of the contract. Under all the
performance standards, including regulating of variants, a brand new set of facilities (and not
price (user fees, as prescribed in the contract) the existing ones as in the case of concession
and quality of service. A concession often lasts agreement) are constructed. In addition, the
for about 25 – 30 years to allow for the long time government often provides guarantee of a certain
usually needed for the concessionaire to recover minimum demand, at a predetermined price,
costs and make profits. for the output to be produced by the private
An example would be concessioning out by operator to ensure that the operating capacity of
the government of a particular school it owns the facilities is fully or satisfactorily utilised. This
to a private school operator to run for 25 years. may mean that the government undertakes to

164
buy a specified volume of goods being provided Promotion of efficiency in service
or services being rendered, at a pre-determined delivery
price, from the private operator. By marrying the areas of strengths of the
An example of BOT contract would be an government sector with those of the private
agreement whereby a private school operator sector partners in an optimal way, services are
agrees with the government to build, at its own delivered in an efficient manner. PPP permits
expense, a new school that it will operate or the government to shift operational roles to the
run for 20 years, after which the school will be usually more efficient private sector partners,
transferred or given out to the government for while retaining, and enhancing focus of, basic
the government to own and run as it deems and core public sector responsibilities, such as
fit. The government, in turn, would guarantee regulation and supervision of private operators.
certain minimum enrolment in the school at a
pre-determined school fee during the 20-year
contract period.
Attraction of foreign expertise and
entrepreneurship
If the private sector partners are foreign, that
Joint ventureship
would mean that the limited expertise and
This refers to joint ownership and management,
entrepreneurship in the country are being
between the government and its private sector
augmented by attracting them from abroad.
partner, of the organisation for providing
the specified services. One alternative is for
both partners to jointly establish a brand new Eliciting participation of citizens in the
organisation that would deliver the service. The delivery of services in their communities
other alternative is for the existing government in conjunction with the government
agency providing the services under government It can get the citizens involved in rendering
ownership to be partially privatised through a services within their communities, like running
sale of a part of the government shareholding to of community schools.
the private sector partner, who is often referred to
as a technical or strategic partner, because of its
expertise and knowledge about the business.
Some disadvantages of PPP
In the context of our example, a joint venture
between the government and a private school PPP contracts can be too technical for
operator can be arranged whereby both parties the government
would jointly establish a school by contributing PPP agreements are generally highly technical
resources to that end. They would both be and the government may not have the capacity
involved in the running of the school, with the or personnel to engage with would-be private
private partner providing its own expertise in the sector partners in a way that may not make the
area of educational management, etc. government cheated by its partner. This is partly
because PPPs are a relatively new, yet-to-be-fully
Some advantages of PPP mastered initiative the world over, not to talk of
in a developing country like Nigeria.
Mobilisation of private capital
A number of PPP types entail provision by the Monitoring of PPP agreements can be
private partner of a part of finance for the service problematic
delivery, either for working capital or investments It is not only the design of contracts that may
in expanding the capacity and even provision of be difficult, implementation and monitoring to
the facilities from the scratch. This reduces the ensure that the private sector partner meets its own
pressure on government budget. If the private terms of the bargain can also be challenging.
partner is foreign, it also results in inflow of
foreign direct investment.

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Differences between PPP and 6 Discuss likely advantages and disadvantages
of public-private parternship (PPP).
privatisation
Privatisation means transfer or sale of ownership Multiple choice questions
of a government-owned organisation being used 1 Privatisation means
in delivering services from the government to A the same thing as nationalisation.
the private sector. PPP, on the other hand, means B sale of government enterprise(s) to
ceding to the private sector some or all of the private investors.
functions or tasks that the government-owned C running a government enterprise as a
organisation performs in delivering the services, private one.
without the organisation being sold to the private D collaboration between the private and
sector. In other words, privatisation entails sale of public sector in providing essential
government-owned organisations to the private services.
investor while PPP does not. Also, PPP entails E none of the above.
the use of the private sector to deliver certain 2 Reasons why a government may want to
functions, as requested by, and under the broad privatise its enterprise(s) include
supervision of, the government. So, privatisation A that government is not known for
has to deal with ‘privatisation’ of government efficiency in running a commercial
organisation or assets while PPP has to deal with enterprise.
‘privatisation’ of certain governmental functions, B that reasons that justified the initial
but still under the request and supervision of government ownership might no
the government. In a sense, both are arguably longer prevail.
different forms of ‘privatisation’ – whether it is the C that government may want to
government organisation/assets or performance boost its domestic popularity with
of specified functions that are being ‘privatised’. privatisation.
Also, as explained earlier, in the case of joint D a and b.
venture form of PPP contracts, whereby a part of E b and c.
an existing government organisation is being sold 3 Possible advantages of privatisation
to the private sector partner, partial privatisation include
and PPP are involved simultaneously. A reduction in inflation.
B short-run poverty reduction.
C short-run employment generation.
Revision questions D boosting of government short-term
political popularity.
Essay questions E none of the above.
1 Explain the meaning of privatisation, and 4 Possible disadvantages of privatisation
distinguish between it and public- private include
partnership (PPP). A short-term job losses.
2 Discuss the reasons why a government may B short-run increase in poverty.
want to privatise its enterprise(s). C promotion of efficiency in the long-
3 Discuss four advantages and three run.
disadvantages of privatisation. D a and b.
4 Distinguish between privatisation and E a and c.
commercialisation, highlighting the likely 5 Which of the following are variants of
advantages and disadvantages of the public-private partnership?
former over the latter. A Build-operate-transfer (BOT)
5 Explain your understanding of public- B Management contract
private partnership (PPP) and discuss, C Concessions
using a practical example, four types of PPP D All of the above
you know. E None of the above

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Chapter 13
Government reform policies:
Deregulation
Meaning of deregulation as their managers, where to open their branches,
and other routine business decisions could be
overruled, vetoed or even imposed by the Central
Economic deregulation is the removal or, rather, Bank. Also, government used to regulate, and still
reduction and simplification of the existing regulates, the quality of goods produced and/
regulations on economic activities that constrain or traded in the economy for safety and other
the effective operation of the market forces. considerations, with special government agencies
like the Standards Organisation of Nigeria (SON)
Rationale for, and scope and National Food and Drug Administration
and Control (NAFDAC) saddled with their
of, the initial imposition of implementation. There is also the regulation
regulation of petroleum products, whereby petroleum
products importers have to be so licensed by a
government agency that is statutorily saddled
To understand the reasons for, and scope of, with the responsibility, and the maximum volume
deregulation, it is desirable to first understand the to import by the licensed importers also has to be
reasons for, and scope of, the initial imposition of as prescribed by that government agency. Another
regulations that are now being dismantled or instance is the requirement by the Company
reduced. and Allied Matters Act (CAMA) of 1990 that
companies have to publish their annual accounts
Scope of economic regulation and certain information has to be disclosed there
under a prescribed format, just as it prescribes the
number, types and qualifications of directors and
In the past, government used to impose regulations
other top officers of a company, and so on.
on economic activities, including production,
distribution, exchange and consumption. Some
of these regulations had to do with price controls Reasons for, and benefits of,
whereby maximum limits (ceilings) and minimum economic regulation
levels (floors) were being prescribed for prices.
Examples were ceilings on commodity prices,
interest rates, rates of dividends on shares, rents, Some of the main reasons for such regulations
and exchange rates, as well as floors on wages, include the following:
in the form of minimum wages. In addition, 1 Creation of a level playing field and
government used to regulate the quantities to promotion of competition (e.g., regulation
trade of foreign currency, bank credit allocation against monopoly and business mergers).
to certain sectors, commodities to import and 2 Prevention of financial instability (as in the
export, etc. There is a control on the number regulation of banks).
and category of expatriates that an employer 3 Promoting quality standards (as when
can employ. Financial institutions, particularly specifying qualities of products for
banks, are probably the most regulated industry consumption and drugs for use).
in the economy, such that those to be employed 4 Consumer protection (e.g., from exploitation
and fraud).
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5 Provision of adequate information (for Rationale for, and scope of,
transparency).
the subsequent deregulation
Costs of economic regulation The initial imposition of regulation is often
reversed or simplified, with the passage of time.
Despite the above reasons and justifications for Reasons for this include the following:
economic regulation, it does have its own costs
and disadvantages.
Subsequent realisation of
Impairment of economic efficiency and implementation challenges
economic growth
Specifically, it constrains the operation of It may later emerge that the implementation of
competitive market forces, thereby preventing the regulation is difficult, cumbersome or not
freedom of economic agents to act. It prevents feasible, thereby necessitating a simplification,
producers from maximising their profits and reduction or an outright removal.
thereby earning highest rates of return on
their investments; it prevents consumers from Cessation of the validity of
maximising their utility or satisfaction, regulation
of foreign trade and capital flows causes the reasons for the regulation
economy to be closed, depriving it of benefiting
from transacting businesses with the rest of the Events may later overtake the reasons on which
world, etc. It is argued by some that, through the regulation was based, thereby calling for its
all these, regulation reduces economic efficiency removal. In other words, the above-mentioned
and, hence, economic growth. In other words, it is benefits of a particular regulation may fall or
argued that the attainment of the above goals and disappear over time.
justifications for regulation entails a trading of
economic efficiency and growth for inefficiency Realisation of mistakes made in
and stagnation.
making the regulation
Every new economic regulation produces
its own victims, making it impossible to Some regulations might have been too hastily
made, with little or no prior consultations,
say categorically that it is beneficial to making the decision to regulate highly flawed
society as a whole in the first instance. A subsequent realisation of
For every new economic regulation, there would this flaw would necessitate the removal of such
normally be gainers and losers. Even if the a regulation.
regulation is beneficial to the majority, it would
still be disadvantageous to some. According to
the received or generally accepted Principles of Increase in the importance of
Economics, it would then be ambiguous as to the costs of regulation
whether the regulation is beneficial to society
as a whole. The disadvantages to the few may In the course of time, the disadvantages of economic
be so severe and serious (probably, bordering regulation may loom so large and become so
on survival) that it becomes impossible to important as to outweigh the advantages. In that
categorically state that society as a whole is case, the affected regulation would have to be
benefiting, because the advantages to the majority reviewed with a view to simplifying, reducing or
may just be thin, shallow and mild. removing it.

168
 deregulation as discussed above can be illustrated
Increase in political influence with the specific case of planned deregulation of
of losers from the regulation petroleum product prices in Nigeria. Petroleum
products are gasoline (or petrol), diesel and
kerosine.
As just pointed out, every newly introduced
regulation has its own victims or losers. In due
course, such losers may wax strong in terms of Features of petroleum sector
political influence and seek to overturn, through regulations
lobbying and other political means, the regulation
that is unfavourable to them.
Four main features of petroleum sector regulations
are as follows:
Change in political perception 1 First, petroleum importers (as the bulk of
domestic requirements are being imported
The thinking of political leaders matters with because local refineries do not operate well)
respect to deregulation. Some politicians with have to be licensed by the g o v e r n m e n t
pro-regulation philosophy and inclination may agency called Petroleum Products Pricing
impose regulations even if reality on the ground and Regulatory Agency (PPPRA). Not
is not strongly supportive of this. Conversely, all intending importers would get licences.
some politicians with anti-regulation stance may 2 Second, the quantities that licensed
remove the existing regulation even if reality on importers can import are subject to the
the ground does not necessitate the removal. So, PPPRA’s approval.
a change in political leadership from those of 3 Third, petroleum marketers or importers
pro-regulation to those having anti-regulation have to sell at prices approved by
inclination can be a reason for economic the PPPRA, irrespective of the costs of
deregulation. importation when the US dollar costs are
converted to the naira. To implement this
pricing policy, the PPPRA administers what
International factor and ‘peer is called Petroleum Support Fund (PSF),
pressure’ effects into which marketers pay (call it tax, if you
like) when the costs of import (i.e., what is
Economic deregulation has now become called landing costs of petroleum imports)
‘fashionable’ internationally, particularly are below the selling prices (i.e., what is
following the collapse of the Soviet Union or called pump prices) allowed by the PPPRA
the communist bloc in the early 1990s and and from which subsidies are paid to the
some deregulation success achieved in Western marketers when the landed costs are above
countries like the US and the UK since the the PPPRA-prescribed pump prices.
1980s. This has made or encouraged many other 4 Fourth, the pump prices have to be the same
countries, including Nigeria, to embark on all over the country, irrespective of the costs
deregulation. Besides, international development to be incurred in transporting the fuels from
partners, like the World Bank and the IMF, actively the ports in Lagos and other coastal areas
promote deregulation in their member countries, to the hinterland. Obviously, there would be
including Nigeria. a greater incentive for marketersto supply
coastal areas and other areas that are very
close to the ports of arrival of the petroleum
Genesis of deregulation – A products, if they must sell at the same price
case study of the petroleum all over Nigeria. So, to remove this incentive,
a subsidy that is graduated according to
products sector the distance from the coastal areas is paid
to the marketers on whatever volume
The general background of, and rationale for, they sell in each locality. This subsidy is

169
 financed from what is called the Petroleum establish refineries elsewhere, from where
Equalisation Fund (PEF). they would supply the Nigerian market.
As a result, the regulations stifle domestic
production.
Some consequences and 4 Because of regulation-induced absence
of private domestic refineries and due
challenges of the regulations to the regulation-caused diversion of
imported petroleum products from the
The main consequences of the regulations, the ports to other West African countries,
features of which are highlighted above, include the market in Nigeria is bedevilled by
the following: sporadic shortages and long queues at
1 Largely as a result of political considerations, petrol stations.
the pump prices that the PPPRA has to 5 Petroleum marketers, probably in collusion
prescribe have almost always been below with some public servants and politicians,
the landing costs of petroleum imports, are believed to be enriching themselves
resulting in subsidies being paid from the unjustly as a result of the regulations and
PSF almost all the time, with just occasional the difficulties of implementing them.
payments by importers into the Fund on For instance, there seems to beample
those very few instances when the pump opportunities for the marketers to lie about
prices exceed the landing costs. So as to the volume imported to Nigeria, and the
make the money in the PSF to be enough volumes they sell in pump stations in areas
to pay such huge subsidies, the Federal, that are distant from the ports so as to
State and Local Governments have to be claim higher subsidies from the Petroleum
replenishing the PSF from time to time. This Equalisation Fund (PEF), etc.
arises from the fact that the payments by
importers into the Fund are much less than A possible case for
the payments made from it to subsidise
the importers. These replenishments of the deregulation of the petroleum
PSF are, in effect, taxpayers’ money, which, product sector
some argue, the government could have
used on other priority areas, in reducing The above challenges have often been adduced
fiscal deficits or in reducing taxes to be paid as justifications for deregulation of the petroleum
by people or a combination of these. sector, which would necessitate removal of
2 Because the subsidised pump prices are government subsidies that are being paid into the
lower in Nigeria than in all her neighbouring PSF to subsidise the pump prices. Importation of
countries (namely Cameroun, Chad, petroleum may no longer require prior licensing
Niger Republic and Benin Republic) and by the PPPRA, just as the quantities to import
other West African countries like Ghana, may no longer need PPPRA’s approval, thereby
smugglers have a field day diverting permitting cut-throat competition among
already subsidised petroleum products importers with the resultant likely downward
from Nigerian ports to all these countries pressure on pump prices in the long-run.
through Nigeria’s very porous borders. In However, like any other form of deregulation,
effect, Nigerian governments end up there are also arguments against the deregulation
subsidising petroleum product consumers of the sector. Most of the cases for and against
in all these countries. deregulation discussed below apply equally to
3 Private investors (including foreign ones) deregulation of the petroleum sector and are,
are scared from investing in refineries therefore, not discussed here separately.
in Nigeria because this regulatory
environment is considered by them not to
be investor-friendly. They rather prefer to

170
Advantages and development partners, like the World Bank
and the IMF, would improve, leading
disadvantages of to their possible endorsement of overall
deregulation economic policies of the country. Like other
economic reform programmes, these can
facilitate the inflow of foreign investments
Advantages to the country.

1 A means of getting rid of archaic and outdated

regulations. Deregulation is a way
Disadvantages
of getting rid of those regulations the
usefulness of which has been overtaken by 1 Sacrifice of the original objectives of
events. introducing the regulation. Deregulation
2 Possible promotion of economic efficiency would mean forgoing those laudable
and economic growth. It is argued in reasons and justifications, many of which
some economic literature that economic are still likely to be valid, for introducing
deregulation promotes economic efficiency. regulation. As pointed out earlier, some
Through this and the likely positive effect of of the reasons include protection of
it on the supply of factors of production (like consumers, creation of a level playing
labour and capital), it would also promote field, and information dissemination. All
economic growth. these, and more, may be sacrificed through
3 Benefits to those that are the losers from the deregulation.
existence of regulation: As pointed out 2 Injury to the beneficiaries of the existence
earlier, every economic regulation normally of regulation. As pointed out earlier, every
disfavours some in society. Deregulation, economic regulation normally favours
therefore, would reverse such disfavour and some in society. Deregulation, therefore,
be to the benefit of such economic groups or would reverse such favour and be to the
agents. disadvantage of such economic agents. This
4 Costs of implementing regulations and attendant is related to the disadvantage just pointed
strain on governance are avoided. While it can be out above.
easy to make regulations, it is not so easy to 3 It may, in fact, reduce economic
implement them. Implementation typically efficiency and growth. While, in
stretches the capacity of the government, principle, deregulation is supposed to
particularly where the machinery of state is improve economic efficiency and growth,
still evolving and governance is not reality does not clearly support this. In
strong, as in Nigeria. Implementation leads many cases of deregulating economies,
to, and is stalled by, corruption and poor contraction (as opposed to growth) of the
governance. It is also very expensive to economy, at least in the short term, is often
implement regulations. Deregulation recorded.
avoids all these problems. 4 Job losses. Like most other economic reform
5 It is in line with the spirit of globalisation and programmes, deregulation often leads to
improves foreign perception of the country’s short-run job losses, thereby worsening
economic management. As in the case of the unemployment level. This explains
commercialisation and privatisation, the traditional hostility of employees to
successful deregulation will improve the deregulation.
perception of the rest of the world about how 5 Resistance and hostility, with consequential
the country’s economy is being managed. political backlash. Deregulation is, in most
Deregulation is now internationally cases, an unpopular policy, causing serious
recognised as an indicator of economic disaffection for the government in power.
management efficiency. In particular, the The losers from deregulation may want to
perception of the economy by international foment trouble while the gainers merely

171
 passively watch on instead of neutralizing C a reduction in inflation.
the protest by losers, a situation that D a and b.
is more prone to political unrest and E a and c.
instability. 4 Likely disadvantages of deregulation
6 Deregulation tends to work against the poor, include
at least initially. Large-scale deregulation A a means of getting rid of archaic and
causes economic shocks (i.e., unexpected outdated regulations.
changes) that entail adjustments by B an improvement in the foreign
various economic agents. But the poor and perception of the country’s economic
vulnerable segments of society may be less management.
capable of coping with the deregulation- C a reduction in inflation.
induced economic shocks, which are mostly D all of the above
of a negative or unfavourable type. E none of the above.
5 Which of the following is not a clear
disadvantage of deregulation?
A Job losses in the short-term.
Revision questions B Tendency for the poor to suffer more.
C Greater tendency for hostility against
Essay questions the government.
1 Explain, with many examples, the meaning D Improvement in the balance of
and scope of deregulation. payments position of the country.
2 Discuss the rationale for deregulation. E Sacrifice of the original objectives of
3 Discuss three likely advantages and four introducing the regulation.
likely disadvantages of deregulation.

Multiple choice questions

1 Deregulation means
A removal of an existing regulation.
B review, amendment or update an
existing regulation.
C removal of all laws affecting the
economy.
D replacing of one regulation with
another.
E none of the above.
2 Possible reasons for deregulation include
A realisation of mistakes made in making
the regulation.
B subsequent realisation of
implementation challenges.
C a change in political perception.
D an increase in political influence of
losers from the regulation.
E all of the above.
3 Likely advantages of deregulation include
A a means of getting rid of archaic and
outdated regulations.
B an improvement in the foreign
perception of the country’s economic
management.

