Incoterms

Habari Mwanafunzi! Welcome to the World of International Purchasing!

Imagine you've just started a booming business in Nairobi, importing the latest smartphones from Dubai. You find a great supplier, agree on the price, and you're ready to make your first order. But then, they send you an email asking, "Do you want this order FOB Jebel Ali or CIF Mombasa?"

Panic! What do these strange codes mean? FOB? CIF? Choosing the wrong one could cost you thousands of shillings or even cause your precious cargo to get stuck! Don't worry. By the end of this lesson, you'll be a pro. These codes are called Incoterms, and they are the secret language of global trade. Let's learn to speak it!

What Exactly are Incoterms?

Think of Incoterms as the "rules of the game" for buying and selling goods across borders. They are published by the International Chamber of Commerce (ICC) and are accepted by traders and governments worldwide, including our own Kenya Revenue Authority (KRA).

They answer three very important questions in any international transaction:

• The Tasks: Who does what? (e.g., who arranges for transport? Who handles customs clearance?)
• The Costs: Who pays for what? (e.g., who pays the shipping company? Who pays for insurance?)
• The Risks: When does the responsibility for the goods (risk of loss or damage) pass from the seller to the buyer?

Getting this right is crucial for your business's bottom line!

Image Suggestion: A vibrant, stylized illustration of the Port of Mombasa. Show a large container ship being unloaded by cranes, with containers stacked on the dock. In the foreground, two business people, a Kenyan buyer and a foreign seller, are shaking hands over a contract that has the word "INCOTERMS" clearly visible. The style should be modern and educational.

The 11 Incoterms: Grouped for Easy Learning

There are 11 official Incoterms, but don't feel overwhelmed! We can group them into four simple categories, identified by the first letter of the term. Let's visualize the journey of goods from the seller to you, the buyer.

    SELLER'S WAREHOUSE --> PORT OF EXPORT --> ON THE SHIP --> PORT OF MOMBASA --> YOUR WAREHOUSE
    
    <-------------------------------------------------------------------------------------->
    |        |                 |                  |                   |                      |
    E-Group  F-Group           C-Group            C-Group             D-Group                D-Group
   (Departure) (Main Carriage    (Main Carriage     (Main Carriage      (Arrival)              (Arrival)
             Unpaid by Seller) Paid by Seller)   Paid by Seller)

Group E: Departure (E-Term)

This group has only one term, and it gives the most responsibility to you, the buyer.

• EXW – Ex Works: The seller just has to make the goods available at their factory or warehouse. You, the buyer, must handle EVERYTHING else – loading the truck, transport to the port, shipping, insurance, and clearing at Mombasa.

Kenyan Example: Imagine you are buying beautiful Maasai beadwork directly from a women's group in Kajiado to export to the USA. If you agree on EXW, your only job as the seller is to pack the beads in boxes. The American buyer has to send their own truck to Kajiado to pick them up and handle the entire export process.

Group F: Main Carriage Unpaid (F-Terms)

Here, the seller is responsible for getting the goods to the main carrier (the ship, plane, etc.), but the buyer pays for the main journey.

• FCA – Free Carrier: The seller delivers the goods to a carrier nominated by the buyer at a named place.
• FAS – Free Alongside Ship: The seller's job is done once the goods are placed alongside the vessel at the port of shipment.
• FOB – Free On Board: This is one of the most common terms! The seller is responsible for all costs and risks until the goods are loaded on board the ship at their port. Once the goods cross the ship's rail, it's your baby!

    ASCII Art: FOB Risk Transfer
    
          Port                    Ship
       +--------+             /----------\
       | Goods  | --Crane--> |  RISK     |
       | on Dock|            | TRANSFERS |
       +--------+             \----------/
       ^                      ^
       |                      |
    Seller's Risk          Buyer's Risk

Group C: Main Carriage Paid (C-Terms)

In this group, the seller arranges and pays for the main carriage to the destination port, but the risk transfers to the buyer *before* the main journey begins.

• CFR – Cost and Freight: The seller pays for everything to get the goods to the Port of Mombasa. But the risk of loss or damage transfers to you (the buyer) as soon as the goods are on board the ship back at the origin port. You need to get your own insurance!
• CIF – Cost, Insurance, and Freight: This is the superstar for Kenyan imports! It's the same as CFR, but the seller ALSO pays for the insurance for the journey. KRA often uses the CIF value to calculate import duties and taxes.

Let's Do Some Math! Calculating CIF Value

Knowing how to calculate the CIF value is a critical skill. This value is what KRA will use to determine how much tax you owe. It's called the Customs Value.

    Step 1: Get the key values from your supplier's invoice.
    - Cost of Goods (FOB Value): $5,000 USD
    - Ocean Freight Cost: $800 USD
    - Insurance Premium: $50 USD
    
    Step 2: Apply the CIF Formula.
    Formula: FOB Value + Insurance + Freight = CIF Value
    Calculation: $5,000 + $50 + $800 = $5,850 USD
    
    Step 3: Convert to Kenya Shillings (KES) for KRA.
    (Let's assume the KRA exchange rate is 1 USD = 130 KES)
    Calculation: $5,850 * 130 KES/USD = 760,500 KES
    
    This KES 760,500 is your Customs Value. Import Duty, VAT, and other levies will be calculated based on this figure.

Group D: Arrival (D-Terms)

This group gives the most responsibility to the seller. They bear all the risks and costs to bring the goods to the destination country.

• DAP – Delivered at Place: The seller delivers the goods to a named place (e.g., your warehouse in Industrial Area, Nairobi), ready for unloading. You are responsible for import clearance and paying taxes.
• DPU – Delivered at Place Unloaded: Same as DAP, but the seller is also responsible for unloading the goods from the truck at your premises.
• DDP – Delivered Duty Paid: The ultimate "hakuna matata" option for the buyer. The seller does everything – shipping, insurance, customs clearance in Kenya, paying KRA duties, and delivering to your doorstep. It's the most expensive option, but it's hassle-free!

Image Suggestion: A clear, simple flowchart diagram showing the 4 groups of Incoterms (E, F, C, D). Each group has a simple icon (e.g., a factory for E, a truck for F, a ship for C, a warehouse for D) and lists the terms within it. The diagram should show an arrow indicating increasing seller responsibility from left (E) to right (D).

Amina's Electronics Shop: A Real-World Scenario

Amina, who owns a shop on Luthuli Avenue, orders 500 phones from a supplier in China.

• Option 1: FOB Shanghai. The supplier's price is low. But Amina has to find a shipping agent, negotiate freight rates, buy marine insurance, and handle the complex KRA clearing process at Mombasa herself. It's cheaper upfront, but a lot of work and risk.
• Option 2: CIF Mombasa. The supplier's price is higher because it includes the shipping and insurance costs. Amina's main job is to hire a clearing agent in Mombasa to handle the KRA process once the ship arrives. This is a very popular and balanced choice for many Kenyan importers.

Amina chooses CIF Mombasa. She pays a bit more to the supplier but avoids the headache of arranging international shipping, allowing her to focus on what she does best: selling phones!

Key Takeaway

Choosing the right Incoterm is a strategic business decision. It's not just a three-letter code; it's about allocating cost, risk, and responsibility. As a purchasing professional in Kenya, understanding Incoterms will make you more effective, help your company save money, and ensure your goods arrive safely and on time. Well done for making it through this lesson. Now you're ready to trade with the world!