CHEQUES & BANKING

ROWLAND ATTA-KESSON
 • Parts of a cheque

CONTENTS • Definitions
• The Banker-Customer Relationship
Photo by Sargdub / CC BY-SA 3.0

PARTS OF A
CHEQUE
 • A special type of draft that is drawn on a bank, ordering
the bank to pay a fixed amount of money on demand.
• What then is a bank? (We will look at this in the next
class)
• Between the time when a cheque is drawn and the time it
reaches the drawee, the effectiveness of the cheque may
be altered by some some events e.g. the drawer may die
CHEQUES OR or order payment not to be made, or the account on
which the order payment is drawn may be depleted.
CHECKS
• To avoid this problem, a payee may insist on payment by
an instrument that has already be accepted by the
drawee.
• Such an instrument may be a cashier’s cheque, a traveler’s
cheque or a certified cheque.
 CASHIER’S
CHEQUE
• Cheques are usually three party
instruments, but on some cheques, the
bank serves as both the drawer and the
drawee.
• Thus, when a bank draws a cheque on
itself, this is called cashier’s check.
• One need not have an account with the
bank to purchase cashier’s check
 TRAVELER’S
CHEQUE
• This is an instrument payable on
demand, drawn on or payable at a
financial institution such as a bank, and
designated as traveler’s cheque.
• The issueing authority has obligation to
pay its traveler’s cheque according to the
terms of the cheque.
 CERTIFIED
CHEQUES
• This is a cheque that has been certified by the bank
on which it is drawn.
• When a drawee bank agrees to certify a cheque, it
immediately charges the drawer’s account with the
amount of the cheque and transfers thouse funds to
its own certified cheque account.
• In effect the bank is agreeing in advance to accept
that cheque when it is presented for payment and
to make payment from those funds reserved in the
certified cheque account.
 • Creditor-debtor relationship
• Creditor-debtor relationship is created when customer
makes cash deposit with the bank

• Agency Relationship
• An agency relationship is created when customer writes a
BANK- cheque on his or her own account

CUSTOMER • Again, agency relationship is created when customer

deposits cheques with the bank for collection
RELATIONSHIP;
• Contractual relationship
RIGHTS &
• Honouring cheques
DUTIES • Overdrafts
• Post dated cheques
• Death or incompetence of a customer
• Stop-payment orders
 • When a drawee bank wrongfully fails to honour a cheque, it is
liable to its customer for damages resulting from its refusal to
pay.
• The customer’s agreement with the bank includes a general
HONOURING obligation to keep sufficient funds on deposit to cover all
CHEQUES cheques, and so the customer is liable to the payee or holder in
civil action if the cheque is not honoured, and if intent to defraud
is proved, the customer can be prosecuted criminally.
• And when the bank properly dishonours a cheque for insufficient
funds, it has no liability to the customer
 • When the bank receives an item properly payable from its
customer’s account but the account contains insufficient funds to
cover the amount of the cheque, the bank has two options. It can
(1) dishonor the item or (2) pay the item and charge the
customer’s account, thus creating an overdraft, providing that the
customer has authorized the payment and the payment does not
OVERDRAFTS violate any bank-customer agreement.
• A bank can expressly agree with a customer to accept overdrafts
through what is called an “overdraft protection agreement”.
• If such an agreement is formed, any failure of the bank to honour
a cheque because it would create an overdraft breaches the
agreement.
 • A bank may also charge a postdated cheque against a
customer’s account, unless the customer notifies the
bank, in a timely manner, not to pay the cheque until the
stated date.
• The notice of postdating must be given in time to allow
POST DATED the bank to act on the notice before committing itself to
CHEQUES pay on the cheque.
• If the bank fails to act on the customer’s notice and
charges the customer’s account before the date on the
postdated cheque, the bank may be liable for any
damages incurred by the customer.
 • Commercial banking practice regards a cheque that is presented for
payment more than six months from its date as a stale cheque.
• A bank is not obligated to pay an uncertified cheque presented more
than six months from its date
• When receiving a stale cheque for payment, the bank has the option of
paying or not paying the cheque.
• If a bank pays a stale cheque in good faith without consulting the
customer, the bank has the right to charge the customer’s account for
the amount of the cheque.
STALE • Section 73 of Act 55 states that
CHEQUES • "Subject to the provisions of this Act-(a) Where a cheque is not presented for
payment within a reasonable time of its issue, and the drawer or the person on
whose account it is drawn had the right at the time of such presentment as
between him and the banker to have the cheque paid and suffers actual
damage through the delay, he is discharged to the extent of such damage, that
is to say, to the extent to which such drawer or person is a creditor of such
banker to a larger amount than he would have been had such cheque been
paid.(b) In determining what is a reasonable time regard shall be had to the
nature of the instrument, the usage of trade and of bankers, and the facts of
the particular case.(c) The holder of such cheque as to which such drawer or
person is discharged shall be a creditor, in lieu of such drawer or person, of
such banker to the extent of such discharge, and entitled to recover the
amount from him.
 • Neither death nor the incompetence of a customer
rovokes a bank’s authority to pay an item until the bank
DEATH OR know of the situation and has had reasonable time to act
INCOMPETEN on the notice