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 Chapter 14
History of the Nigerian capital
market
evolution and history. While still looking forward
to a detailed discussion of these institutions in the
Introduction next chapter, a very broad classification of them
is shown in the schematic diagram of Fig. 14.1,
Financial markets can be divided into three, where they are classified as the stock exchange,
namely capital market, money market, and regulatory authorities, arbitration authority, and
foreign exchange market. The capital market is for other players.
issuing and trading in securities meant for raising As a better appreciation of the capital market
long-term funds; the money market is for raising history and evolution can be had by examining
short-term funds; and the foreign exchange separately the evolution of each of the institutions
market, for exchanging domestic currencies into comprising it, we adopt below the approach of
foreign currencies. These markets are not always discussing these separately for each of the above-
designated physical places like markets for goods mentioned four broad categories. We separately
and services – sometimes they are but sometimes trace the evolution of the stock exchanges,
they are just networking arrangements that enable regulatory authorities, arbitration authorities,
potential buyers and sellers to communicate and and other major players in that sequence. As
strike deals. stock exchanges constitute the centrepiece of the
The concern of this chapter is with the capital capital market to the extent that both are often
market, particularly its history and evolution in (mistakenly) regarded as being synonymous,
Nigeria. Like capital markets in other countries, much of the discussion of the Nigerian capital
the Nigerian capital market has many institutions market evolution will focus on the evolution of
and players, each with its own pattern and the stock exchanges in the country.

Capital market institutions

Stock exchange Regulatory Adjudication/ Other major players

- Operators (Issuing houses,
- LSE/NSE (1st tier, 2nd
authorities Arbitration brokers/dealers, etc.
tier, and ASEM/PPEX/AIM
- Self-regulatory authorities - Institutional/individual
- ASCE
organisations (SROs) - Judicial courts investors
- OTC
- SEC - IST - Users of funds (companies
and governments)

Fig. 14.1 A broad classification of capital market institutions in Nigeria

173
Evolution of stock exchanges due to the adoption in 1999 of the electronic
trading system to replace the manual-based
in Nigeria call-over system, aggressive multiplication
of trading floors might have been stepped
Nigerian Stock Exchange (NSE) down. This is because electronic trading
can be done from any part of the country,
Major landmarks in the evolution of the Nigerian no matter how remote trading floors are. In
Stock Exchange are as summarised in a Table 14.1. principle, physical trading floors can even
Let us discuss them here briefly. be done away with.
1 The first issue of securities in 1946. In 1946, 4 Emergence of All Nigeria Stock Index (ASI) in
the first public issue was made with the 1984. In line with other exchanges the world
floating of £300,000 bonds by the colonial over, the NSE started in 1984 to maintain an
government to implement its 10-year index for equity or ordinary shares traded
development plan. on its floor. The index, called All Share Index
2 Birth of the LSE IN 1960. In September 1960, (ASI), has 1984 as the base year, i.e. 1984 =
the first stock exchange in Nigeria, t h e 100. The index is used to trace the movement
Lagos Stock Exchange, was incorporated of share prices over time. It is a performance
under the extant Companies Ordinance indicator of shares of companies that
(precursor of the Companies andAllied are listed on the exchange. The NSE has
Matters Act of 1990), initially as a private recently introduced other indexes of sub-
limited liability company until 1990 when groups of shares comprising the ASI.
it was re-incorporated as a private,non- 5 Establishment of Second-tier Securities Market
profit company limited by guarantee. (SSM) in 1985. In 1985, the NSE established
The establishment was sequel to the a window, called Second-tier Securities
recommendation of a committee, under the Market (SSM), for listing the securities of
Chairmanship of Professor Barback of NISER, those companies that were not able to meet
Ibadan, set up in 1958 by the government the requirements for the regular window
to advise on how to promote a securities (which could now be referred to as the First-
market in Nigeria. While the Central Bank of tier Securities Market). As will be discussed
Nigeria was providing subventions to it and in a later chapter, the listing criteria for the
the LSE was submitting periodic reports to SSM were softer. As also pointed out below,
the CBN, the LSE nevertheless operated as the SSM was abolished in 2009, after almost
an independent company. The LSE started two and a half decades of existence.
actual operation in 1961, when it listed 19 6 Linking up in 1987 with a global body for
industrial and government securities. online international dissemination of NSE
3 Change of name from LSE to NSE in 1977. In trading information. In an attempt to meet
1977, following the 1976 recommendations international standards and reach out to
of the Financial System Review Committee, other countries in the spirit of globalisation,
under the Chairmanship of Dr Pius the NSE, in 1987, linked up with the Reuters
Okigbo, the Lagos Stock Exchange was Electronic Contributor System for online
renamed Nigerian Stock Exchange international dissemination of NSE market
(NSE). Logically, this is to reflect its new information. Such information includes
orientation to spread its coverage over trading statistics (volume traded, price, etc),
the country for, starting from 1978 when ASI, and company news (including their
its first branches or trading floors financial statements). The rest of the world,
outside Lagos were established in Kaduna by being acquainted with such information,
and Port Harcourt, it has since continued can make decisions on whether to invest in
to establish its trading floors in many other the Nigerian capital market.
state capitals, including Benin, Yola, Kano, 7 Incorporation in 1990 of NSE as a company
Onitsha, Ibadan, Abeokuta, etc. However, limited by guarantee. In 1990, the NSE was re-
incorporated as a private company limited

174
 by guarantee. Thus, it is now a ‘mutual’ which is manual and gradually becoming
organisation or association, the owners of outdated the world over, was replaced by
which are the major players in the capital the automated trading system (ATS), which
market – e.g., dealing members that are permits brokers to execute orders from the
also called stockbroking firms. There has comfort of their offices, through computer
been an ongoing debate on whether to de- terminals, without having to go physically
mutualise it and re-incorporate it again, this to the trading floor.
time as a public (instead of private) limited 12 Permission of cross-border listing in early
liability company, so as to have its shares 2000s. In about year 2000, cross-border
quoted on the stock exchanges. listing started to be allowed. Accordingly,
8 Removal in 1993 by government of its direct foreign listing of securities previously listed
control on pricing. Prior to 1993, there used on the NSE is now allowed, just as securities
to be pricing and other direct controls in previously listed outside Nigeria are also
the capital market by the Securities and permitted to list on the NSE. A number of
Exchange Commission (SEC). Realising that companies have seized this opportunity to
market competitiveness could not thrive list their securities across the border.
well under such controls, the Government, 13 Introduction around mid-2000s of dematerialised
in 1993, abolished such direct controls and certificates and e-dividend payments. After about
thereby deregulated the market. 2005, the NSE and CSCS Ltd introduced
9 Internationalisation of the capital market. A the alternative of dematerialised securities
further step was taken in 1995, when the certificates in electronic form, making it
Federal Government internationalised the unnecessary for investors to obtain paper
capital market by abrogating the laws that certificates. Paper certificates are planned
restricted foreign participation in Nigerian to be phased out in due course. Similarly,
capital market. By this, foreign companies payment of dividends direct into the bank
and individuals can now participate in the accounts of shareholders (i.e., e-dividend
capital market not only as investors (i.e., system) has been introduced to replace the
buyers and sellers of securities), but also as cumbersome paper dividend warrants that
operators (stockbrokers, issuing houses, were being posted to shareholders with the
etc). attendant risk that they might not receive
10 Establishment in 1997 of the CSCS Ltd. Clearing, the warrants.
settlement and delivery of certificates was a 14 Abolition towards the end of 2000s of the SSM
daunting challenge facing the NSE. In 1992, and plan to replace it with ASEM/PRIPEX. In
it got approval to establish a subsidiary to 2009, the SSM window that was established
tackle this challenge, but it was not until in 1985 was abolished and there is a
1997 when the subsidiary, Central plan to replace it by the establishment of
Securities Clearing System (CSCS) Ltd, Alternative Securities/Private Placement
commenced operation. The role of CSCS Ltd Exchange (ASEM/PRIPEX) in 2010/2011.
includes not only clearing, settlement and As discussed in a later chapter, this is
deliverybut also custody of the purchased to cater, not only for small and medium
securities. The establishment of CSCS Ltd enterprises, but also for those that made
has greatly reduced the clearing period from private placements during the pre-2008
several months prior to its commencement boom but failed to list such securities,
of operation in 1997 to the present cycle of thereby providing those who subscribed
T + 3 (meaning, transaction day plus 3 other for the private placement to have an exit
days, so that securities would be delivered opportunity by selling the shares.
to the buyer, and money to the seller, on the
fourth day of transaction).
11 Replacement in 1999 of the call over system
with automated trading system (ATS).
In 1999, the call over system of trading,

175
Table 14.1 Important landmarks in the evolution of the Nigerian Stock Exchange

1946 Government floating of securities in Nigeria for the first time, but without any stock
exchange in existence.
1960 Lagos Stock Exchange, LSE (later renamed Nigerian Stock Exchange, NSE) was
established.
1961 LSE started operations, with listing of 19 government and industrial securities that
year.
1977-78 LSE was renamed NSE, reflecting a plan to spread branches throughout the country.
The first branch was opened in Kaduna and Port Harcourt in 1978.
1984 NSE started calculating stock exchange index, with the launching of the equity stock
index called All Share Index (1984 = 100 or base year).
1985 Established the window, called Second-tier Securities Market (SSM), for listing
securities of medium and small companies.
1987 NSE established connections with the Reuters Electronic Contributor System for
online worldwide dissemination of stock market information to the rest of the world.
1993 Federal Government deregulated stock market transactions so that pricing of
securities now ceased to be under the direct control of the SEC.
1995 Federal Government internationalised the market by abrogating the laws that
restricted foreign participation in Nigerian capital market.
1996 NSE launched its Internet system called CAPNET in order to modernise the market
infrastructure.
1997 NSE established its subsidiary, Central Securities Clearing System (CSCS) Ltd, which
is responsible for securities clearing, settlement and delivery as well as securities
custody.
1999 Called over system was replaced with automated transaction system (ATS) as a
method of trading.
Just after 2000 In post-2000, cross-border listing became allowed.
Post-2005 Electronic or dematerialised share certificates introduced as an alternative to paper
share certificates. E-dividend payment was also introduced as an alternative to
paper dividend warrants being sent by post.
2010/2011 The Second-tier Securities Market (SSM) was abolished and is planned to be
replaced with the ASEM/PRIPEX securities market.

in securities in 2001 before its name was changed

Other exchanges in Nigeria to Abuja Securities and Commodity Exchange
(ASCE) to reflect its expanded mandate that year
Abuja Securities and Commodity to trade in commodities. It now limits itself to
Exchange (ASCE). commodity trading only.
The securities law permits multiple exchanges
to be established in the country, provided those Over-the-counter (OTC) market
seeking to establish them meet the criteria and The evolution of the stock exchange would
get SEC’s approval. In fact, the law also provides be incomplete without reference to Over-the-
for the registration of what is called Capital Trade Counter (OTC) market. In advanced economies,
Points, which are, in effect, small and less elaborate OTC market refers to less formal contacts outside
exchanges to cater for the need of small enterprises the regular exchange between market makers
(of the types that the SSM and ASEM/PRIPEX (i.e., dealers) to trade in existing securities. OTC
windows of the NSE were designed to cater is a sort of secondary securities market, as trading
for). Accordingly, the Abuja Securities Exchange in only existing securities takes place there. In
(ASE) was established in 1998 so as to break the Nigeria, the only OTC market in existence so
monopoly of the NSE. It started electronic trading far is mainly for government debt instruments.
176
 the Securities and Exchange Commission (SEC)
that is vested with such powers in law. It is
therefore the evolution of SEC from its precursor,
the CBN’s Capital Issues Committee established
in 1962, until its present status and stature, that
is discussed below. The important landmarks in
the evolution of capital market regulations in the
country are as shown in Table 14.2.

Establishment of the Capital

Issues Committee in 1962

The CBN established in 1962 a Capital Issues

Committee for the purpose of regulating public
issues of securities. Its mandate was to scrutinise
and screen applications from companies seeking
to raise capital from the then Lagos Stock Exchange
and recommend the timing of such issues. But it
had no statutory backing, and merely operated
unofficially. It was not as a regulatory body as
such, but was merely a consultative and advisory
body.

Establishment of Capital Issues

Commission in 1973

Fig. 14.2 Nigerian Stock Exchange building, Lagos Following the promulgation of the Capital Issues
Decree of 1973, the Capital Issues Commission was
established in March 1973 to replace the Capital
The National Association of Securities Dealers Issues Committee. It had greater institutional and
(NASD), comprising dealers in the OTC market, statutory support and not merely a creation of the
has been registered. CBN. It was primarily to regulate the pricing and
timing of issuance of securities for trading in the
primary market of the then Lagos Stock Exchange
Evolution of capital market (LSE). This was sequel to the influx or anticipated
regulatory authorities influx of companies coming to the LSE to list their
securities to enable wider members of the public
to become shareholders, in order to comply with
Nigerian capital market is regulated by a number the Nigerian Enterprises Promotion Decree of
of authorities. First, there are the self-regulatory 1972. This Decree made it mandatory for certain
organisations (SROs), in the sense that they enterprises that were owned by foreigners to
promulgate rules, regulations and bylaws for transfer certain proportions of ownership to
proper functioning of the market, which are, Nigerian. It was this Decree that was a major
however, binding on their members only. Stock factor behind the establishment of the Capital
exchanges are an example of SROs. So also is Issues Commission.
the National Association of Securities Dealers
(NASD) comprising dealers in the OTC. But, in
terms of authority whose mandates cover the
entirety of the capital market participants, it is

177
Table 14.2 Important landmarks in the evolution of Nigerian capital market apex regulatory authority

1962 CBN established the Capital Issues Committee, an informal body without any
statutory backing and, hence, was not a regulatory body in a true sense.
1973 The Capital Issues Committee was replaced with Capital Issues Commission, which,
though no longer a CBN in-house creation, was still not a regulatory body in a true
sense.
1979 The Capital Issues Commission was replaced by the Securities and Exchange
Commission (SEC), based on the SEC Act of 1979. SEC is, both de facto and statutorily,
a regulatory body.
1999 The SEC Act of 1979 was replaced with the Investment and Securities Act (ISA) of 1999,
with more powers and functions.

Establishment of the Securities regulatory authorities, stock exchanges, issuing

houses, brokers/dealers, investors, investors,
and Exchange Commission in fund raisers, etc. Until the passage of the 1999
1979 ISA, such disagreements could only be resolved
through the conventional judicial courts.
In 1976, the Government constituted the Financial Unfortunately, the conventional judicial process
System Review Committee, headed by Dr Pius is too slow to be useful in most cases. Besides,
Okigbo. Following the recommendations of the the capital markets world over are becoming too
Okigbo Committee, the Government caused to be sophisticated and technical for judicial officers of
enacted the Securities and Exchange Commission the conventional courts to understand, let alone
(SEC) Act of 1979. It was this law that gave birth to adjudicate on disagreements based on them. But
SEC establishment the same year, when it became with provision in the ISA for the establishment of
the de facto apex regulatory body of the Nigerian an Investment and Securities Tribunal (IST) and
capital market with mandates to: its actual establishment the same year, disputes
1 regulate and develop the Nigerian capital on capital market issues can now be brought
market; there. Except the chairperson of the tribunal that
2 determine the prices of securities; and has to be an expert in law, members only need to
3 set the basis of allotment of securities. be experts on financial matters. Also, the ISA is
a fast track civil court. The Tribunal’s judgments
have the same status as the judgments of the
Widening the powers and conventional High Courts and appeals could
mandates of the SEC only be made to the Court of Appeal.

In 1996, the Government constituted a panel,

headed by Chief Dennis Odife, to review the Evolution of other major
capital markets and make its recommendations. players
Following the report of the Odife Panel in the same
year, the Government enacted the Investment and
Other major players in the capital market have also
Securities Act (ISA) of May 1999, which repealed
been evolving as those explicitly reviewed above.
the SEC Act of 1979 (as later amended in 1988).
The number and sophistication of brokerage
The ISA widened the powers and functions of
firms have been increasing. The issuing houses
SEC, as will be discussed in the next chapter.
also have grown. The roles of issuing houses were
formerly being performed mainly by merchant
Adjudication and arbitration banks. But with the introduction of universal
in the capital market banking in 2002, merchant banks went universal
to focus on regular commercial banking business,
Disagreements may, and often do, arise among necessitating the establishment of issuing house
various players in the capital market, be it subsidiaries as well as subsidiaries that were
178
Table 14.3. Summary of committees instituted by the government on capital market matters, and the effects of their
recommendations on market development

Name of Committee Effects of their recommendations

Professor Barback Committee of 1958, Recommended the establishment of the Lagos

to examine the desirability and modality of establishing a stock exchange in Nigeria.
Stock Exchange, which was established in 1960.

The Financial System Review Committee The recommendations were the basis for the
of 1976, headed by Dr Pius Okigbo. Securities and Exchange Commission Act
of 1979 as well as the change in the name
of Lagos Stock Exchange to Nigerian
Stock Exchange, with the attendant more
nationwide orientation of the exchange.

The Capital Market Review Panel of 1996, The recommendations were the basis of the ISA
headed by Chief Dennis Odife. of 1999 on which the widening of SEC’s powers
and functions were based, and on which the
establishment of the IST was also based.

broking firms. Concerning the evolution of an Nigerian Enterprises Promotions

investor base, institutional investors have also Decrees of 1972 and 1977
grown. Changes in legislation and government That of 1972 mandated transfer of certain fractions
policies on insurance companies, pension funds, of ownership of certain enterprises from foreign
etc. have moulded their pattern of evolution. to indigenous ownership, necessitating the use of
On the side of users of funds, the Federal capital markets to effect such transfers. As pointed
Government has since been joined by State and out earlier, this was the reason for the creation
Local governments in floating debt instruments of the Capital Issues Commission in 1973. The
in the market. This summary is as provided in 1977 Decree expanded the scope of enterprises
Table 14.3. to be transferred to Nigerians and, with it, the
expansion of capital market activities.
Reasons for the evolution of
the Nigerian capital market Privatisation of government enterprises
The spate of privatisation of government activities
since the late 1990s also gave impetus to the use of
The observed developments in the Nigerian capital markets for effecting transfer of ownership
capital market can be attributed to a number of from the government to the private sector.
factors, the major ones of which are as discussed
below. Banking consolidation since 2005
The boom in stock market activities between
Government policy measures 2005 and 2008 was, in the main, due to the
banking consolidation measures of the CBN,
which required commercial banks to recapitalise,
The government has over the years embarked
leading to a frenzy in accessing the capital market
on measures that have had the incidental effect
to raise funds.
of promoting capital market activities. Such
measures include the following:

179
Increase in the size of the Weak contract enforcement
economy and awareness of
capital market benefits Even with the establishment of the Investment and
Securities Tribunal, contract enforcement through
the judicial process is still weak. The process takes
Over the years, the level of economic activities too much time, and is generally ineffective. In
has been on the increase, even if only very addition to the challenges of enforcement of the
gradually. This has induced some capital market existing laws, the laws on contract enforcement
developments. Again, the awareness of the also need to be reviewed, Contract enforcement is
general population of the opportunities and at the centre of capital market activities.
benefits of capital market seems to have increased
steadily over time.
Inadequate corporate culture
Globalisation and opening up among Nigerian entrepreneurs
of the economy
Many Nigerian entrepreneurs are averse to having
their enterprises quoted on the stock exchange.
The globalisation process and government They prefer to go it alone. This is partly to avoid
attempt not to be left out of the process has led sharing ownership and control with others and
to the opening up of the economy, including partly to prevent the prying eyes of the regulatory
internationalisation of the capital market by authorities and investing public from knowing
permitting foreign investors and capital market the affairs of their enterprises.
operators to access the Nigerian capital market.
These, in turn, have all led to the inflow of foreign
portfolio capital into the Nigerian capital market. Low level of public awareness
about the capital market
Challenges facing Nigerian
Despite the modest increase over the years in the
capital market development awareness of capital market opportunities and
potential, the level of awareness is still low.
Despite the moderate developments experienced
by the Nigerian capital market, there are a number
of challenges still facing the market. Major ones
Revision questions
among these are as identified below.
Essay questions
1 Write short notes on two of the following
Regulatory environment committees/panels to highlight their
significance in the evolution of the capital
There is still much to do to improve the regulatory market in Nigeria:
environment, the weakness of which was a main a) Barback Committee of 1958;
cause of the capital market bust or stock market b) Pius Okigbo Financial System Review
crash of 2008 – 09. The authorities should have Committee of 1976; and
prevented the duping of investors in primary c) Dennis Odife Capital Market Review
market activities, particularly banks that access Panel of 1996.
the market to raise funds, which preceded the 2 Write short notes on the Capital Issues
crash. Committee and Capital Issues Commission
as two precursors of the present Securities

180
 and Exchange Commission, highlighting Stock Exchange (NSE) started in
the differences between the two. A 1965.
3 Discuss five factors that have promoted the B 1975.
development of the Nigerian capital market C 1984.
over the years. D 1994.
4 Discuss five major problems that have E 1999.
militated against the development of the
Nigerian capital market.

