Forum: 1
Topic outline
- General
- Unit 1: SOCIO-ECONOMIC DEVELOPMENT Unit 1: SOCIO-ECONOMIC DEVELOPMENT
Unit 1: SOCIO-ECONOMIC DEVELOPMENT
Introduction
In Rwanda and the world over, there are a lot of talks about the future of work. Much of the time, these conversations are fuelled by the concern many people share as they try to understand the impact the new technologies will have on our industries. They tend to reduce these discussions to twofold arguments; how smart machines will do extraordinary things to improve our lives, or how this or that innovation will make human labor obsolete, creating a jobless dystopia. Both conclusions strike as somewhat specious. It’s not that these concerns aren’t valid, but they oversimplify a more complex phenomenon.
But why and how does entrepreneurship fuel economic growth? On the surface, the answer seems intuitive: entrepreneurs create businesses and new businesses create jobs, strengthen market competition and increase productivity. In Rwanda, entrepreneurism is becoming part of our identity and self-image. It’s non-limited, too; both sides of social economic aspect, business development and the political spectrum celebrate entrepreneurial activities as a source of economic growth and development. Entrepreneurism is seen as a route to upward mobility a way for people to build wealth.
However, it’s important to understand that for entrepreneurs to bring new ideas to life, they need access to education and a level-playing field on which to compete. Economic growth suffers when entrepreneurial activity is unevenly spread socioeconomically. Under the right conditions, entrepreneurs have an incredible power: they help people prosper economically, and they also serve society as they help engineer innovative solutions to problems and challenges related to unemployment and low standards of living.
1.1 The Meaning of Social Econo mic Developmenty
1.1.1 Activity 1.1
In senior 2, unit 1 you described the role of an entrepreneur in socio-economic development and Senior 2 unit 3 you also analyzed the contribution of the various types of work to socioeconomic development while in senior 3 in unit 4 you analyzed different forms of enterprises. Referring to your prior knowledge: a. What do you understand by “Socio-economic Development”?
b. What are the factors that may have affected the socio-economic development of your locality?
c. What are the indicators of the socio-economic development you have seen over the past five years in your locality?
Social-economic development: it is a process of social economic transformation in a society. Development is a gradual process through which there is a persistent increase both in quality and quantity of goods and services that are enjoyed by the people in a community or a country. E.g. having schools in a community may not be sufficient, but the quality of teachers who teach in such schools is also very vital. The scholastic materials available in schools are also important.
Eating food is essential but eating food with required body building nutrients is more vital etc. If an occurrence in a community leads to negative effects, then that occurrence is said to bring about underdevelopment. E.g. the cutting down of forests may help some people to get money in the short run but may lead the community to suffering in long as a result of drought.
The changes could be both positive and negative. Positive changes lead to the advancement of the society and the negative ones lead to stagnation or decline of the society’s social and economic wellbeing.
Ese URWIBUTSO / SINA GERARD Company undertakes special projects which are critical to the economic and social development of local communities.
That is why it takes pride in the promotion and development of the community of RULINDO District and its surrounding. This is done by creating various socioeconomic actions like the agribusiness activities, provision of employment, construction of schools, etc. Those who study veterinary have livestock which helps them in doing their experiment and on which they practice surgery which helps them in knowing what are animals sick of practically not only in theory.
Those who study agronomy also have modern gardens which they use in their studies by cultivating them and controlling what they saw until the harvest and production. Enterprise URWIBUTSO/SINA GERARD Company is committed to corporate social responsibility, promoting local development, distribution of cows to the local population with the system of mass redistribution of calves and heifers, creating job opportunities and training for farmers, and environmental protection.
1. Describe some of the changes in terms of development that you have observed in order to make your community a better place than it is now.
2. Explain how some ways of conducting entrepreneurship may holdback development rather than promoting it.
1.2 Factors and indicators of socio-economic development
Economic development is not possible without growth, but growth is possible without development because growth is the increase in the Gross National Product (GNP).1.2.1 Factors for socio-economic development Different societies have undergone socio-economic transformation while others have not. The presence of different factors of socio-economic development in an area shows that such an area is developed or is developing and also determines a pace at which it can develop.
The factors that determine socio-economic development may include:
i. Level of technology. It is a determinant because better technology means better goods and services at lower prices. Technology also enables people to get better shelter, medical facilities, education, transportation and generally better standard of living. Communities with better level of technology experience fast socio-economic development.
ii. Level of entrepreneurship. Communities with high level of entrepreneurship tend to experience faster socio-economic development than those without entrepreneurship. This is because entrepreneurs create employment opportunities which increase people’s income. Entrepreneurs produce goods and services, establish medical facilities and other products which improve people’s standard of living. Entrepreneurs also pay taxes to the government which increases the government revenue. The government uses such revenue to provide education, security, medical care, infrastructure and other public expenditures.
iii. Investment climate. It refers to the conditions under which investors in a particular country operate. A good investment climate means that the conditions in the country favor investors. These conditions include favourable taxes, proper laws, economic and political stability. When the investment climate is stable, entrepreneurs create more goods and services, give job opportunities, and generally the socio-economic development will be obviously seen.
iv. Education system. Education is a key determinant of socio-economic development. Education eliminates unproductive beliefs, and myths, give people skills to produce goods and services and others earn money/income, live hygienic, disease free life, etc.
v. Availability and use of resources. The resources that lead to the socioeconomic development may be human, natural or financial. The human resources in form of skilled people provide labor to produce goods, start businesses, provide services like education, medical care etc. Natural resources like fertile soil, timbers, fish and minerals generate income, promote industries and earn government foreign exchange.
vi. Financial resources. This is in terms of access to finance which help to start and expand existing enterprises develop infrastructures, and buy goods and services. Availability of these resources determines the socio-economic development of a community or a country.
vii. Level of savings. Savings refer to the financial resources set aside in the present time to use them in the future. When money is saved and accumulated can then be invested which lead to the socio economic development.
viii. Population growth rate. Population growth refers to the increase in the number of people in a given area at a time. When the population is growing rapidly, it means there are more people per unit area. A rapidly growing population incresaes demand for goods, services and shelter and making it an opportunity for enterprises to produce goods and services to satisfy this growing population other infrastructures. The combination of these factors may lead to socio-economic development.
ix. Customs and traditions. Some customs and traditions promote the socioeconomic development. This is because some of them encourage education and more effective medical care and generally keep people more modern. Such positive customs and traditions promote people’s socio-economic development.
x. Social and physical infrastructure Good roads, schools, hospitals, telephone systems and other infrastructures significantly determine the rate of socio-economic development in an economy. Such social and physical infrastructure makes business easy; improve health services, education, distribution of goods and services and general wellbeing.
xi. Political climate. Political climate is a key determinant of socio-economic development. A society that is characterized by political stability and social harmony can achieve socio-economic development. Political stability makes people secure to organize their business enterprises; produce more commodities and hence socio-economic development.
1.2.2 Indicators of Socio-economic development
Social- economic development involves increased goods and services, better health, education, security, shelter, better distribution of resources and generally better standard of living. Some indicators of socio-economic development are the following:
i. High GDP per capita: GDP is Gross Domestic Product. It is the total value in money terms of all goods and services produced within a country in a given year. If the GDP is increasing, it implies that there are more goods and services being produced and available to the people which in return signifies a better standard of living.
ii. High real Gross National Product (GNP) per capita is one of the indicators of social economic development in terms of an increase in the economic real national income over a long period of time. Real national income refers to the country’s total output of final goods and services in real rather than monetary terms thus a country with high GNP per capita signifies a better standards of living.
iii. High level of literacy: Literacy is the ability to read and write. Literacy rate is a crucial measure of a country’s human capital. It shows the country’s ability to use human being in the production of goods and services, understand government programs and communicate.
iv. Life expectancy: Life expectancy refers to expected number of years someone expects to live at birth. Socio-economic development enables people to enjoy good health, nutrition, work and generally wellbeing. The higher life expectancy is therefore an indicator of socio-economic development.
v. High level of employment (Occupation structure of labor force) Employment level is another indicator of socio-economic development. The higher level of employment shows more income for people and more income means better standard of living.
vi. Availability of goods and services: when more goods and services are available, people are able to enjoy a variety of items at a reasonable price; this improves the standard of living.
vii. Developed infrastructure: Better and accessible infrastructure such as roads, networks, schools, communication, hospitals, electricity and water etc. all indicate the socio-economic development
viii. Improved security (Political stability): Security is important for people since they can move freely carrying out different business activities. This in turn lead to improved standard of living among people. If there is insecurity, then socio-economic status is low. vii. Improved health facility: Health facilities in form of clinics, hospitals and other medical services are indicators of socio-economic development. A society with better health facilities enjoys a higher level of socio-economic development in the country.
viii. Improved shelter: Good and decent shelter indicate socio-economic development of a given area. When more people have access to shelter, then there is socio-economic development in the country.
ix. Access to clean water: Clean water is important for life since people get free from diseases. Healthy people tend to get involved in different productive activities which contribute much to socio economic development of a given community.
xii. Consumption per capita: This is the average amount of money consumed in a country. If it is low, then there is low development in the country; and when it is high the development is also high. The consumption rate is a major determinant of standards of living. If the population consumption per capita is high, it means they have a vision to consume a variety of goods and services thus an indication of socio economic development.
Application Activity 1.2
With examples in your community; briefly discuss the social economic changes that took place over the past five years.
1. Reflect on your community and describe at least 2 people or enterprises and how they have contributed to social economic development.
2. Every last Saturday of the month, all Rwandans participate in “umuganda” (community work day). Imagine in your sector the Umuganda was organised and hosted by your Cell and as entrepreneurship student you have been invited to address the congregation after Umuganda. The theme is “Promoting social economic development in our Sector”
a. Briefly share with the congragation a presentation about the contribution of “umuganda” towards the social economic development of your area.
b. Discuss the different challenges to social economic development of your community.
c. Suggest and briefly explain possible1.3 Role of entrepreneurship in socio-economic development
MIZERO is the poultry farm owner located in rural area which has transformed the village in the following ways:
• Improvement of the social and economic life for his family.
• Creates employment opportunities to local citizens and so helping them to change their standard of living.
• Supplies eggs to the local communities which are an important source of nutrients with high quality protein.
• Reduces malnutrition in the village as a result of cheap supplied eggs.
• Villagers can use the farm manure in their field in order to increase the local production then increase the farmer’s revenue.
• The business and employees pay taxes which increase the government revenue.
• He becomes a role model for the population surrounding his farm.
Questions;
a. From the case study, describe briefly how MIZERO has contributed to the socio-economic development of his region.
b. Explain briefly the impact of creating agri-business
Entrepreneurship has an important role to play in the development of the country.
It is one of the most important engines to economic development. The number and the competence of entrepreneurs largely affect the economic growth of the country since through entrepreneurship, different jobs are created; communities are developed to mention but a few.
Entrepreneurship helps in the process of socio-economic development in the following ways:
creates employment opportunities. Entrepreneurship creates employment directly (own job) and indirectly (for other persons). Directly, by self-employment as an entrepreneur, and indirectly by starting many industrial units that offer jobs to people; thus entrepreneurship is the best way to fight against unemployment. Entrepreneurship has a vital role to play in creating small firms which are important sources of new jobs.
Enterprises that start at a small scale end up employing hundreds and thousands of people directly. This means that people earn salaries and wages from the enterprise. Indirectly, employment is created when people employed also employ others or people who are providing goods and services employ their own workers to help them produce goods and services.
Example: Mahoro opened a restaurant. He has employed a manager, an accountant, cashier, waiters, waitresses and the cleaners. These are directly employed by Mahoro. Kayijuka supplies food staffs to Mahoro’s INJIRUREBE Restaurant. For Kayijuka to do this, he has employed a driver and more workers in his farm. These workers and the drivers are not employed by Mahoro’s INJIRUREBE restaurant but they got their jobs indirectly because of Mahoro’s INJIRUREBE restaurant.
Increases Government revenue (Business Taxes). Government imposes taxes as a means of raising revenue to finance its expenditures. Government requires money to pay government officials and civil servants, construct roads and the bridges, build and equip schools and hospitals, and finance all other services that are provided by government. Government gets this money from different ways which are fees, taxes, dues and other revenues from different services. There would be no good roads, schools, hospitals and civil servants like teachers, doctors and police would have no salaries if there was no tax.
Such services therefore, are provided by the government from the tax revenues collected from the entrepreneurship activities and hence lead to socio-economic development.
1.3.1 Other contributions of entrepreneurship to socio-economic development include the following:
Social responsibility
Entrepreneurs engage in corporate social responsibility programs and help the communities. They sponsor sports activities, medical facilities, support schools and other community programs. This promotes socio-economic development in those communities within the country.
i. Provide variety of goods (products) and services. Enterprises produce goods and services that are used on daily basis. Without entrepreneurship, there would be scarcity which in turn would lead to high prices and generally low standard of living. Clothing, medicines, sugar, textbooks and many other goods and services are provided by entrepreneurs.
ii. Utilization of natural resources. Entrepreneurship makes possible the use of natural resources and transforms them into usable products. Without entrepreneurs, resources like minerals, sand, fish, timber, oil, and others would stay unutilized. By effective utilization of such resources, entrepreneurship contributes to socio-economic development.
iii. Environmental protection. Entrepreneurship is a source of environment protection. Entrepreneurs come up with energy saving products like solar energy, gas, etc. They produce and distribute environment friendly packaging products, smoke free generators and many others.
iv. Research and development (Creativity and innovation). Entrepreneurs engage in research and lead to the development of new products. Entrepreneurs take risk to invest in research like in latest advances in medicine, electronics, ICT and even security systems which have been developed. Obviously, these developments are a big factor in socioeconomic development.
v. Infrastructure development. Entrepreneurs put up the infrastructure to facilitate their enterprises but in the process lead to socio-economic development. For example, when a road is built to transport raw materials, other people use the same road to access schools and hospitals etc. This is an indication that, entrepreneurship leads to socio-economic development
vi. National Income. National income consists of the total value of all final goods and services produced in the country accruing to an economy in one accounting year. Goods and services produced are for consumption within the country as well as to meet the demand of exports. An increased number of entrepreneurs is required to meet this increasing demand for goods and services. Thus, entrepreneurship increases national income.
vii. Wealth Creation and Sharing. Entrepreneurs establish the business entity, where they invest their own resources and attract capital (in the form of debt, equity, etc.) from investors, lenders and the public. This mobilizes public wealth and allows people to benefit from the success of entrepreneurs and growing businesses. This kind of pooled capital that results in wealth creation and distribution is one of the basic imperatives and goals of economic development.
viii. Balanced Regional Development. Entrepreneurs set up new businesses and industrial units which help regional development by locating them in less developed and backward areas. The growth of industries and business in these areas leads to infrastructure improvements like better roads, airports, stable electricity and water supply, schools, hospitals, shopping malls and other public and private services that would not otherwise be available.
ix. Standard of Living. Increase in the standard of living of people in a community is yet another key goal of economic development. Entrepreneurs do this not just by creating jobs, but also by developing and adopting innovations that lead to improvements in the quality of life of their employees, customers, and other stakeholders in the community. For example, automation that reduces production costs and enables faster production will make a business unit more productive, while also providing its customers with the same goods at lower prices.
x. Exports. Any growing business will eventually want to get started with exports to expand their business to foreign markets. This is an important ingredient of economic development since it provides access to bigger markets, and leads to currency inflows and access to the latest cuttingedge technologies and processes being used in more developed foreign markets. Another key benefit is that this expansion will lead to more stable business revenue during economic downturns in the local economy.
1.3.2. How Entrepreneurship affects negatively/retard social economic development. Entrepreneurship is said to affect negatively to a society’s development if the following happens:
i. Exploitation of workers through underpayment, delayed payment, deductions in form of unjustified penalties etc.
ii. Exploitation of natural resources without considering the posterity; as we exploit the resources for our survival today it is also important to think about the generation to come. Some resources are limited in nature such that when they are used without care for the future, the generation to come may not have what to live on.
iii. Using defective weighing scales; some entrepreneurs use defective scales and exploit their customers through under weighing of quantities.
iv. Breaching of contracts when we realize that we stand to benefit less.
v. Corruption: Entrepreneurs usually do businesses through improper channels eg bribing leaders to do illegal activities.
Application Activity 1.3
1. Reflect on your community and discuss the visions of Socio-economic development in your respective localities
2. Increasing youth employment is central to Rwanda`s employment policy in the context of Rwanda vision 2020 and job strategy. Mention at least 2 prominent entrepreneurs from your locality and discuss how they have contributed to the community development.
3. Explain the problems the society would face if such entrepreneurs were not operating in the community
4. Some entrepreneurial activities hinder socio-economic development. By use of the entrepreneurial practices below, briefly explain how they can hamper socio-economic development. • Improper packaging.• Out competing small scale entrepreneurs.
