Chapter, 4 Banking

UNIT FOUR
RELATIONSHIP BETWEEN BANKER AND CUSTOMER

4.1. GENERAL RELATIONSHIP BETWEEN BANKER AND CUSTOMER
Con’ed
i. Debtor and Creditor Relationship
ii. Trustee and Beneficiary Relationship:-The banker acts as a trustee for
his customers in those cases where
1. He accepts securities and other valuables for safe custody.

2. If money is deposited to the bank with a special instruction to retain it
till the customer gives further instruction.
3. When a cheque or bill is deposited with the bank for collection until it is
collected and credited to the customer’s account
iii. Agent and Principal Relationship
OBLIGATION OF A BANKER
1. To honor cheques: The banker is bound to honor his customer’s cheques if

there is sufficient balance in his account and the cheque has been drawn.
2. To Maintain Secrecy of Account:-. In an ordinary debtor-creditor
relationship, there is no obligation of secrecy. But in the case of banker, one
of the implied terms of the contract is that he obliged to keep the affairs of his
customer secret except under special circumstances such as:-
a) Where disclosure is under compulsion by law
b) Where there is a duty to the public to disclose
c) Where the interest of the banker requires disclosure
d) Were disclosure is made with the consent of the customer
RIGHTS OF BANKERS
Right of Lien
• Lien can be either (i) a general lien, or (ii) a particular lien. General lien
entitles the creditor in possession to retain the goods and securities till all
his claims against the power of goods have been satisfied. Thus, it is
applicable in respect of all amounts due from the debtor to the creditor.
But a particular lien is a specific lien, which confers a right to retain
those goods for which the amount is to be paid.
The right of lien of the banker has the following
exceptions:
I. Articles for safe custody.
II.Documents left for a specific purpose: -
III.Securities left negligently: -
IV.Securities held in trust. The banker cannot exercise the right of general
lien over the securities deposited by the customer as a trustee in respect
of his personal loan.
Right of Set Off
•This right enables the banker to combine the two accounts in the name of
the same customer and to set to the debt, if there is no agreement to the
contrary. The right of set off gives a special protection of the banker in case
of a default by a customer whose one account is overdrawn and the other
account has a credit balance.
•Thus, where a customer maintains two accounts in his name, and one of
them shows a debit balance, the bank can set off the debit balance against
the credit in the second account.
Right of Appropriation
•Right of appropriation is the right of a banker to appropriate the money paid
by the customer to any of the loans.
•The implications regarding appropriation of payments made by the customer

are as follows;
i. Appropriation indicated by the debtor
If a customer has more than one debts due to the banker, he has
the right to direct the banker to reduce or cancel any debt at the
time of payment, For instance, if a customer has two account and
one of them shows an overdraft, the customer may direct, at the
time of payment, the banker to credit the same to any of the two
accounts as per his instructions.
ii. Appropriation by Banker
•In the absence of any instructions from a customer who owes money to the banker on a number
of accounts, the banker has a right to appropriate the payment to any debt or account according
to his discretion. But he should inform the customer about the appropriation
iii) When neither party appropriates
•When neither the customer has given any instruction to the banker nor the banker has taken any
action to appropriate the money, the payment must be appropriated to discharge the debts in
chronological order (i.e. order of time) irrespective of the fact that some debts are time-barred.
•If the account is discontinued and new account is opened, the rule does not apply to the old
account.
Right to Close Account
• A customer may close the account with the banker at any time he feels
without assigning any reason. Similarly, a banker may close the account of
his customer by sending a written intimation to the customer. The banker
must give the customer a sufficient notice before closing the account. If he
closes the account without giving proper notice, he will dishonor cheques
drawn before the closure of the account. This will injure the credit of the
customer for which he may claim damages. The length of the notice will
depend on the circumstances of the case and nature of the business of the
customer.
A banker can close the account of a customer without giving notice:
 When a customer dies

 When a banker comes to the knowledge that a customer has become insane.
 A banker should not honor cheques after receiving the garnishee order from
the court attaching his customer's account in implementation of a decree.
 When a banker receives a notice of assignment of his customer's account to a
third party
Special Type Of Customers
1. Minors
•According to Article 198 of the Civil Code of Ethiopia 1960 a minor is a
person of either sex who has not attained the full age of eighteen years.
However, in the case of some other countries when a guardian is appointed
by court in respect of this person‘s property minority extends to twenty
years.
A. Credit Account
•An account can be opened in the name of a minor, and banker runs no
risk so long as the account is in credit balance.
•
B. Unsecured Overdraft
•The legal position of a contracts entered by a minor is void and
therefore, he is not bound to pay the overdraft.
C. Secured Overdraft
•The position of the banker is in no way better in the case of secured overdraft. Since he
cannot avail any security given by a minor.
D. Overdraft Secured by Guarantee
•Since a guarantee presupposes a debtor against whom the debt secured

