2WEEK TWOBANKING

OPERATIONS-WHAT BANKS DO?

DEFINITION OF A BANKER

• Banker: refers to a legal person or company carrying on the business of receiving moneys and collecting drafts for customers subject to the obligation of honouring cheques drawn upon them from time to time by the customers to the extent of the amount available on their current account (Dr Hart).

• In 1899, the United States Supreme Court (Austen) used these words to describe a banker:• Is a trader who buys money, or money and debts

by creating other debt, which he does with his credit- exchanging for a debt payable in the future on demand.• Is a dealer in capital or more properly, a dealer

in money. The bank is an intermediate arty between the borrower and the lender.

DEFINITION OF A BANKER

DEFINITION OF A BANKER

CASE: UNITED DOMINIONS TRUST LTD V KIRKWOOD(1966).

A finance house (UDT) sued K(the customer) to recover payment of a commercial loan. K argued that the loan contract was void since he asserted that UDT was not a bank but an unlicensed moneylender. Evidence was given that UDT provided current account services to customers and was recognized by other banks.

HELD: UDT was a recognized bank and the loan contract was valid.

It was established in this case that the essential characteristics of the business of a bank are:

The collection of cheques for customersThe paying of cheques for customers

The keeping of current accounts for its customers

DEFINITION OF A CUSTOMER

• A customer is defined as a potential person who opens a deposit or current account or negotiates an advice on current or loan account.

• Dr. Hart defines a customer: as one who has an account with a banker or for whom a banker habitually undertakes to act as such, a person (whether an individual, firm, company, society or any legal entity including a government dept etc) is said to be a customer of a bank when his dealings with the bank relates to the business if banking. i.e accepting of deposits and lending note.

• To constitute a customer a person must:• 1. Open a bank account in his name by making the necessary

deposit• 2. The dealing between the bank and the customer must be of the

nature of banking business

BANKER-CUSTOMER RELATIONSHIP

There exists two relationship: a general and special relationship.

The relationship between the banker and a customer is basically the contractual relationship and may take the form of :

Debtor/creditor (primary)Agent/principal (secondary)Trustee/beneficiaryBailee/bailorNB: these are general relationship. The general

relationship is further grouped into primary and secondary

• Debtor/creditor relationship: the banker being the debtor in respect of monies deposited with him and creditor in respect of money lent by him.

• Characteristics of this relationship:• The banker as a debtor is not suppose to look for his creditor to pay

him when the time is due• The money does not become due at any time. It is repayable between

advertised period• The money does become due at any place. It is repayable at the

drawee(customer) bank• The customer (creditor) must write out a written order for withdrawals• Agent/principal: the agency comes in when the bank’s function is

something more than the mere receipt and payment of money. The bank collects cheques for the customer and performs any ancillary services including the purchase of stocks and shares.

• Trustee/beneficiary relationship: a trustee is a person who holds property for the benefit of another, trustees are appointed to control and administer the property in the interest of the beneficiaries of the trust.

• Banks act as trustees appointed under an express trust by the customer. Under an express trust the bank is subject to the general law on powers, duties and liabilities of trustees and this includes the duty to take care of the property to the standard of a prudent person.

• Bailee/bailor: bankers safeguard their customers valuables and securities. In this instance, the transaction becomes a contract of bailment and the relationship that of bailee and bailor.

• This arise when one person (bailor) deposits goods with another (bailee) for a specific purpose on terms that the goods will ultimately be redelivered to the depositor or dealt with according to the depositors instruction as soon as the purpose for which the bailment arose has been fulfilled.

• Risk facing a Bailee (bank)• 1. conversion: an unauthorized act that deprives a person of his

property permanently or for an indefinite period. • 2. negligence: a breach of the duty of care of items for

safekeeping. Negligence may be due to fire, loss floods etc.

• NB: to be successful, a claim in negligence would need to be establish that the conduct of a bank had been such that as a direct result the depositor had suffered loss and maybe the bank had knowledge as to the content of items deposited.

SPECIAL RELATIONSHIP• Rights of bankers

• 1.right of general lien- i.e right to retain property belonging to a debtor

• 2. right of set-off between two account• 3. to charge appropriate payments and produce accurate records• 4. to charge reasonable interest• 5. to close customers account in some cases but prior notice has to be

given to the customer.• Obligations of bankers

• Bankers are under the obligation to fulfill certain duties while dealing with the customer

• 1. to honour cheques of the customer• 2. maintain secrecy of customers account• 3. 1. to receive customers cash and cheques and credit it to their

account• 4. give reasonable notice before closing a credit account. This• i. gives the customer time to make other arrangements• Ii. Save the bank from having to return cheques already issued by the

customer, thus preventing any action for damage to his reputation.