Multiple choice questions

1 The Lagos Stock Exchange was established
in
A 1948.
B 1960.
C 1968.
D 1970.
E 1978.
2 The provisions of the Securities and
Exchange Act of 1979 were based mainly
on the recommendations of the
A General Yakubu Gowon Investment
and Securities Panel.
B Barback Committee.
C Pius Okigbo Financial System Review
Committee.
D Dennis Odife Capital Market Review
Panel.
E General Murtala Mohammed
Investment and Securities Committee.
3 The provisions of the Investment and
Securities Act (ISA) of 1999 were based
mainly on the recommendations of the
A General Yakubu Gowon Investment
and Securities Panel.
B Barback Committee.
C Pius Okigbo Financial System Review
Committee.
D Dennis Odife capital market review
panel.
E General Murtala Mohammed
Investment and Securities Committee.
4 The Investment and Securities Tribunal was
established in
A 1966.
B 1976.
C 1986.
D 1996.
E 1999.
5 The All Share Index (ASI) of the Nigerian

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 Chapter 15
Nigerian capital market and stock
exchange
and the less regulated stock exchange called
Meaning and structure of Over-the-counter (OTC) market. An exchange is
the capital market also often called a bourse.

Meaning of capital market Abuja Securities and

Commodity Exchange (ASCE)
As pointed out in the previous chapter, the
financial markets of an economy can be divided A commodity exchange is for trading in tangible
into three, namely capital market, money market, commodities (especially raw materials like farm
and the foreign exchange market. While the produce, solid minerals, and crude petroleum
foreign exchange market is where the domestic oil and gas) in the spot market, as well as
currency is exchanged for foreign currencies, intangible commodities like forward contracts
the money market is for trading in short-term and derivatives (i.e., futures, options, and swaps
securities (e.g., treasury bills, commercial papers, contracts). In Nigeria, the only commodity market,
and certificates of deposit), and the capital market Abuja Securities and Commodity Exchange
is for trading in medium-term to long-term (ASCE), is nascent, having just started operation
securities, like shares and bonds. (As a rule of in 2006. As a result, it is only a spot market and,
thumb, only securities with less than a year tenor in principle, forward market also, but not any
are regarded as being of short-term nature.) market for trading in derivatives.

Structure of Nigerian capital Over-the-counter (OTC) market

market
The OTC market, on the other hand, is an
The major players or stakeholders in the Nigerian automated electronic network where transactions
capital market and the relationships among in existing securities take place, on a less formal
them are as shown in the schematic diagram in basis, among securities dealers (also called
Fig. 15.1, where they are broadly classified into market makers). So, it is a secondary market only.
five, namely capital market operators, capital The trading there is through negotiation over the
market regulators, capital market arbitration, the telephone, fax, online channel, etc., as opposed to
exchanges and transparency-promoting agencies. the auction method on the floor of the exchange.
Each of these is discussed below, starting with In Nigeria, the market presently exists for trading
the exchanges. in debt instruments, particularly government
bonds.
Exchanges in the capital
market Nigerian Stock Exchange (NSE)

Ownership and governance

As shown in Fig. 15.1 exchanges comprise the
The Nigerian Stock Exchange (NSE) is a mutual
commodity exchange, organised stock exchange,
organisation, i.e., owned by those whose primary

182
interest is not the rate of return or dividends (until recently) an alternative window, with less
to be received from their shareholdings, but stringent conditions for companies to get listed, to
from other common stakes that they have in accommodate public limited liability companies
the organisation, which is what makes them the that do not meet the listing requirements for the
owners or shareholders in the first place. In the regular window, but which could meet the less
present case, although individuals with expertise stringent criteria. One of such windows was the
and experience in business and finance can be Second-tier Securities Market (SSM) established
owners in exceptional cases, the main owners of in 1985 and abolished in 2009. Presently in
the NSE are the market operators, particularly the the pipeline is a replacement to be called the
licensed dealing members (called stockbrokers) Alternative Securities/Private Placement
who derive their incomes or means of livelihood Exchange (ASEM/PRIPEX).
from the existence and well-functioning of the
market, which is therefore more important to Organisation into primary and
them than the dividends they receive from their secondary segments
shareholdings in the NSE. Thus, like any other Irrespective of the type of window, each has two
mutual organisation, the NSE is not established market segments, the primary and secondary
primarily for profit making but to serve the segments. The primary segment brings into
other common interests of the owners and, like contact those who want to raise funds to execute
any other organisation incorporated as being projects and programmes (which are the Federal,
limited by guarantee (instead of by shares), it State and Local Governments and public limited
is not supposed to distribute profits made to liability companies that are listed on that segment
the owners. However, there has been a recent of the exchange) into contact with investors that
clamour to demutualise the NSE, in line with the want to supply the funds. The methods of raising
global trend, by converting it into a public limited funds from the primary market (like offer for
liability company for subsequent listing on its own subscription, offer for sale, and rights issue) are
exchange and stock exchanges elsewhere. But this discussed later. The secondary segment of the
clamour has not been heeded for acceptance and market, on the other hand, is where those that
implementation. hold the securities that were initially bought from
Also, like any other mutual organisation, the primary market sell on a ‘second-hand’ basis
voting power in arriving at decisions is not based to those that are willing to buy from them. Those
on shareholdings in the NSE, unlike in a limited buying from them, who are mostly individual
liability company. The NSE is governed by a investors and speculators, may also wish to sell
Council, which is presided over by its president. them later in the same secondary market, and so
The Council makes policies, enforces discipline on. While the primary market is for raising funds
among members, makes rules and regulations for those seeking to finance investments and other
for the dealing members, grants quotation and projects, it is the secondary market that gives
listing for securities, assumes responsibility for liquidity to investment in the primary market
protecting the interest of the investing public, by facilitating sale of that initial investment in
and considers complaints about and among the the primary market, should the investor need
members. There is also the Director-General, who money for better investment opportunities or
is responsible for implementation of the Council’s for some pressing personal reasons. Without the
decisions and for the day-to-day running of the secondary market, primary market investors
affairs of the exchange. may be compelled to hold on to their investments
forever, in the case of shares, and until maturity,
Organisation into regular and softer in the case of debt instruments. Obviously, only
windows very few investors would not mind being locked
The Nigerian Stock Exchange had (and is likely into an investment forever, or for a very long
to continue having) more than one window. period.
There is the mainstream, standard window for
relatively big enterprises. There has also been

183
NSE’s specialised subsidiary, the CSCS courts existed to adjudicate on capital market
Ltd disputes. This had a number of drawbacks, one of
To facilitate securities clearing, registration and which was that the conventional judicial process
settlements as well as custody of certificates, the is too long to meet capital market requirements.
NSE incorporated in 1992 the Central Securities Another drawback is that present day capital
Clearing System (CSCS) Ltd, which started actual market matters have become too sophisticated
operations in 1997. Major functions of the CSCS and technical for conventional judicial officers to
Ltd include: grasp and, hence, to adjudicate on properly. To
1 Clearing, registration and settlement of rectify these drawbacks, the ISA of 1999 provide
securities. Clearing refers to matching for the establishment, for handling capital
of the buying and selling to ensure market-related cases, of a civil law court called
that they tally and are correct; registration Investment Securities Tribunal (IST), which was
means recording or keeping the records of established the same year. The IST is to be chaired
the transactions; while settlement means by a legal practitioner but the other eight (8)
deliveryof evidence of ownership to the members do not need to be lawyers – they only
buyers and making available the cash need to be experts in capital market matters. The
proceeds to the sellers. In this regard, the IST is at the same level as the conventional high
CSCS Ltd is the equivalent of the Clearing court judge, so that appeals from it go direct to
House of a commodity exchange. No the Court of Appeal.
securities can be traded until the settlement
has been effected by the CSCS Ltd. Before it Regulatory authorities
started operation in 1997, security clearance
and settlement used to take some months.
At the inception of its operation in 1997,
Self-regulatory organisations
it was able to reduce this trading cycle to (SROs)
what is referred to as T + 5 days (i.e., the
day of transaction plus 5 more days) and The capital market has, at least, two layers of
it has now reduced this even further to T + regulatory authorities. First, there is what is called
3 days, meaning that delivery of securities self-regulatory organisations (SROs). While they
to the buyers and availability of the cash too are under the supervision of the Securities
proceeds to the sellers now take place on the and Exchange Commission (SEC), they regulate
fourth working day after occurrence of the themselves or their members, provided this is
transactions. within the confines of the overall regulation by
2 Provision of depository or custodian SEC. Such SROs include the stock exchange (that
services. In this regard, dematerialised or self-regulates the stock market) and the National
electronic security certificates are deemed Association of Securities Dealers (NASD) that
to be in the custody of the CSCS Ltd. self-regulates the OTC market.
Thus, the CSCS is the equivalent of the
warehouse in connection with commodity
exchange. On request (e.g., for the purpose Apex regulatory authority:
of meeting bank loan collateral), CSCS Ltd The Securities and Exchange
issues certificates evidencing the ownership Commission (SEC)
of securities.

The true apex regulatory authority of the capital

Capital market market is only one, and that is the Securities and
adjudication/arbitration Exchange Commission (SEC), whose authority
derives from the Investment and Securities
Act (ISA) of 1999, as later amended. It has
Prior to the coming into effect of the Investment regulatory oversight over all corporate bodies
and Securities Act (ISA) of 1999, only the regular and individuals that perform one function or
184
the other in the capital market. According to the this power and function on the SEC.
ISA, the two basic objectives of SEC are investor 11 Supervision and regulation of venture
protection and capital market development. capital activities, commodity exchanges and
In meeting the first of these two objectives collective investment scheme (even including
(i.e., the objective of investor protection), SEC the traditional rotating saving schemes called
performs the following functions: esusu). While the power to perform the
1 Regulatory. It regulates the market to protect earlier-mentioned functions initially derive
the investing public from unwholesome, from the SEC Act of 1979 (as amended), the
sharp and fraudulent practices in the sale of power to perform this particular function is
securities. a new addition contained in the ISA of 1999
2 Registration. It registers the capital market (as amended).
operators, namely stockbrokers, issuing Concerning the second objective of capital
houses, registrars, investment advisers, market development, the SEC has been
portfolio managers, capital market performing the following developmental roles:
consultants, reporting accountants, solicitors, 1 Public enlightenment. It carries out public
etc. It also registers stock exchanges, enlightenment programmes on capital
commodity exchanges, ‘mini’ exchanges market matters.
called capital trade points, clearing and 2 Research and publication. It carries out,
settlement companies (like the CSCS Ltd), and publishes, research on capital market
and depository companies (also like the issues.
CSCS Ltd). In addition, it registers all 3 Capacity building. It trains or builds the
securities traded on the exchanges. capacity of market operators. Its Capital
3 Investigation. SEC investigates reports of Market Institute is a vehicle through which
violations and alleged violations of the ISA. this is done.
4 Rule making. It makes rules and regulation
that guide behaviour and transactions in the
capital market.
Capital market operators
5 Enforcement. It ensures market participants
comply with ISA provisions. As shown in Fig. 15.1, there is a long list of capital
6 Timing and volume of issues in the primary market operators (sometimes referred to as capital
market. It controls the timing and volume market intermediaries). The major roles of each
of issues in the primary market to ensure of them are either in the commodity market (as
that the market is not congested with new indicated in the diagram), the secondary market
issues, leading to avoidable and undesirable of the exchange (namely stockbrokers/dealers
depression in securities prices. and settlement banks), and primary market of the
7 Review of accounts. It reviews the accounts exchange (in other cases). These are discussed
of public liability companies listed on the below.
capital market, with a view to monitoring
their performance and gathering detailed Operators in the primary
statistics on such performance, for the
purpose of policy formulation. market of the stock exchange
8 Approval of mergers and acquisitions. It
approves applications for mergers between Issuing houses
two or more public limited liability An issuing house is the firm or organisation that
companies. assists the company or government seeking to
9 Approval of State and Local Government bond raise funds from the capital market to issue the
issuance. It has the statutory power to do securities to buyers. After giving necessary expert
this and has been doing so. advice to the issuer client, it would make sure
10 Approval for establishment of unit trusts (i.e., that it complies with the regulatory procedures;
mutual funds). It is the Companies and Allied coordinate preparation of necessary documents
Matters Act (CAMA) of 1990 that confers (e.g., the Prospectus) for the issuance (including

185
the input of reporting accountants, auditors and for all they wanted, but the entire issue, that
solicitors); and send an application for approval underwriters subscribe for in such countries.
to the SEC and the NSE (i.e., if the securities are
intended to be later listed on the NSE). They Registrars
market and promote the issue in order to get A registrar of a public limited liability company
enough investors to subscribe for the securities. is a firm that provides registry or record keeping
In addition to this core function, they of the names, contact particulars and number
also provide ancillary services like securities of shares held in the company by the numerous
underwriting. For the issuance of Federal shareholders of that company, dispatch to the
Government securities (debt instruments), it is shareholders the annual reports and dividend
the CBN that performs the role of issuing house. warrants, and convene annual general meetings
But, in respect of corporate issuance of shares and and extraordinary meetings on behalf of the
debt instruments, merchant banks (also called company. A number of companies use just a
investment banks) perform the roles. But the department within them to provide such registry
generic name for them all is issuing house. services, while other companies outsource it by
They are also involved in carrying out contracting the services out to specialist registrar
company mergers and acquisitions, as well as firms for fees.
company restructuring, e.g., selling off a segment
of a company.
Investment advisers
These counsel would-be investors on how and
Underwriters where to invest and would-be issuers of securities
Underwriting in the capital market context refers (in order to raise capital from the market) on the
to standing ready or making a firm commitment timing, pricing and strategies to adopt. Issuing
to take up either all, or a fraction of, securities houses typically are the ones that provide such
issues that remain unsubscribed for by investors, investment advice to their clients (issuers of
with a view to re-selling them in the secondary securities) while stockbroking firms usually do
market at a later date, hopefully at higher than this for their investor clients also.
the original issue prices that underwriters and
other subscribers pay. For instance, if 250,000
securities are to be issued at $5 each but there Audit firms and Reporting Accountants
Capital market laws and regulations require
are subscriptions from investors for only 200,000,
accountants to report on the authenticity of
underwriters are to take up the whole or a fraction
claims and assertions made in the financial
of the remaining 50,000 units at the same $5 each
documents that the issuers produce (especially the
for a stated commission. Later, they would offload
Prospectus) for wooing investors to subscribe for
whatever units are underwritten in the secondary
the securities. This is to protect the investors from
market at whatever price it could fetch, but with
being victims of false claims. Such accountants
the initial hope that it would fetch not less than
are the ones called reporting accountants.
the $5 each for which they were underwritten. So,
underwriting is a sort of guarantee or insurance
against the risk of inadequate subscription for Solicitors
new issues, and underwriters are paid by issuers In the same manner, legal experts (lawyers or
stated commissions for providing this service. solicitors) are often required to give legal opinion
In many cases, it is the issuing houses that also on the planned new issues.
double as the underwriters. Accordingly, for
Federal Government debt securities, the CBN Trustees
is the underwriter. It should also be noted that, Generally, a trustee is an individual or an
in some countries like the US, underwriters first institution that performs for another person or
subscribe for all the shares (i.e., before the public entity fiduciary duties, i.e., duties based on trust
could subscribe for them) and it is from them that on part of the person or entity for whom the duties
investors have to buy such shares. That is, it is not are performed. Institutional trustee services are
just the leftover after the public has subscribed available with banks, trust companies, and law

186
firms and, as they handle financial and capital subscribe for the shares (or any other securities)
market-related matters, they have to be registered being issued. Commercial banks, because of the
by the SEC. Some of their duties or services are in branch networks that extend to every corner of
connection with portfolio and fund management the country, are particularly suited to receive
to generate appropriate returns for investors such applications from even remote parts of the
in the funds. They similarly handle the trust of country and forward these to their head offices
consortium finance to ensure strict compliance which, in turn, would submit them to the issuing
with the terms and conditions of the consortium house. But other players too, like broking firms,
finance, just as they do to the trust of employee perform the role.
shares by warehousing or keeping employee
shares on their behalf. They also handle property
Receiving banks
management and family trust to generate
These are the commercial banks into which the
good returns on the properties as well as act as
proceeds of subscription for the securities are
nominees for those who do not want their identity
paid.
as owners of assets held in trust to be known or
disclosed publicly. They also perform custodian
trusteeship by providing safe custody of clients’ Capital market consultants
possessions. In addition, they provide estate and These are lawyers, accountants, valuers,
wills administration by ensuring secrecy, security engineers, etc whose expertise and professional
and impartial distribution of the assets when the opinions may be needed from time to time in
owner dies. connection with issuance of securities. For them
Another function of trustees that is to be so engaged, prior registration with the SEC
immediately relevant here relates to trusteeship is required.
for government and corporate debt instruments
or bonds, to ensure that the interests of investors Operators in the secondary
(i.e., lenders) are taken care of. Debt instruments market of the stock exchange
have trust deeds, where the terms and conditions
(including interest payment, debt repayment, and
assets pledged as collateral) of the debt contracts The three main operators that operate almost
are stated. It is the trustees that enforce compliance exclusively in the secondary market are the
with these terms and conditions, particularly on stockbrokers, dealers, and settlement banks.
behalf of the lender. It is not feasible for several
lenders to come together to enforce compliance Stockbrokers
by a particular borrower, and that is how a trustee These are individuals (or, rather, firms called
comes in. stockbroking firms or stockbroking houses) that
act as agents of buyers and sellers of securities in
Portfolio/fund managers the secondary market. They are not the owners
These are the firms that manage funds for their of securities they sell, and neither do they buy
clients, who rely on their professional judgments. securities from their clients on their own accounts
They help buy securities for their clients and (i.e., for themselves). Instead, they only act on
sell such securities as they deem appropriate, behalf of their clients and, for this service, they
collecting dividends and interest for the clients, are paid commissions – that are small percentages
etc. Some of the funds managed in this manner of the values of the transactions carried out for
are mutual funds, asset-backed securities and their clients, which must fall within the ceilings
exchange-traded funds (ETF) – all of which are prescribed by the SEC.
discussed later. In practice, stockbroking firms also perform
services other than the core brokerage functions
of acting as investors’ agents in buying and selling
Receiving agents
of securities. Such functions include investment
These are firms (sometimes commercial banks)
advisory services, investment analysis and fund/
that are contracted by the issuing house to receive,
portfolio management. They also sometimes
on behalf of the issuing house, applications to
187
provide credit facilities called margin loans. of not getting securities sold in the secondary
The reason for margin loans is to buy additional market that militates against subscription for
securities to those already had. The collateral to securities of small or otherwise little known
be pledged for the loans is the existing securities companies when they want to access the capital
already had. The new securities to be bought market, necessitating the establishment for them
with the loans can also be included as a part of of second-tier securities market and similar
the collateral. arrangements. The existence of market makers
In Nigerian capital market, there are addresses this problem to a large extent.
hundreds of registered stockbrokers, all of which In the past, in the UK and some other countries
are registered by the SEC and are also members that adopted the UK capital market tradition,
of the NSE. Passing of stockbroking professional market makers were referred to as jobbers. But
examinations is a prerequisite for membership. the name jobbers has since been dropped even in
They probably constitute the largest number the UK, since 1986 when a wide ranging capital
of capital market operators. They are officially market reform (called Big Bang) took place there.
called dealing members of the NSE, to distinguish When jobbers exist there, they perform the dual
them from the ordinary members. As the name roles of both dealers and floor traders (those that
suggests, they are also free to buy shares on their more or less have a monopoly to trade on the
own account. But this is not in their capacity exchange floors and through which stockbrokers
as stockbrokers as such, but in their separate have to get trades executed for their clients). In
capacity as securities dealers. other words, they are not pure market makers or
pure floor traders in the sense they are used here,
Dealers but an amalgam of the two.
Stock dealers are also called market makers, for In Nigerian capital market, a virile class
the fact that they determine or make prices at of market makers has not emerged. But the
which they trade in the securities they deal in. government is trying to nurture them, at least in
Unlike brokers, dealers buy securities on their the market for government bonds.
own account (i.e., for themselves) with the hope
of selling them at higher prices. Thus, they are not Settlement banks
agents of the buyers or sellers. They display what These are the banks appointed by the NSE/CSCS
is called two-way quotes, the lower is the buying Ltd, into which stockbrokers and other members
price and the higher is the selling price, such that of the exchange contribute money. The commodity
the difference between the buying and selling exchange, Abuja Securities and Commodity
prices constitute their own reward, although they Exchange (ASCE), also has its equivalent, called
may also receive some commissions. Dealers stand clearing banks, for its clearing house.
ready to sell whatever units customers want to buy
at the displayed price and similarly stand ready
to buy (and warehouse until buyers emerge) at Operators in the commodity
the stated price whatever units customers bring. market
Instead of failing to sell up to what customers
want to buy, they would rather increase the price Using the Abuja Securities and Commodity
so as to scare away an appropriate number of Exchange as a point of reference, commodity
customers. Also, instead of not being able to buy market operators include members of the
all that customers bring to sell, they would rather commodity exchange, who are ordinary members
reduce the price at which they would buy so as to (who are not qualified to trade on the exchange),
discourage an appropriate number of customers ordinary trading members (who are commodity
from selling. Thus, they provide liquidity for brokers), and institutional trading members (who
the securities they deal in, and this is a great trade on their own account, instead of for clients).
advantage to securities that are not widely traded Many ordinary trading members and institutional
and which may not get buyers immediately in trading members also double as members of the
the absence of the market makers. It is the fear clearing house of the exchange.