• Harmful products like expired products.
• Pollution from factories industries. • Income inequality.
• Advanced technology that creates unemployment.
• Industrial accident.
5. Discuss the role of entrepreneurship in employment creation.
1.4. Meaning of environment and society, their types and components
Activity 1.4
1. What do you think about the environment and the society?
2. In your own understanding, discuss the relationship between environment and society.
1.4.1 Meaning of environment
“Environment”, this word has a great importance in our life. Environment means everything that is around us (an individual or a business or an institution). It refers to both abiotic (physical or non-living) and biotic (living) environment. Environment mainly consists the following components: atmosphere, hydrosphere, lithosphere and biosphere. The survival of an individual person or a business is largely influenced by the environment. Anything that negatively affects the environment affects the individual person, a business or institution as well.
The environment can be divided into the following different types:
Physical environment: This consists of all geographical features/topography such as rocks, soil, mountains, hills, drainage systems, plateaus.
Biological environment: This consists of ecology that is to say plants and animals of any kind both on land and in water.
Cultural environment: This consists of society, economy and politics. The most important thing about the cultural environment is that it cannot be physically represented, but it is there anyway. The study of this aspect environment is taken by economists, socialogists, politicians and other such people.
Social environment: Reflects the traditions one grew, lives in, and the community with whom the individual interacts. The economic environment refers to the set of factors that surrounds the organism involving monetary, natural, and human resources that influence the behavior of that particular organism.
Political environment involves conflicting interactions between other organisms, often resulting in the formation of alliances or coalitions and used to resolve the conflict and achieve the goals of the allies or their influential members.
N.B: If a society’s activities are not well managed they may lead to environmental degradation. Such activities may result into soil erosion, deforestation, air pollution etc.
1.4.2 Business environment
Activity 1.41. What do you think about the environment and the society?
2. In your own understanding, discuss the relationship between environment and society.
Business refers to an economic activity that involves production and selling of goods and services covering risks with an aim/objective of making profit.Business environment is the combination of internal and external factors that influence a company’s operating situation. The business environment can include factors such as: clients and suppliers, its competition and owners, improvements in technology, laws and government activities, market, social and economic trends.
1.4.3. Types of Business environment and their components
The environment of a business enterprise falls under different categories namely, the internal environment and external environment.
i. Internal environment: The internal business environment is made up of the factors and resources within the business enterprise itself which affect the way the enterprise operates. The internal environment can be controlled by the management of the enterprise. The internal business environment comprises of both tangible and intangible resources.
These factors can affect the business operations negatively or positively but they can be controlled by the management of the enterprise.
ii. External Business Environment: The external environment of a business is made up of those factors and the conditions outside the business which affect the business operations. The business enterprise always has limit control over the external environment. The external business environment may be categorized into the following environment:a. Economic Environment: Economic environment includes the type of economic system that exists in the economy, the nature and structure of the economy, the phase of the business cycle (e.g., the conditions of boom or recession), the fiscal, monetary and financial policies of the Government, foreign trade and foreign investment policies of the government. These economic policies of the government present both the opportunities as well as the threats (i.e. restrictions) for the business firms.
b. Social and Cultural Environment: Members of a society have important influence over business firms. Activities of business firms may harm the physical environment and impose heavy social costs. Besides, business practices may violate cultural ethics of a society. For example, advertisement by business firms may be nasty and hurt the ethical sentiments of the people. Businesses should consider the social implications of their decisions. This means that companies must seriously consider the impact of its actions on the society. When a business firm in their decision making take care of social interests, it is said to be socially responsible.
c. Political and Legal Environment: Businesses are closely related to the government. The political philosophy of the government wields a great influence over business policies. In the economic sphere, the public sector plays a vital role in economic development. Besides, the private sector should be controlled by a suitable government policy under various types of regulatory policies which influence the directions in which private business enterprises has to function.d. Technological Environment: The nature of technology used for production of goods and services is an important factor responsible for the success of a business firm. Technology consists of the type of machines and processes available for use by a firm and the way of doing things. The improvement in technology raises total factor productivity of a firm and reduces unit cost of output.
e. Demographic Environment: Demographic environment includes the size and growth of population, life expectancy of the people, rural-urban distribution of population and educational levels of labor force. All these demographic features have an important bearing on the functioning of business firms. Since new workers are recruited from outside the firm, demographic factors are considered as parts of external environment. The skills and ability of a firm’s workers determine to a large extent how well the organization can achieve its mission. The demographic environment also affects both the supply and demand sides of business organizations.
f. Natural Environment: Natural environment is the ultimate source of many inputs such as raw materials, energy which business firms use in their productive activity. Natural environment includes geographical and ecological factors such as minerals and oil reserves, water and forest resources, weather and climatic conditions, etc.
g. Ecological environment: Driven by the motive of profit maximization, businesses can cause irreparable damage to the exhaustible natural resources, especially minerals and forests and pollution of environment. Countries including Rwanda have now become conscious of the adverse effects of depletion of exhaustible natural resources and pollution of environment by business activity. All these environments have a direct bearing on how the business operates its strategies, polices and costs. A change in any of these environments is likely to have far reaching impact on the operations of the business enterprise.
1.4.4 Dependence of the business on the natural environment
Businesses greatly depend on the natural environment in many different ways, some of which include the following:
i. Sources of raw materials: Most of the raw materials used in the manufacture of goods and services are derived from the natural environment. Such raw materials include: wood or timber, water for drinks, gas, coal, oil petroleum, skins, hides, minerals such as lime stone, copper, iron, gold, silver etc.ii. Provides transport: The natural environment provides the business with transport networks such as road, water, and air transport which help to transport raw materials to the business premises and finished products to the market plus labour to and from the business premises
iii. Disposal grounds for waste from the business environment: the natural environment serves as the disposal ground for waste products such as smoke, rubbish, industrial fumes and oils etc.
iv. Home for business: Land provides ground on which business premises or buildings (structure) are built as well as being a home to other businesses that survive on land, like farming both for crops and animals.
1.4.5 Dependence of society on business
The society depends on the business in the following ways:
i. Provision of goods and services. Business provides goods and services that satisfy the needs of people in society. Such needs include both basic and secondary needs like food, shelter, medical care, and clothing. Such needs are satisfied by different services which include: education, medical, manufacturing, trading, agribusiness etc.
ii. Provision of employment opportunities: Business provides employment opportunities to the society, both self and paid employment for example, people who work in factories, hotels, restaurants, etc. This increases people’s standards of living.
iii. Supporting community development programs/Corporate social responsibility: Business usually contributes towards community development programs by making donations and also directly getting
23Entrepreneurship Senior Six Student Book
involved in these programs. Example: construction of schools, hospitals; providing of clean and safe water etc.iv. Payment of taxes: Businesses support the society through paying taxes which are used to provide essential services such as health, education, security, roads etc. Such services benefit the business community and the society in general.
v. Cleaning and protecting the environment: Businesses protect the environment through recycling used products and by-products back into the production process and making useful products out of them. Businesses also participate in environmental and cleaning programs schools, cleaning public parks and streets as well as planting trees and protection of wetlands.
vi. Market produce: Businesses buy raw materials from the members of the community enabling them to obtain market for their products and get income.
vii. Some businesses provide a means of saving the human environment from harmful products. For example, companies that process garbage into manure help to make society enjoy a healthy environment.
viii. Some businesses provide social services such as Schools (provide education), hospitals (health services).
1.4.6 Dependence of business on society or benefits from society
There is a direct relationship between business and the society in the following ways:
i. Provision of market: The products of businesses are bought and consumed by members of society thereby providing demand and market for the businesses.
ii. Provision of capital: Businesses need capitals for purchasing fixed assets such as furniture, motors, vehicle, machines, and construction of business premises and for running the day to day operations. This is provided by the society through loans offered by financial institutions and individual money lenders.
iii. Source of labor: Businesses acquire labor, both skilled and unskilled, for running business operations and producing goods and services from the society.
iv. Provision of security: For businesses to operate effectively, it requires peace and stability to prevail in the area of operation which society provides through the army and local defense forces. Society also offers acceptance which is important for successful establishment and smooth operation of the business.
v. Provisions of raw materials: Members of the community sell different raw materials like agricultural raw materials to the businesses that are used to produce goods and services.
vi. Land as a factor of production: Many businesses use land owned by members of the society which they rent or occupy on leasehold.
1.4.7 Responsibility of the business towards the natural environment
It is the responsibility of the business to care for and protect the natural environment by optimizing the use of energy, ensuring effective use of materials and creating replacement for instance by planting trees, encouraging re-use and recycling of products and by-products and also incorporating the principle of sustainable use and development of natural environment. It is important therefore for entrepreneurs to carry out regular environmental checks and inspection to identify those activities that harm the environment such as constructing in wetland and lumbering, such that they are avoided or taken carefully in a manner that will not harm the environment. This will help to reduce negative environment effects of the business operations by:
• Recycling used products.
• Cleaning the environment and the reducing pollution.
• Cutting or reducing harmful emissions like carbon dioxide.
• Checking harmful influents and ensuring of proper usage and disposal.
• Developing technologies which demand less of natural resources and produce better products.
• Educating consumers on usage and disposal on their products
• Using bio-gradable materials example packaging materials.
• Asking consumers if they need some of the packaging materials.
1.4.8 Responsibility of the business towards society
It is important that businesses exercise some responsibilities towards society to enhance the positive effects or check the negative effects. Businesses can do the following for the society:
• Production of goods and services.
• Payment of taxes.
• Contribution towards community development programs.
• Proper disposal of waste products.
Application Activity 1.4
1. Discuss various components of environment.
2. Explain briefly the effects of entrepreneurial activities on environment and society.
3. Describe different types of the environment.
Activity 1.5
From your community identify some possible negative effects of the business activities on the society and environment.
1.5.1 Effects of business on the natural environment
Businesses affect the natural environment through their requirements such as land, raw materials and agrochemicals, products like sugar, cloth, medical care etc.and by-products such as noise, rubbish, gases, effluents, industrial wasted oils, molasses from sugar production.1.5.2 Business requirements that affect the natural environment
The most common business requirements that affect the natural environments negatively include the following:
i. Land is required for setting up businesses; construction of business premises, and for installation of machinery for business operation and extraction of raw materials. Many business operations require large piece of land which lead to clearing of vegetation like forests, and wetland which adversely affects the environment.
ii. Machinery and equipment for productive operations; these affect the environment through their emissions causing air and water pollution and also produce noise and vibrations. These affect workers and health of people living within the business locality.
iii. Packaging materials: example: packaging products affect the drainage system and soil texture.
iv. Disposal: Ground for waste products or rubbish created through consumption and production operations which create and emit toxic chemicals. These affect the environment negatively endangering both aquatic and non-aquatic life.
v. Agro-chemical requirement: These are particularly for agribusiness and include chemicals and artificial fertilizers used to control pests and diseases and improve soil fertility. These affect human and animal life when dissolved in the water or rainfall, finding way into the water table.
vi. Human resource requirements: These manage businesses which misuse the environment in various harmful ways such as lumbering, mineral extracting, and also create waste products.
1.5.3 Forms of negative effects of business on the natural environment
The business affects the natural environment through:
i. Pollution: Businesses emit a lot of carbon dioxide, smoke, ozone depleting gases, dust, sulfur dioxide that pollute the air which is dangerous for animal and plant respiration. Manufacturing businesses also pollute water by releasing their effluents into water ways and drainage systems hence endangering human and plant life. The noise produced by manufacturing firms is also pollution.
ii. Deforestation: Some businesses use trees in their operations for production of goods and services like carpentry workshops, agricultural businesses, construction businesses and households clear large tracks of forests to make farms, roads, and railways. Such activities destroy the forests thus causing deforestation which in turn changes weather patterns, reduces rainfall and fertility.
iii. Depletion of resources: Businesses use a lot of natural resources in their operations for example fish processing businesses deplete fish resources, and quarrying businesses also destroy and degrade land. Some of these resources are self-renewable but the rate at which they are exploited exceeds the rate of renewal yet man’s effort to replace them is also very minimal.
iv. Vibration: This is a result of movement and running of heavy industrial machines. These vibrations greatly triger land slides, leading to the collapse infrastructure.
v. Land or soil degradation, this refers to spoiling of soil fertility, soil nutrients composition (organic and inorganic) and the soil resulting from different usage like overgrazing, over cultivation, deforestation, quarrying, and contamination by disposal of harmful waste products (industrial wasted oil and chemicals). vi. Wet/land destruction: The creation of land for business sites and settlement, construction of business structure and installation of machinery leads to encroachment on wetlands hence destroying the natural water catchment areas and the purification process.
vii. Displacement of people: The establishment of businesses displaces people which affect the balance of the ecosystem causing population pressure in some places and hence affecting the natural environment.
1.5.4 Other negative effects of business on people
Any good business must be guided by the three Ps of investment: Profits, People and Planet. Most businesses only stop at profits and end up affecting people and the planet. Besides the natural environment (planet) other negative effects of business on people include the following:
i. Expired goods that are harmful to people’s health; this is common with such goods as food, drink and medicine. This applies to animal’s health as well.
ii. Poisonous products like narcotic drugs harm people’s mental and physical health;
iii. Immoral behaviors like prostitution spring up in areas operating bars and casinos;
iv. Drunkenness is one effect of business on people that is difficult to eradicate;
v. Unethical business practices may slowly become a norm and acceptable: cheating in weights and measures, adulterated goods and other bad practices;
vi. There may be over-exploitation of workers by businesses chasing profits;
vii. Businesses selling stolen goods encourage robbery in society;
viii. Spread of infectious diseases such as HIV/AIDS and other related diseases is easy from such businesses and long distance transportation, bars, hotels and lodges.
Application Activity 1.5
Referring to your respective localities, mention the entrepreneurial activities that are causing or are likely to cause environmental degradation; in detail, explain how each activity identified can or is affecting the environment.
1.6. Managing and preventing the negative effects of a business on different types of environment and their components
Activity 1.6
Sometimes business activities negatively affect the environment and society: what do you think could be the strategies that can be used to reduce the negative effects of entrepreneurship on the environment.
The reducing of the negative effects of business on the natural environment requires a joint effort by the entrepreneurs and the government or society through taking some of the following measures :
i. Recycling used products and by-products: By-product of the production process and used products should be recycled back into the production process to be made useful by using them to produce goods and services shredding papers can be recycled to get fragile product like trays. This will help to reduce the rate of population caused by the careless disposal of waste.
ii. Waste treatment and proper waste disposal: Entrepreneurs should always treat waste materials to purify them and choose proper waste disposal grounds that do not affect the environment negatively and also enlarge animals and plant life.
iii. Environment friendly packaging materials: Entrepreneurs should also choose proper packaging materials like paper bags or cloth in case of plastic which affect the soil structure
iv. Reforestation: Refers to re-planting of trees to replace those that have been cut so that the natural environment balance is not disturbed. This should be encouraged to reduce the effect of deforestation on climate, soil fertility and water catchment.
v. Covering soil: This may involve terracing, planting trees (afforestation) and other ways that can be used to cover the soil to ensure that it is not left bare. Organic manure may be used to replace the depleted soils.
vi. Use biological pest and disease control: Agribusiness entrepreneurs should be encouraged to use biological disease control instead of chemical in their farming process, farm yard manure and other natural fertilizers. Chemicals pollute the land and affect human, plant and animals.
vii. Development of new raw material saving technologies: Entrepreneurs should be encouraged to invest in research to develop new technologies that save raw materials and have improved methods of production that do not pollute the environment.
viii. Environmental education or protection sensitization campaigns: An interdisciplinary approach should be used in and out of the school to sensitize both the young and adults about the importance of living in a protected natural environment and the consequences of living in the degraded environment and also how they can protect the environment
ix. Compulsory environment impact assessment: The government should undertake compulsory environmental impact assessment before licensing businesses such that businesses with potential dangers of the environment are known in advance and also majors to minimize such dangers are devised in advance.
x. Setting environmental standards: The government should ensure that environment standards are set by the environmental protection bodies such as Rwanda Environment Management Authority (REMA), and also ensure that effective supervision and monitoring is carried out to ensure that the businesses respect the set environmental standards and regulations. Businesses should be requested to contribute funds for environmental protection and conservation programs such as cleaning of towns and setting up the garbage collection centers and tree planting.
xi. Encouraging sustainable use of natural resources: The resource exploitation rate needs to be checked to avoid over exploitation and resource exhaustion especially for the natural resources such as forests, fish etc. Strict laws should be put in place and implemented regulating the exploitation of resources like about type and size on fish net, laws encouraging replanting after cutting down trees etc.
xi. Optimizing energy use: Using of energy saving system in production processes and homes should be encouraged together with use of other alternative energy sources in place of wood fuel that do not degrade the natural environment like solar electricity, biogas, hydro-electricity etc. this calls for government involvement to reduce and stabilize prices of these alternatives energy forms to make them affordable to the people and business.
xii. Laws against pollution: Government should enforce laws to penalize businesses that use machinery that pollute the environment. Even very old vehicles that emit a lot of fumes should be banned.