CE OF • Section 74 of Act 55 states that “The duty and authority

of a banker to pay a cheque drawn on him by his
CUSTOMER
customer are determined by-(a) countermand of
payment; (b) notice of the customer's death.”
 • This is an order by a customer to his banker not to pay a
certain cheque.
• Only a customer or a person authorized to draw on the
account can order the bank not to pay the cheque when
it is presented for payment.
• A customer has no right to stop payment on a cheque
STOP- that has already been certified or accepted by a bank.
PAYMENT • A stop payment order must be received within a
ORDERS reasonable time and in a reasonable manner
• Though, it can be given orally, it is advisable to be in
writing
• The order is a risk to the customer because the
customer must have a vaild legal ground for issueing the
order, otherwise the holder or payee can sue the drawer
 • Section 22 of Act 55 states
• Subject to the provisions of this Act, where a signature on a bill is forged or
placed thereon without the authority of the person whose signature it purports
to be, the forged or unauthorised signature is wholly inoperative, and no right to
retain the bill or to give a discharge therefor or to enforce payment thereof
against any party thereto can be acquired through or under that signature,
unless the party against whom it is sought to retain or enforce payment of the
bill is precluded from setting up the forgery or want of authority:Provided that
nothing in this section shall affect the ratification of an unauthorised signature
not amounting to a forgery.

• This means that when a bank pays a cheque on which the drawer’s
signature is forged, generally the bank suffers the loss, and can only reover
CHEQUES from the forger if found, or from the holder, if the holder knew of the

WITH forgery.
• The bank must therefore recredit the account of the customer
FORGED • That is why banks asks for signature card of customers
SIGNATURES • If customer negligence substantially contributes to a forgery, the bank is
usually not liable to recredit the customer’s account
• But section 58 of Act 55 states
• When a bill payable to order on demand is drawn on a banker, and the banker on
whom it is drawn pays the bill in good faith and in the ordinary course of
business, it is not incumbent on the banker to show that the endorsement of the
payee or any subsequent endorsement was made by or under the authority of
the person whose endorsement it purports to be, and the banker is deemed to
have paid the bill in due course, although such endorsement has been forged or
made without authority.
 • Computer technology application to banking in the form of
electronic funds transfer systems, has helped to relieve
banking institutions of the burden of having to move loads
ELECTRONIC of paperwork to process fund.

FUND • An EFT is a transfer of funds made by the use of an

TRANSFERS electronic terminal, a telephone, a computer.The Payment
Systems Act, 2003, (Act 662) and Electronic Transactions
Act, 2008 (Act 772) are laws regulating this area.
 • Automated teller machines (ATMs)
• The machines are connect online to the bank’s computers. A
customer inserts a debit card issued by the bank and keys in a
personal identification number (PIN) to access her or his accounts
and conduct banking transactions
• Point-of-Sale systems
• Online terminals allow consumers to transfer funds to merchants
to pay for purchases using a debit card
• Direct deposits and withdrawals
• Customers can authorize the bank to allow another party, such as
TYPES OF EFT the government or an employer, to make direct deposits into their
accounts. Similarly, a customer can request the bank to make
automatic payments to a third party at regular, recurrent
intervals from the customer’s funds (e.g. insurance premiums or
loan payments)
• Internet payment systems
• Many financial institutions permit their customers to access the
institution’s computer system via the internet and direct a
transfer of funds between accounts or pay a particular bill, such as
a utility bill. Payment can be made on a onetime or a recurring
basis
 • New forms of electronic payments (e-payments) are
replacing physical cash i.e. coins and paper currency, with
virtual cash in the form of electronic impulses.
• Digital cash consists of funds stored on microchips and
other computer devices.
• Digital cash is increasingly being used to launder money
• Various forms of e-money are emerging.

E-MONEY • Simplest kind of e-money system uses stored-valued cards.

AND ONLINE • These are plastic cards embossed with magnetic strips
containing magnetically encoded data.
BANKING
• In some applications, a stored-valued card can be used only
to purchase specific goods and services offered by the card
issuer. e.g. using copier machines in university libraries in
developed countries
• Another type is smart cards, which are plastic cards
containing microchips that can hold much more
information than magnetic strips