• Rights of customers• 1. account details at all times• 2. to open and close account• 3. to receive information eg. Changes to terms and conditions in

the contract• 4. to make enquiries, changes to your account and other personal

details• Obligation of the customer

1. To exercise reasonable care when drawing his cheques

2. To go to his bankers when he requires payments

3. Pay reasonable interest and commission and other charges on banking services

4. To inform the bank of any known forgeries on the account.

OPENING AND OPERATING BANK ACCOUNTS• 3 basic type of account

• 1. Current account: provide the account holder with cheque book.• Advantages• a. 24 hr access to the account• b. use of cheques and ATM• c. overdraft facili t ies enjoyed• Disadvantages• a. they pay no interest on deposit• b. fees and charges has to be paid on the account• C. significant interest is paid on overdrafts• 2. Savings account: allows customers to make deposit and withdrawals,

however the number of withdrawals is limited.• Advantages• 1. the account earns interest• The money is safe in the hands of the bank• 2.money can be withdrawn as long as its meets the withdrawals terms and

conditions.• Disadvantages• 1. the interest is small• 2. withdrawals are limited

3. fixed/time/negotiable certificate of deposit (NCD’s)Time deposit/ CD’s: are bank accounts that require the account

holder to make deposit and agree to leave funds in the account for a specific period of time in return for interest .

Fixed deposits: loan arrangements where a specific amount of funds is laced on deposit under the name of the account holder. The actual amount of the fixed rate can be influenced by factors such as the type of currency involved.

Application form contains:Particulars of the customerAmount proposed to depositTerms of deposits-including the opening date and expiry dateSpecimen signatureInterest on the depositParticulars of the bankSignature of the authoritiesThe word not transferable to indicate that it is not negotiable

ADVANTAGES OF FIXED DEPOSIT1. provide a way for savings2. offers investment opportunities for investors3.the account can be used as a security to secure a loan4. with a fixed interest, the investor is safe from

fluctuating interest rate.A way to make more interest than the normal savings

Disadvantages1. funds cannot be withdrawn until maturity2. since the interest rate is fixed, if there is an

increase in the market rate, it will not have any effect on the rate of the customer.

PROCEDURE FOR OPENING CURRENT AND SAVINGS ACCOUNTS

1. obtaining a completed account opening form. The applicant fill the forms with his/her detail including name, occupation, specimen signature etc and other particulars required by the bank with:

a. a valid identity cardb. proof of address eg. Utility billsc. passport size photographsD. know your customer forms duly completed2. an introduction: when a customer who is not

previously known to the bank proposes to open an account, it is in the banks interest to seek information about the customer before accepting him/her.

Reasons for referencesa. identity: this is to confirm that the new customer has

not taken the identity of someoneb. character: that the character of the person is good and

has the ability to operate the account.c. means of livelihood or employment: so as to know the

name of the customers employers to forestall the payments of cheques etc.

Sources of referencesi. the customers employerii. Existing customeriii. The customers bankers (corporate entities)iv. Customers solicitors or auditors( corporate entities)3. specimen signature: the applicant is required to give

his signature on the card meant for the account opening. This help to avoid forgery of signatures

4. initial deposit of cash5. issue of pass book: Forms used in operation of bank account1. pay in slip book2. cheque book3. pass book : is a book that the banker keeps full record of

the customer’s account. It is written by the bank and hence it is essential for a customer to send it periodically to the bank.

Opening a business accountThings to consider before opening the account1. meet with your business consultant before2.bring document3. fill account opening forms4. if its an incorporated business you have to submit

certificate of incorporation, details of directors etc.

CLOSING OF A BANK ACCOUNTThe account may be closed by either the customer or the

bank. And it may be closed in the following cases: 1. request of the customer2. inoperative of the customer: if the customer does not

operate the account for some time. However the is required to give notice to the customer

3. by the order of the bank: this happens when the bank thinks that the conduct of the customer is unsatisfactory. Eg forgery, issuing cheques without sufficient amount in the account.

4. receipt of notice of the customers death5. mental incapacity of the customer6. insolvency of the customer: if the bank gets to know of

this, they have to stop all payment on the account but they can receive deposits

7. the order of regulatory bodies like Bank of Ghana

CHEQUESTechnically, a cheque is a negotiable instrument instructing a

financial institution to pay a specific amount of a specific currency from a specified demand/current account held in the drawer/depositors name with that institution.

It can also be defined as :Section 1 (1) of the Bill of Exchange Act, 1961 (Act 55) defines a bill of exchange as “ an unconditional order in writing, addressed by one person to another (the bank), signed by the person giving it, requiring the person to whom it is addressed, to pay, on demand, or at a fixed or determinable future time, a sum certain in money, to or to the order of a specified person or to bearer”.

In simple terms: A Bill of Exchange is an unconditional order in writing, addressed by the drawer to another person, a banker , signed by the drawer, requiring the bank to pay on demand a sum certain in money to, or to the order of a specified person or to bearer.

PARTIES TO A CHEQUE1) the one who gives/makes the order- the drawer of the bill.2)the one to whom the order to pay is given/addressed – the drawee3)the person to whom payment is to be made (payee) – the one in

possession of the bill (bearer bill) or the holder of the bill.The drawer, the drawee and the payee must be named with certainty.

Types of cheques1. travelers cheque: issued by the bank for remittance of cash from

one place to another2. gift cheques: used for presentation on occasions like miss Ghana’s,

company’s CSR’s etc3. crossed cheques: a cheque which carries two parallel lines on the

face of it with or without the words “& co. the crossing may be in the form of general and special crossing

4. order cheque: a cheque payable to a particular person by the holder ’s order only.