Application Activity 1.6
Briefly, explain how the entrepreneurs and the government or the society provide a joint effort to reduce the negative effects of business on the natural environment
1.7. Entrepreneurs and social responsibility/Proactive social responsibility
Bank of Kigali sponsored Special Olympics sports competition, specially designed for people with cognitive delays. We believe that with sports activities such as these, the Special Olympians develop mental, physical, and social skills leading to more independent living. More so, Special Olympian families get to recognize that their children with intellectual disability are worthy human beings with a lot to offer.
The Bank has for the past two years been one of main sponsors of Ulinzi walk which aimed at creating public awareness against breast cancer and emphasizing early detection as the best protection. The initiative also encourages solidarity in facing cancer by demonstrating public ownership of the cancer burden in order to stimulate intervention of the needed changes.
The Bank acknowledges the need for a healthy society in order for Rwanda to achieve its vision 2020 goals. The Bank has supported Friends of Africa a campaign focusing on increasing returns on investment in the fight against HIV/AIDS, Tuberculosis and Malaria, diseases that have been among the leading causes of death in Sub Saharan Africa.
1. Identify the enterprises which are involved in these different activities
2. Discuss different ways businesses have proactively contributed to the social and environmental context.
3. What benefits can an enterprise achieve by supporting these activities?
4. What achievements will the participants gain in involving in these different activities?
Pro-active socio-responsibility
Pro-active social responsibility is commonly called corporate social responsibility and it refers to initiative taken by a business to give back to the community. It normally takes various forms, depending on the community needs. The following are ways through which businesses give back to the community
i. Promoting other local businesses through Cross networking espencialy non-competing companies of similar markets.
ii. Participating in Holiday Food Drives. During the holidays, many businesses encourage employees to bring in unopened non-perishable canned and boxed foods that can be donated to local food banks to help hunger striken areas.
iii. Sponsoring youth sport teams.
iv. Holding contests. Business can support the community while also encouraging employees to have fun by holding a contest. Each employee chooses a local charity and instead of prizes, money goes to the charities chosen by the winners.
v. Sponsoring a participant(s) in a local marathon, especially if you can support your own employees who are participating in such events.
vi. Building houses to disadvantaged residents.
vii. Offer Your Skills through teaching classes on entrepreneurship to local residents or offering to teach a specialized skill that could be of value to those who have been out of the workforce for a while.
viii. Encouraging employees to volunteer by offering paid time off for volunteering.
Application Activity 1.7
a. As a manager of the small enterprise, you have saved 1,000,000 Frw to spend on social responsibility. Identify five urgent problems affecting the community and explain how you can use that saving to come up with solutions to the above problems.
b. Explain the importance of corporate social responsibility.
Skills Lab Activity1.8
Read and analyse the case study and answer the given questions
Amahoro Ltd a medium size enterprise deals in manufacturing of soap, cooking oil and sweets. It employs many people from the community and also pays taxes to the government as expected.
It has huge plants and machinery that make the manufacturing or processing of named products above. The industry’s wastes and emissions are not well always air. People in the neighbourhood complain of noise from the industry during operations.
Questions;
1. How important is the above industry to the society?
2. What issues are observed in the above case study?
3. As students of entrepreneurship, how would you advise the industry to solve the above issues?
4. As an aspiring entrepreneur who wants to start up a business or have been running an active business club, what do you or would you put in the place to make sure the environment is well protected?
End of Unit Assessment
1. Explain the positive and negative effect a cement factory to be located in your sector is likely to have on the natural environment
2. Explain what you can do to reduce the negative effect of your business activities on the natural environment.
3. Why is it necessary for an entrepreneur to take care of the natural environment?
4. dentify and explain the responsibility of business to society and the environment 5. Differentiate between the economic environment and the legal environment of a business
6. Discuss the role of entrepreneurship in socio economic development
7. Briefly explain how the following external business environment factors may negatively affect business activities
a. Economic environment
b. Legal environment
c. Natural environment
d. Society
8. Observing what is surrounding you in your community, explain the changes that you have seen in regard to socio economic development
9. In your community, examine the major indicators of socioeconomic development.
Unit 1: SOCIO-ECONOMIC DEVELOPMENT - Unit 2: Environment Impact Assessment (EIA)Unit 2: Environment Impact Assessment (EIA)
Unit 2: Environment Impact Assessment (EIA)
Key Unit Competency: To be able to analyze EIA as a tool for prevention and control of the social economic development impacts on the environment
Introduction
In the previous unit socio- economic (social and economic development), you were able to assess the role of economic activities on the environment. You noted that as a result of all economic activities such as building infrastructure (i.e., roads and pipelines, mines, and tourism facilities etc.), the natural surrounding environment can be affected in one way or the other. This is evident when we consider the results of large-scale development like open-pit mines, hotels for thousands of people and large hydroelectric dams that often have irreversible impacts on the environment and the livelihoods of people because of large-scale deforestation, excessive water use, habitat destruction and resettlement.
Because of the big relationship that exists between the natural and human environments, it is very important to try to assess the environmental and social impacts of economic activities, projects and planned developments that may affect the quality of the environment and impact well-being. As the human population continues to increase and natural resources become more limited, it is important to have mitigation measures of solving environmental challenges arising from economic activities and thus the need to have EIA.
This unit is therefore designed to help you be responsible and to ensure that all environmental matters are taken into account quite early in the project planning process while taking into consideration traditional aspects like impact on local people, biodiversity, etc. It will equip you with knowledge and skills as well as attitudes that will enable you come out with appropriate EIA reports for the projects you intend to start. It will also help you predict the effects of proposed activity/ project on the environment and on social economic development.
Introductory activity 2.1
EIA Case Study:
The government of Rwanda through Rwanda Environment Management Authority (REMA) and EIA guidelines expects entrepreneurs to be cautious and careful with goods produced, the technology used, the materials used for the production and their probable impact on the human health and the environment. If the product/project does not meet the requirements of the standard it is not permitted for further production and the owner will have to change the technology and the structure of the product.
With the ever increasing rates of urbanization and population growth rates the economic activities if not well addressed are bound to impact negatively on the environmental attributes of the project areas and its surroundings. Kigali being the capital city of the country, it continues to have the most economic activities and population. With the above economic situation, the economy and the environment are bound to be affected negatively and positively and thus entrepreneurs intending to start any project have to prepare appropriate Environmental Impact Assessment reports showing most sustainable and cost effective way of mitigating any negative impact that may arise as a result of the implementation of the proposed project.
Questions :
Referring to the above case study, answer the following questions.
a. What do the Environmental Impact Assessment guidelines expect entrepreneurs to be observant of ?
b. In what ways can the projects started in Kigali affect the economy positively?
c. What are likely negative effects of the business activities or projects to the environment and Kigali community at large ?
d. What strategies would you propose to the entrepreneurs in Kigali to mitigate the likely challenges as a result of the projects started ?
e. Write a simple Environmental Impact Assessment report of the business idea you intend to start in your community.
2.1 Meaning of Environmental Impact Assessment (EIA)
In this section, you will learn about the most common definitions and objectives of EIAs, together with a brief history and examples to illustrate why Environmental Impact Assessments are important. This will help you to gain a basic understanding and the purpose of EIA.
Activity 2.1
Analyzing the below picture and using the background knowledge from the introductory activity above answer the questions that follow.
While entrepreneurs are undertaking economic activities or setting projects, they have to be cautious to reduce adverse effects on the environment and human beings. This can be done by replacing and/or modifying planned activities to reduce negative impacts for example in the above picture where terraces are used to reduce soil erosion and other environmental effects.
Questions,
a. What do you understand by Environmental Impact Assessment?
b. Explain the major purpose of Environmental Impact Assessment.
2.1.1 Meaning of EIA
An environmental impact assessment (EIA) is a systematic process for identifying, predicting and evaluating the environmental effects of proposed actions and projects. This process is applied prior to major decisions and commitments with particular attention given to preventing, mitigating and offsetting the significant adverse effects of proposed undertakings.
2.1.2 Historical background & Context of EIA in Rwanda.
Environmental challenges in Rwanda date back several decades. Recently, the Government of Rwanda has undertaken strong commitment to understand its current and future environmental challenges as a necessary step in the pursuit for sustainable development. Today, to effectively manage environmental challenges, EIA was adopted to effectively manage environmental challenges such as;
• Soil erosion,
• Deforestation,
• Wetland drainage,
• Water degradation,
• Climate change and the loss of biodiversity
The national environmental challenges are exacerbated by the;
• Low levels of environmental awareness
• Inadequate technical & human resources
• Low intra-sectoral coordination on environmental issues
Thus, these EIA guidelines should serve as a protocol for use by various stakeholders involved in the conduct of environmental impact assessment.
2.1.3 National Policy on EIA
The Constitution of the Republic of Rwanda adopted in June 2003 ensures the protection and sustainable management of environment and encourages rational use of natural resources.
Various initiatives were taken by the Government of Rwanda (GoR) to address the environmental issues; they include;• Formulation of environmental policy (2003);
• Enactment of environmental Organic Law No. 04/2005 of 08/04/200 (2005);
• Establishment of Rwanda Environmental Management Authority (REMA), under Organic Law No.04/2005 of 08/04/2005 Article 64, to coordinate and oversee all aspects of environmental management for sustainable development.
• Other various socio-economic development policies and strategies such as “Rwanda Investment and Exports Strategic Action Plan, 2005-2007”.
Vision 2020” call for a well regulated environment management system that takes into account principles of sustainable development while at the same time contributing to poverty reduction.
2.1.4. International Context of EIA
EIA process operates within the global concept of sustainable development and embrace commitment to international environmental conventions particularly:
United Nations Conference on the Human Environment (Stockholm 1972);
• United Nations Conference on Environment and Development (UNCED 1992);
• The world Summit on Sustainable Development (WSSD 2002);
• African Ministerial meeting on Environment held in Durban, South Africa (1995) to all of which, Rwanda is a party
EIA is an invaluable tool for environmental management in a trans-boundary context, playing role in information dissemination between Rwanda and neighbouring countries and widening the scope of understanding of environmental impacts beyond its borders. EIA process in Rwanda provides a pretext and basis for future international cooperation and conflict resolution concerning environmental impacts at a regional level.
2.1.5 Objectives, Roles and Benefits of EIA in Rwanda
The main objective of EIA is to promote sustainable development and ensure that environmental issues are given proper priority. This is in line with that is fully committed in its pursuit for sustainable development with the objectives of enhancing living standards of people in a short period of time and obtaining true benefits to sustainably balance human needs with nature for today’s and future generations.
The objectives of EIA are four fold;
• To provide a national standardized process for development authorization,
• To protect Rwanda’s natural environment from potentially significant and avoidable impacts caused by development projects,
• To invoke environmental consciousness and responsibility for all development activities in Rwanda.
• To facilitate efficient and modern development activities whilst considering the needs of present and future generations
The aims of EIA are divided into two categories of planning, namely;
• Immediate Aim: To inform the process of decision-making by identifying potentially significant environmental effects and risks of development proposals.
• Long-Term Aim: To promote sustainable development by ensuring that development projects do not undermine critical resources and ecological functions or the well-being, lifestyle and livelihood of communities and people who depend on them.
To address these aims, the strategy of EIA process can be divided into two categories of action:
• Short-Term Strategy: Assess project proposals by identifying environmental risk, potential impacts and mitigation and monitoring measures.
• Long-Term Strategy: Assess the ongoing impacts of projects through environmental monitoring after the project has been approved and implemented.
Roles of EIA
Adaptation of EIA in Rwanda hinges on its importance as:
i. A key component of a more systematic and objective approach to environmental issues;
ii. Provides a framework for promotion of efficient decision-making in project approval;
iii. Enables implementation of environmental safeguards to mitigate significant negative impacts;
iv. Avoid ecological damage and large-scale irreversible loss of natural resource.
v. An invaluable tool for environmental management in a trans-boundary context;
vi. Provides a basis for future international cooperation and conflict resolution concerning environmental impacts at a regional level.
vii. Provides a basis for future international cooperation and conflict resolution concerning environmental impacts at a regional level.
Benefits of EIA
i. Enabling incorporation of environmental considerations in design and site selection for a project or development activities.
ii. Providing information beneficial to decision making.
iii. Enhancing responsibilities of relevant parties in the development process.
iv. Mitigating and minimizing environmental damage.
v. Avoiding costs and delays in implementation of projects that would arise from un anticipated environmental problems.
vi. Making development projects more financially and economically efficient.
vii. Making an active contribution to sustainable development.
2.1.6 EIA Development Planning
The concept of sustainable development requires EIA to be expanded beyond projects level. The detail of environmental information necessary depends on the relevant needs of decision makers. For example, in policies and development plans, one needs general and qualitative environmental information to identify major environmental problems, without dealing with specific impacts.
When implementing project level Environmental Impact Assessment is necessary to identify specific impacts and technical information of the project. Since it is important that EIA must be carried out not only at project level, but also for masterplans for development of regions, sectors, provinces, cities and industrial zones, Strategic Environmental Assessment is a vital tool in such cases. For effective integration of decision making with sustainable development criteria, SEA has proven an effective tool in restraining environmental degradation at national and global level
2.1.7. Strategic Environmental Assessment (SEA)
SEA is the assessment of impacts of policies, plans, programmes which are higher than the project level. It involves impacts identification and analysis of development programs or policies in order to establish potential cumulative effects on environment over the long-term.
SEA is undertaken much earlier in the decision-making process than EIA. It is therefore seen as a key tool for sustainable development. Strategic Environmental Assessment aims at incorporating environmental and sustainability considerations into strategic decision making processes, such as the formulation of policies, plans and programs.
Application Activity 2.1
Case study
Due to the different economic, political, social and environmental changes in today’s economy, there’s need for proper planning for any economic activity to be implemented. Entrepreneurs are expected to follow proper EIA guidelines so as to avoid environmental, human and economic risks.
Rwanda’s government through REMA ensures the protection and sustainable management of environment and encourages optimal use of natural resources. Different stakeholders have different functions to perform in order to execute proper EIA procedures.
As a student of entrepreneurship, you have been approached by MUTESI Chantal who is planning to start a project of brick laying in her society. Advise her on the following.
a. What measures should she take to mitigate the likely environmental challenges caused by her project? b. Why does she need to do EIA for her project?
2.2. Environmental Impact Assessment (EIA) Process
Activity 2.2
1. Think about the different natural resources in your community, how have the people used them in a way that is not sustainable and environmentally friendly?
2. If a big project is to be started in your community, what concerns would you have? Given the above concerns, write a simple report to REMA at your district summarizing and showing assessment of environment and social impacts of the project once started with the proposed mitigation measures.
Introduction
This section covers the steps of the EIA process. In this section you will learn the different steps of EIA process that help decision makers to understand if their impacts on the environment and well-being are severe enough or significant.
If the EIA process is successful, it identifies alternatives and mitigation measures to reduce the environmental impact of a proposed project. The EIA process also serves an important procedural role in the overall decision-making process by promoting transparency and public involvement.
The EIA process aims to assesst and inform development decisions by mandating a consideration of project alternatives and ways to prevent, mitigate, and control potential negative environmental and social impacts. This generally involves a number of steps, including project screening, scoping, assessment, impact management, EIA report development, public participation, review, decision, and monitoring.
a. Project Application and Registration
The first step of the EIA process is a developer submitting an application for EIA of a proposed project to REMA in form of a project brief. REMA registers the project brief as the developer’s formal application for an EIA. The purpose of a project brief is to provide sufficient information on the project to enable the authority and lead agencies establish whether or not the proposed activities are likely to have significant environmental impacts, and also determine the level of EIA required (screening). If adequate mitigation measures are identified in the Project Brief, this may eliminate the need for a full EIA and the project may be approved with or without implementation conditions.
At a minimum, a project brief submitted to the authority shall contain the following information:
i. Name, title and address of the developer.
ii. Name, purpose, objectives and nature of project, including attributes such as size of project, design, activities that shall be undertaken during and after the establishment of the project, products and inputs, sources of inputs, etc.
iii. Description of the proposed project site and its surroundings and alternative sites, if any, where the project is to be located.
iv. Description of how the proposed project and its location conform to existing laws, regulations and policies governing such project and the use of the site/area proposed for its location.
v. Any likely environmental impacts that may arise due to implementing various phases/stages of the project and proposed mitigation measures thereto.
vi. Description of any other alternatives, which are being considered (e.g. technology, construction and operation procedures, sources of raw materials, handling of wastes etc, decommissioning/closure and site restoration).
vii. Any other information that may be useful in determining the level of EIA required.
b. Screening
Screening, carried out by the Authority is a process of determining impact level of a proposed project, which then determines extent of the EIA study.