can be enforced to follow that a guarantee given to cover an overdraft
given to a minor is void.
E. Joint Account
•An account can be opened in the joint names of a minor and an adult.
But, a minor cannot be made personally liable for an overdraft or loan
F. Minor as an Agent
•He can act as an agent if authorized to do so, he can draw and accept and
may overdraw his principal’s account, if he is authorized in this regard. In
all such cases the banker must obtain a clear mandate from the principal
stating the various power given to the agent.
G. Minor as a partner
•A minor may became a partner, but he is not personally liable for the debts of the
partnership incurred during his minority.
2. Lunatics :-
A lunatic is a person who lacks understanding power and rational
judgment. When a banker receives notice of a customer's lunacy or
insanity, all operations on the account must be suspended until receipt of
an order of the court.
•When a person becomes insane, the court appoints a receiver to take care
of his property as long as continues to do so.
3. Intoxicated Persons
•A contract by a drunken person is avoidable and can be ratified by him

when he is sober. The position of an intoxicated person is almost similar
to lunacy. It is, however, difficult to understand whether the person is so
intoxicated as to be in capable of understanding the nature and effect of
the contract. Under such circumstances the banker must honor the
cheques of such person only in the presence of a witness and not
otherwise. Such a witness preferably must be an outsider rather than an
insider.
4. Executors and Administrators
• An executor is a person named in the will to implement the will of a

deceased person after his death.
• Where no person is named in the will or the person named refused to act,
then the court will appoint a person and such person is called
administrator.
• Bankers do not face any risk in opening accounts for executors and
administrators in their personal capacity.
5. Local Authorities
•While opening an account in the name of local authorities a banker has to

exercise the greatest care.
•
•Firstly, he must ascertain (determine) the nature of their constitution.

•Secondly, he must find out whether they are in powered to open a bank
account. Some authorities are prohibited from opening a bank account with
private banks, if authorize to open, only certain persons are authorized to open
an account and operate according to the authority given to him.
•Thirdly, the banker must find out whether these authorizes are permitted to
borrow money with or without security.
6. incorporated Bodies
•In opening an account in the names of an incorporated bodies like clubs,

committees, etc. the banker must see whether they are properly registered or
not, by laws of such associations or clubs.
•A mandate containing the names of persons authorized to operate the account
and their specimen signature should be obtained.
•Incorporated body couldn’t be held liable in respect of any liabilities incurred
by its officials, as it has no legal personality. Moreover, the persons authorized
to sign cheques cannot be held personally liable for any overdraft, if in
signing the cheques they clearly indicated that they are acting in their
representative capacity and not in their individual capacity.
7. Joint Accounts
•Joint accounts are accounts opened in the name of two or more partners
who are neither trading partners’ executors nor trustees. Before opening, the
banker must satisfy himself that:
I. All persons should sign the application for opening the account
II.The banker should ascertain/determine the system under which the
account is to be opened
III. The nature of accounts must also be ascertained
IV. He must ascertain the mode of operation of the account
V. In the absence of specific instructions all the joint account holders must
sign the cheques
A mandate from persons desiring to open a joint account is required from all members containing the following particulars
a) Drawings: - the mandate must state the name of persons who are
authorized to draw cheques.
b) Survivorship: - the mandate should also deal with the question of
survivorship. To avoid future disputes, the application to open joint
account must contain the clause “in the event of death, insolvency or
withdrawal of any of us, the survivor or survivors of us shall have full
control of any money, then and thereafter standing to our credit account
with you.”
c) Power to overdraw: - the mandate must also contain the names of
persons who are authorized to overdraw.
8. Partnership
•A banker should never open an account in the name of a partnership firm unless
and until one or more partners make an application.
•Particulars required to open a partnership account can be expressed as a mandate
as follows:
a) the name of partners who are authorized to draw or sign cheques
b) The names of partners who are entitled to borrow money on behalf of the
firms
c) The names of persons who have the power to overdraw, endorse, make and
accept bills of exchange and promissory notes on behalf of the firm, and
d) The names of the partners who have power to mortgage or sell any property
belonging to the firm.
The end

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UNIT FOUR

RELATIONSHIP BETWEEN BANKER AND CUSTOMER

1. He accepts securities and other valuables for safe custody.

1. To honor cheques: The banker is bound to honor his customer’s cheques if

•The implications regarding appropriation of payments made by the customer

iii) When neither party appropriates

 When a customer dies

•Since a guarantee presupposes a debtor against whom the debt secured

•A contract by a drunken person is avoidable and can be ratified by him

• An executor is a person named in the will to implement the will of a

•While opening an account in the name of local authorities a banker has to

•Firstly, he must ascertain (determine) the nature of their constitution.

•In opening an account in the names of an incorporated bodies like clubs,

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