188
 There are also warehouse operators, who
operate warehouses where goods are stored prior
Independent investment
to their delivery when contracts expire. analysis

Transparency agencies A number of capital market operators, particularly

stockbroking firms, carry out researches and
analyses of companies in order to project their
Transparency, in this context, means availability
future performances. The outcomes are made
of information to guide buying and selling
available to their clients and/or members of the
decisions. This would serve to minimise the
public. A problem with this is that the analyses
problem of asymmetric information, whereby
and researches may not be as independent and
one party to the transaction would have greater
unbiased as they are supposed to be, due to the
access to information relevant for buying or
fact that some of the companies being analysed
selling decisions than the other party, as a result
are major clients of the analyst firms analysing
of which the other (relatively ignorant) party
them, thereby creating a conflict of interest.
would become vulnerable to being exploited.
Major capital market agencies and mechanisms
that promote transparency are the daily trading Rating agencies
reports from the floors of the exchanges, reports
of independent analysts, and reports of rating These are agencies that rate the degree of risks
agencies. These are discussed below. associated with corporate and government debt
instruments to enable potential investors to be
Daily trading reports aware of the risks associated with investing in
such securities and, hence, determine the prices
An exchange typically provides physical (i.e., they would be prepared to pay for buying them.
electronic) facilities for dissemination of trading The higher the risks, the lower investors would
information. As soon as buying and selling floor be willing to pay. A typical rating agency has
brokers match their trade under the open outcry its own classes of grade such as A, B, C, and
or call over trading method, designated staff of the D, in ascending order of risk. By looking at a
exchange, who are reporters, would be listening company’s past records and the prospects facing
to verbal communication and gestures (under the it, it would be able to assign a suitable grade to
manual open cry or call over trading method) it. The emergence of rating agencies in Nigerian
and watching (under the electronic or automated capital market is recent and they are still very few.
trading system, ATS) for completed trades. They But there are international rating agencies like the
are interested in the particulars (especially, price Fitch and Standards and Poor (S & P).
bids, asking price and trading price) in respect of Fig. 15.1 gives a summary of institutions in
which they would be recording continuously in the Nigerian capital market.
their computer terminals or hand-held computers.
This is to enable them to broadcast the price
statistics to information vendors, who, in turn,
would transmit the prices to quote machines
around the world.
In Nigeria, trading statistics in the NSE
(including share prices, quantities, market
turnover, market capitalisation, All Share Index,
as well as periodic releases by quoted companies
of their results) are recorded in the NSE’s Daily
Official List, Internet/website, and intranet as
well as electronic and print media, and the Reuters
Electronic Contributor System (for worldwide
dissemination).

189
 Nigerian capital market institutions

1. Exchange
3. Regulatory authorities 5. Transparency agencies
- Apex regulatory authority, SEC - Trading floor reporters
Commodity Over-the-counter - Self-regulating organisations - Investment analysts
exchange (OTC) market in (SROs) - Rating agencies
bonds - Others

2. Adjudication and arbitration 4. Capital market operators

- Issuing houses
Nigerian Stock Exchange - Stockbrokers/Dealers
- Issuing houses
- Regular window
- Underwriters
- Window for soft requirements CSCS Ltd
- Registrars
for listing (e.g., SSM)
- Investment advisers
- Audit firms (as Reporting accountants)
- Solicitors
- Trustees
- Portfolio/Fund managers
- Receiving agents
- Receiving banks
- Clearing banks
- Commodity market players (members, warehouse
Secondary market Primary market operators)
- Capital market consultants
- Investors
- Speculators

Raisers of funds Suppliers of funds

Fig. 15.1 Nigerian capital market institutions and stakeholders

Procedures for trading in, of raisers of funds and, hence, issuers of securities
in the capital market are public limited liability
and methods of raising funds companies and governments at the Local, State
from, the primary market and Federal levels. When any of these wants to
raise funds, it would first approach an issuing
house that is to provide advice on how to best do
Procedures for trading in the it.
primary market
Issuing house reaches out to other
The issuer first approaches the issuing market operators
house The issuing house would then liaise with, and
As pointed out before, the two major categories coordinate the input of, other capital market

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operators like reporting accountants, and Approval is sought for allotment made
solicitors, to produce required documents (e.g., and certificates are issued
Prospectus in the case of corporate issuance The issuing house would apply for SEC approval
through offer for subscription and the like). of the allotment and subsequent registration of
the securities, after which the subscribers would
Approval of SEC and stock exchange is be issued certificates by the issuer’s Registrar.
sought
The issuing house would apply for approval by Securities are listed on the stock
the SEC. At the same time, the stockbroker to exchange for trading in the secondary
the issue would apply for approval by the stock market
exchange if the securities are intended to be The stock exchange would list the securities in the
listed there for trading in the secondary market. market for trading in the secondary market. Only
It is the stockbroker to the issue, as opposed to the certificates already submitted to, verified by
the issuing house, that would apply for stock and in custody of the CSCS Ltd can be traded in
exchange approval because it is the stockbroker the secondary market.
that has dealings with the secondary market, and
would therefore get the securities listed there.
Methods of raising funds from
Documents in support of the offer are the capital market
produced and disseminated
After the necessary approval, the issuing house The four basic ways of raising funds in the primary
would produce and disseminate the required market are offer for subscription, offer for sale,
documents (prospectus, etc.) to invite subscriptions rights issue, and private placement. There is a
for the offer. It would market and publicise the fifth method, called introduction, which, however,
offer before and after the commencement. does not lead to new funds being raised as such.
All these are as discussed below.
Intending subscribers submit
applications and make payments Offer for subscription
Applicants would complete the prescribed This refers to direct issue of securities to the
application forms, where they would indicate public, with the proceeds going to the issuing
the number of securities (e.g., number of shares) company. If the company is raising funds from
they wish to subscribe for and submit these with the market for the first time, the issue is referred
the payments to the receiving agents (e.g., banks) to as the Initial Public Offer (IPO).
who, in turn, would forward them to the issuing
house. Offer for sale
This refers to any of two ways of selling and
Allotment is made and payments in transferring securities. First, it refers to sale of
existing but yet-to-be listed securities by the
respect of unsuccessful applications are promoter or existing shareholders, whose holding
refunded. is hereby partially or wholly relinquished, so that
After the closure of the offer, the issuing house no new fund is being raised, because the proceeds
would do the allotment, which refers to assigning of the sale would go to the particular shareholder
the securities to successful applicants. If the issue that is selling off the shares. For example, if
is over-subscribed (i.e., subscription above the the government wants to privatise a company
units to be issued), allotment would be prorated by selling a part or the whole of its existing
among the subscribers, meaning that all or, at holding, this is usually the method to adopt. The
least some, applicants would get only a fraction government would only bring its shareholding
of the units applied for. Money would be returned for sale in the stock market through an offer for
for unsuccessful applications, i.e., the balance of sale. Thus, the company being privatised would
applications that are not allotted. not get any new funds, as the proceeds of the offer
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for sale would go to the shareholder selling off basis of their previous interactions as customers,
the shares which, in this case, is the government. suppliers, etc. of the company, or the assurances
The second meaning is the offer whereby new given by their brokers. Otherwise, they may be
securities are issued, but it is in the name of the taking a serious risk because the usual screening
issuing house, as opposed to, or instead of, the by SEC and NSE need not apply to a private
name of the issuing company, that members of placement, particularly if the issuing company
the public are invited to subscribe for. In other does not intend to ever list such securities on the
words, it is the issuing house that now invites stock exchange.
people to subscribe. It is almost (through not
exactly) as if the issuing house already bought Introduction
the securities from the company and is now re- In this case, no new or existing securities are sold
selling them in its (i.e., issuing house’s) name. By
to the public. As enough shares of the company
this, the company would be able raise new funds, are already being held by the public, there is no
unlike in the case of the first method of offer for compelling reason any longer to increase the
sale described above. shareholding by the public. What simply happens
is that the company wants to get these securities
Rights issue introduced into, and listed on, the stock exchange.
This is the issue of shares to only existing This approach would be suitable, for instance,
shareholders and strictly in proportion to their for a company that has got many members of
existing shareholding. Thus, a rights issue is the public to hold its securities through private
usually expressed in ratio terms, like 1 for 4 placement so that what now remains is to get
(meaning 1 share will be sold to each shareholder those securities listed on the stock exchange.
for every 4 shares being held as at a particular
date, so that a shareholder with 4,000 shares
would be allotted 1,000 units in the rights issue). Prospectus
The rights issue is normally priced lower than
the market price of the same shares, so as to make it As already mentioned, direct sale by a company
attractive to existing shareholders to take up their of its new securities to members of the public
rights. Thus, if the shares are currently trading for requires the publication of a document called
$10 in the market, the rights issue may be made a prospectus. A prospectus is a document of
at $6 each. But, as the name suggests, a rights advertisement or invitation to the public to
issue is only a right, but not an obligation, so that subscribe or purchase the shares and debentures
a shareholder may elect to renounce the rights. of a company. Publication of the prospectus
This is done either by simply taking no action but is statutory. It is through the prospectus that
to allow the rights to lapse or by selling the right prospective investors obtain information which
to a willing buyer that does not even need to be guides them in deciding whether or not to invest
an existing shareholder. in the securities being advertised. The information
contained in the prospectus includes the identity
Private placement of the company; the directors and other officers of
This refers to sale of securities not through the company; the price, quantity and timing of the
invitation to members of the public to subscribe securities to be issued; and reports by the auditors
but through invitation to a select group of and others experts on the company. In some
investors or business contact groups like cases, the issuance of an abridged or summarised
customers, suppliers, etc to subscribe for them. prospectus is permitted, especially if the stock
The issuing house in charge and/or sponsoring exchange considers that a full prospectus would
stockbroker also invites its clients to subscribe. be unduly costly and time-consuming.
Any limited liability company, and not just
public limited liability company, can raise funds
through private placement. Those subscribing
for the securities are supposed to do so on the

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Procedures and mechanisms Types of trading instruction to give to
the broker
for trading in the secondary The instruction can be in the form of specifying a
market price limit (i.e., maximum price to buy or minimum
price to sell). This price limit can be either a limit
order (i.e., indicating the maximum price to buy
Stock exchange as a
a particular stock or the minimum price to sell a
counterparty to contracts particular stock, as appropriate). It can also be a
market order, whereby the stockbroker is asked
An important principle underlying trading on the or permitted to buy or sell at the prevailing
exchange is that it is a third counterparty to every market price, whatever that may be. There is a
contract, with the other counterparties being special case of limit order called stop loss order,
the buyer and seller. By this, the exchange is the according to which the broker is instructed to sell
buyer to the seller and simultaneously the seller as soon as the price falls to a particular amount
to the buyer. This is to engender confidence in the so as to enable the seller-client to stop the loss he
exchange since if, say, the buyer defaults by not incurs on the transaction from increasing further.
making payment when the contract expires, or For example, if a client buys a stock at $10 per
the stockbroker of the buyer misappropriates the share with the hope of selling it at a higher price,
fund, this would affect only the exchange (which it can happen that the price continues to fall,
is the ‘intermediate’ seller). It is not conceivable instead of rising. By giving a standing stop loss
that the exchange would default. It is therefore a order that the broker should sell the stock as soon
‘default’ absorber that guarantees both the seller as the price falls to $8, the investor will be able to
and buyer against default risks. prevent the loss from going out of control, e.g., if
the price continues to fall to $3 or even lower!
Eligibility to trade
Contract enforcement mechanisms and
the use of margin credit facilities to buy
Those trading on the floor of an exchange are
required to be licensed dealing members of the securities
exchange. These members support the exchange The intending seller is required to have deposited,
by dues and assessments, including contributions through the broker, the security certificate to the
to the Trade Guarantee Fund (GTF) that exists to CSCS Ltd for verification before asking it to be
absorb any default while remedial, disciplinary sold while the buyer must have made available
and related measures that are taken against the the money to the broker who, in turn, would pay
defaulting members are still ongoing. it to one of the exchange-accredited Settlement
Banks to assure the exchange that resources exist
for making the payment. In case the buyer does
Trading procedure not have enough money to fund the transaction,
he can take a margin credit facility from his
Approaching the stockbroker broker. To do this, he would have to pledge
Following standard practice in mature stock securities already held as collateral. If the value of
exchanges the world over, trading procedure in such securities are still not enough for the size of
the NSE requires a first-time customer or client margin facility, he can augment this by pledging
to first open an account with a stockbroker. An the ones for which he is seeking the margin facility
existing customer, on the other hand, would to buy, in which case they become automatically
only need to approach his stockbroker (via the pledged as soon as the broker buy the securities.
telephone, the Internet, or physical visit) and
request to buy or sell, as appropriate, through the Matching of transactions
broker, on the exchange. The broker representing the seller and that
representing the buyer would then try to find
each other out to match the trades and arrive

193
at a bargain, through any of the mechanisms with hands) the quantity and price of their bids,
discussed below. and the floor brokers that want to sell on the
other side of the pits also yell (or hand-gesture)
the quantity and price of their offers. According
Trading mechanisms – to exchange rules, no one can bid below a higher
Electronic trading, open outcry, bid or offer above a lower asking price. This
call over system and direct means that, at any point in time, only the highest
bid and lowest offer are allowed to come forward
online methods while all others are silenced. If a floor broker
is willing to pay the highest price offered, he
There are two broad mechanisms through which would yell it out and all other (i.e., lower) bids
intending seller’s broker and buyer’s broker are would have to disappear. When the floor brokers
able to locate each other and strike a deal. These representing the stock brokerage firms for the
are the call over system (which is a version of buyer and seller meet and execute the trade, they
the open outcry mechanism), and the electronic would also often cry out ‘Sold’ or ‘Done’ or ‘Take
trading mechanisms. These, including the open it’. Thereafter, the floor brokers would relay the
outcry method, are as explained below. information that the trades have been executed to
the brokerage firms, which, in turn would notify
Open outcry mechanism their customers accordingly. The arrangement
This is a method that uses ‘face-to-face’ verbal ensures that the identity of the customers, on
bids (intention to buy) and offers (intention to behalf of whom the floor brokers are making the
sell) in the trading pits – a part or arena of the bids and offers, remains undisclosed.
trading floor that is specially constructed to suit
open outcry trading, with each category or group Call over system
of commodities having a separate pit where This is an adaptation of the open outcry method
buyers and sellers face each other. to suit the less developed nature of stock markets
In addition to crying out, screaming or yelling, in some developing countries, including Nigeria
the floor brokers or floor traders (with many of until the system was changed to electronic trading
them wearing uniform-like coloured jackets) also in 1999. The adaptation consists of assigning a
run or go about in the pit as well as use hand chairperson to preside over the trading session
gestures and other signals that could be used by and allot the traded securities to successful bids
the floor brokers to communicate with each other. and offers. But, in the main, the important features
These hand signals vary and each of them is of the open outcry method are still preserved.
understood by all the floor traders. For instance, Both are manual-based, for instance.
palms in means ‘I am a buyer’ while palms out
means ‘I am a seller’. Hand gestures are used to Electronic trading mechanism
communicate price bids (i.e., prices the buyers This involves trading by stockbrokers through
are ready to pay) and price offers or asking prices computer terminals, from the comfort of their
(i.e., prices sellers are asking), quantity bid and offices. The commodity broker would enter
offered, and other terms and conditions of the a customer’s buy or sell order into the online
transaction. terminal. The order would then find its match
The stockbroker would approach floor automatically through the online channel, i.e., a
brokers or floor traders, who are the ones that buy order would seek to match a sell order and vice
are eligible to run round in the pit to carry out versa. If it does not find a match instantaneously,
trades either on their own account or for the stock it will be stored online until a similar and opposite
brokerage firms but who, unlike stock brokerage order matches it or the order expires (if the order
firms, are not eligible to directly take orders from is valid for only a limited period). The trade will
the public customers. They constitute their own be executed when a matching opposite order is
‘auctioneers’ in the pits, where the floor brokers found. The exchange’s trading engine matches
that want to buy cry out (or, sometimes, gesture the trade on price-time priority basis. Completed

194
trades would be notified electronically to the regular hours. This is likely due to a number of
stockbroking firm, which, in turn, would notify obvious advantages of the automated, electronic
this to the customer concerned. Because the trading system. In particular, the system is faster,
physical trading floor is now dispensed with, cheaper and more efficient. It is also less prone to
floor brokers are bypassed and, arguably, cease to manipulation by dealers and brokers. It is deemed
be relevant. to be more transparent as trade execution is based
on first-come, first-served priority. Nevertheless,
Comparison of call over and electronic the call over system has its own advantages,
trading mechanisms which include the fact that the face-to-face contact
among brokers enable them to read each other’s
The open outcry mechanism is an old, manual
mood and speculate on the motives for the trade.
method of trading that has since been generally
Particularly, the grapevine and other informal
abandoned in mature stock exchanges, that
sources of information that are made available on
have now shifted to the modern, electronic
the trading floor, often deepen their knowledge
trading mechanism. The only exceptions are the
of the prevailing market situation.
commodity and stock exchanges in the US, which
still largely adhere to this traditional method, just
as commodity exchanges in some developing Situation with the NSE
countries do. But, even in the US exchanges, In Nigeria, the call over system was being used
they have in place after-hours electronic trading until 1999, when the automated trading system
systems (including the electronic communication (ATS), a version of electronic trading mechanisms,
network, ECN) that operate when the trading started. But, even then, brokers still often go to
floors are already closed. Some exchanges are the trading floors.
even already adopting electronic trading during