Screening enables early identification of environmental issues of major concern and incorporation of appropriate mitigation measures. Screening also enables identification of potential impacts on natural resources (whether the project would result in direct or indirect negative or positive impacts to natural resources), excessive resource consumption and waste generation.
c. EIA Study and Report
Environmental Impact Study phase is the investigative stage of the EIA process for which a developer hires EIA experts. This phase begins by a developer selecting expert(s) among a list of EIA experts provided by the Authority. If REMA disapproves of the selected expert(s), because their expertise is not suited to the scope of the proposed study, the developer will be required to choose again. If the developer’s second choice is disapproved, then the Authority shall appoint EIA expert(s) it considers best suited to undertake the study and develop an Environmental Impact report, which is submitted to the developer. The developer and EIA experts shall work together throughout the environmental impact study (EIS) phase to develop adequate measures to mitigate negative impacts and enhance positive ones.
d. Project Decommissioning and Relocation
Upon project completion or when seeking relocation, a developer should prepare a decommissioning plan and submit it to REMA for approval. The decommissioning plan should include but not limited to assessment of existing environmental conditions, all proposed engineering works, mitigation activities associated with the removal of project facilities and proposed restoration measures.
Application activity 2.2
1. Given the project you intend to start, write a project brief to be submitted to the authority?
2. What are the benefits of EIA process?
2.3 Roles of Stakeholders in EIA Process
Activity 2.3
Referring to activity 2.3 about Mutesi Chantal,
1. What stakeholders will be involved in her project and why?
2. How can she involve her community in the project she intends to start?
2.3.1 Roles and Responsibilities of different Stakeholders in EIA
This section will help you understand the role of stakeholder participation in EIA process. It shows the role of all those with a stake in the outcome of a project and how their involvement helps in planning and management of EIA process. The stakeholders share information and knowledge, and may contribute to the project, so as to enhance the success of the project and hence ultimately their own interests.
a. REMA (Rwanda Environment Management Authority)
Mandated by law, REMA has a responsibility to organise the EIA procedure by undertaking screening, guiding developers on assessment procedures, conducting public hearings, reviewing EIA reports based on the terms of reference (TOR) and taking decisions on approval or disapproval of proposed projects. The Authority is also responsible for monitoring implementation of environmental protection measures.
Roles of REMA
i. Receive and register EIA Applications (project briefs) submitted by developers,
ii. Identify relevant Lead Agencies to review Project Briefs and provide necessary input during screening,
iii. Review Project Briefs and determine project classification at screening stage,
iv. Transmit Project Briefs to relevant Lead Agencies and concerned Local Governments to provide input on Terms of Reference (TOR),
v. Publicise Project Briefs and collect public comments during development of TOR,
vi. Approve EIA Experts to conduct EIA studies.
a. Developers
The developer has direct responsibility for the project and should provide necessary information about the project at all stages of the EIA process. Developers hire experts to undertake EIA studies on their behalf and answer questions about potential impacts and proposed mitigation recommendations at public hearings. Developers have the responsibility to implement the environmental management plan including mitigation measures as proposed in the EIA report and carry out subsequent environmental monitoring and auditing.
Roles of Developers
i. Prepare and submit EIA applications (in form of Project Briefs) to REMA,
ii. Hire experts to undertake EIA studies on their behalf,
iii. Prepare and append an addendum (Environmental Impact Report Addendum) to the EIA report (if necessary),
iv. Submit the EIA report, Environmental Management Plan and the EIA Report Addendum (if applicable) to the Authority,
v. Participate in public hearings and also implement terms and conditions (if any) REMA attached to approval of their projects.
a. Lead Agencies/Line Ministries
Lead agencies such as government ministries or departments +Lead agencies have the responsibility to take part in EIA of projects under their sectors. They provide valuable technical information to EIA experts during EIA studies and are involved in the review process.
Roles of Lead Agencies/ Line Ministries
i. Participate in screening at the request of REMA,
ii. At the request of REMA, review Project Briefs so as to advise on Terms of Reference,
iii. Ensure that their own projects adhere to EIA requirements,
iv. Ensure that private-sector projects in fields over which they have jurisdiction comply with EIA requirements,
v. At the request of REMA, they can serve on REMA’s Technical & executive committee.
Application activity 2.3
There has been a concern in your community about how entrepreneurs involve the general community during planning and implementation of their projects. Given the project you intend to start in your community, show how you would involve the community to be part and parcel of EIA process.
2.4 EIA PROCEDURE
Activity 2.4
For EIA report to be finally submitted to the authorities (REMA offices of a given district), there is a process that developers have to go through. Given your knowledge and background about EIA so far, what process should one go through while preparing the EIA report?
EIA Procedure
In this section, you will learn about the steps of EIA process and you will be able to understand how it informs development decisions. You will also be able to recognize that for sustainable development and optimal use of resources to occur, entrepreneurs need to provide alternatives and ways of preventing, mitigating and controlling potential negative environmental and social impacts of their projects.
EIA in Rwanda consists of the following procedures;
a. Project Brief Submission and Registration. As a first step in the EIA process, a developer proposing to start a project shall notify REMA in writing by submission of a Project Brief. The purpose of a Project Brief, which is to provide information on the proposed activity so as to enable REMA and Lead Agencies establish whether or not the activity is likely to have significant impact on the environment, and thus determine the level of EIA necessary.
b. Scoping and consideration of alternatives. The responsibility for scoping is done by developers (or their EIA experts) in consultation with Lead Agencies and all relevant stakeholders. Scoping is intended to establish important issues to be addressed in the environmental impact and eliminate the irrelevant ones. After scoping, REMA approves the terms of reference that would be used for carrying out the environmental impact study.
c. Baseline data collection and Analysis of Initial State. Baseline data describes status of existing environment at a location before intervention of the proposed project. Site-specific primary data on and around a proposed site should be collected by experts conducting the environmental impact study to form a basis for future environmental monitoring.
d. Impact prediction and analysis of alternatives. Impact prediction is a way of forecasting the environmental consequences of a project and its alternatives. This action is principally a responsibility of an EIA expert. For every project, possible alternatives should be identified and environmental attributes compared. Alternatives should cover both project location and process technologies. Alternatives should then be ranked for selection of the most optimum environmental and socio-economic benefits to the community. Once alternatives have been analysed, a mitigation plan should be drawn up for the selected option and is supplemented with an Environmental Management Plan (EMP) to guide the developer in environmental conservation.
e. Public hearing. After completion of EIA report, the public must be informed and consulted on a proposed development. REMA may, if it deems necessary, conduct a public hearing before EIA reports are appraised by its technical committee. Any stakeholders likely to be affected by the proposed project are entitled to have access to unclassified sections of the EIA report and make oral or written comments to REMA. REMA shall consider public views when deciding whether or not to approve a proposed project.
f. Decision-making. During the decision-making and authorization phase, EIA documents submitted to the Authority are reviewed by two decisionmaking committees: a technical committee and an executive committee constituted by REMA. If the project is approved, the developer will be issued with an EIA certificate of authorization, which permits implementation of the project in accordance with the mitigation measures in the EIA report and any additional approval conditions.
g. Environmental Monitoring. Monitoring should be done during both construction and operation phases of a project. It is done not just to ensure that approval conditions are complied with but also to observe whether the predictions made in the EIA reports are correct or not. During implementation and operation of a project, monitoring is a responsibility of the developer and REMA.
2.5 Practical Activity on designing EIA reports of projects
According to REMA, the EIA report should entail the following;
i. Executive summary of the EIA report which should be brief and focus on following matters:
• Name and location of the project;
• Name of the developer
• Name of the agency preparing EIA report;
• Main impacts identified;
• Mitigation recommendation
• Environmental monitoring plan
ii. Objectives of the project, including ideas, intentions and particular objectives.
iii. Description of the proposal and its alternatives. In this part, it is necessary to describe in detail the proposed project and its alternatives including those not subjected to pre-feasibility study or feasibility study.
iv. Discussion on the proposal and its relation to relevant policies, laws and programmes (sectoral and regional). In this section, the proposal must be shown to be in line with policies, laws, institutional framework and development strategy of Rwanda.
v. Impact assessment that includes assessment of all impacts to the local population and measures to avoid and mitigate impacts.
vi. Evaluation and comparison of alternatives and selection of one that is environmentally suitable that shows impacts with largest effects, measures for avoiding, mitigating and managing them and environmental improvement opportunities.
vii. Impact management and environmental monitoring plan (EMP). This is a plan for monitoring and management of impacts during the implementation and operation of the project, where the responsibilities between the state and investor are differentiated.
Skills Lab Activity 2.5
The government is running a youth empowerment program aiming at making youths start strong viable and sustainable projects in their communities. One of the conditions is that for the youth to qualify for the program is to develop EIA report of the project that will be supported. Using the above information (about EIA report), write a simple EIA report for the project you would present to the government to win the above support.
End of unit assessment
Part A (Multiple choice questions) choose the most appropriate answers
1. EIA is defined as (select one):
a. A process of identifying, predicting, and evaluating the likely impacts of a proposed project or development to define mitigation actions to reduce negative impacts and to provide positive contributions to the natural environment and well-being.
b. A report written by government representatives on the planned development impacts of environment, socio-economic issues and culture.
c. Project life-cycle assessment.
2. What is essential in an EIA? (Select all that apply):
a. That it allows decision makers to assess a project’s impacts in all its phases.
b. That it allows the public and other stakeholders to present their views and inputs on the planned development.
c. That it contributes to and improve the project design, so that environmental as well as socioeconomic measures are core parts of it.
3. What is the purpose of the “screening” step of EIA? (Select all that apply);
a. To assess the quality of the project design.
b. To facilitate informed decision making by providing clear, well-structured, factual analysis of the effects and consequences of proposed actions.
c. To determine whether a full EIA is needed.
4. Which type of project usually requires an EIA? (Select all that apply):
a. Small housing building.
b. Dams and reservoirs.
c. Industrial plants (large scale).
d. Community garden development.
e. Irrigation, drainage, and flood control (large scale).
f. Mining and mineral development (including oil and gas).
g. Port and harbour development.
h. Development of wells in the community.
i. Reclamation, resettlement and new land development;
j. Thermal and hydropower development.
k. Outdoor recreation.
5. EIA is usually required for a development project when (select all that apply):
a. Large changes are expected in the environment.
b. Limited impacts are expected in the environment.
c. A small area is expected to be affected by the project
d. There are potentials for transboundary impact.
e. Many people are likely to be affected by the project.
f. No cumulative impacts are expected.
g. There are protected areas in the project area of influence
6. What specific aspects does a good EIA report and review include? (Select all that apply);
a. Assessment, mitigation measures and related plans.
b. Terms of reference (TOR).
c. A generalized set of assumptions about the project benefits described in highly technical terms.
d. A satisfactory prediction of the adverse effects of proposed actions and their mitigation using conventional and customized techniques.
e. Information that is helpful and relevant to decision making.
7. What kind of monitoring is referred to when we speak of monitoring a development project (select all that apply?)
a. Monitoring indicators that measure the impacts on the environment and communities as a result of the development project.
b. Ensuring the fulfillment of all the commitments made in the approved EIA.
c. Keeping track of changes that may happen in the environment and communities because of the project and other local and/or global changes, such as changes in livelihoods due to economic crisis or migration, differences in water availability due to drought, etc.
d. Keeping track of the political context, to ensure that the project retains its licence.
c. Part B (True/False questions)
1. Frequency of monitoring will be determined by the nature of the project. True or false?
2. A good quality EIA might still lead to the planned development not being permitted to go ahead based
3. on the identified impacts. True or false?
4. The EIA Report is compiled by the designated government agency. True or false?
Unit 2: Environment Impact Assessment (EIA) - Unit 3: CUSTOMS AND PROCEDURESUnit 3: CUSTOMS AND PROCEDURESUnit 3: CUSTOMS AND PROCEDURESKey Unit Competency: Developing an ethical understanding of Rwandan Customs system.
3.1 Meaning of Customs and Customs declarationActivity 3.1Referring to the photo below and using on your previous knowledge on customs, answer the questions that follow;Introductory activity.The government of Rwanda has reinforced a policy of obligatory deductions for imported and exported products; it is possible for the Government to tax products which are not manufactured in the country. Based on your previous knowledge about Rwandan customs, gained from S.3 unit 6 as well as knowledge about taxes in the economy gained from S. 5 unit 3, answer the following questions:a. In your own understanding, what is meant by customs and customs declaration.b. Briefly explain the different types of customs declaration.c. What are the objectives of the customs service department?d. Identify partners involved in the process of customs declaration.e. Give examples of exported and imported comodities in Rwanda.f. Mention some customs exempted comodities in Rwanda.g. Discuss the various documents/forms that are used in customs declaration.h. Explain the procedures followed in customs declaration.