5. bearer cheque; a cheque payable to a person who bears or carries the cheque

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STANDARD BANKING ACTIVITIES

1. banks act as payments agents : by conducting current account for customers, paying cheques, collecting cheques etc

2. banks borrow money : by accepting funds deposited and by issuing debt securities like bank notes, commercial papers etc

3. banks lend most funds to households and sort of customers: that is they provide intermediation function

Channels that they perform these functions through:1. ATM’s2. branches3. mobile bankingPhone banking

4 MAIN TYPES OF BANKINGUNIVERSAL/COMMERCIAL BANKING: They perform

almost all the banking activities. The activities include:a. Retail banking: where the bank directly deals with

individual customers and small businesses rather than big onesb. Wholesale banking: provision of banking services to large

corporate clients, medium-sized firms, real estate etc. this type of banking involves huge transactions.

c. Corporate/business banking: they provide financial needs of large businesses both domestic and multinational private and public businesses. They consist of fewer borrowers and the account size is usually large.

Services they provide under corporate banking:Project financing, provision of term loansFinancing of export and imports, credit arrangementsHandling foreign currency and hedging against changes in

value.

d. Investment banking: their activities relate to the financial markets, they help firms, governments in raising capital through underwriting, acting as agent of the issuance of the securities and giving advices.

Advantages of Universal banking1. many locations: this give the account holder to access his/her

money at vantage points2. providing funds for customers: in the form of loan provision3. low service provision: they act as wholesale companies by

buying in bulk and selling at a discount. The services they provide are not on the high side

4. more product offerings: 5. employment generationAccelerating industrialization: economic development of the

nation by providing resources to where it is needed most. Disadvantages

1. access loan is quite difficult2. rigid standards that they follow

ELECTRONIC BANKING/ELECTRONIC FUNDS TRANSFER (EFT)

1. mobile banking2. online banking3. internet banking4. telephone banking5. video banking

Advantages of E-banking to the customer1. anywhere banking no matter where the customer is in

the world. You can check your balance, give instructions to the bank etc

2. anytime banking3. reduces cost of banking to the customer over a period

of time4.cash withdrawal from any branch with the use of ATM5.on line purchase

Advantages of E-banking to the bank1. innovative scheme, address competition and present with

modern technology2.reduces the rate that customers comes to the banking hall3. inter-branch reconciliation is immediate thereby reducing

chances of fraud and misappropriation4. on line banking is an effective medium of promotion of various

schemes of the bank Disadvantages of E-banking

1. risk of system brake down2. takes time to set up and get use to an online account3. the coverage area may be small and not cover all branches4. has a lot of security concerns

IT on service qualitySmall banks can compete well with big ones by incorporating IT

in their operationsIts difficult for banks to build lifetime relationship with their

customers

PERSONLIZED BANKINGThis type of banking deals with very high net worth

individuals and families with high liquidity. But this has change and individuals can open these account with as little as GHC100 Eg of these type of banks include

1. Private/personal banking: the banks gives more personal banking services than on mass market retail banking.eg barlays prestige customers. The relationship manager often pays them visit to give them advices

2. Islamic banking: they provide banking services that is consistent with the principles of Islamic law and its practical application through the development of Muslims.

3. Ethical banking/social/civic/sustainable banks: they are concern with the social and environmental impact of its investments and banking activities

Advantages of personalized banking

1. They offer expert advice on investment and financial products

2. all your affairs remain private between you and your designated bank manager

3. they foster good relations and are transparent in their activities

4. maintain staff and customers welfare.Ethical banking offers benefit like:a. promoting corporate social responsibilityb. attract ethical motivated customersc. attract ethical motivated investedd. avoid harmful publicity linking the bank to its suppliers

practices Disadvantages of personalized banking

1. cost of private banking: the service they provide is not for free

INTERNATIONAL BANKINGThis refers to banking businesses undertaken across the borders

and activities involving the use of different currencies. That is the process in which financial institutions allow foreign clients to use their services.

Services provided under international bankingForeign currency loansFinance services to importers and exportersRemittances servicesAll general banking services etc.Main theories describing the motive for overseas expansion

relate to:1. factor pricing differentials and trade barriers2. arbitrage and the cost of capital3. ownership advantages4 diversification of earnings5. utilization of managerial capacityLocation and product lifecycle

ADVANTAGES OF INTERNATIONAL BANKING 1. promote international trade and protection against

fluctuating domestic interest rate and other macro economic variables

2. entrepreneurs will benefit from the foreign financial market 3. provision of wide variety of services like credit cards, debit

cards, payments account etc 4. provision of offshore banking which has relaxed tax rules 5. interest rates may be attractive overseas than the domestic

rate Disadvantages of international banking

1. if you have an account in a country that is politically instable it will affect you.

2. offshore banking can be dangerous for the investor/customer

3. exchange rate risk 4. taxation, where a country have strict and unfriendly tax rate

2THE END

QUESTIONS???