Fig. 15.2 A trading session at the Nigerian Stock Exchange

195
Online trading in securities is divided into a number of units called shares
A recent stock market development is the (with a single unit being called share). Each unit or
emergence of online trading, which is a further share indicates a measure of rights and privileges
extension of electronic trading discussed above. of owning the shares. Three major rights and
Through this, the traders can trade directly (thus privileges concern receipts of a portion of the
bypassing stockbrokers) from their computer periodic profits called dividends; sharing from
terminals and get the trade routed directly to the whatever remains as assets of the company, if and
trading floor of the exchange, where the order when its life comes to an end through liquidation;
would be executed immediately. In this manner, and voting at annual and any other meetings of
the calling of stockbrokers on the telephone or the shareholders. For a given size of the stock, the
visiting them is eliminated, and the services of higher the units or shares bought and held by a
brokers to the clients are thereby greatly reduced, shareholder, the higher will also be the fraction of
if not almost eliminated. the stock held and, hence, the greater will be the
fraction of the above-mentioned three rights and
Over-the-counter (OTC) market privileges to that shareholder. So, the word stocks
The call over and electronic trading mechanisms (the plural of stock) would then refer to the entire
just described apply to the organised stock capital stock for two or more companies.
exchange, and not to the less formal exchange However, the traditional distinction between
called over-the-counter (OTC) market. There, shares and stock that is being made above is
trading takes place through direct contact fading away, such that people nowadays use
between dealers or market makers, who contact the word stock to also mean the same as share,
each other through the telephone and electronic i.e., a unit of the entire capital stock, and stocks
media. The stock exchange is not counterparty to also mean shares. So, it is the context of usage
to OTC contracts. Not all the elaborate rules in the literature that could then clarify whether
and regulations of the organised exchange apply the word stock is being used in the traditional or
to the OTC market either. In Nigeria, the OTC ‘modern’ sense.
market has yet to emerge, except for trading in
debt instruments, especially the FGN bonds. Two broad categories of shares, the
Ordinary and Preference shares
There are two broad categories of shares or
Instruments or products stock: ordinary and preference shares. They
traded on the stock differ mainly in terms of the three categories of
rights and privileges mentioned above, namely
exchange dividends, share of assets on liquidation, and
voting rights.
The various financial instruments or products Preference shareholders enjoy a fixed rate
that can be traded in the markets are as shown (expressed as a percentage of the nominal value
in the schematic diagram of Fig. 15.3, where of the shares) of dividend which has to be paid
the instruments are classified into four broad before any dividend can be paid to ordinary
categories, which are shares, debt instruments, shareholders. That is, preference shares attract
new instruments and derivatives. These are priority claims to dividends while, on the other
discussed below. hand, ordinary shares attract whatever remains
out of the total dividends after paying the fixed
Shares dividend rate on preference shares. So, in a
year when the portion of profit earmarked for
distribution as dividends is not much, ordinary
Meaning of shares and stocks shareholders may get little or even nothing,
Shares are units of the share capital stock of a
whereas, if the profit set aside as dividend is
company. The entire ownership interest in the
much, the sky could be the limit to dividends
company (i.e., what belongs to the owners) is
going to ordinary shareholders.
called capital stock or simply, stock. This, in turn,

196
 Second, preference shareholders are entitled to preference share does not attract any extra
share in the assets of the company in liquidation dividend, no matter how bountiful the dividends
(i.e., when the company’s life is being terminated) to the ordinary shares become. The preference
up to the nominal value of the shares and it is after share that is participating in terms of dividends
then that whatever remains, if any, is assigned to can also be presumed to be participating in
ordinary shares. Thus, if the cash realised from terms of asset distribution when the company is
the sale of assets remaining on liquidation is not winding up, although this is not always the case.
much, little or nothing may be left for ordinary Unless the Articles of Association of a company
shareholders to get, whereas the sky could be the states otherwise, preference shares are presumed
limit to what they would have should the cash to be non-participative.
realised from the asset sale be plenty. Fourth, a preference share is either redeemable
Third, preference shares do not have voting or non-redeemable. It is redeemable if it is to be
rights other than one-share-one-vote during a redeemed after a stated period, with the cash
poll at shareholders’ general meetings that the returned to the shareholder for the share that
law stipulates, whereas ordinary shares have all is thereby cancelled, in the same manner that a
the voting rights. The only exception is when their debenture or any other loan is redeemed. A non-
fixed-rate dividends are in arrears. This means redeemable share is the one that exists for as long
that it is normally only the ordinary shareholders as the company continues to exist.
that can vote at company meetings and, therefore,
are in control of the company. Debt instruments
Other two popular names for ordinary shares
are common stock and equity.
Meaning and nature of debt instruments
A debt instrument is a loan to the issuing
Different categories of preference shares companies or government that is raising funds.
There are many types of preference shares. First, The document, certificate or note evidencing the
on the basis of convertibility to ordinary shares at loan and its terms and conditions (like interest
a later date, there is convertible preference share rates, repayment date and any collateral) is called
(which is that which can be converted within a a bond or debenture (in the case of the securities
stated period of time in future, at the discretion issued by a borrowing company). Such a formal
of the shareholder, to a stated number of ordinary certificate does not normally exist in the case of
shares) versus non-convertible share. conventional bank loans – hence, debentures and
Second, on the basis of dividend receipt, there bonds are referred to as securitised loans while
is cumulative preference share (which is the one bank loans are not. It is this feature that makes
that allows the fixed rate of dividend that is not debt instruments relatively transferable from one
paid for a period, usually due to company losses lender to another would-be lender. And that is
or inadequate profits, to be carried forward and why they are tradable in the securities markets,
paid at a later date when circumstances allow), including the stock exchange, while bank loans
versus non-cumulative share (whereby, any are not.
dividend that is not paid for a period is forfeited
for ever). Unless the Articles of Association of a
company states otherwise, preference shares are Difference between corporate bonds and
presumed to be cumulative. debentures
Third, a preference share can be participating It is only in countries like the US where there
or non-participating. It is participating if the is a difference between bonds, which refer to
share attracts extra dividend above the fixed rate, corporate debt instruments secured with specific
after the ordinary shares are paid sufficiently collateral, and debentures, which are those that
well up to a certain limit, as a result of which the are not secured by collateral. In the UK and other
preference share would now be able to participate countries that adopt the UK’s nomenclatures
with ordinary shares in whatever dividend that (including Nigeria, to an extent), all long-term
still remains to be shared. A non-participating corporate or industrial debt instruments are
called debentures, whether secured or unsecured

197
by collateral. Secured instruments are simply Interest is a charge, to be deducted before arriving
distinguished by being called fixed charge or at the profit, while dividend is an appropriation or
also floating charge debentures (depending on sharing of profits. Fifth, debt instrument holders
whether a particular fixed asset is earmarked as have priority claims to incomes and assets of
the collateral or it is the general, ever-changing the company ahead of the shareholders. Thus,
or floating assets of the borrower that are the payment of interest on debt is not discretionary
collateral), while unsecured instruments are but compulsory, whether or not the company
called naked debentures. In such countries, bonds makes profits, while payment of dividend (even
and debentures are used interchangeably. on preference shares) is discretionary and is
determined by availability and sufficiency of
Different names for government debt profits. In the same vein, should the company
instruments in different countries - FGN wind up and its assets are realised, lenders have to
be paid the nominal value of the debts first, and it
bonds, Gilt-edged securities, Treasury
is only thereafter that shareholders have to share
bonds, etc whatever remains, if any. But, while the sky could
When it comes to government debt instruments, be the limit to the dividends shareholders get
different names are also used, depending on the when profits are buoyant or what they get from
country. In Nigeria, they are called FGN bonds the surplus assets of the company on winding
(if issued by the Federal Government of Nigeria, up (if cash realised from asset sale is substantial),
FGN), after changing the name from Federal lenders cannot participate in such fortunes beyond
Government Development Stock, while State and the contractual interest rate (and, on liquidation,
Local government bonds are simply called State face value of the debts). Finally, debt instruments
Government bonds and Local Government bonds do not carry voting rights, so that the holders
respectively. In the US, they are called Treasury are not entitled to share in the decision-making
bonds if issued by the Federal Government of process, unless the company is in difficulty to the
the country. In the UK, on the other hand, they extent that the interest payment and/or debt re-
are referred to as Gilt-edged securities, or simply payment to them are in arrears.
Gilts.
Different types of corporate debt
Differences between debt instruments
instruments
and shares In Nigeria, there have not been many types of
First, shares represent ownership interest in one government debt securities (whether issued by
form or the other, so that shareholders are owners the Federal, State or Local Government), except
of the company, whereas debt instruments are that they have various tenors like 3, 5 and 10
loans, so that bondholders or debenture holders years or even longer. But the same is not true
are just lenders to the company. Second, debt for industrial (i.e., corporate) bonds. First, there
instruments have a maturity date, i.e. a tenor, are convertible bonds (i.e., those that the holders
meaning that the contractual relationship have an option to convert to another type of
between the lenders and the borrowers is for securities, especially ordinary shares, within a
a limited period (except in the unusual case of certain period and at a stated conversion rate),
a government debt instrument, called consols, and non-convertible bonds (i.e., those that cannot
which is for perpetuity). On the other hand, shares be converted to any other security). Second, there
do not have maturity dates (except in the unusual are naked (i.e., unsecured) bonds, which are those
case of redeemable preference shares). Third, that are not collateralised or secured but floating
shares apply to only corporate entities (since charge bonds (which are those collateralised by
governments do not issue shares), while bonds the general, non-specific assets of the borrower,
apply to both corporate entities and governments. and fixed-charge secured bonds (referring to those
Fourth, while what is paid to debt instrument collateralised by a specific asset of the borrower,
holders is called interest, the corresponding a special case of which is mortgage, collateralised
payment to shareholders is called dividends. by real estate property).

198
 Secured, fixed charge debts have priority over hence, the value of each unit, varies according to
floating charge debts which, in turn, have priority the values of the underlying assets represented
over unsecured ones, since secured lenders have by the fund. If the underlying assets are securities
documents or, sometimes, even the actual asset that are listed on the exchange, it means the value
pledged, in their possession, thereby enabling would vary on a daily basis as the stock market-
them to sell the assets should the borrowers determined values of the underlying securities
default. Third, in countries like the US (but not also change. In many cases, investors can leave
yet in Nigeria), there is callable bond (whereby the funds by selling the units they hold there at
the borrower can choose to repay the debt before the market price and new investors can enter by
the maturity date) and non-callable debt (that the buying units at the current market price of each
borrower must wait till the maturity date before unit.
redeeming the debt, even if ample resources exist The specific category of assets on which mutual
to make premature repayment desirable). funds are allowed to invest in varies. Some invest
in only shares, some in only debt instruments,
some in any combination of securities that the
New instruments – Collective asset managers deem fit, some in real or physical
investment schemes, Asset- assets, etc. Some invest in securities of companies
backed securities, and the activities of which are compliant with Islam
(e.g., they would not be securities issued by
Exchange-traded funds (ETF) breweries and banks that charge interest rates on
loans), some in so-called ethical securities (e.g.,
As shown in Fig. 15.3, the three broad types by excluding shares of cigarette manufacturing
of new products are the collective investment companies and companies dealing in similarly
schemes (particularly, mutual funds), asset- controversial products). There is one peculiar
backed securities, and exchange-traded funds type called real estate investment trust (REIT),
(ETF). The three are similar and interrelated. the underlying assets of which are real estates
(buildings, land, etc.) and, in some cases,
Mutual funds or unit trusts mortgages (taking over of loans secured by real
A mutual fund (which, in the UK nomenclature, estate properties). Virtually all these categories
is called a unit trust) is a collection or pool of exist in Nigeria.
financial contributions of several investors, the Contributors to mutual funds are typically
combined proceeds of which are invested in small savers and investors. However, there is an
either general assets or (in most cases) a specific exception called hedge funds, the investors of
category of assets. The fund is organised and which are large and very rich savers – often called
managed by an asset management firm. It is an high networth investors.
asset management company that organises a As just mentioned, many mutual funds,
mutual fund, which would be divided into several including some REITs, have been established
units, each of which is sold for a given amount. in Nigeria. Most of them are listed on the stock
The asset management firm would then invite exchange on a memorandum basis (i.e., just for
interested investors to contribute into it (i.e., by information of the market), making it easier
buying the units in exchange for money), after for their market values to be ascertained and
which the initial proceeds would be invested. The transparent for those that want either to leave or
returns from the investment would be distributed join the funds.
among the investors according to the number of
units each is holding. These returns comprise Asset-backed securities
the interest and dividends on the investment (or As the name suggests, asset-backed securities
rent collections from real estates, in the case of (also called collateralised securities) are the
real estate investment trusts [REITs]) and capital securities issued on the basis of an underlying
gains on (i.e., profits realised from) the sale of collection of real or financial assets. Assets, in this
assets in excess of their original costs. The value sense, could mean conventional assets, including
of the fund (called the net asset value, NAV) and, current assets like debtors (i.e., receivables) and
199
loans granted. Thus, the underlying assets can assets) that can be known only at the end of the
be a collection of loans granted that are taken trading session. So, an investor in ETF can trade
over (at less than face value) so that subsequent with it by giving a limit order (including a stop
collections at face value would lead to profits, loss order), just as in the case of shares. But ETF is
as in the case of an asset management company not as easily redeemable as mutual funds, should
that took over, at very deep discounts, non- an investor want to leave the scheme. An investor
performing loans of commercial banks in Nigeria who wants to sell his ETF holding can either
with the hope of collecting most of the loans at return the Creation Unit to the ETF company, or
face value or close to face value. It can also be a can unbundle the Creation Unit and sell, on an
collection of mortgage loans (loans granted on the individual basis in the market, the constituent
security of real estate properties). The underlying securities that make up the bundle.
assets can as well be a collection of fixed assets,
from which returns can be made when the assets
are used profitably or sold above the cost of
Derivatives, including forward
acquiring them. It is the operators of the scheme contracts
that determine the category or basket of assets to
pool from various sources. In Book 1, under Chapter 7 on Commodity Market,
On the strength of each of the above the meaning and types of derivative instruments
categories of asset, securities can be issued and were discussed in detail. It was pointed out there
sold, whether in the stock market or outside. The that a derivative is simply a contract, i.e., a formal
buyers of such securities, which are what is called paper agreement, that is based on an underlying
asset-backed securities, are now the owners of the physical asset or commodity, whereby the value
underlying assets, and would derive income from of the contract is always the same as the value of
the earnings being generated by the underlying the underlying asset, so that its value increases or
assets. If the underlying assets are mortgage falls as the value of the underlying asset increases
loans, the securities so issued are called mortgage- or falls. It is called a derivative because its value
backed securities (as discussed in Book 1 in the derives from (i.e., is based on) the value of the
chapter on Banking). These securities, being underlying asset. Because of this one-to-one
more standardised and, hence, more transferable linkage in its value with that of the underlying
and marketable than the underlying assets, are asset, it has been found convenient to trade with
tradable in the secondary market of the stock third parties in such contracts or paper agreement
exchange like conventional shares and bonds. instead of the original commodities or assets from
which their values are derived, as this, among
Exchange-traded funds (ETF) others, obviates the need for physical handling
Exchange-traded funds (ETF) are funds under an of assets. Trading in it is done by entering into
asset management company that resemble mutual another (i.e., second-layer) contract based on the
funds in many respects, with a few exceptions. initial contract. This also means that the value of
One area of difference is when an ETF is being the second-layer contract would be the same as
created or bought in the primary market. The the value of the first contract and, by implication,
payment for buying each unit (called Creation the value of the original underlying commodity.
Unit, which is a basket or bundle of different The three types of derivative contracts, namely
securities) is not in the usual manner, and the futures, options and swaps, were explained
value of each unit is such that only wholesale in Book 1, where it was also pointed out that
investors could ordinarily afford to pay for it, the fourth type, forward contracts, is half-way
so that retail investors are practically excluded. between being a derivative and non-derivative,
Another area of difference is that ETF is traded in instrument, due to its limited standardisation
the secondary market, just like shares, and there and, hence, tradability.
are quotes for it throughout the trading session, For very brief definitions that would facilitate
i.e., there is real time or instantaneous pricing for it a recall of the details contained in Book 1, a spot
in the market. This is unlike mutual funds, the net transaction or contract is defined here as the one
asset value (i.e., the unit value of the underlying whereby delivery of what is bought and payment
200
for it are immediate, almost instantaneous (except swap one stream of future receipts (e.g., variable
for the logistics of clearance), upon the conclusion interest rate on a debt) for another stream that
of the contract. On the other hand, in a forward has a different feature (e.g., fixed interest rate on
contract or a futures contract, the price is agreed another debt).
upfront but delivery and payment are deferred till A stock market, unlike a commodity market,
a pre-determined future date. A futures contract is essentially for spot transactions. Buying and
is like a forward contract, except for the major selling of securities are for immediate delivery
fact that the former is much more standardised in and settlement, subject to some days needed for
terms of the size, tenor, grade, etc. of the contract, clearing to be carried out. However, some stock
a feature that makes it tradable on an exchange, markets also handle transactions in derivatives,
unlike a forward contract that normally trades particularly those whose underlying assets are
in the OTC market where flexibility prevails. An not tangible ones (i.e., not raw materials like farm
option is a contract whereby the option seller produce, solid minerals and crude petroleum oil
grants, in return for a premium or ‘fee’, the option and gas) but financial instruments like foreign
or right to buy (in the case of a call option), or to currencies, debts, stocks and stock indexes (e.g.,
sell (in the case of a put option), a particular asset All Share Index of the NSE).
within a specified period and at a pre-determined In Nigeria, trading in derivative contracts
price (called strike price). The asset on which the is yet to be introduced at the NSE. However, its
option is written can be a tangible commodity or introduction has been suggested and seems to be
a security (e.g., shares) or a futures contract. In receiving some attention and consideration.
the case of a swaps contract, it is an agreement to

Instruments traded
in the Stock Exchange

2. Debt instruments 3. Recent instruments 4. Derivaties (Not yet Shares or Stock

- Collective investment introduced in Nigeria)
products (mutual funds) - Forward contracts
- Asset-backed securities - Futures contracts
- Exchange-traded funds (ETF) - Options contracts
- Swaps contracts

Corporate bonds Government bonds Ordinary shares Preference shares

- Convertible or non-convertible - FGN bonds - Convertible or non-convertible
- Floating charge or fixed - State and Local - Cumulative or non-cumulative
charge including mortages) Government bonds - Participating or non-participating
- Callable or non-callable - Redeemable or non-redeemable

Fig. 15.3 Instruments traded on stock exchange

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Some concepts on stock
market trading and Number of deals
This is the number of transactions (i.e., number of
performance indicators trades) during a period, like a day. This is another
measure of how active the market is.
Indicators of performance of
the overall market – Index, Indicators of returns to
capitalisation, etc individual investors – Income
flows versus capital gains
There are a number of indicators of performance
of transactions in a stock market, notable among The returns accruing to an investor have two
which are the following: components. The first is the stream of incomes
received from the securities in the form of interest
Stock market index (in the case of debt instruments) or dividends
An index shows the average movement over a (in the case of shares). The second is the capital
period in the prices of a category of securities gain, which is the degree of appreciation over a
traded in that market. An index has a base year, period of time (say, a year) in the market value of
for which it is set at 100. In the case of the NSE, the securities. A capital loss is also a possibility
the index is called All Share Index (ASI), with that happens if the market value falls over a
1984 being the base year (i.e., 1984 = 100). It period. A realised capital gain occurs when the
captures only prices of equity or ordinary shares securities are actually sold at the higher market
traded in the market. So, if ASI is 2,500 at the end value while an unrealised capital gain (i.e., the so-
of a particular year and it becomes 3,000 at the called paper gain) occurs if the securities are still
end of the following year, it means that the prices being held and the gain is only ‘on paper’, and
of ordinary shares traded in the market have can be reversed in future if the market price of
increased in values, on average, by 20 percent or the securities drops. It is the combination of the
[(3,000 – 2,500)/2,500] x 100. This means that, on interest or dividend income and the capital gain
average, equity investors have reaped 20% capital that makes the total return on the investment.
gain on their investments during the latter year.
A stock index is a measure of returns accruing to
Speculators’ versus investors’
investors and also an indicator of the perception
of investors on the prospects of the companies motives for securities
quoted in the stock market. transactions
Stock market capitalisation Speculation and speculators – The bull,
This is the market value of the securities listed in the bear and the stag
the market. It is got by summing up the closing Traders in securities have two broad motives,
prices of all the units of different securities listed namely to invest and to speculate. A speculator
in the market. For instance, if there are 10 billion is the one that buys securities in anticipation of a
securities listed for all categories of securities, rise in the securities price in an immediate future,
market capitalisation is the sum of prices of the 10 when it is to be sold. He is not interested as such
billion units. Market capitalisation is a measure of in the securities or the issuers of the securities
the size of the market. per se. Thus, he is primarily concerned with
the anticipated capital gain. He is not primarily
Market turnover interested in the fundamentals (i.e., the basic
This is the monetary value of units of securities factors that drive the performance of the company
traded in a given period, e.g., a day. It is a measure issuing the securities), but in such things as the
of how active the market is. market psychology that temporarily affects