Questionsa. Explain the term customs.b. In your understanding, what do you think normally happens at the Customs?c. “Goods to declare”. Based on this statement, what do you think customs declaration means.Customs: Is the government agency entrusted with enforcement of law and regulations to collect, protect import-revenue, to regulate and document flow of goods in and out of the country. Customs are also refered to as the official organization or department responsible for collecting taxes on goods especially on goods leaving or entering the country and preventing illegal trade.Customs declaration Is a statement showing goods being imported and exported on which duty will have to be paid. It is a necessary document to facilitate the acceptance, verification and payment of taxes before the goods can be handed over to the importer; or Customs declaration: is the practice used by customs officers to clear goods into a country and levy tariff including clearance procedures such as documentation and inspection, method of determination of goods clarification, and method of assigning its value as the base for an Advalorem tariff.3.2. Objectives of the Customs Services DepartmentActivity 3.2.Do you think it is important for Rwanda to have a customs services department? Give reasons for your response.The primary function of customs services department is to assess, collect and account for import duties and taxes due on imports. Apart from its fiscal responsibilities, customs services department is responsible for the following:a. Enforcement of customs legislation and other relevant laws;b. Facilitation of legitimate trade;c. Protection of society from illegal entry and exit of prohibited goods;d. Compilation of trade statistics for economic planninge. Take all actions necessary to identify and combat evasion of duties and to combat fraud in its many forms;f. Ensure efficiency and effectiveness of the customs services department through enhanced management controls, training, increased accountability and the expansion of computerization.Application Activity 3.2Discuss the objectives of customs service department3.3. Customs Offices in RwandaActivity 3.3.Based on your previous knowledge on customs and taxation in Rwanda and referring to the map below, answer the following questions;
Questions;a. Mention the main customs offices in Rwanda located on the map above?b. Mention any other customs offices in Rwanda you know that are not mentioned above.c. Why do think there are many customs offices in Rwanda?Customs OfficesThe history of taxes in Rwanda indicates that tax legislation was inherited from colonial regimes. During the Second Republic, the administration and accountability of taxes in Rwanda was initially under the Ministry of Finance and Economic Planning. This was later on vested into Rwanda Revenue Authority (RRA) that was established by law N0 15/15 of 8th November 1997.The authority was established by the Government to restore, to improve its resource mobilization capacity and strengthen the main economic institutions of the country while providing the public with better quality and courteous services, In bid to mobilize more resources, the authority is therefore required to assist taxpayer in understanding and meeting their tax obligation.3.4 Types of customs declaration and goods that may be exported and imported in RwandaActivity 3.4.Basing on your knowledge acquired in previous classes, conduct research from the library /internet and answer the following questions;1. Explain the term export customs declaration?2. Briefly explain on the following different types of customs declaration;i. Export.ii. Import.iii. Temporary importation.iv. Warehouse.v. Transit.3.4.1 Export customs declarationThis is an official document declaring designated goods or service produced in one country to another which is called C17 form. Export of goods often requires involvement of customs authorities. An export’s counterpart is an importer.Goods that may be exported in Rwanda
Activity 3.41. What comodities may be exported and imported to and from Rwanda?2. Explain the process of exporting and importing goods through customs in Rwanda?Export ProceduresGoods for exportation other than goods to which the provisions of regulations 132, 133, 134 and 135 apply shall be entered using form C17 Form.• Policy statement: The Department shall endeavour to facilitate the exportation of goods from Rwanda subject to such terms and relevant authorities in respect of goods being exported may lay down conditions as; Goods may only be exported or accepted for carriage for export after such declaration or other acceptable documentation has been delivered to customs by the exporter or agent, and duly processed.• Prohibitions and Restrictions of exports: The goods specified in Part A of the Third Schedule are prohibited goods and the exportation of the goods is prohibited (Section70 (1)) of the East African Community (EAC), Capital Market Authority (CMA). The goods specified in Part B of the Third Schedule are restricted goods and the exportation of the goods, save in accordance with any conditions regulating their exportation, is prohibited ((Section70 (2)) of the EAC, CMA. Customs Officers must therefore ensure that regulations in force for the control of restrictions and prohibitions of exports of any particular goods are observed.• Required Custo3ms Procedure Codes.a. Goods for Commercial Use: Goods for commercial use intended for export must be entered on Customs declaration. The Customs procedure code to be entered will depend on the nature of the goods to be exported as per Customs Procedure Codes.b. Travellers Samples and Temporary Exportations: Where goods are being exported as samples or being exported for purposes of repair or replacement due to faulty manufacture, a duly completed declaration must be presented to Customs. Failure to do so may result into full duty being collected on such goods upon return to Rwanda.• Re-exportation of GoodsProhibited and restricted exports generally: The office charged with the responsibility of monitoring exports should scrutinize supporting documents such as Invoice, Consignment Notes, Packing List, Certificate of Origin and Certificate of Quality. Once satisfied with the way information has been entered and that the goods are not being exported contrary to export control regulations, the declaration should then be assessed, payment of processing fees and any other fees processed in ASYCUDA++ system followed by issuance of receipt and release order to the clearing agent.3.4.2 Import customs declarationIs a government document declaring designated goods or service produced to be moved or sold into the country from other countries. In order to facilitate trade, RRA customs services department adopted some special regimes.Importers Procedures: In order to facilitate trade, RRA Customs Services Department has adopted some special regimes. This includes, Direct Delivery, Clearance on Truck, and Quick Release Regime offloads and Re-load of goods.Quick Release (Q.R): There are two types of Q.R special regimes; namely:a.Quick Release with Deposit. This is where goods can be granted quick release after payment of the deposit, such goods include:• Perishable goods.• Factory machinery spare parts or other factory material that may stop the functioning of the factory incase of shortage.• Goods with doubtable origin in case investigations are being conducted on the certificate of origin• Fragile goods that can be damaged when offloaded e.g. glasses.• Goods that are not off loaded in Kigali due to Contracts between the importer and the transporter e.g.Malt for BRALIRWA offloaded at GISENYI.Procedure for Quick Release with Deposit
• Clearing agent should fill the prescribed application form clearly specifying reasons for request of thisspecial regime.• The application request should be addressed to the Commissioner for Customs and Excise.• The clearing agent submits the approved form to the special regime desk for processing.• If the application is approved, the Clearing agent prepares a provisional declaration and submits acopy to Special Regime Team office to calculate the correct amount to be deposited.• After payment of the deposit, the Head of Special Regime Team allocates special regime officer toaccompany the consignment and conduct physical examination at the importer’s premises.b.Quick Release without DepositThis is where the goods are granted Q.R special regime without payment of the deposit. These goods include the following:• Goods exempted from payment of duties and taxes.• Goods that belong to the Government of Rwanda.• Bank coins and notes.Procedure for Quick Release without Deposit• The Clearing agent fills the prescribed application form clearly specifying reasons for request of thisspecial regime.• This application should be addressed to the Head of Central Operations Division.• If the application is approved, the Clearing agent prepares a provisional declaration and submits acopy to Special Regime Team office.• The Head of Special Regime Team allocates special regime officer to accompany the consignmentand conduct physical examination at the importer’s premises.Clearance of goods on truck (“Distinguished Service Cross D.S.C”)Goods, which can be granted this regime, fall into:• Identical goods that can be easily identified and verified when loaded on the trucks e.g. sugar, rice,goods that are not allowed in the public warehouse due to their nature e.g. Cement, Salt• Heavy and bulky items that can be easily identified and examined when loaded on the trucks e.g.Machines, rolls for making iron sheets…
Procedure for Clearing of goods on truck• The clearing agent fills a prescribed form applying for “D.S.C” special regime. This application form,accompanied by the manifest is submitted to cargo control office.• Cargo controller or warehouse team leader (depending on where the truck is parked) verifies thegoods and establishes whether “D.S.C” regime should be granted or not, based on the nature of thegoods. Submits a detailed report to the commissioner for customs & excise• The commissioner’s decision is returned to the cargo controller who notes the granted regime. Theclearing agent prepares the declaration, which is submitted to the cargo controller for verification ofgoods and taxes and duties due. When verification is done, the agent pays taxes and duties and thengoods are released.3.4.3. Temporary importation.Is the import of goods into another country or territory for a limited period of time; such goods are generally not subject to tariffs or similar fees, though they must leave the country within a certain period of time.Temporary importation means that goods may be used in the country without payment of duty or VAT under certain conditions and re-exported afterwards in the same state as they were in at import.Conditions that apply• Temporary importation regime granted to International Organizations governed by a specificconvention ratified by the Republic of Rwanda;• Temporary importation regime granted to Institutions or persons not governed by any specificConvention with the Republic of Rwanda;Required documents• Arrival notice where applicable;• Bill of lading or Airway Bill;• Original invoices;• Packing list of the imported goods;• A letter of guarantee to cover the duty and taxes on the goods signed by the organization and the lineMinistry; the convention ratified by Republic of Rwanda and any other document that may be requiredby the Customs.Note: With exceptions to goods imported under specific conventions, goods under the temporary admission procedure with partial relief shall be subject to payment of duties and taxes, upon expiration of six (6) months within the Customs territory.The following supplies are exempted from Value Added Tax;1. Water supply services. The supply of main water and sewerage services made for non-profit motive, excluding sewerage pump out services.2. Health supplies.• The supply of health and medical services.• Articles designed for use by the disabled.• The supply or importation by eligible persons, of equipment and drugs to hospitals and healthcentres.• Supply or importation of drugs and medical equipment made by persons recognized by Rwandanlaws, for medical use, by patients and disabled persons.3. Educational services.• Educational services provided to pre-primary, primary or secondary students.• Educational services provided by social organizations, to students and other youths, meant forpromoting the social, physical, educational or spiritual development of the members otherwise than forprofit.• Educational services provided to vocational and to other tertiary institutions.• Educational materials supplied directly to learning institutions.
• The eligible bodies for this exemption shall be those recognized by the laws of Rwanda as publicinstitutions, not for profit social organizations and any other form of voluntary or charitable institution. • Books, newspapers, journals, cassettes and diskettes used as educational materials.4. Transport Services.• Transportation of persons by road in a bus or coach licensed under the roads and road traffic law andhaving a seating capacity for fourteen or more adult persons.• Transportation of persons by air or any scheduled flight.• Transportation by railway.• Transportation of persons or vehicles by boat.5. Transfer of property.• The sale or lease of an interest in land.• Sale or transfer of a building or part of a building, flat or tenement meant for residential purposes.• The renting of, or other grant of the right to use, accommodation in a building used - predominantly asa place of residence of any person and his family, if the period of accommodation for a continuousterm exceeds 90 days.3.4.4 Warehousing.A warehouse is a commercial building for storage of goods. Warehouses are used by manufacturers, importer, exporter, wholesalers, transport businesses, customs, etc. Warehouses allow transport optimization along the supply chain, and allow companies to work with an optimal inventory (economic order quantity) regarding service quality.Types of warehouses1. Private Bonded Warehouses: A Bonded warehouse is a building, installation or area approved byand under the supervision of customs where goods may be stored under the conditions laid down bythe provisions in force. Private operators are allowed to operate bonded warehouse. An aspirant hasto apply to the Commissioner of Customs clearly indicating the nature of the warehouse you want tooperate.Here are a few things you need to know about private bonded warehouse• The Customs need to approve all goods that are to be warehoused• The license to operate a bonded warehouse is valid for one-year renewable.• Companies or individuals applying for the first time to operate a bonded warehouse are not limited toa certain period of time to accomplish all the formalities but those requesting for the contract renewalare allowed only one-month period.2. Public bonded WarehousesThe Public bonded warehouses are buildings and equipment therein, or area for deposition of warehoused goods by any person and that are approved for that purpose by customs. The manifest cargo/control system is designed to ensure that all goods that arrive under the transit system at GIKONDO parking lot are correctly accounted for.The control of goods in all public warehouses is the responsibility of the Customs Department of the Rwanda Revenue Authority (RRA). The physical handling of cargo is the responsibility of cargo handling companies like MAGERWA, KOBIL, and TOTAL. These companies have their own stock record systems.Unwarehousable GoodsThe following are examples of goods which are unwarehousable:• Salt; • Chalk;• Cement; • Fireworks;• Match Box; • Dried fish;• Acids for trade and business; • Perishable goods;• Ammunition for trade and business; • Combustible or inflammable goodsexcept petroleum productsfor storage inapproved places; Explosives;• Any other goods which the Commissioner may gazette; Etc.Requirements in order to qualify to operate a Bonded warehouse• Licensing RequirementsAs a necessary condition you must fulfill the following conditions in order to qualify to operate a Bonded warehouse:i. You must be a Rwandan citizen or a permanent resident or an investor registered under RwandaDevelopment Board (RDB);ii. You need to possess a trade license issued in Rwanda;iii. You need to possess a Tax Clearance CertificateFor the Commissioner of Customs to consider your request you need to;• Complete an application form issued by Customs;• Submit a plan of the premises as required by Customs;• Meet the standards set by customs based on the nature of goods and activities of the bondedwarehouse;• Execute a bond equal to duties and taxes due on goods to be warehoused (Bank/ Insuranceguarantee);• Pay a license fee during one-year period.Minimum Requirements for the WarehousesTo qualify for a License to operate a bonded warehouse you will need to ensure that the following minimum requirements are available at bonded warehouse:• Fence-structured premises should be at least 2 meters high;• The premises should have concrete or cemented ground/floor;• Should provide a suitable office with all facilities for Customs and other stakeholders;• Should have a computerized system in place capable of generating arrival notice of goods and stockrecord of warehoused goods;• Should have systematic procedure of entry and exit of goods in the warehouse;• Possession of electronic weighing machines approved and certified by competent authority;possession of elevating equipment’s, machines and materials where applicable; Stack and arrangethe goods in the bonded warehouse in a proper way in order to ease verification by the customsofficers; Provide lock and key for securing the doors of the bonded warehouse;• Provide all necessary labor and materials needed for treatment, sorting, packing, examining,weighing and storing the goods; Ensure the insurance of warehoused goods;• Parking space for vehicles; Safety equipment for the security of workers and warehoused goods;lights for security purposes;• The premises should have a single entrance;• In case the bonded warehouse is under rental contract, the contract should at least be equivalent tothe bond agreement period of one year.Suspension and Cancellation of a LicenseThe Commissioner General of Customs reserves the right to suspend or cancel a license in case you fail to comply with the customs law and subsidiary legislations that regulate operations of bonded warehouse;• Failure to comply with the minimum requirements for setting up a warehouse.• Act fraudulently in dealing with customs and clients or if there is no longer a need for a bondedwarehouse in the area in which it is located;Note. Where the bonded warehouse is suspended, customs may lock and seal the bonded warehouse during the period of suspension.3.4.5 Customs transitTransit refers to the movement of goods entering or leaving the country’s borders under Customs control. • Transit Documentation: Documentation is done by a clearing agency on behalf of theimporter/exporter. Clearing Agencies present transit declarations (IM 8) to Customs through theBureau or Remote DTI. Agencies must be careful while filling the documentation form, especially onsection indicating the correct country of destination and the exit office. Here is an example: if thecountry of destination is Democratic Republic of Congo then the possible codes of offices ofdestination are 31GC, 41MU, 41CY, 41BU.• Registered transit declarations with supporting documents are presented to Customs through theAcceptance desk and follow the approved Declaration Processing Path.• Customs Operations: Customs examine the documentation to establish the correct bond amount tobe debited and generate a Transit document (T1) from the declaration lodged by the Clearing Agentif it meets all the requirements during entry examination. The transit document (T1) containssummarized information from the IM8 declaration and constitutes the actual transit transactiongenerated.• At its generation, all appropriate blank fields are filled in and the T1 is then registered and a T1registration number is generated with serial D. At this stage, Customs automatically debit the Transitbond account of the clearing agency at registration of the Transit document (T1).• Transit Guarantees: All types of transit are designed to ensure that any charges due on goods aresecured. This is achieved through a system of guarantees and the key personnel in this regard arethe principal and the guarantor. A guarantor is an individual or firm or any other body that is eligibleto contract a legal third person (normally a bank or an Insurance company). He/she is responsible forpayment of duties and other charges to which the principal has become liable as a result of anyirregularity concerning the transit declaration.• The principle is responsible of goods from point of entry to destination office. In transit the principlehas to provide a guarantee in order to ensure payment of any customs due or charges, which may beincurred in respect of the goods.• Change of destination and Re-routing of T1: This is the customs procedure under which goods intransit change the office of destination. It is granted upon application on the customs approved formby the importer or his clearing agent. If the reason is found appropriate, the office of destination isrerouted electronically.• In cases where a truck uses the wrong office of exit/clearance, the T1 can be re-routed to the correctdestination after all the necessary formalities have been done.• The re-routing of T1’s: It is done only for T1 that has not yet been validated at the initial office ofdestination.• Trans-shipment: This is the customs procedure under which goods are transferred under customssupervision from the importing means of transport (vehicle) to another means of transport.• Goods may not be unloaded or transshipped from their means of transport except with writtenauthorization from customs and in the presence of Customs officers. Unloading or transshipment musttake place according to the conditions determined by Customs and in accordance with the legalprovisions in force.• On completion of Trans-shipment exercise, the new seal is endorsed on documents and put on thetruck by customs.Application Activity 3.41. Describe the steps process related to customs procedures2. Explain the documents fulfilled in temporary importation regime granted to International Organizationsgoverned by a specific convention ratified by the Republic of Rwanda3. Explain the differences between warehouse and warehousing customs4. Give the documents used for goods which are in transit5. Explain the term trans-shipment3.5. Customs exempt goodsActivity 3.5In Rwanda there are goods and services that are not charged customs duties.1. Mention some of the goods and services you think should not be charged duties in Rwanda2. Why do you think some goods and services should not be charged duties in Rwanda?The exemptions on goods and servicesThe following categorizes exempt goods and services which includes;• Fish, fresh vegetables, fertilizers used in agriculture health service and supplies eg drugs, medicineand materials for the disabled.• Education services and supply of education materials to learning institutions, books, journals,cassettes, discs• Machinery for industries;• Raw materials for industries;• Building and finishing materials imported by an investor fulfilling the requirements determined by anorder of the Minister in charge of finance;• Refrigerating vehicles, tourist vehicles, ambulances, fire-extinguishing vehicles, hearses;• Vehicles and movable property and equipment for foreign and Rwanda’s• Diaspora investors and their expatriate staff;• Equipment for tourism and hotel industry and relaxation places appearing on the list determined byan order of the Minister in charge of finance;• Goods and services meant for free economic zone;• Medical equipment, medicinal products, agricultural, livestock, fishing equipment and agriculturalinputs;• Equipment in education field;• Equipment’s information, communication and technology (VAT Law) etc.The following goods and services are intended for persons of a special category:• Goods and services intended for diplomats accredited to Rwanda that are used in their missions;• Goods and services intended for international organizations that have signed agreements with theGovernment of Rwanda;• Goods and services donated to local non- governmental organizations, which have been acquiredthrough funding by countries or international organizations that have signed agreements with theGovernment of Rwanda and for being used for agreed upon purposes;• Goods and services intended for projects funded by partners that have signed agreements with theGovernment of Rwanda.”The following goods and services shall be exempted from value added tax:• Transportation services by licensed persons:• Transportation of persons by road in vehicles which have a seating capacity of fourteen (14) personsor more;• Transportation of persons by air;• Transportation of persons or goods by boat;• Transportation of goods by road;• Lending, lease and sale :• Sale or lease of land;• Sale of a whole or part of a building for Residential use ; etc.Application Activity 3.5Explain the term “customs exempt goods”1. What do you understand by customs exemption?2. Name any five customs exempted goods in Rwanda3.6 Partners in the process of customs declarationActivity 3.6From your prior knowledge, what are the partners and shareholders in customs declaration?The following are the main partners involved in customs declaration:• International Civil Aviation Organization,• International Maritime Organization• Universal Postal Union,• The United Nations Educational,• Scientific and Cultural Organization,• United Nations / Economic Commission for Europe,Inter Governmental Organizations• Organization for Economic Co-operation and Development (OECD),• Organization for Security and Co-operation in Europe (OSCE),• The World Bank, International Trade Center (ITC)International Cooperation• The European Union (EU),• European Free Trade Association (EFTA),• International Standards Organization (ISO),• International Air Transport Association (IATA),• Global Facilitation Partnership for Transportation and Trade (GFP),• The International Road Union (IRU).• The Bureau International des Containers et du Transport Intermodal (B.I.C.), Global ExpressThe following are main Stakeholders involved in customs declaration:• Customs administration: It manages all the operations in collaboration with the customs agent incharge.• Warehouse: refers to a designed space to receive and records goods• Customs warehouse: It is a warehouse where goods are stored waiting to be cleared. e.g:MAGERWA• Rwanda Standards Board RSB: It verifies and accredits the conformity of the quality goods andservices following the international norms/ standards• Transport Companies: Include national and international transport companies• Customs Agent also called declarant: refers to an agent who is in charge of customs declarationfor importer’s account who pays him/her agreed fees.• Rwanda National Police: It is a unit of national police in charge of protecting rights of customsadministration. It sues customs and fiscal infractions. e.g. Rwanda Protective DepartmentApplication Activity 3.6Who are the customs partners regarding customs procedures?3.7. Documents used in customs declaration
Activity 3.7
1. Explain what do you understand by documents as used in customsdeclaration?
2. State at least three types of customs declaration documents you know
in Export and Import of goods.Documents in customs Declaration: they are used to declare what goods have
been brought on to the nation, as some may have limit or customs excise tax or are
banned from entry. These may include:
1. Transaction Invoices: is a non-negotiable commercial document issued by
a seller to a buyer.