202
securities prices. He has a gambling tendency inherently (long-term) investors, with extremely
and is a risk lover. little speculative motive.
A speculator who believes that the price of
an asset will rise in future is called a bull, while
Hedging and hedgers when trading in
the one that believes the price will fall is called
a bear. A bull buys now with the hope of selling derivatives exists
in future at the anticipated higher price. A bear, In a stock market where derivatives are also
on the other hand, sells now with the hope of traded, we can identify a third category of traders,
buying a replacement in future at the anticipated which is the hedger. As fully explained in Book 1
lower price. Even if he presently does not own in the chapter on Commodity Exchange, hedgers
the asset to sell, he could still borrow the asset use derivatives to protect themselves against the
through his broker and sell it at the high price risk of unfavourable future price movements.
now and replace it by buying at the expected They are risk averters. But, as the conventional
lower price in future – this being what is called stock market is for spot transactions and not for
short selling. If his prediction is correct, he would derivatives, the opportunity to use the market for
gain. But there is the risk that the price may never hedging risks hardly exists.
fall as anticipated but continue to rise, in which
case, he would incur a loss as the asset now has Functions and importance of
to be bought later (at the higher price) to replace
the one previously borrowed and sold. There is a stock exchanges and capital
third category of speculators called stags. A stag markets
is the speculator who buys securities with the aim
of selling it very quickly at a higher price. It also
refers to a speculator that subscribes for newly
Functions of the stock
issued securities in the primary market, with a exchange
view to selling them at higher prices immediately
after the securities are listed in the secondary Stock exchanges are the core or centrepiece of the
market. He capitalises on the usual occurrence capital market because of their importance. They
whereby newly issued securities, immediately perform many functions, notable among which
they are listed in the secondary market, often trade are the following:
at higher prices than the prices at which they were
bought or subscribed for in the primary market.
Provision of trading facilities
Thus, stags are a special case of the bulls.
An exchange provides arrangements and facilities
for buying and selling of securities. The facilities
Investing and investor include:
An investor, on the other hand, is interested 1 Physical infrastructures like the trading
in holding the securities for a relatively long floors, support facilities such as phones, and
period. He is more concerned with the income price-reporting and dissemination systems.
streams (dividends or interest) from holding 2 Electronic networking arrangements that
the assets. While also mindful of the possibility enable remote electronic trading to take
of capital gains over a long period of time, he is place.
not obsessed with it. He is more interested in the 3 Organisational framework for human
fundamentals that drive the securities prices on networking arrangements that enable
a sustainable basis. He is risk shy. He does not security traders, clearing units (like the CSCS
engage in activities like short selling. Ltd), etc. to coordinate and get in touch with
In reality, it is not easy to classify a particular each other for carrying out trading.
trader as either an investor or a speculator 4 An elaborate set of rules, regulations,
because each trader normally has the two motives bylaws, etc. that guide and facilitate trading
of speculating and investing, though to different in an organised manner, including orderly
degrees. Nevertheless, institutional investors pricing, clearing and delivery of traded
like insurance companies and pension funds are securities.
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Registration of dealing members and Importance and roles of stock
discipline of erring ones exchanges and capital markets
The stock exchange registers and accredits those
that can trade in the market either on their own Both the stock exchange and the entire capital
account or on behalf of their clients. Those so market (of which the exchange is a component)
accredited are called stockbrokers or licensed perform similar roles. These are discussed below.
dealing members of the exchange. There are
accreditation criteria, like having acquired
requisite academic and professional qualifications. Promotion of efficient allocation of
It can also disqualify existing members that are resources
found to be inadequate in their professional It can serve to allocate the limited saving or
performance. Accreditation is a form of quality resources of investors efficiently among those
control that screens out those with questionable that would make best uses of the resources, as
competence or integrity or both. opposed to those that would squander them on
projects that are not very useful. By scrutinising
Registration of securities and admission the prospectus and related documents, the stock
exchange aids investors to fund only those
to daily official lists projects that are likely to earn sufficient rates of
It also registers securities that can trade in the return.
market by admitting such securities to its Daily
Official List. Again, this provides a sort of quality
control and assurance on the types of securities Promotion of good corporate
that are traded in the market. governance and appropriate separation
of ownership from control
Prescription and enforcement of a code The stock exchange tries to ensure that companies
of behaviour on players in the market whose securities are listed on the exchange put in
The exchange is a self-regulator organisation place good corporate governance, usually with an
(SRO), meaning that it regulates activities appropriate separation of ownership from control.
taking place there, subject to overall directives This facilitates engagement of professionals and
from the SEC. Such codes of behaviour are to other competent hands outside the ownership
guide members of the exchange (particularly, class to manage the affairs of the company. In this
stockbrokers) and companies and governments regard, it also provides a mechanism for orderly
that want their securities listed on the exchange. management succession.
This is to ensure orderly transactions in the
market. Promotion of transparency in managing
the quoted companies
Ownership and control of the CSCS Ltd It is a precondition for getting securities
The NSE, by establishing the CSCS Ltd, can listed on the exchange that the issuers have
also be regarded as performing those functions to commit to periodic, regular and frequent
of clearing, settlement and delivery of security releases of information and statistics about their
transactions and holding custody of the performance and financial situations, including
documents. audited financial statements. This compels the
management to be more transparent than if this
Developmental functions were not the case.
It undertakes activities that are aimed at further
developing the market, particularly in the areas Barometer for gauging the state of the
of capacity building through organisation of economy
seminars, workshops and road shows in and The stock and capital markets are a barometer of
outside Nigeria. the economy. Activities there provide a measure
of the existing state of the economy as well as the
204
perception by various economic agents on the
future state of the economy. Policy makers need
Revision questions
this type of information for necessary and timely
remedial measures. Essay questions
1 Discuss briefly six functions of the Nigerian
Attraction of foreign capital inflows, Securities and Exchange Commission.
2 Write short notes on the roles and functions
especially portfolio capital
in connection with the capital market
Foreign portfolio investors are those seeking
of any two of:
to invest in debt instruments and shares of
a) Company Registrars
companies without the intention to be involved
b) Issuing Houses
in running the affairs of the borrowing entities,
c) Securities Underwriters
but just for the purpose of earning returns, unlike
3 Discuss the functions of each of stockbrokers
foreign direct investors that are interested in
and dealers, highlighting the
having a significant say in the running of the
differences between the two.
entities. Capital market and stock exchanges
4 Write short notes on:
provide an avenue for foreign portfolio investors
a) The roles of the Central Securities
to invest in the country.
Clearing System (CSCS)
b) The role and contents of a Prospectus
Provision of employment 5 Write short notes on any three of the
Thousands of people are employed in the capital following ways of raising funds in the
market and stock exchange as staff of stockbroking primary segment of the capital market:
firms, issuing houses, registrars, etc. a) Offer for subscription
b) Offer for sale
Enabling the government to raise long- c) Rights issue
term funds for its development projects d) Private placement
The Federal, State and Local Governments can 6 Explain the following methods of trading
finance their budgetary gaps by accessing the on the stock exchange:
capital markets. a) Call over system
b) Automated trading system
Provision of companies’ access to c) Online trading in shares by investors
7 Explain the ways in which ordinary shares
finance and preference shares differ.
In the absence of the capital market, companies
8 Write short notes on any three of the
would find it difficult raising long-term finance
following types of preference shares:
and may be compelled to rely on working capital
a) Convertible preference shares
finance from commercial banks.
b) Participative preference shares
c) Cumulative preference shares
Enabling the government to implement d) Redeemable preference shares
its industrial policies 9 Explain what you understand by debentures
In this regard, it was the capital markets and stock and discuss the differences between
exchange that enabled the Federal Government to debentures and shares.
implement its indigenisation policy of 1972 and 10 Explain what you understand by speculation
1977, privatisation programme since the 1980s, in the capital market and differentiate
and commercial bank re-capitalisation policy between bulls, bears and stags as different
of 2005. Otherwise, the implementation of such types of speculators.
policies would have been too chaotic to imagine. 11 Discuss five functions of a stock exchange.
12 Discuss five areas of importance of a stock
exchange.

205
 D An investor can exit from the fund by
Multiple choice questions selling off the units owned there.
1 An over-the-counter (OTC) segment of the E It can provide investors an opportunity
capital market is to diversify their investment.
A a secondary market.
B a primary market.
C the most highly regulated part of the
stock market.
D for trading in only shares.
E none of the above.
2 Which of the following operate only in the
primary segment of the capital market?
A Stockbroker
B Dealers
C Issuing houses
D Securities underwriters
E c and d
3 Which of the following is not correct about
the Nigerian Stock Exchange (NSE)?
A It distributes a part of the profit it
makes to its shareholders in the form
of dividends.
B It is owned mainly by capital market
operators.
C It has a Director-General as its Chief
Executive Officer.
D It is incorporated as a private company
limited by guarantee under the
Companies and Allied Matters Act
(CAMA) of 1990.
E It is a self-regulatory organisation
(SRO).
4 Initial Public Offer (IPO) refers to:
A Making a rights issue for the first
time.
B Making a private placement for the
first time.
C Making an offer for sale for the first
time.
D Making an offer for subscription for
the first time.
E All of the above.
5 Which of the following is not correct about a
mutual fund?
A Another name for it is Unit Trust.
B Another name for it is Exchange
Traded Fund (ETF).
C It is owned by two or more investors,
who share in returns from it.

206
Chapter 16
Second-tier securities market and
other softer windows of the stock
exchange
Introduction tinkering with the existing the SSM but a rather
drastic departure that necessitated abolishing
Small- and medium-scale enterprises are very SSM in late 2009 and its planned replacement
important in an economy, especially in Nigeria with a different type. This planned replacement
where they account for the bulk of employment is called Alternative Securities/Private Placement
outside traditional agriculture. However, such Exchange (ASEM/PRIPEX), which is also
enterprises are often handicapped by inadequate referred to as the Alternative Investment Market
access to long-term finance. At the same time, the (AIM), borrowing from the name adopted for the
capital market discriminates against them due equivalent in the London Stock Exchange that
to the usually stringent conditions needed to be was introduced there in 1995.
listed on the stock exchange. Below, we examine the reasons why small
An attempt to reduce such discrimination and other companies are not listed on the regular
has led to the creation of a window of the stock stock exchanges in spite of the benefits this
exchange, where listing requirements would brings. We also discuss alternative measures,
be less stringent, to accommodate them. Such a besides creation of a softer window on the stock
window would also serve as a nurturing ground exchange, which can facilitate, or make them get
for them to grow, come of age and attain a some advantages of, being listed without actual
sufficient level or standard that would meet the full-fledged listing. The Alternative Investment
requirements of listing in the regular, conventional Market (AIM), which is the softer window of the
window of the exchange. London Stock Exchange, is then discussed as a
Accordingly, the NSE created in 1985 a case study. Thereafter, the salient features of the
window called the second-tier securities market SSM, while it lasted, are highlighted. Finally, an
(SSM) with the listing criteria being simplified evaluation of the advantages and disadvantages
and softened to enable enterprises that were of having a softer window - like a variant of the
small or medium in size, by Nigerian standards, SSM, ASEM/PRIPEX or AIM - is carried out.
to be listed there. However, after operating this These advantages and disadvantages are general
window for almost 25 years, it was found that enough to accommodate any of the variants that
the initial objectives of establishing the window may eventually replace the abolished SSM.
were not being met. Besides, there were other
developments in the capital market, particularly
Why some companies are not
the outstanding plethora of private placements listed on the main exchanges
that took place during the boom period of 2005
– 08 on the understanding that the securities
An understanding of why companies are not
would soon be listed on the stock exchange but
listed in the regular window of the stock exchange
without the securities actually being listed years
would guide in devising how to bring such
after the private placement. This prompted
companies on board or otherwise cater for their
capital market authorities to seek to remedy
needs by way of creating an alternative window
this, through measures that went beyond mere
tailored to their requirements.
207
Factors that may be segment of this market. A major reason for the
disincentive of investors is the very low level of
disincentives to companies in liquidity (i.e., ability to sell enough units of a stock
seeking stock exchange listing without having to seriously lower the price or buy
enough units without having to seriously raise
One reason that is commonly put forward in the the price of the stock). If this is the situation, there
Nigerian context is the unwillingness of family is not much that creation of a softer window can
companies to co-own and co-run the companies do on its own. Probably, the enhancement of the
with members of the public. Owners of such liquidity of the stocks by creating an OTC market
businesses rather prefer to go it alone at any for them whereby market makers, by being ready
cost, even if it means not being able to source to buy such stocks at their quoted prices and
funds from the capital market. It is argued that warehousing them until buyers are found, would
indigenous enterprises in Nigeria are averse to bring about the desired liquidity. It should be
going public, preferring to remain closely held. noted that the main difference between a softer,
If this is so, there is little that creation of an alternative window and an OTC market is that
alternative, softer window of stock exchange can market makers operate in the OTC market but
do to bring on board such companies. not necessarily in the softer window of the stock
Another reason is ignorance of owners of exchange. Otherwise, both of them are similar in
companies of the likely benefits of getting their terms of informality, including operation under
companies listed. In this case, public education fairly flexible stock exchange regulations.
and raising of awareness of such proprietors Low level of corporate governance and
is what is called for. This is because, if they transparency is another possible disincentive to
are ignorant of the benefits of full listing, they investors in the stocks of such companies. They
would equally be unaware of being listed in the are not required to publish their performance
alternative, softer window as well. results as frequently as companies that have full
It is also often claimed that the requirements for listing, and the required standard of corporate
full listing are too stringent for many companies governance is also lower. This means that a proper
to meet. Many company proprietors are said balance would be needed in the softer window
to be averse to disclosing publicly the financial of an exchange between creating an incentive to
positions and performances of their companies. companies seeking listing through watering down
If that is the situation, a case can be made for of the transparency and corporate governance
an alternative and softer window on the stock criteria, and not creating disincentives to would-
exchange to accommodate the circumstances be investors.
of such companies, but not to water down
corporate governance and transparency criteria, Alternative measures of
so as to safeguard the investing public from being
swindled by unscrupulous promoters. availing companies of limited
stock exchange listing
Factors that may be
disincentives to investors The creation of a softer window out of the stock
in investing in the stocks exchange is a device for encouraging companies
to get a somewhat limited form of listing on the
of upstart and little-known exchange and, thereby, derive some benefits
companies of listing. However, there are other ways of
achieving practically the same ends. Two of such
ways are discussed below.
A reason why the SSM was performing below
expectations and, hence, its abolition in 2009
was because there was little investors’ interest in
the stocks of companies listed in the secondary

208
Establishment of capital trade In Nigeria, there is the OTC market in debt
instruments, particularly government bonds.
points There is yet to be an OTC market in shares.

The existing securities law in Nigeria provides for

the registration of capital trade points, which are Practices and experiences
essentially mini-exchanges, i.e., small exchanges, outside Nigeria regarding
with the objective of facilitating capital sourcing
by small enterprises while maintaining crucial creation of softer windows
capital market investment culture in the environs for smaller enterprises –
of the trade points. This differs from the softer
window in the sense that it exists on a stand- The alternative investment
alone basis, instead of being an appendage or market (AIM) of LSE as a
affiliate of a main exchange. But there has never
been any reported attempt to apply to the SEC for case study
establishment of such capital trade points.
It is common in exchanges of many countries to
Establishment of an over- fashion out of the main exchange a special and
softer window (or a stand-alone less stringent
the-counter (OTC) market in securities market) to cater for the needs of smaller
private securities enterprises. For example, in India (which is also
a developing country like Nigeria), there was
An over-the-counter (OTC) market has similar created in 1990 what is called Over-the-Counter
characteristics as a softer window of the main Exchange of India (OTCEI). This is an electronic
exchange. Rules and regulations are few and stock exchange, and it was the first in India to
are often applied flexibly. Also, the number of introduce market makers.
participants or traders is also little. However, But, probably a more globally known and
there is a crucial difference in the sense that patronised softer window is that of the London
dealers or market makers (who trade on their Stock Exchange (LSE) called the Alternative
own account), and not stockbrokers (who only act Investment Market (AIM). The AIM was
as agents for the buyers and sellers of securities), established in 1995 as a sub-market of the LSE and
are the operators in an OTC market. Of course, has become an international exchange, mainly
the dealing members of the NSE are permitted to due to its low-regulatory situation. Its regulatory
double as both brokers and dealers, but the legal framework is based on what is tagged ‘comply
and professional responsibilities are different for or explain’ principle, whereby listed companies
the two roles. who do not comply with the regulations (which
Securities of small and little known companies are more or less guidelines or even guidance)
do not often have many buyers to enable a seller only need to explain why they do not comply
to dispose of his shares without much hassle, or in order to justify the non-compliance. Self-
many sellers to enable an intending buyer to have regulation is more dependent upon, as opposed
enough to buy without much problem. There is to external regulation by the stock exchange.
therefore the need for market makers who would To facilitate the self-regulation, underwriters
give two-way quotes (i.e., buying and selling of securities listed in the market also double as
prices) and are ever-ready to buy whatever advisers (called nominated advisers, nomads),
volume sellers are offering and whatever buyers and it is the role of nomads to be advisers and
want to buy. In other words, there is the need for regulators. They, in turn, are liable to damages
securities dealers that would provide liquidity in for tolerating misdemeanours on the part of the
the shares of such little-known companies, and it companies under their supervision, in addition to
is only in the OTC markets where such market having their reputation at stake.
makers operate.

209
Features and operating the funds through the promise of listing the
regulations of the defunct securities on the stock exchange as a strategy for
encouraging people to subscribe for the private
Nigerian Second-tier placement securities. While this second window
Securities Market (SSM) was yet to be launched by the end of 2010 when it
was still awaiting SEC approval, some salient and
broad features of it can be deduced. Specifically,
Background it can be safely deduced that it will lower the
conditions for listing on the main exchange. On
this, it would have much in common with the
In 1985, the Second-tier Securities Market (SSM)
abolished SSM. So, the review of SSM features
was created in the stock exchange to accommodate
discussed below would also apply to such second
those public limited liability companies that are
window whenever it comes into existence.
too small to be listed on the main stock exchange.
The requirements for listing on the stock exchange
were rather too demanding for such companies Differences in the requirements
whereas they could be quoted in the SSM where for the main and secondary
requirements were less stringent. In other words,
the conditions and regulations were more
windows
stringent for regular stock exchange listing than
for SSM quotation. The differences in the requirements for quotations
As has been pointed out above, the SSM was in the first-tier and SSM were as shown in Table
abolished in 2009/2010 due to the fact that it was 16.1. This was the situation at the inception of
performing below expectations. But this was the SSM in 1985. Later, some parameters were
with a view to introducing another window for changed, particularly concerning the annual fee
small enterprises that would replace the SSM. At that was later increased from $2,000 to $3,000,
the same time, the new window would enable and the limit on the amount that could be raised
companies that raised funds through private that was later increased from $5 million to $10
placement during the 2005-2008 boom period to million. But, in the main, Table 16.1 illustrates the
list such securities in such a new window. This is areas where the bar was lowered to accommodate
in view of the fact that most of them were raising smaller companies.
Table 16.1 Differences in listing requirements for quotations in the first-tier and second-tier securities markets

Requirements First-tier market Second-tier market

1 Trading period Must have been trading for Must have been trading for at least
at least 5 years. 3 years.
2 Number of shareholders Must have not less than Only 100 shareholders required.
500 shareholders.
3 Percentage of issued shares Not less than 25 per cent. Only 10 per cent required.
available to the public
4 Annual fees Often very high and varies Fixed annual charge of $2,000.
with the share capital of the
company.
5 Limit on the amount that No limit imposed. Not more than $5 million.
can be raised.
6 Frequency of statements Quarterly, half-yearly Half-yearly and annually.
of account and annually.

210
Existence of both primary and shareholders easily buy shares in companies
quoted in the SSM, rather than having to resort
secondary segments of the to private negotiation in the absence of the SSM.
market
Enhanced ability to sell securities
In the previous chapter, the workings of the The ability of quoted companies to raise finance
primary and secondary markets in respect of is also enhanced. The securities they issue can be
the main (or first-tier) market were discussed. It more readily sold than if the SSM did not exist.
should be noted here that there also exist primary
and secondary markets for this second window. Ease of transfer of shares
The conditions or requirements for accessing the The shares of quoted companies become more
primary market are those just enumerated above, transferable and, hence, more liquid. This means
while comparing them with parallel conditions for that shareholders now find it easier to sell their
companies to be quoted on the main exchange. In shareholdings (in whole or in part) to willing
the secondary market, the shares can be listed and ‘second-hand’ buyers in the secondary segment
traded through stockbrokers in broadly the same of the SSM. This is of great advantage to investors
manner as those listed in the first-tier market. who are strapped for cash.