2. Transport documents: are documents which show information about
cargo that is being transported. Transport documents lie at the heart of
international trade transactions. These documents are issued by shipping
line, airline, international trucking companies, railroad, freight forwarder
all logistics company.
There is a type of transport document for each model of transport:
3. CMR: the CMR (Convention relative au Contrat de transport international
de Marchandise par Route) transport document is an international
consignment note used by drivers, operators and forwarders that govern
the responsibility and liabilities of the parties to a contract for the carriage
of goods by road internationally.
4. Air waybill: is a transport document used for air freight. An air waybill
(AWB) is a non-negotiable transport document covering transport of
cargo from airport. It indicates only acceptance of goods for carriage. This
document is prepared by IATA Transport Agent or the airline itself and is
addressed to the exporter, the airline and the importer.
5. Bill of Lading: is a transport document for sea freight. Bill of lading B/L is
used by the agent of a carrier to shipper, signed by the captain, agent, or
owner of vessel.
6. Import license: An import license is a document issued by a national
government authorizing the importation of certain goods into its territory.
7. Packing list: is a more detailed version of the commercial invoice but
without price information.8. Certificate of origin: show that goods in particular shipment have been wholly
obtained, produced, manufactured or processed in a particular country.
9. Certificate of analysis: is a document which confirms that specific goods have
undergone specified testing with specified results and adhere to product
specification and standard of production.
10. Goods arrival notice: is a document sent by a carrier or agent to the consignee
to inform about the arrival of the shipment and number of packages, description
of goods, the weight, and collection charges (if any)
11. Assessment Notice: is a document issued by a taxing authority specifying the
assessed value of a property.
12. Certificate of Fumigation: is the proof that wooden packing materials issued in
international sea freight shipping e.g wooden pallets and crates, wood, wool etc.
Have been fumigated or sterilized prior the international shipment
13. Goods invoice: is a document sent by a seller to a buyer. It specifies the amount
and cost of goods that has been provided by a seller.
14. Payment receipt: is a simple document that shows that payment was received
for in exchange for goods or services.
15. Phytosanitary certificate: is a certificate stating that a specific crop was inspected
a predetermined number of times and a specified disease was not found or a
certificate based on an area surveillance stating that a specific disease, as far as
known, does not occur in the area of production.
16. Warehouse handling fees invoice: is a document given by a warehouseman for
items received for storage in his or her warehouse which services has evidence
of title to the stored goods.
17. ImportDeclaration Form (IDF). (from theImporter);Importer’sTax Identification
Number (TIN) and Value Added Tax (VAT) numbers; Duties and Taxes Exemption
Certificates.Application Activity 3.7
Describe different documents involved in customs declaration.3.8 Declaration forms in customs
Application Activity 3.8
From your prior knowledge answer the following questions:
1. Explain the meaning declaration form?
2. Mention the different types of the declaration forms you know3.8.1 Declaration form
Is a form that is required by most nation countries when a citizen or a visitor or
goods are entering that nation’s borders, called import. The purpose of the import
form is to declare what goods are being brought into the nation, as some countries
may have import quota (limits), customs excise taxes, or bans from entry on some
goods or quantities of goods. The form is also used to calculate any applicable tariffs
or duties
3.8.2 Types of declaration formsThere are two forms of declaration:
1. Customs arrival card or a lading card when traveling with your goods.
The traveler or family members are required to complete the form, sign it,
and then submit it to the custome and/or border protection official before
arriving into the nation. Most nations require declaration of alcoholic drinks,
tobacco product, animals, fresh food, plant material, seeds, soils, meats etc2. Commercial invoice or a Pro-forma invoice, or an import declaration
form, or a re-export declaration. If not traveling with the goods, which
are shipped, one must use other customs declaration forms. Incoterm on
these forms define the shipment and customs declaration. Also, the forms
normally require the traveler to note the country of origin of the goods
and may sometimes require a certificate of origin. These forms can also be
used when hand carrying goods across a border. Errors on the forms can
cause delays or confiscation of the goods. For that reason, importers often
use a customs brokerage to clear goods through customs.Application Activity 3.8
Case study
An International trade enterprise has imported the following products outside
Rwanda:Oil from Tanzania, Sugar from Kenya, cement from Zambia; upon arrival at the
customs, he was told that the importer should pay customs duties in regard to
importation procedures.In line with the case study above, describe the different documents which can
be used for the declaration of goods at the customs.3.9 Verification and payment of customs duties
Activity 3.9
• Based on your research in the library/internet what do you think about the
document to be submitted to RRA in clearing and paying for the product
in the state warehousing?The importer must submit the necessary documents at the nearest Customs branch
office; alternatively, the importer may appoint a clearing agent to do the clearance
on their behalf. Clearances can also be done electronically. Customs clearance
procedures can be found at the E-Regulations Rwanda website.The importer must also be registered as importer and exporter. Before the payment
of customs duties, there is the declaration of commodities which has the following
process:• Clearing through customs: Clearing through customs is the implementation
of necessary formalities so that commodities can be consumed, exported or
put under other customs regulations.• Clearance of goods on truck (“D.S.C”): Goods, which can be granted this
regime, fall into:i. Identical goods that can be easily identified and verified when loaded on
the trucks e.g. Sugar, Rice etc.ii. Goods that are not allowed in the Public Warehouse due to their nature e.g.
Cement, Salt etc.iii. Heavy and bulky items that can be easily identified and examined when
loaded on the trucks e.g. Machines, rolls for making iron sheets etcProcedure
i. The clearing agent fills a prescribed form applying for “D.S.C” special regime.
This application form, accompanied by the manifest is submitted to Cargo
Control office.ii. Cargo Controller or Warehouse Team Leader (depending on where the truck
is parked) verifies the goods and establishes whether “D.S.C” regime should
be granted or not, based on the nature of the goods.iii. Submits a detailed report to the commissioner for Customs & Excise
iv. The Commissioner’s decision is returned to the Cargo Controller who notes
the granted regime.v. The clearing agent prepares the declaration, which is submitted to the cargo controller for verification of goods and taxes and duties due.
vi. When verification is done, the agent pays taxes and duties and then goods
are released.The documents that are required in Clearance of goods on truck examination
are the following:i. Arrival notice of a commodity;
ii. A commercial invoice;
iii. Transport invoice;
iv. Certificate of origin;
v. Certificate of quality;
vi. Waybill.
vii.Certificate of inspection for a car;
viii. Identification of the importer.
After the examination of all these documents, the customs officer makes his
declaration testifying that the commodity can be consumed and affixes a validation
stamp.Verification of a stored commodity
This is about physical verification of a commodity put in a warehouse, its location,
etc.It is the arrival notice that guides the controller in his/her work; In this step, the
declaring officer replaces the importer.The purpose of the verification is to confirm not only the existence of the commodity,
but also its value and the respect of the customs legislation by the importer. At the
end of the verification, the controller signs on the verified documents.This verification is carried out by technicians who verify the conformity of data at
their disposal and the customs law. These are the people who confirm the exact
value of a commodity, its state and tax together with customs duties to be paid.Payment of the invoice
In reality, this invoice is settled at the beginning of clearing through customs
operations. In this step, the issue is to confirm the payment of the bill and the making
of the bill. This allows a delivery of the commodity to its owner.Application Activity 3.9
1. Explain clearly the steps/process in clearing and paying customs duties
2. Mention the documents that are required in verification for customs duties3.10 Administrative practices for taking goods out of customs
When the customs operations are finished and the payment of fees is completely
done, the customs give the authorization of withdrawing goods.It is then the duty of the owner of the warehouse to proceed for operations of
balancing the documents and giving the authorization of goods to be loaded in a
vehicle supplied with the entering bill and formal withdrawal (Exit form).There exist also related services like the Rwanda Board of Standards and the customs
police that carry out the inspection of documents to confirm the withdrawal
authorization.Skills Lab Activity 3.12
Read the following scenario and answer questions that follow:
Umutoni is a major trader who exports her products to Uganda; she has to
clear her products at Katuna border with customs office.a. Describe some of the departments she has to deal with during customs
declaration.b. Describe some of the documents she is likely to use during declaration.
End of Unit 3 Assessment:
1. Identify a business project you can operate after school. For this project
identified, explain how the business will contribute to promote export
of the products to the foreign countries. List and explain what you can
do to encourage entrepreneurs to go for delivering their products out of
Rwanda.2. Identify some of the measures to help people develop a positive attitude
towards customs declaration.3. Identify some challenges encountered at customs department
Unit 3: CUSTOMS AND PROCEDURES - Unit 4: FINANCIAL MARKETSUnit 4: FINANCIAL MARKETS
Key Unit Competency: To be able to evaluate the role of financial markets
Introduction
The financial market plays the key role in the economy by stimulating economic growth, influencing economic performance of the actors, and affecting economic welfare. A financial market brings buyers and sellers together to trade in financial assets such as stocks, bonds, commodities, derivatives and currencies. The purpose of a financial market is to set prices for global trade, raise capital, and transfer liquidity and risk. Some examples of financial markets include the stock market, the bond market and the real estate market. Financial markets can also be broken down into capital markets, money markets, primary markets and secondary markets.Financial markets and capital are often used interchangeably; although these definitions of the terms overlap somewhat! Whilst often or not those two terms are used synonymously, in reality a distinction also exits. «Financial Markets» pretty well provides an umbrella term underneath which other, more specialised markets sit.
Basically, capital market is a part of financial market. Any overlap is generally sorted out by local definitions made and hopefully enforced by the local regulator. For most practical purposes the physical markets have evolved to specialise in certain products (or ‘financial instruments’) to avoid confusion.
This unit aims at helping to explore more about financial markets operation as one of the strategies of linking investors and lenders. It will explain more on capital market instruments and how one is protected in capital markets, evaluates the role of financial markets in general and in Rwanda. The unit highlights the following:
• Whether Rwanda has financial markets in her financial system.
• The roles of financial market in the mobilization of domestic resources for investment.
• Discusses the challenges and constraints that impede the development of an effective domestic financial market in general and Rwanda in particular.
• How the government of Rwanda regularly issues to the public, both Treasury Bills and Treasury Bonds.Introduction activity:
Refering to the picture and case study below answer the questions that follow ;
Manirafasha and his wife Akimana are modern farmers in rural area. They own different assets and have for long accumulated huge sums of money. Manirafasha’s family is comprised of the father, the mother and their 2 children ; a daughter and son who are completing their secondary school studies.
Manirafasha and his wife Akimana are planning to retire from their farming activities and are also getting worried of their future when they will no longer be able to perform their farming activities in a few years to come. When their children came back from school where they also study entrepreneurship subject, they advised their parents to think how they can sustain their income in the near future and continue to meet their basic needs through investing their money into more secured investment projects.
a. Referring to your own family, your community and Mr. and Mrs. Manirafasha’s family, why do you think families should worry about theirfuture financial capacities and well being ?
b. What changes in terms of productivity do you observe from farmers and other workers in your community when they reach in seventies of age ?
c. Referring to the above scenario, describe different alternatives investment projects that you would advise the family to invest their money in. d. Referring to the country’s saving policy, where would you advise the family to invest and why ?
4.1 Meaning and functions of financial Market
Activity 4.1Use the pictures below to answer the questions that follow 9.6
a. Describe what you think the people in both pictures are doing.
b. Do you find any relationship of their activities?
c. What do you understand by financial market?
A financial market is a market in which people and entities trade financial securities, commodities, and other fungible items of value at low transaction costs and at prices that reflect supply and demand. Securities include stocks and bonds, and commodities include precious metals or agricultural goods.
Financial markets facilitate:
• The raising of capital (in the capital markets)
• The transfer of risk (in the derivatives markets)
• Price discovery
• Global transactions with integration of financial markets
• The transfer of liquidity (in the money markets)
• International trade (in the currency markets),Financial Markets are used to match those who want capital to those who have it. Typically, a borrower issues a receipt to the lender promising to pay back the capital. These receipts are securities which may be freely bought or sold. In return for lending money to the borrower, the lender will expect some compensation in the form of interest or dividends. This return on investment is a necessary part of markets to ensure that funds are supplied to them.
Application Activity 4,1
a. What do you understand by financial markets?
b. Explain the role of financial market
4.2 Types of financial markets
Activity 4,2
Identify different types of financial markets that you know
The types of financial markert are:
i. Physical asset markets versus financial assets markets: Physical assets markets are for physical products such as wheat, autos, real estate, computers, and machinery whereas financial asset markets, on the other hand, deal with stocks, bonds, notes, and mortgages. Financial markets also deal with derivative securities whose values are derived from changes in the prices of other assets eg convertible bond.
ii. Spot markets versus futures markets: Spot markets are markets in which assets are bought or sold for “on-the-spot” delivery (literally, within a few days) whereas futures markets are markets in which participants agree today to buy or sell an asset at some future date.
iii. Money markets versus capital markets: Money markets are the markets for short-term, highly liquid debt securities whereas capital markets are the markets for intermediate or long-term debt and corporate stocks.
iv. Primary markets versus secondary markets: Primary markets are the markets in which corporations raise new capital whereas secondary markets are markets in which existing, already outstanding securities are traded among investors.
Application Activity 4,2
Kamana is a senior 4 student who inherited a very big house in Kacyiru Sector and 50,000,000 Frw from his late grandmother with whom he was living. He is planning to invest his money in a financial market and he is seeking your advice on an alternative solution. Help him identify the ideal financial market he will have to join and explain the reason you would advise him to join that market.
4.3 Capital market
Activity 4,3By use of the photo below answer the questions that follow Activity 9.6
Figure 4.4: Kigali Friends Supply Ltd’s industry
It was back in 2008 when Kigali Friends Supply Ltd were facing economic crisis as it was unable to meet their growing need. Kigali Friends Supply Ltd Company was a well established company with many employees and different branches across the country and it was known by many people as it had built good reputation for better service and quality products. Every person would appreciate to work with the company. None would understand the reason behind the difficult time the company was facing.
The truth was that the company invested much money in expansion to meet the growing market need using all its reserves and money borrowed from the bank expecting that the sales trend of the time will remain constant. It was a surprise for the company to learn that the world was facing a serious economic crisis which the company didn’t envision and the market demand for the company’s products and services started declining increasingly. This time was the difficult time for the company as it was unable to meet its contract obligations due to shortage in working capital. Employees were worried of the future; suppliers also. There was pressure from the bank to repay the loan
Questions;
a. Explain the source of money used by the company to expand its business.
b. Identify the problems faced by the company.
c. Where else do you think the company could have borrowed money to finance its investment that would have saved it from the world economic crisis?
d. What do you understand by capital market? What are its functions?
4.3.1 Meaning of capital market
A capital market is a place in which financial securities are traded by individuals and institutions/organizations. The capital market is further divided into primary and secondary market. A capital market is a place in which financial securities are traded by individuals and institutions/organizations. It can be a primary market where initial public offers (IPOs) take place or a secondary market where IPOs are traded subsequently.Primary market: The primary market is the market for new issuers or where new capital is raised. It is the market where securities are sold for the first time. At the primary market sale proceeds of the securities offered flow directly from the buyers or investors to the issuers of the securities.
Secondary market: The secondary market is the market for trading securities that have been sold or issued in the primary market and already in the hands of the public. Once securities have been successfully issued in the primary market, they are subsequently traded in the secondary market.
4.3.2 Functions of Capital Market
Capital market is very important as it plays a significant role in the national economy. A developed, dynamic and vibrant capital market can immensely contribute for speedy economic growth and development.Let us get acquainted with the important functions and role of the capital market.
i. Mobilization of Savings: Capital market is an important source for mobilizing idle savings from the economy. It mobilizes funds from people for further investments in the productive channels of an economy. In that sense it activates the ideal monetary resources and puts them in proper investments.
ii. Capital Formation: Capital market helps in capital formation. Capital formation is net addition to the existing stock of capital in the economy. Through mobilization of ideal resources, it generates savings; the mobilized savings are made available to various segments such as agriculture, industry, etc. This helps in increasing capital formation.
iii. Provision of Investment Avenue: Capital market raises resources for longer periods of time. Thus it provides an investment avenue for people who wish to invest resources for a long period of time. It provides suitable interest rate returns also to investors. Instruments such as bonds, equities, units of mutual funds, insurance policies, etc. definitely provides diverse investment avenue for the public.
iv. Speed up Economic Growth and Development: Capital market enhances production and productivity in the national economy. As it makes funds available for long period of time, the financial requirements of business houses are met by the capital market. It helps in research and development. This helps in, increasing production and productivity in economy by generation of employment and development of infrastructure.
v. Proper Regulation of Funds: Capital markets not only helps in fund mobilization, but it also helps in proper allocation of these resources. It can have regulation over the resources so that it can direct funds in a qualitative manner.
vi. Service Provision: As an important financial set up capital market provides various types of services. It includes long term and medium term loans to industry, underwriting services, consultancy services, export finance, etc. These services help the manufacturing sector in a large spectrum.
vii. Continuous Availability of Funds: Capital market is place where the investment avenue is continuously available for long term investment. This is a liquid market as it makes fund available on continues basis. Both buyers and seller can easily buy and sell securities as they are continuously available. Basically capital market transactions are related to the stock exchanges. Thus marketability in the capital market becomes easy.
Application Activity 4,3
Government of Rwanda is supporting capital market operations.. With the help of examples; explain the benefits of investing through capital market in Rwanda.
Activity 4,4
Observe the picture below, and answer the question that follows;
Figure 4.5: People queuing to buy shares at Initial Public Offer (IPO)
Blarirwa and Bank of Kigali- BK are two among many companies that started to trade their shares. On Initial Public Offer (IPO) of each company, Uwimana and her husband Kalisa bought shares in both companies worth 10,000,000 Frw. Now the family is in need of paying schools fees for their child who is studying at university of Rwanda. Explain the procedure to get back their money?
4.4 Stock exchange
4.4.1 Meaning of stock exchangeThe word “Stock Exchange” is made from two words ‘Stock’ and “Exchange”. Stock means part or fraction of the capital of a company, and Exchange means a transferring of the ownership; representing a market for purchasing and selling. Thus, we can describe the stock exchange as a market or a place where different types of securities are bought and sold. Securities traded on a stock exchange include shares issued by companies, unit trusts, derivatives, pooled investment products and bonds. As the stock exchange deals in all types of securities, it is known as ‘securities market’ or ‘securities exchange’ also.
A stock exchange is a secondary market of securities because the trading happens only for the securities that have already been issued to the public and now being allowed to be traded on the floor of a stock exchange after getting listed with the stock exchange. The initial offering of stocks and bonds to investors is by definition done in the primary market and subsequent trading is done in the secondary market.
4.4.2 Functions of stock exchange
Stock exchange is one of the most important financial intermediaries and plays a very important role in the capital formation and economic development of the country. Given below are some important functions of stock exchanges from economic point of view:i. Marketability of Securities: The stock exchange provides for easy marketability of securities as securities can be bought and sold conveniently on the floor of the stock exchange. The Stock Exchange provide companies with the facility to raise capital for expansion through selling shares to the investing public and on the other hand provides investors with a platform to trade these shares.
ii. Price Determination and Continuity: Since transactions take place regularly on a stock exchange there is continuity in the dealings. Supply and demand in stock markets are driven by various factors and this balance of supply and demand affects the price of stocks. These prices gets duly recorded and reported in the newspapers for the benefit of investing public. Besides, stock exchanges have defined rules and regulations to moderate price fluctuations to ensure continuity in buying and selling.
iii. Mobilizing Surplus Savings: Stock exchange is an integral part of the capital market of a country. When people draw their savings and invest in shares (through an IPO or the issuance of new company shares of an already listed company), this leads mobilization of funds to help companies finance their organizations. They facilitate the process by which the savings from all parts of country gets channelized as investment into industrial and commercial undertakings financing their capital requirements. This promotes business activity resulting in stronger economic growth and higher productivity levels of firms.
iv. Barometer of the Economy: The share prices fluctuate on stock exchanges as a result of underlying market forces. The intensity of buying and selling of securities and the corresponding rise or fall in the prices of securities reflects the investors’ assessment of the economic and business conditions. Share prices tend to rise or remain stable when companies and the economy show signs of stability and growth whereas they might fall sharply at the time of an economic recession, stagnation, depression, or financial crisis. Change in security prices are known to be highly sensitive to changing economic, social and political conditions and hence act as a barometer of economic and business conditions.
v. Mobility of Capital: Investing in other businesses require huge capital outlay whereas investing in shares is open to both the large and small stock investors. Stock exchanges furnish an open and continuous market for small investors and their savings that are invested in securities are converted into cash for reinvestment in other securities. Thus, stock exchanges provide mobility to capital and facilitate sound investment. Savings are encouraged when people come to invest in stock exchange.
vi. Profit Sharing and Resource Allocation: As a result of stock market transactions, funds flow from the less profitable to more profitable enterprises. All type of stock investors whether they are individuals, professional stock investors, institutional investors earn capital gains through dividends and stock price increases. This enables them to share in the wealth of profitable businesses. Industries which have potentials of growth are able to attract the savings of people towards their ventures relatively more than those which have no such prospects. Thus, financial resources of the economy are allocated on a reasonable basis. Unprofitable and troubled businesses may result in capital losses for shareholders.
vii.Speculation: The stock exchanges are also fashionable places for speculation and bring equilibrium in the prices of securities which are bought and sold by speculators. In a financial context, the terms “speculation” and “investment” are actually quite inter-related because “investment” means the act of placing money in a financial vehicle with the intent of producing returns over a period of time. Speculators generally buy securities in anticipation of rise in the prices. As a result of their buying, prices do not decline as low as might have been the case without their buying and vice versa hence regulating excessive price fluctuations.
viii.Liquidity:This is the most important function provided by the stock exchanges. The capital investments are generally long term and if shareholder wants their investment back, in a physical scenario, it will result in winding up the company and selling its assets to discharge the money. Investors usually prefer liquidity of their investment. The stock markets facilitate and provide that assurance to investors. These are markets which facilitate buying and selling of securities assuring liquidity of investments which goes to serve the investor’s need.
ix. Corporate Governance: As stock exchanges facilitate ownership of companies to be help by a wide and varied scope of owners, companies generally tend to improve management standards and efficiency to satisfy the demands of these shareholders. To safeguard the interest of investors more stringent rules are imposed by public stock exchanges and the government on public corporations when compare to privately owned enterprises. Every stock exchange defined its own rules and regulations for the control of operations of the exchange. Only members are allowed to deal in securities and make transactions. As the members have to transact their business strictly according to the rules, the investors’ interests are safeguarded against dishonesty or malpractices. Traded public companies tend to have better management records than privately held companies.
Application Activity 4,4
1. What do you understand by the stock exchange?
2. Describe any four (4) functions of stock exchange.
4.5 Rwanda Capital Market Authority- CMA
4.5.1 Introduction
Capital Market Authority (CMA) is a public institution established by Law No.23 /2017 of 31/05/2017 responsible for developing and regulating the capital markets industry, commodities exchange and related contracts, collective investment schemes and warehouse receipts system. CMA was previously referred to as the Capital Market Advisory Council (CMAC) which was a council established by Prime Minister’s Order of 28 March 2007 to initially guide the development of a Capital Market in Rwanda.CMA’s Vision: To be a key contributor to Rwanda becoming a competitive financial center through mobilization of long term capital.
CMA’s Mission: To nurture wealth by facilitating the development of an orderly, fair, transparent and efficient capital market.CMA’s Core values: Good Governance, Knowledge, Creativity and Innovation.
4.5.2 Responsibilities of Rwanda Capital Market Authority
The Rwanda Capital Market Authority is responsible for:
I. Implementing the Government policy on Capital Market;
ii. Preparing draft policies on capital market;
iii. Advising Government on policy relating to the capital market;
iv. Promoting public awareness on the capital market and develop such market;
v. Elaborating action plans and conducting studies in order for CMA to achieve its mission;
vi. Formulating principles and regulations for the capital market;
vii. Making regulations governing capital market business in accordance with the Law regulating capital market in Rwanda;viii. Controlling and supervising all capital market activities with a view to maintain proper code of conduct and acceptable practices on the capital market;ix. Registering capital market business and related instruments provided for by the Law regulating capital market in Rwanda;
x. Issuing, suspending, and withdrawing licenses and approvals related to capital market business;xi. Seeking to achieve fairness, efficiency and transparency in the functioning of the capital market;
xii. Protecting citizens and investors in capital market from unfair and unsound practices or practices involving fraud, deceit, cheating or manipulation;
xiii. Monitoring, supervising, and take actions with regard to the compliance with this Law and regulations thereto related as well as with the Law regulating capital market in Rwanda and regulations thereto related;
xiv. Co-operating and collaborating with other regulatory bodies in accordance with the provision of the Law regulating capital market in Rwanda;
xv. Consulting concerned organs prior to making any decision to modify principles and regulations of the profession that may have impact on the functioning of the capital market;
xvi. Keeping adequately and timely records of decisions made in the accomplishment of CMA mission;
xvii. Accomplishing any other mission assigned by the Law regulating capital market in Rwanda.4.5.3 Capital market business
In CMA act, capital market business refers to all business activities specified below:a. Dealing in capital market instruments;
b. Arranging deals in capital market instruments;
c. Safekeeping and administration of assets;
d. Managing capital market instrument;
e. Giving capital market advice;
f. Using electronic means for giving investment instructions4.5.4 Capital market instruments
a. Shares: A share is a unit of ownership in a limited company and gives the holder claim over any dividends that the corporation/company may pay on it in future and on its face/ residual value in case the company is liquidated or closed. Owners of shares are called shareholders and receive dividends on their shares from the company’s profits usually at the end of financial year.b. Instruments creating or acknowledging indebtedness
I. Debentures: A debenture is a type of debt instrument that is not secured by physical assets or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer. Both corporations and governments frequently issue this type of bond to secure capital.
ii. Debenture stock: Loan contract issued by a company or public body specifying an obligation to return borrowed funds and pay interest, secured by all or part of the company’s property. Certificates specifying the amount of stock, with coupons for interest attached, are usually issued to the lenders
iii. Loan stock: Loan stock is shares of common or preferred stock that are used as collateral to secure a loan from another party. The loan earns a fixed interest rate, much like a standard loan, and can be secured or unsecured. A secured loan stock may also be called a convertible loan stock if the loan stock can be directly converted to common shares under specified conditions and with a predetermined conversion rate, as with an irredeemable convertible unsecured loan stock (ICULS).
iv. Bonds: Bond is a debt instrument created for the purpose of raising capital. They are essentially loan agreements between the bond issuer and an investor, in which the bond issuer is obligated to pay a specified amount of money at specified future dates.
v. Certificate of deposit: A certificate of deposit is an agreement to deposit money for a fixed period with a bank that will pay you interest. You can choose to invest for three months, six months, one year or five years, etc. You will receive a higher interest rate for the longer time commitment.
c. Government- owned capital market instruments
i. Treasury Bills: Treasury Bills (T-bills) are short term debt securities (one year or less) issued as a primary instrument for regulating money supply or raising funds via open market operations to finance the budget gap. T-bills are always issued through the country’s central bank, and commonly pay no explicit interest but are sold at a discount, their yield being the difference between price and the par-value also called redemption value.
ii. In Rwanda; T-Bills are issued by auction on weekly basis with maturity dates of 28 days, 91 days, 182 days and 364 days. T-Bills market is announced via BNR website, each Monday for auction on Thursday (T), and settlements take place on Friday (T+1). The minimum purchase is 100,000 Frw. T-bills market is open for all investors (Banks, non Banks, Insurance companies, Pension Fund, individuals, etc)iii. Treasury Bonds: A Treasury Bond/Government bond is a debt instrument issued by a national government through the Central Bank in its capacity of Government agent, generally with a promise to pay periodic interest payments and to repay the face value on the maturity date.
iv. The terms on which a Government can sell bonds depend on how creditworthy the market considers it to be. Government bonds are usually denominated in the country’s own currency. Bonds issued by national governments in foreign currencies are normally referred to as sovereign bonds, although the term “sovereign bond” may also refer to bonds issued in a country’s own currency.Application Activity 4.5
a. Capital Market Authority in Rwanda played an important role in financial stability and the economic development of the country. Discuss the role played by Capital Market Authority.
b. Describe the capital market instruments.
4.6 Capital market participants, benefits of investing through capital markets and how investors are protected
Activity 4.6
Muhizi is a famous farmer known to be exemplary in Gakenke District. He always receives visitors coming to learn from him how to invest in agriculture, especially in coffee and banana farming. Muhizi is married and has 3 children. It is now over 5 years when Muhizi started struggling searching for another business in which he can invest and secure a brighter future and prepare the good heritage for his children. Currently, he has been informed that there is a capital market in Rwanda. Muhizi is very interested and would like to invest in this new business.
1. Identify institutions and players who contribute in the good running of capital market business.
2. Explain the contribution of each player in the process of investing in capital market.
3. What will be the advantages for Muhizi to invest in capital market?
4.6.1 Capital market Participants
In capital market, there is a flow of funds from one group of parties (funds-surplus units) known as investors to another group (funds-deficit units) which require funds. However, often these groups do not have direct link. The link is provided by market intermediaries such as brokers, mutual funds, leasing and finance companies, etc. Players in capital markets can be divided into investors, issuers and intermediaries. The market intermediaries in Rwanda include the Rwanda Stock Exchange Market, licensed brokers, dealers, and sponsors. The regulator is the Capital Markets Authority.i. Investor: An investor is a person or a legal entity that allocates capital with the expectation of a future financial return.
ii. Issuer: The term issuer refers to a legal entity (government, corporation, or investment trust) that develops; registers and sells securities to the investing public in order to finance its own operations.iii. Stock exchanges: Stock exchanges basically serve as:
a. Primary markets where corporations, government and other incorporated bodies can raise capital by channeling savings of the investors into productive ventures; and
b. Secondary markets where investors can sell their securities to other investors for cash, thus reducing the risk of investment and maintaining liquidity in the system. Stock exchanges impose stringent rules, listing requirements, and statutory requirements that are binding on all listed and trading parties.iv .Stock brokers: A stock broker is an agent who represents clients to buy or sell stocks and other securities. The term is applied to both companies that deal in securities and their employees, who technically are registered representatives working for the brokerage. A broker’s primary service is to buy and sell stocks on an exchange for members of the investing public who wish to own part of a company. When anyone decides to participate in the stock market, a broker is usually the first place they go. An account is set up for the client through which he/she trades stocks. The broker accepts stock orders from the client and then executes these directly on the exchange. A business that engages solely in broker services interacts with the stock market for its clients only. Every transaction made affects a client’s account. For this reason, a broker is often referred to as an “agent.”
v. Dealers and traders: A stock market dealer trades equities under its own own. The business itself maintains stock holdings that are not in the name of any client. The dealer may actually be a client of another broker, so as to trade these stocks for its own account. However, unlike a “trader,” who maintains his/her own account with a broker that affects no one else, a “dealer” may use its portfolio to offer services to the public. “Market makers” are dealer businesses that continuously buy or sell certain securities from the public, using their own holdings for these transactions. Thus they are in the business of dealing securities independent of an exchange.
vi. Sponsors: sponsors can be a range of providers and entities supporting the goals and objectives of a capital market. Sponsors invest in private companies, create demand for publicly traded securities, underwrite mutual fund shares for public offerings, and issue exchange-traded funds, offer platforms for benefits and more.