Advantages and Increase in investment

The realisation by investors that their money will
disadvantages of creating not be locked-in or tied down for a long time
softer windows, like the will likely encourage more investments and also
increase the number of investors. This is a great
defunct second-tier advantage to companies, as they can now raise
securities market, for small more finance if they wish.
companies More reliable market value of shares
By participating in the SSM, a more reliable
The advantages and disadvantages discussed market value of a company’s securities can be
here are general enough to also apply, in the main, established. As a result, companies quoted in the
to any other second or softer window that would SSM should find it easier to grow through merger
replace the abolished SSM once the approval of and take-over transactions. This is because the
the SEC is given. issue of shares in one company in exchange for
shares (as opposed to cash) in another company
Advantages of the second-tier becomes much easier if each company’s shares
already have established values.
securities market
Protection of investors
The SSM was created to cater for those companies The public is better protected from the fraud
that are not eligible to be fully listed on the stock that may be perpetrated by some unscrupulous
exchange. Thus, the benefits of the SSM can be companies. This is because a company quoted
evaluated by enumerating (with appropriate on the stock exchange is always under the
modifications) the advantages enjoyed by surveillance of the Stock Exchange Council, as
companies listed on the main (or first-tier) stock well as the Securities and Exchange Commission
exchange. (SEC). In addition, it is subject to various kinds
of discipline imposed on quoted companies by
Enhanced ability to buy securities the stock exchange. All these serve to reduce
The existence of the SSM facilitates the access of malpractices.
investors to the securities market. Prospective

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Improved public image only in name. Their shares were not even actively
Getting quoted on the stock exchange is seen by traded, in addition to their not even complying
lenders, customers, suppliers and many members with the various disclosure requirements. Also,
of the public as a sign of maturity, respect and during about 25 years of its existence, hardly did
status on the part of the company. any company graduate from the SSM to the main
market, thereby defeating the argument that
Training ground for eventual listing on it is a training ground for getting listed on the
main exchange. It seems that the stock exchange
the main exchange authority abolished the market out of frustration
Getting quoted in the second-tier market serves
with its inability to achieve the objectives of
as a good training and preparation ground for
establishing it.
eventual listing on the main exchange.
It should be noted that the first, third and sixth
advantages stated above accrue to the investors, Revision questions
while the rest accrue to the company.
Essay questions
Possible disadvantages of 1 Discuss factors that are likely to be
disincentives to an investor to trade
having a second window
in securities issued by a small, little
known issuer or company and how such
Investor protection can be challenging disincentives can be reduced.
The rules and regulations in the main exchange 2 Discuss factors that are likely to be
are there for a purpose, and not just for the fun disincentives to a company to list its
of it. In the main, they are supposed to protect securities for the first time on the stock
investors. Relaxing or removing some of such exchange and how such disincentive can be
regulations, particularly those bordering on reduced.
transparency and good corporate governance, in 3 Write short notes on:
the name of encouraging small companies to get a) Capital trade points
listed, may expose investors to manipulations of b) Over-the-counter (OTC) market
some of such companies. 4 Discuss four advantages and two
disadvantages of having a softer window of
It may still not encourage companies to a regular stock exchange to accommodate
seek stock exchange listing small companies, as in the case of the defunct
No matter how relaxed the conditions for listing Second-tier Securities Market (SSM) of the
may be, not many more companies may still Nigerian Stock Exchange.
seek listing. This is because proprietors of most
of the companies are simply averse to sharing Multiple choice questions
investment in their companies with outsiders 1 The Second-tier Securities Market of the
and exposing information about the affairs of Nigerian Stock Exchange that was created
their companies to marginal shareholders that in 1985 was abolished about 25 years after
bought just few shares through the market. because:
A It was competing with the main or
Likelihood of success of a second, regular stock exchange.
liberal market is not supported by B It was not meeting the initial objective
Nigerian experience so far for which it was created.
The experience with the defunct SSM has shown C It was being used mainly for money
that relaxing conditions for companies may not laundering, to siphon funds abroad
work. Only very few companies remained in the from Nigeria.
market prior to its abolition in 2009/2010, and
they were mostly on the list of quoted companies

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 D Some big, highly capitalised
companies were using it to raise
funds, thereby depriving smaller
companies of the opportunity to raise
funds through it.
2 One indicator of size that can be used to
classify companies eligible to use a softer
window of the stock exchange is
A the number of shareholders.
B the number of employees.
C the number of years since
incorporation.
D connection with the government.
E none of the above.
3 One advantage to a small company getting
listed in the softer window of a stock
exchange is
A enhanced ability to sell securities.
B enhanced ability to sell the company’s
products.
C enhanced ability of the company to
recruit staff.
D enhanced connection with the
government.
E none of the above.
4 One possible disadvantage to the economy
of a small company getting listed in the
softer window of a stock exchange is that
A it will result in too many companies
getting listed.
B it may make the company produce
low quality products.
C it may result in retrenchment of
workers.
D investors may be less protected.
E it may retard growth of the main,
regular stock exchange.
5 Which of the following is not correct in
connection with a softer window of a stock
exchange?
A It has both primary and secondary
segments.
B It is only a primary market.
C It is only a secondary market.
D It is for trading government bonds.
E b, c and d.

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 Chapter 17
Economic groupings of West Africa
There are many inter-governmental economic The Economic Community
organisations or groupings in West Africa, whose
broad objectives are to promote the development
of West African States
of the member countries. Notable among these (ECOWAS)
are the five that will be examined in this chapter,
namely the Economic Community of West Background, history and
African States (ECOWAS), Niger Basin Authority
(NBA), Lake Chad Basin Commission (LCBC), membership of ECOWAS
Mano River Union (MRU), and the West African
Monetary Agency (WAMA), which replaced the The Economic Community of West African
defunct West African Clearing House (WACH). States (ECOWAS) is a form of economic union,
All these are discussed below in the above order i.e., a partial unification of the economies of its
of listing.

Fig. 17.1 ECOWAS member states

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member states. It was founded in 1975 by fifteen i.e., finance capital, across the borders
countries, namely, Nigeria, Togo, Ghana, Guinea, of member states.
Benin, Mauritania, Sierra Leone, Liberia, Gambia, 5 Harmonise agricultural policies and
Senegal, Cote d’Ivoire, Burkina Faso, Niger, also promote, in the member states,
Guinea-Bissau and Mali. Later, in 1977, Cape common agricultural projects, especially
Verde Islands joined after it gained independence in the fields of marketing, research and
in 1976, thereby raising the membership to sixteen. agro- industrial enterprises.
But, in December 2000, Mauritania withdrew its 6 Evolve a common policy in the development
membership, thereby lowering the membership of infrastructure, e.g. transport,
back to the original fifteen. So, the fifteen members communication and energy.
now are Benin, Burkina Faso, Cape Verde, Cote 7 Harmonise various fiscal and monetary
d’Ivoire, Gambia, Ghana, Guinea, Guinea-Bissau, policies.
Liberia, Mali, Niger, Nigeria, Senegal, Sierra 8 Eliminate differences in the levels of
Leone and Togo. development among the members.
As ECOWAS was not able to keep pace with
its initial time plan and a rather ambitious extent Likely benefits of ECOWAS to
of collaboration as embedded in the 1975 treaty, member states
it had to come to reality in 1993 by revising the
treaty in Cotonou on 24 July 1993, towards a
looser collaboration. 1 There can be net trade creation. Trade
The ECOWAS is based in Abuja, Nigeria. creation is the advantage of increased trade
resulting from economic integration due
to a shift of patronage from relatively
Objectives of ECOWAS inefficient domestic producers to more
efficient producers somewhere else within
It is the objective of ECOWAS to promote the (ECOWAS) region.
cooperation and development in all fields of 2 Opportunities for large-scale production,
economic activity, particularly in the fields of together with the resulting economies of
industry, transport, telecommunications, energy, scale, would be enhanced. This is because
agriculture, natural resources, commerce, the uneconomic or wasteful duplication
monetary and financial issues, as well as in of some half-sized industries that existed
social and cultural matters. This is for the before ECOWAS formation (and the sub-
purpose of raising the standard of living of optimal scale of operation which was due to
the people in members states, increasing and insufficient market to support a higher scale
maintaining economic stability, fostering closer of operation) may now be replaced, each
relations among its members, and contributing with a single and larger industry that
to the progress and development of the African serves all ECOWAS member states.
continent. 3 By enhancing the mobility of factors of
ECOWAS has the aim of eventually merging production (labour, entrepreneurship and
most aspects of the economies of member states. capital or finance), resources would be
In particular, it aspires to: better allocated from countries where they
1 Remove tariffs and other impediments, e.g., are relatively in surplus to those where they
quotas, to the movement of goods w i t h i n are relatively scarce and are, therefore, badly
the ECOWAS region. needed.
2 Maintain a common external tariff (CET)
policy in respect of all goods coming from Activities and achievements of
outside the ECOWAS region.
3 Remove all obstacles to movement of all ECOWAS
persons across the borders of member
states. These are going to be discussed under economic,
4 Remove all obstacles to movement of funds, infrastructural and energy, social, security and

215
political spheres as follows: in the development of hydroelectric dams in
many member countries as well as thermal
Economic activities and achievements plants in some of them to be based on the energy
The ECOWAS adopted the Protocol on free out of Nigerian natural gas. Also, thousands of
movement of persons. This abolished visa and kilometers of electricity lines are scheduled to be
entry permit requirements, and gave citizens of put in place. For rural areas that are not linked
member states with valid travel documents and with the national grid or central power sources,
international vaccination certificates the right of ECOWAS is also supporting renewable sources of
residence for a maximum of ninety days even energy, such as solar energy, biomass, mini- and
without permission. micro-hydro-electric energy.
It also adopted the issuance of a common
international passport, i.e., ECOWAS passport, Social areas
which is already in issue in some member states, ECOWAS has established the West African
including Nigeria. Health Organisation (WAHO). It is also trying to
It also adopted in 1990 the agreement to harmonise laws on drug control among member
eliminate customs duties and taxes of equivalent countries. In addition, it has adopted a protocol
effect on goods as well as non-tariff barriers (e.g., on education and training. It promotes youth-
quotas) on trade of goods within member states. related as well as gender-related activities and
It sponsors and organises regional ECOWAS projects, e.g., by establishing the ECOWAS Youth
trade fairs. and Sport Development Centre and also the
It has created the West African Monetary Gender Development Centre.
Institute (WAMI), which is to facilitate the
creation of the second regional currency, ECO Regional security
(i.e., in addition to the Francophone countries’ The ECOWAS nations have signed a series of
CFA). It is also to harmonise monetary and non-aggression Protocols since the first one in
fiscal policies as well as payment systems. It also 1978. These are agreements against member
transformed the West African Clearing House countries attacking each other. This is to guard
(WACH) that it established earlier into the West against member countries declaring wars and
African Monetary Agency (WAMA) that is also open hostilities against each other. They also
to complement WAMI, and perform many other signed a Protocol on Mutual Defence Assistance
functions as discussed towards the end of this in 1981 that provided for the establishment of an
chapter. Allied Armed Force of the Community which
would defend a member country against attacks
Infrastructure and energy from outside ECOWAS.
Thousands of kilometres of roads have been built, ECOWAS adopted in 1998 the Declaration of
including interconnection roads. ECOWAS has a moratorium on importation, exportation and
also adopted harmonisation and liberalisation manufacture of light weapons in West Africa.
of both the air and maritime transport services. The war in Liberia led to the establishment
Concerning telecommunications, it sponsored in 1990 of the ECOWAS Monitoring Group
the establishment of INTELCOM I programme (ECOMOG). In addition to Liberia, ECOMOG
and its successor, INTELCOM II. These have has intervened in Sierra Leone and Guinea-
created a network of automatic telephone, Bissau. Observers and analysts generally see
telex and telefax links or networks through the ECOMOG and its peacekeeping activities as the
member states. most important achievement of ECOWAS to date.
The West African Gas Pipeline that conveys For example, in the case of the Liberian war, the
natural gas from the petroleum prospecting part US (i.e., the former colonial master of Liberia),
(i.e., Niger Delta) of Nigeria to some West African the OAU (now African Union, AU) and the UN
countries is also attributable to the ECOWAS resisted appeals to intervene to restore peace in
initiative and moral support. Liberia. It was the establishment of ECOMOG
In the area of energy, ECOWAS is engaged that took up the challenge.

216
 Based on its realisation that ‘prevention is unity that exists. Observers and analysts have
better than cure’ when it comes to conflicts, it also identified this as the reason why the Southern
also adopted in 1999 a mechanism for conflict African Development Council (SADC), which is
prevention, management and resolution, the southern African equivalent of ECOWAS and
peacekeeping and security. This mechanism which was formed about five years after ECOWAS,
provides for institutions and policies aimed at has made much more substantial progress than
preventing, managing and resolving internal ECOWAS has made. SADC members are not
conflicts and conflicts between member states. polarised along such a line as most of them had
It also contains measures for strengthening a common colonial history with Britain, without
cooperation in the areas of preventive any one having been a former colony of France.
diplomacy, conflict prevention, early-warning As an example, the Francophone countries
and peacekeeping operations. It goes further by already have, since independence, a common
authorising interventions in member states in the central bank and a common currency (CFA).
event of an internal conflict that could cause either So, they are not supportive of ECOWAS having
a humanitarian disaster, a serious threat to peace what they see as a duplication of what they
and security in the sub-region, or an overthrow of already have and got used to. Second, France still
a democratically elected government. continues to be paternalistic to its former colonies
in West Africa, managing their affairs for them in
Polity – Democracy and governance many respects. In this regard, France would not
In 2001, the ECOWAS adopted a protocol on ‘permit’ them to enter into any alliance or be a
democracy and good governance. This provides signatory to any ECOWAS pact or protocol, be
for constitutional convergence principles, rule it economic, political or otherwise, that would
of law, human rights and good governance. jeopardise its relationship with, or firm grip on,
This is to strengthen the above-noted protocol these former colonies.
that authorises interventions in member states
in the event of an internal conflict that could Weakness in implementing policies and
cause an overthrow of a democratically elected measures
government. Thus, democracy has now been Probably as a result of lack of political will
formally adopted by ECOWAS as the only on the part of leadership at the national level,
acceptable system of political governance. Thus, ECOWAS has hardly implemented any protocol
countries like Guinea and Niger, where there or policy in accordance with the laid down time
was military seizure of power in 2008 and 2009, plan or timetable. The time schedule is almost
were suspended from ECOWAS membership always derailed and missed. This includes the
until they restored democracy. Related to this, implementation of the common external tariff
ECOWAS also sends observer missions to witness (CET) protocol, removal of customs duties on intra-
and report on elections in member countries to regional trade, intra-ECOWAS free movement of
enable it to form an opinion as to whether such persons, and so on. While they have often been
elections are free and fair enough for it to receive implemented eventually, the implementation
ECOWAS endorsement. is delayed substantially, sometimes by 10 years
or even more, when compared with what was
Challenges facing the ECOWAS initially scheduled. A single monetary zone and
the use of a common currency, ECO, were initially
Differences in colonial history supposed to have taken effect by 2000 while they
This arises as a result of some member were still in the pipeline as at the end of 2010,
countries having been colonised by, and gained following a series of postponements of takeoff
independence from, France while others were dates. This persistent failure to keep to schedules
colonised by, and gained independence from has adversely affected the credibility of ECOWAS
Britain. This dichotomy has continued to polarise protocols, agreements, etc.
ECOWAS and has made it a herculean task to
forge unity other than the present semblance of

217
Civil and political unrests 1964 as the River Niger Commission before it was
Many member countries have been bedevilled re-founded and its name changed in November
by serious civil wars, civil unrest and political 1980 to Niger Basin Authority.
challenges. This has prevented ECOWAS from It has nine (9) member countries, which are
focusing on its mandate of promoting economic the countries that include part of the Niger Basin.
development and unifying the economies of These are: Benin, Burkina Faso, Cameroon, Chad,
member countries. Instead, it has had to be Côte d’Ivoire, Guinea, Mali, Niger and Nigeria. It
distracted by, and preoccupied itself with, is based in Niamey, in Niger.
settlement of political disputes, prevention
and ending of wars, etc. While all these are
necessary as a prelude to achieving economic Objectives, mandates, functions
integration and development, they were not the and activities of the Niger
primary motive of establishing ECOWAS. Thus,
ECOWAS’s major achievement so far, through
Basin Authority
ECOMOG intervention, is not directly related to
any of the primary objective of ECOWAS. The Niger Basin Authority was established for
the promotion of cooperation among member
Lean resources to implement policies countries to ensure integrated development of
resources of the Niger Basin. It originally defined
and measures its mission as the cooperative management of
Many member countries are not up to date in the
water resources, most notably, but not limited
payment of their assessments to the ECOWAS,
to, the Niger River. Such resources are wide-
and the assessments are even too modest to
ranging, as they include agriculture – crop
finance the various projects and programmes
production through land cultivation in the Basin
that line up for execution. As a result, ECOWAS’s
and irrigation with River Niger water, livestock
budget is very lean. This also makes it imperative
through animal grazing there, and fishing on the
for ECOWAS to depend on donors from non-
River Niger water. They also include damming
member countries and international multilateral
the Niger River to supply water and also generate
development partners, a situation that does not
electricity, just as the navigable portions of the
augur well for a regional organisation that is
river can be used for transportation.
supposed to be independent of non-member
Thus, while water and hydroelectric resources
countries and other international organisations.
were the centrepiece or preoccupation of the
NBA, the NBA provides a forum for harmonising
Poor state of intra-ECOWAS the development of energy, agriculture, forestry,
infrastructure transport, communications, and industrial
Although ECOWAS is doing something at its resources of the member nations. In this regard,
characteristic slow pace to improve the intra- it has created an ‘Integrated Development Plan
regional infrastructure, the existing state is still of the Basin’, which especially focuses on cross-
too inadequate. There are no regular flights boundary projects.
between member states, and telecommunication Also, while not the original focus of the NBA,
facilities are also inadequate. environmental protection from the threats of
desertification, deforestation and pollution of the
rivers by agriculture and industry has become a
Niger Basin Authority major theme of their work.
(NBA) The NBA also participates in cooperative
projects with organisations such as the World
Background, history and Wildlife Fund on environmental matters,
including preservation of wildlife.
membership

The Niger Basin Authority (NBA) was founded in

218
Challenges of the NBA reports which each State undertakes to
address to it;
5 Formulating common rules concerning
Like any other pan-West African economic
navigation;
organisation, the NBA faces the challenge of
6 Establishing regulations governing its
inadequate funding to prosecute its various
personnel and ensuring their application;
programmes. There is also the challenge of
7 Examining complaints and assisting in
inadequate political will or commitment on the
settling disputes;
part of the member countries. As a result, not
8 Supervising the implementation of the
many citizens in the member countries are aware
provisions of the present Statutes and the
of the NBA’s existence, simply because it hardly
Convention to which it is appended.
touches or impacts on their life.
In line with the above terms of reference, the
primary responsibility of the Commission is to:
The Lake Chad Basin 1 Regulate and control the utilisation of water
and other natural resources in the Chad
Commission (LCBC) basin;
2 Initiate, promote and coordinate natural
Background, history and resources development projects and
membership research; and
3 examine complaints and promote the
settlement of disputes.
The Lake Chad Basin Commission was established
in 1964 by the Fort Lamy Convention by the
four countries that share borders with the lake, Activities and achievements
namely Cameroon, Niger, Nigeria and Chad.
Thirty years later, i.e., in 1994, the Central African Activities and achievements of the LCBC include
Republic became a member. Also, Libya joined in the following:
2008, making six members altogether. Sudan and 1 It was through it that the demarcation
Republic of Congo are observer countries. exercise of boundaries between Chad, Niger,
According to Article 9 of the Statute and Nigeria and Cameroon was done between
Convention establishing the LCBC, it shall have 1988 and 1992. The demarcation exercise later
the following terms of reference: formed the basis of the dispute settlement
1 Preparing joint rules, permitting the between Cameroon and Nigeria by the
complete application of the principles International Court of Justice.
affirmed under the present Statutes and the 2 It has prepared a Master Basin Plan of its
Convention to which it is appended, and activities and programmes, in collaboration
ensuring an effective implementation of with experts and with the support of the Food
such rules; and Agriculture Organisation (FAO) and the
2 Assembling, examining and diffusing United Nations Development Programme
information on the projects prepared by (UNDP). With a subsequent successful
member states and recommending the implementation of the Mater Plan, the
planning of joint works and research impact of the LCBC would be felt in the
programmes within the Chad Basin; member states.
3 Maintaining liaison between the member 3 It also has prepared a Strategic Action
states with a view to having the most efficient Plan, under which 36 priority projects were
utilisation of the waters of the Basin; identified. The project for water transfer
4 Following up the execution of works and from Oubangui to Lake Chad was the
studies in the Chad Basin falling within the second on the list of the projects contained
present Convention and keeping member in the Strategic Action Plan.
states informed at least once a year through 4 It has also prepared the LCBC Vision 2025,
the exploitation of systematic periodic which also defines the means to attain the

219
 envisaged targets by 2025. The Vision 2025 Cote d’Ivoire agreed to join the Union, although
aims at the reversal of degradation trends, it is not yet known whether it is still planning to
as well as the restoration and conservation actually join.
of the ecosystem for promoting sustainable Major challenges bedevilling the MRU
development of the sub-region. include lack of political will on the part of national
leadership. Also, the prolonged civil wars in
Liberia and Sierra Leone and the ongoing post-
Some challenges war reconstruction efforts have (and, for a while,
will continue to) distract the attention of national
Despite all the master plans, strategic plan, Vision political leadership from political commitment to
2025, and so on, there are still no significant the cause of the MRU. There is also the problem
improvements in river basin management. of inadequate funding. But probably a bigger
The rapidly drying up of the Lake Chad challenge is the continued relevance of the
makes the matter worse. The lake is said to be goals and objectives of the MRU. The modest
drying up at an alarming rate, making the task of achievements of having a common external tariff
the LCBC herculean. It looks like running after a (CET) in 1977 and liberalisation in 1980 of intra-
moving target. Unfavourable climatic conditions Union trade seem to have been made redundant
and also man-made factors have led to significant and overtaken by events as ECOWAS (which
reductions in the volumes of water flowing from MRU members also belong to) has also done the
rivers into the Lake, thereby resulting in the same.
rapidly shrinking of the Lake.
As a result, the competition between different
land and water users has continued and is The West African Monetary
even intensifying, making the area vulnerable Agency (WAMA), successor
to a breakdown of law and order, unless this is
contained through the activities of the LCBC. of the defunct West African
Clearing House (WACH)
The Mano River Union
Background, history and
The Mano River Union (MRU) was established membership
in 1973 between Liberia and Sierra Leone, before
Guinea joined in 1980. It is based in Freetown, In 1996, the West African Clearing House
Sierra Leone. The goal of the Union was to foster (WACH), which was established in 1975 as a
economic cooperation among the countries. It is multilateral payment facility to improve sub-
named after the Mano River which begins in the regional trade in West Africa, was transformed
Guinea highlands and forms a border between into a broad based autonomous agency called the
Liberia and Sierra Leone. The Union aims to West African Monetary Agency (WAMA). The
establish a customs union amongst member WAMA has more enlarged roles and functions.
states. Initially, it was achieving some targets It was established in September 1996 with the
contained in the treaty establishing it. This mandate to coordinate the affairs of member
includes the introduction of a common external countries of West Africa towards the attainment
tariff at the intra-union trade level in 1977 and the of a Single Monetary Zone for ECOWAS. It is an
liberalisation in goods of local origin in 1981. autonomous specialised agency of the Economic
However, the conflicts in the countries Community of West African States (ECOWAS),
(particularly, the civil wars in Liberia and, then, and is based in Freetown, Sierra Leone.
Sierra Leone), starting from late 1980s, stalled the Efforts to promote monetary integration
progress that was being made in achieving the in West Africa were concretised in 1975, when
objectives of the Union. However, in May 2004, the central banks in the sub-region signed the
Union was reactivated at a summit of the leaders agreement to set up the West African Clearing
of the three member states. Also, in April 2008, House (WACH). It was a multilateral payment

220
arrangement, with the participation of all 3 Encouraging and promoting trade and
the then eleven central banks in West Africa exchange liberalisation.
(including the BCEAO, the abbreviation for 4 Enhancing monetary cooperation and
the common central bank of Francophone West consultation among member states.
African countries). The commercial banks in the 5 Facilitating the harmonisation and
sixteen West African countries also participated. coordination of monetary and fiscal policies
WACH was to promote the use of local currencies and structural adjustment programmes.
for West African transactions so as to bring about 6 Ensuring the monitoring, coordination and
savings in the use of foreign exchange. It was implementation of ECOWAS
also to promote trade liberalisation in member monetary cooperation programme.
countries, and for the countries to also consult 7 Encouraging and promoting the application
frequently among themselves on monetary of market determined exchange rates and
cooperation matters. In 1987, a remarkable step interest rates for intra-regional trade.
was taken towards intra-ECOWAS monetary 8 Initiating policies and programmes
cooperation, with the adoption of the ECOWAS on monetary integration and cross-
Monetary Cooperation Programme (EMCP). The border investments that will lead to a
EMCP involved the adoption of collective policy single monetary zone in West Africa.
measures for achieving a harmonised monetary
system and common management institutions.
The transformation of WACH to WAMA was an
offshoot, and an integral part of this EMCP. The Challenges
WAMA was charged, in addition to the functions
of WACH, with assisting member countries in A major challenge facing WAMA, as with all
the: other pan-West African economic organisations,
is inadequate funding.
1 Harmonisation and coordination of Another challenge is the problem of identity,
macroeconomic policies; whereby some pan-West African organizations
2 Coordinating the implementation of the that perform broadly similar functions already
EMCP; and existed before it, and it is difficult for most
3 Ensuring the introduction of a single outsiders to see where WAMA differs or is
currency for the sub-region. unique when compared with such other bodies.
Concerning membership, WAMA is comprised In this regard, there is the ECOWAS-owned West
of the seven Central Banks of the West African African Monetary Institute (WAMI) with similar
sub-region. These include BCEAO (Banque functions. This is not to talk of the Bank of West
Centrale des Etats de l’Afrique de l’Ouest) for the African States (BCEAO), and the West African
nine Francophone countries, Bank of Cape Verde, Economic and Monetary Union (UEMOA) of the
Central Bank of the Gambia, Bank of Ghana, Francophone West African States. This is why
Central Bank of Liberia, Central Bank of Nigeria there have been calls for a rationalisation and
and Bank of Sierra Leone. In other words, the restructuring of WAMA.
central banks cover the 15 member countries.
Revision questions
Objectives and functions of
WAMA Essay questions
1 Discuss five areas of achievement of
The objectives of setting up WAMA and areas ECOWAS since its formation.
where it is mandated to function are as follows: 2 What are the objectives of ECOWAS?
1 Promotion and use of national currencies 3 Discuss four important problems facing
for regional trade and transactions. ECOWAS.
2 Bringing about savings in the use of foreign
reserves for member states.
221
4 In respect of any two of the following,
write on the origin, membership and
objectives:
a) Niger Basin Authority
b) Mano River Union
c) Lake Chad Basin Commission
5 Discuss the history and objectives of the
West African Monetary Agency (WAMA).

Multiple choice questions

1 Which of the following countries is not an
ECOWAS member?
A Guinea
B Ghana
C Senegal
D Liberia
E Cameroon
2 Mano River Union was formed in
A 1980.
B 1970.
C 1993.
D 1973.
E 1985.
3 Members of the Lake Chad Basin
Commission are
A Cameroon, Niger, Nigeria.
B Central African Republic and Nigeria.
C Libya, Niger, Cameroon.
D Lybia, Nigeria, Chad.
E All of the above.
4 Which of the following is the successor to
the West African Clearing House?
A ECOWAS
B West African Monetary Institute
C West African Monetary Agency
D Niger Basin Authority
E None of the above
5 A problem common with most pan-West
African inter-governmental economic
groupings is
A being recently established.
B poor funding.
C lack of suitable headquarters.
D hostility from the host government of
countries where the headquarters are
located.
E none of the above.

222
 Index
Abuja Securities and Commodity Exchange (ASCE) , – functions of major department in, 69-71
176, 183 – nature of, 46
Acceptance, 22 – structure of, 46- 60
Advertisement, 89 Business organisational set-up, 46
– advantages and disadvantages of, 90-91 Business resources, 62
– nature of, 89 Business systems – and resources, 62
– roles of in a business, 90 Buying and selling – essential documents in, 108-111
– types of, 89 Capital , 1-5
Advice note, 110 – borrowed, 3
Agency – concept of, 1-2
– authority of, 28 – debenture,
– creation of, 27 – employed, 3
– nature and type of, 27 – fixed, 1
Agents – effects of contracts made by, 28-29 – long-term, 3
Alternative Investment Market (AIM), 207, 209 – owned, 3
Asset-backed securities, 199-200 – owned, 3
Authority, 49 – types of, 49 – share, 3
Automated teller machine (ATM), 133-134 – short-term, 3
Bank draft, 25-126 – working, 2
Bill of exchange Act, 139, 150 Capital investment to turnover – relationship of, 12
Bills of exchange, 129, 139 Capital Market – adjudication /arbitration, 184
– acceptance of , 141 Capital market operators, 185
– discount houses and discounting of, 143 – in the commodity market, 188-189
– meaning of, 139-140 – in the primary market of stock exchange, 185-
– negotiation of, 142 – endorsement of, 142 187
– noting and protesting of dishonoured, 141-142 – in the secondary market , 187-188
– parties to, 140 – in the stock exchange , 187-188
– presentation of, 141 – methods of raising of fund from, 191
Build-Operate-Transfer, 164 Capital Market regulatory Authorities
Build-Own-Operate, 164 – adjudication and arbitration in, 178
Bureaucracy, 46-47 – evolution of, 177-178
– features of, 46-47 – reasons for the evolution of, 179-180
– meaning of, 46 Cash on Delivery, 124
Business Cash payment, 121-122
– meaning of, 62 Central Securities Clearing System, 184
– registration for the formation of,42-43 Centralisation ( of business organisation), 47
Business documents, 108- 154 Certificate of deposit, 152
Business environment Charge card, 133
– and social responsibility, 71-73 Cheque Act, 12
– nature of, 71-73 Cheque guarantee card, 14
Business law, 2-45 Cheques, 148
– meaning of, 21 – certified, 26
– scope of, 21 – clearing of, 150
Business management, 62-74 – drawee and drawer, 148-149
– functions of , 64 – kinds of crossing, 140-150
– administration, 64 – open and crossed, 149
– hierarchy , 64-66 – stopped and returned, 150
Business names (registration of), 41 – procedure for Clean bill, 144
applying for, 41 Commercialisation, 155-157
Business objectives, 63 – conflict of, 63-64 – advantages of, 156
Business organisation, 69 – disadvantages of , 156-157

223
 – reason or rationale for, 155 – forms of, 47-49
Commodity market, 200 Deeds, 22
Communication (departmental) Delivery note, 110
– flow of, 59-60 Departmentalisation, 66
– inter and intra, 58 Deregulation (economic), 48-49
Company and Allied Matters Act, 42, 167, 174 – costs of, 168-169
Consignment note, 110 see (way bill) – meaning of, 167
Consumer Protection Council Act (1992), 98,104 – reasons for and benefits of, 167 -168
Consumer protection Council(CPC), 104-105 – scope of, 167
Consumer protection, 92-107 – need for, 92-93 Deregulation (Petroleum Product Sector)
Consumer rights in Nigeria, 102 – institutions or – advantages of, 171
organisations for protecting, 102-105 – consequences and challenges of, 170
Consumer rights, 93 – disadvantages of , 171-172
– and responsibilities,93-94 – features of, 169
– non-governmental institutions that promote – genesis of, 169
and protect, 105-06 Direct debit, 126
Consumerism, 93 Direct deposit, 126
Contracts, 21 Discount, 16, 120
– breach of, 25 – cash, 120
– capacity to,23 – trade, 120-121
– discharge of, 25-26 Dividend warrants, 52
– enforcement , 2 Documentary bill, 144 see (cash against document)
– formation of, 22-23 Documentary credit, 144 see also (letters of credit)
– illegal, 24 – alternative ways of making finance available
– invalid, 23 to, 146-147
– nature of, 21 – mechanism of operation of, 146
– of employment, 30-32 – nature and meaning of, 144-145
– remedies for a breach of, 26-27 – types of, 145-146
– stages involved in the formation of, 2-22 Domestic trade
– terms of, 22 – components of the price of good in, 119
– void, 24 – types of quoted prices in, 120
– voidable, 23 Duress, 25 – and undue influence, 25
Copyright , 31, 35 – manner of exploiting,40 Economic Community of West African States
– duration of, 40 – infringement, 40-41 (ECOWAS), 214
Copyright Act, 35 – activities and achievements of, 215
Corporate Affairs Commission, 41-42 – benefits of to members states, 25
Counterfeit and Fake Drugs and Unwholesome – challenges facing, 217-218
processed Foods (miscellaneous provision) Act, – objectives of, 215
98-99 Economic grouping of West Africa, 214-221
Credit (Business), 15-20 ECOWAS Monetary Group (ECOMOG),216
– from bank, 15-16 Electronic cheque, 125 see (e-cheque)
– from insurance company, 17 Electronic purse card system, 131
– from other specialised government Electronic wallet device, 135
institutions, 16 Employee – duties to his employer, 32
– from venture capital fund (VCF), 17 Employer – duties to employee, 31-32
– instruments, 18 see (Financial) Estoppels, 27
– types and sources of, 15 Federal Environmental Protection Agency, 105
Credit cards, 131-132 Food Drug and Related Products (Registration) Act,98
Credit note, 111 Foreign bill, 144
Credit transfer, 126 Foreign payments, 126-128
Debit card, 30-131 Foreign trade – quoted prices and trade terms in, 114-
Debit instruments, 197-199 118
Debit note, 111 Giro system, 124
Decentralisation (of business organisation), 47-48 Government reform polices
– advantages of, 48 - commercialisation, 155-157
– disadvantages of, 48 - Privatisation and Public-Private Partnership

224
 (PPP), 159-165 Negotiable instruments, 138
Herbal medicine and Related Products (Labelling) – comparison of with documents of title, 138-139
Regulations, (2005), 101 – meaning and nature of, 138
Hire purchase Act (1965), 95 – types of, 139
Hire purchase, 17-18, 34-38 Niger Basin Authority, 21
– and finance company, 35 – history of, 174-176
– features of, 18 – and stock exchange, 182-205
– nature of, 34) – exchange in, 182
– right of cancellation of, 35 – meaning of, 182
Industrial design, 37-38 – structure of, 182
Infrastructure, 1 Nigerian Communications Commission Act (2003),
International Chamber of Commerce, 144, 145 99-100
International Chambers of Commerce Uniform Nigerian Enterprises Promotion Decree (1977), 177,
Customs and Practices, 145 179-180
Internet-based electronic card, 130 see (e-card) Nigerian Second-tier Securities Market (defunct), 20
Investment and Securities Tribunal, 178 – advantages of, 211 – disadvantages of, 212
Invoice, 110 – features and operating regulations of, 210-211
Lagos Stock Exchange, 177 Okigbo,Pius, 174
Lake Chad Basin Commission (LCBC), 219 Organisation structure
– activities and achievements of, 19-220 – functional, 52
– challenges to, 220 – geographically-based, 54-55
Legal tender, 22 – product-based, 52-54
Letter of credits (standby), 147-148 Organisational level, 50-51
Mail order, 128 Overdraft, 16
Mano River Union, 220 Over-the –Counter (OTC) market, 176-177, 182
Market ( secondary) Patent and Design Act, 35
– eligibility to trade in, 193 Patent protection – rationale for, 36
– procedures and mechanism for trading in, Patent, 36-37 – nature and meaning of, 36
193-196 PayPal, 137
– trading mechanism in, 195-196 Personal Identification Number (PIN), 131
– trading procedure, 193-194 Place , 85 see (distribution)
Market (primary) – procedures for trading in, 190-191 – nature of as a component of the marketing
Market research versus marketing research, 79 mix, 85
Market versus marketing, 79 – physical , 85
Marketing mix, 77 Postage stamps, 124
– and market segmentation, 7 Postal order, 122-123
– meaning of, 77 Power, 49 – major sources of, 49
– types of, 78 Price of goods in foreign trade
Marketing, 75-91 – categories of components of, 113
– functions and roles of in a business, 75-76 – identifiable, 10
– importance of to the economy, 76 Price, 82
– meaning of, 77 – meaning of, 82
– nature of, 75 – objectives of, 82
– orientation in, 76-77 Pricing policies
Means of payment, 122-124 – major factors that may effect, 82-83
Misrepresentation, 24-25 – some of, 83-84
Mobile payment mechanism, 135 Principal, 29
Money order, 124 – duties of agent to, 29
Money transfer control number, 136 – duty of to an agent,30
MoneyGram , 135, 136, 137 – rights of an agent against, 29-30
Mutual fund, 199 see ( unit trust) Private currency, 129
National Agency for Food and Drug Administration Privatisation , 159-162
and Control (NAFDAC) Act (1993), 98 – advantages of, 160-161
National Agency for Food and Drug Administration – comparison between and commercialisation,
and Control (NAFDAC), 103-104 162
National Standard Organisation (NSO), 102-103 – disadvantages of, 161-162

225
 – meaning and methods of, 159 – disadvantages of, 87
– reasons or rationale for, 159-160 Share warrants, 151 see (stock warrant)
Pro forma invoice, 109-110 Smart card payment device, 134
Product – meaning of as a component of the Span of control, 50
marketing mix, 80-82 – advantages and disadvantages of, 50
Product life-cycle – and pricing policy, 84-85 – factors that determines, 50
Profit, 6-9 Specialisation, 52 – and departmentalisation, 52
– and turnover ratios, 11-12 Standard Organisation of Nigeria (SON), 102
– gross, 7, 11 Standing order, 126
– nature of, 6 State Government Criminal Code and Penal Code for
– net, 6, 8-9, 12 Consumers
Promissory notes, 29 – organisational measures for protecting, 101-
– nature of, 150-151 102
– similarities between and a bill of exchange, – regulatory measures for protecting, 100
151 Statement of account, 111-112
Promotion Stock exchange
– comparison of different forms of, 86 – as counterparty to contracts, 193
– nature, 86 – functions of, 203-204
– strategies, 80 – importance and roles of, 204-205
Prospectus, 192 – instrument or product trades on, 196-201
Public Health Act (1990), 97 Stock exchange listing, 207-208
Public relations, 87 Stock market
– activities and media involved in, 87-88 – capitalisation, 202
– methods of, 87 – index, 202
Public-private partnership, 162-166 – turnover, 202
– advantages of, 165 Stored-valued cards, 129
– disadvantages of, 165-166 Telegraphic transfer, 128
– meaning and features of, 162-163 Terms of payment, 120-122
– types of, 163-165 Trade journal, 108
Purchase order, 109 Trade Malpractices (miscellaneous offences) Act, 98
Reference letter, 109 Trade mark Act, 36, 38
Relationship among departments (functional), 55-60 Trade mark, 36, 38-39
– functional authority, 57-58 Trading Account Equation, 8
– line authority relationship, 55-56 Turnover, 10-14
– staff authority relationship, 56 – and profitability relationship, 10
– unity of command, 55 – determinants of, 10
Responsibility, 49-50 – importance of, 10
Revenue Expenditure – rate of stock, 10-11
– and capital expenditure, 6 West African Clearing House, 216
– and capital receipt 7 West African Gas pipeline, 216
Sale-by owner, 33 West African Health Organisation, 216
Sales of Goods Act (1893) West African Monetary Agency, 216 see also (West
Sales promotion African Clearing House)
– forms of, 88-89 – challenges facing, 221
– nature of, 88 – objectives and functions of, 221
– purposes of, 89 West African Monetary Institute, 216
Scrip, 128-129 Western Union 135-137
Second-tier securities market, 207 – and other softer
windows of the stock exchange, 207-221
Securities and Exchange Commission, 177, 178, 185-
189
Seller (unpaid)
– remedies for buyers, 34
– right of, 33-34
Selling (personal), 87
– advantages of, 87

226