4.6.2 Benefits of Inves ting through capital markets
A capital market is a place in which financial securities are traded by individuals and institutions or organizations. It can be a primary market where Initial Public Offers (IPOs) take place or a secondary market where IPOs are traded subsequently. The following benefits apply both to the primary and secondary markets:
a. Access capital: By issuing shares or debt directly to the public through the RSE private sector businesses and government can raise funds for expansion of existing business or new projects.
b. Discover the value of its business: By listing on the RSE issuers or owners of business are able to discover the price of their securities and therefore the value of their business. This enables them to realize the market worth of their wealth.c. Raise a company’s visibility and enhance its status with customers and suppliers at home and overseas: A listing on the capital market raises the profile of a company through continuous media coverage. This is free publicity and enhances the product presence of the issuer among its customers.
d. Have better bargaining position with financiers: Increased capitalization of an issuer over time enables the issuer to raise capital at a lower cost due to their improved rating in the market.
e. Enhance management practices: The capital market requires a minimum level of disclosure and corporate governance and this encourages the quality of management practices.
f. Foster employee motivation: Listed companies may easily employ executive using stock option techniques.
g. Benefits from Capital Market incentives: New issuers take advantage of incentives provided to listed companies. This comes in the form of low costs and tax advantages to shareholders and owners of the business.
h. Use of shares as currency: Listed companies with known market value can use their shares as currency instead of cash when taking over other.4.6.3 How investors are protected
Investor protection in capital market is aimed at providing fair play to investors. But it is not aimed at protecting an investor from his/her own errors of judgment or ensuring that he/she gets profits all the time. The law protects investors who have been victims of fraud, dishonesty and unfair practices. All investors face the normal market risks. The regulator in capital market is CMA. Investors are protected in the following ways:• CMA ensures that only competent and credible professionals are licensed to serve the market.
• CMA supervises all members of RSE to ensure compliance with regulatory requirements.
• CMA ensures that prospectuses of issuers have adequate disclosure for decision making.
• CMA ensures that there are periodic reports and all price sensitive information are released once they are available.
• National public education and awareness campaigns create well informed investors.Application Activity 4. 6
1. Indicate the benefits of investing in Treasury Bonds.
2. Explain how investing through capital markets raises the visibility of the company.
4.7 How to invest in capital market
Activity 4.7
1. Based on the illustration below, describe the process of investing in Rwanda capital market.
2. Indicate 2 options of investing in capital market in Rwanda.
3. Identify 3 companies selling their shares in Rwanda Stock Exchange.
Figure 4.6: Capital market players and processes involved
4.7.1. Primary market and secondary market
The investments in the capital market may be either in the bonds or stocks. Investments in the stocks or bonds may be either investing in the new issues or in the existing securities. The Primary market is the market where securities are sold for the first time, while Secondary Market is the market where already existing securities are bought and sold through licensed brokers. The primary capital market handles the trading and investments in the new issues while the secondary capital market takes care of the trading of existing securities.
4.7.2. Primary Market Transaction Process:
i. The issuer decides to raise capital through the Capital Market
ii. Issuer appoints advisors, sponsors/co registrar/fiscal agents/sponsoring brokers
iii. Issuer prepares draft prospectus or information memorandum
iv. The issuer applies to CMA to list its securities on the market
v. Issuer discusses the offer document with CMA and finalizes the prospectus or information memorandum
vi. The issuer states the offer period and offers securities to the public
vii. Public investors subscribe to securities during the offer period
viii.Offer closes and publication of allotment results
ix. Issuer is admitted to list on RSE4.7.3 Secondary market transaction process
i. Buying client or selling client approaches stockbroker, opens an A/C and pays for an order; either provides funds or gives securities to broker and broker acknowledges
ii. If buying stockbroker has securities or sell order for securities sought or, required at ordered price, broker sells directly to the client
iii. If buying broker has no selling orders for securities and or price given by sellers, the broker contacts the other brokers seeking securities required.
iv. Buying stockbroker and selling stockbroker attends trading sessions at the trading floor. All stockbrokers attend the session and all report:
v. traded securities –prices, volumes and securities
vi. Buying orders outstanding positions –price, volumes and securities
vii. Selling orders outstanding positions –price, volumes and securities
viii. RSE (Rwanda stock exchange) compiles market report and distributes to the market and Public through the media.
ix. On settlement day, the CSD (Central Securities Depository) clears the trades for settlement of securities against funds between stockbrokers and the change of ownership takes place at T+2 (trade date plus two days). The CSD is under the Central Bank of Rwanda.Application Activity 4.7
Explain how a person can save and invest through the Treasury Bonds which raises money to finance the Government of Rwanda‘s development projects.
4.8. Procedures to join Rwanda stock exchange
Activity 4.8
Suppose that you are Managing Director of MUDASOBWA COMPANY LTD, manufacturing computers. As you want to expand your business in other countries, you decide to raise money by joining the capital market: RSE.
a. Identify needed documents to register your company at RSE.
b. Indicate basic requirements to sell or buy shares of companies listed in Rwanda Stock Exchange.
4.8.1. Requirements and process to join the Rwanda stock exchange
It is mandatory to open a Central Securities Depository (CSD) account in order to buy or sell shares of companies listed in Rwanda Stock Exchange. The Central Exchange Depository System can be compared to a bank where the records of all share holding of listed companies are kept. It is database where investors can open accounts called Central Exchange Depository or Central Securities Depository (CSD) and debit them with shares/bonds for the purpose of trading.
The Process of Opening a CSD Account is the following :
• You will need to identify the stockbroker of choice
• Provide two (2) recent passport size photographs
• Provide your original national identity card or passport together with a photocopy.
• If you are a company, you will need to provide an original certificate of incorporation together with a photocopy.
• If you are an organization registered in any other way e.g. Society, you will need to provide the original certificate of registration and photocopy.
• You will hand in sign the form in presence of your Stockbroker
• You will be left with the duplicate of account opening form your records.
• Your Stockbroker will provide you with your own CSD account number, to be kept confidential.
• You are free to open several CSD account with different stockbrokers.
• You can migrate from one broker to another simply by completing and signing the exchange transfer form. This form is available from your broker and must be signed by your current stockbroker and your new stockbroker.4.8.2. Trading Operations
Rwanda Stock Exchange secondary trading is conducted through a dual process. Members trade in an open outcry trading session which is conducted at the RSE Secretariat through and over the counter market the following business day, where a member is allowed to buy or sell directly to clients in their offices. Equally, members are allowed to transact with other members either face to face via any other way of communication. During the designated trading floor sessions at the RSE secretariat, all members must report all their transactions that they conducted outsid e theofficial trading session.Application Activity 4.8
1. What do you understand by CSD account?
2. Explain the role of Central Exchange Depository System in capital market.
3. Explain the process of opening a CSD account.
Skills Lab Activity 4.9
Read and analyze the Case Study below and answer the given questions
Mushanana is a business club operating in one of the schools in Rwamagana district. The club is worth 350,000Rwf which is share capital contributed by all the members of the club. The club consists of 100 members and is planning to expand the number of members as well have more projects. The club leadership has a challenge of raising more capital for the clubs well as making sure shares of members are well managed.
Questions
1 . How much did each member of the club contribute to raise the business club capital?
2. What strategies can the club leadership put in place to raise more capital?
3. As an aspiring entrepreneur, what can you do to save for your future?
End of Unit 4 Assessment
1. Discuss the role of capital market on the financial market on the country‘s economy
2. Explain the role of stockbrokers in stock exchange process.
3. Summarize advantages of investing at the Rwanda Stock Exchange market.
4. Discuss the difference between primary capital market and secondary capital market.
5. Describe/explain the process of joining RSE.
6. Janet Wood, a U.S. Citizen, is considering making a $50,000 investment in the bonds of the Bank of Kigali. The bonds are denominated in Frw.
If the Frw decline in value against the dollar after Janet buys the bonds,
a. What will happen to Janet‘s investment ?
b. What other risks does Janet bear with this investment ?
c. If Janet‘s bank decides to buy the bonds, how could it better withstand the risks ?
7. Floruty, a company that went public in 2016, announced the sale of an additional 50 million shares of its common stock on April 1, 2018. Before deciding on the additional stock, Floruty analyzed how its stocks and bonds were trading in the secondary markets. Why did Floruty study the secondary markets if the additional shares of common stock were considered new issues, thus being sold in the primary markets ?
8. Explain what might happen in the economy if there were no financial institutions.
Unit 4: FINANCIAL MARKETS - Unit 5: FINANCIAL STATEMENTSUnit 5: FINANCIAL STATEMENTS
Key Unit Competency: To be able to prepare financial statements
IntroductionFinance is a word that brings good or bad memories to people. The reason behind such conception is that finance can be considered as the art of handling money. As you might know most organizations if not all run on money. Be it a family, a church, a school, a hospital, governments, none of them can operate without money. Everything we do has to be connected to money either directly or indirectly. We don’t normally see finance when there is a new house that is coming up in our neighborhood. We neither see finance when our parents pay our school fees. But it is there, and without it most of the things that we do see would not exist. In order to solve most of the challenges that people or organizations face, money should be there.
In today’s world, people in search of money are committed to being job creators instead of being job hunters. In so doing, they are rushing to starting their own business which requires them to use different financial management skills to successfully run them. The financial management requires application of different skills and tools to measure the business profitability. In order to assess the business profitability, there is a need to provide a number of answers to many numbers of questions that include the following:
i. How much do I earn in terms of profit?
ii. How worth is my business?
iii. What is the flow of cash in my business?
iv. How much did I invest in my business?To find answers to the above questions, this unit will enhance your understanding of the main financial statements namely Income statements, balance sheet, cash flow statements’ and statement of owners’ equity and linkages between these financial statements.
This information will be useful in analysing financial performance by way of ratio analysis; the techniques used in analyzing the financial position of a company and, having gained that knowledge then to assist in interpreting current and potential future performance of the business.
Introductory activity:
The following are information obtained from the books of account of UWINEZA’s business for the period ending June 30, 2010
She started the trading year with stock valued 1,000,000 Frw that she bought using her own saving of 850,000 Frw, loan from her friend 100,000 Frw and bank loan of 50,000Frw. During this year she sold goods on cash worth 7,000,000 Frw that she had purchased on 5,000,000 Frw; paid wages and salaries of 500,000 Frw; rent and rates of 360,000 Frw; postage and telephone 120,000 Frw and received rental fees of 1,200,000 Frw. If at the end of the year she had a stock valued at1,200,000 Frw ;Questions
a. How much did she pay for purchase ?
b. What are total expenses for Uwineza during this trading period ?
c. How much did she earn from sales ?
d. What is the amount of other income ?
e. Did Uwineza make profit or loss during this trading period ?
f. Identify assets of Uwineza and demonstrate that the accounting equation (Assets= Capital + liabilities) is justified.5.1 Financial Statements
Activity 5.1Analyse the JYAMBERE cooperative case study below and answer the questions that follow ;
JYAMBERE cooperative is a cooperative of 3,000 rice farmers that was established in 2010. The cooperative is collecting and selling the members’ produce at a competitive price. Cooperative pay its member 250 Frw per 1 kg of paddy rice; pay 10 Frw per 1 kg for packaging and 20 Frw per 1 kg for transport to the market. Total monthly salaries of all cooperative staff are 300,000 Frw, monthly electricity cost is 20,500 Frw and other monthly overheads cost the cooperative 41,254 Frw. The last year cooperative has collected and sold 360 Tons of paddy rice at 315 Frw per 1 kg.
a. How much money did the cooperative pay to its farmers?
b. How much did the cooperative earn from sales of its rice?
c. How much were total expenses?
d. Develop a report to be presented to members in their Annual General Meeting
5.1.1 Meaning of Financial Statements
Financial statements are reports prepared by a company’s management to present the financial performance and position at a point in time. Financial statements are output of the accounting system and are prepared by businesses or organisations normally at the end of the financial year or trading period to find out the profit or loss made by the business and also to determine the financial position among other reasons. They also summarize data into a form that is useful for decision making. External users of accounting information like investors and creditors are more interested in the financial statements or final accounts than the books of accounts.5.1.2 Importance Financial Statements
Financial statements are useful for the following reasons:• To determine the ability of a business to generate cash, and the sources and uses of that cash.
• To determine whether a business has the capability to pay back its debts.
• To track financial results on a trend line to spot any looming profitability issues.
• To derive financial ratios from the statements that can indicate the condition of the business.
• To investigate the details of certain business transactions, as outlined in the disclosures that accompany the statements.5.1.3 Types of financial statements and their purpose
There are four main types of financial statements, which are as follows: Income Statement, Balance Sheet, Cash Flow Statements and Statement of Owners Equity. Generally, the financial statements can be prepared from the trial balance. A balance sheet reports on a business financial position at a point in time. The income statement, the statement of owner’s equity, and the statement of cash flows report on financial performance over a period of time.Preparers and users determine the length of the reporting period. A one year reporting period is common. However, the semi-annual, quarterly, and monthly periods are also used depending on the needs. The one-year reporting is known as the accounting, or fiscal year.
Application Activity 5.1
Read the following scenario and answer the questions that follow:
Assume that during holidays you work in a supermarket within your community as a cashier.
Your manager wants you to write each sale and to issue EBM receipt immediately when you collect cash.
Recently, because there were two consecutive public holidays, people rushed during lunch time to buy goods that they would use during that period since most shops will be closed. That event increased the number of customers to be served at the same time and the assistant manager asked you to avoid delays by taking customers’ cash and making change without recording the sales or issuing a receipt. Because of the pressure, you accepted his suggestion.
At the end of the day, you are neither able to identify the sales nor able to tell who bought what items from your shop.
a. By the end of two days, do you think that you will be able to determine the sales of each item and why?
b. What do you think should be the financial information needed for you to prepare a good report
after the two days?
c. Who are the users of financial statements and why do they need them.
5.2 Income Statement
Activity 5.2.
Figure : 5.2. Tomato growing
Mr. DUSABE and his wife KEZA are in agribusiness where they grow Tomatoes on small farm. They paid laborers 4,500,000 Frw, paid tomatoes’ transport to the market 1,000,000 Frw; bought seeds at 200,000 Frw and leased land for 1,000,000 Frw. This season, the harvest was good with 45 Tons of tomatoes harvested.
a. How much did DUSABE and KEZA pay for their farming activities ?
b. How much did DUSABE and KEZA earn from sales of their Tomatoes, if 1kg of tomatoes was
sold at 250 Frw ?
c. What is the difference between their income received and expenses incurred from sales of
tomatoes in their farming activities ?
d. What do you understand by an income statement ?
e. Why do you think it is important for a business to prepare an income statement ?
Unit 5: FINANCIAL STATEMENTS - Unit 6: STOCK CONTROLUnit 6: STOCK CONTROL
Unit 6: STOCK CONTROL
Key unit competence: To be able to assess the need for proper inventory
management
Introduction
All institutions, organizations and companies hold stocks. These are the stores of
materials they keep until needed. An agricultural cooperative, for example, harvests
rice and keeps it in stock until it sells it to customers; a factory keeps a stock of raw
materials for its products; a television company has a stock of recorded programmes;
a research company has a stock of information; a bank holds cash for its day-to-day
transactions; a school stores didactic materials to be used by teachers. Whenever an
organization has materials that it does not use immediately, it puts them into stock.This unit is designed to equip you with knowledge, skills and attitudes that will
enable you to manage effectively stock and make an inventory, to comply with the
standards, policies and procedures to be followed in the procurement of goods,
services and works in supply chain management. Through this unit, you will learn
how to use basic documents needed in stock management, how to conduct
perpetual and periodical inventory, procurement procedures, as well as evaluation
methods on supplied stock.Introductory activity
Read the following story and answer the questions that follow;
Kamana is an ambitious entrepreneur, based in Rwamagana town. He is a
famous shopkeeper, with the best quality of goods. Recently, he started to
process maize and produce flour. This new business was very demanding to
an extent that Kamana was obliged to hire an employee responsible for shop
management, as he caters for maize processing business. Kamana became
very busy, to the level that he was no longer able to carry out inventory control,
monitor changes in the marketplace and cater for the needs of customers. So,
designing, planning, executing, controlling, and monitoring of supply chain
activities became responsibilities of the new employee. As the new employee
was not experienced about procurement procedures, stock and inventory
management as well as proper identification and follow up on clients’ needs,
there were often missing items in the stock, despite raised need by clients.
On the other hand, a considerable number of goods were rejected due to the
expiration and damage. After a while, Kamana just noticed that the number of
customers and his revenues were decreasing.Questions
1. What are the main causes of poor inventory control from the above
story?2. Identify main effects of poor stock management and inventory control
on a given business.3. What advise can you give to Kamana and his employee in relation to
proper business management?4. As an entrepreneur, what can you do in order to avoid incidents related
to poor stock management in your business?6.1 Meaning of stock, stock management and inventory
Activity 6.1
Suppose you are a top manager of a big organization such as a health center
or a restaurant having a big number of clients who normally come at different
time intervals, which owns different materials and assets used in the provision
of its services. Since these assets have to be kept safely for the purpose of
customer’s satisfaction, and realization of organization’s objective, you
decided to hire some employees to carry out the required activities. Besides, as
a manager before commencing your responsibilities, you were informed that
shareholders need regular reports on the status of their business, including
available assets.
Unit 6: STOCK CONTROL - Topic 7
- Topic 8
- Topic 9
- Topic 10