THE COPPERBELT UNIVERSITY

LS – Banking Law and Practice

Course Material

Prepared 2022

Acknowledgement:

The Copperbelt University gratefully acknowledges the contribution of the following

people in the development of this course material:
Zimba Vivien. – LLB, LLM, MCIArb.
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OVERVIEW

To acquire specialized knowledge of law and practice relating to Banking

OBJECTIVES

By the end of the course, students should be able to:

1. Explain the system and structure of banking institutions

2. Explain the regulation of the financial systems
3. Analyze the relationship of banker and customer
4. Explain cheques and payment systems
5. Discuss the law on insolvency
6. Identify legal aspects of company securities

COURSE CONTENT

UNIT 1: EXPLAINING THE SYSTEM AND STRUCTURE

1.1 Banking Institutions and Central Bank
1.2 Non-Banking Financial Institutions

UNIT 2: EXPLAINING REGULATIONS OF THE FINANCIAL SYSTEM

2.1 The Banking and Financial Services Act No. 7 of 2017
2.2 The Securities Act No. 41 of 2016
2.3 The Pensions and Insurance Act
2.4 The Competition and Consumer Protection Act No. 24 of 2010

UNIT 3: ANALYZING THE BANKER/CUSTOMER RELATIONSHIP

6.1 The definition of a customer
6.2 The express and implied terms
6.3 The rights and duties of the customer and the Bank
6.3.1 Banks duty as agent
6.3.2 Banks duty as trustee
6.3.3 Banks duty of secrecy and the exceptions thereof
6.3.4 Banks rights to payment, interest and other charges
6.3.5 Termination of banker/customer relationship

UNIT 4: EXPLAINING CHEQUES AND PAYMENT SYSTEM

4.1 Legal rules governing cheques, paper payments systems and electronic
payments systems
4.2 National Payment Systems Act No. 1 of 2007
4.3 The Clearing System in Zambia
4.4 Guarantees
4.5 Letters of Credit

UNIT 5: DISCUSSING INSOLVENCY

5.1 Corporate and Insolvency Act No. 9 of 2017 – Part III
5.2 Banking and Financial Services Act No. 7 of 207 – Part X
5.3 5.4.1 Powers of Liquidation/Receiver

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5.4.2 Priority of Claims

5.4.3 Other consequences as seen from regulation.

UNIT 6: IDENTIFYING LEGAL ASPECTS OF SECURITY

6.0. Definition and justification for security
6.1 Taking security from Companies
6.1.1 Floating and Fixed Charges
6.1.3 Rules concerning registration of charges over company assets
6.2 Types of Security
6.2.1 Guarantees
6.2.2 Pledges
6.2.3 Mortgages
6.2.4 Land
6.2.5 Stocks and Shares
6.2.6 Lien Policies

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1. Course Syllabus

1.1. Course Title: LAW – Banking Law and Practice

1.2. Required Text:

1. R M Goode (2004) Commercial Law (Penguin Group, London)
2. Kenneth Mwenda (2010) Legal Aspects of Banking Regulation: Common Law
Perspectives from Zambia (Pretoria University Law Press: Pretoria
3. Harvey, Charles, 1991, ’On the perverse effects of financial sector reform in
anglophone Africa’, South African Journal of Economics, 59 (3): 258-286
4. Musokotwane, S., ’Domestic resource mobilization and development in Zambia:
1970-1986’, mimeo
5. Martin Brownbridge (1996) Financial Policies and the Banking System in Zambia,
IDS Working Paper No. 32.
6. Relevant statutes:
4.1 Bank of Zambia Act Chapter 360 of the Laws of Zambia,
4.2 The Banking and Financial Services Act No.17 of 2017,
4.3 Prohibition and Prevention of Money Laundering (Amendment) Act No. 44
of 2010,
4.4 Cheques Act Chapter 424 of the Laws of Zambia

1.3. Instructor Details:

1.3.1. Names: Zimba Vivien
1.3.2. Availability: vivien@astrialearning.org
1.3.3. Biography:
Mrs Zimba lectures in the School of Law. She holds a Bachelor of Laws
Degree (LLB) and a Master of Laws (LLM) in International Business and
Trade Law from Middlesex University, London - UK. She has vast experience
in Alternative Dispute Resolution (ADR) and she is an ADR practitioner both
in Zambia and United Kingdom. She has in recent past resolved a number of
Arbitration disputes at domestic and international level. She aspires to
enhance her research skills with the view to becoming a notable author in the
field of academia.

Course Overview:

Banks are the important segment in the Zambian Financial System. An

efficient banking system helps the nation’s economic development. Various
categories of stakeholders of the Society use the banks for their different
requirements. Banks are financial intermediaries between the depositors and the
borrowers. Apart from accepting deposits and lending money, banks in today’s
changed global business environment offer many more value added services to their
clients. The Bank of Zambia as the Central Bank of the country plays different roles
like the regulator, supervisor and facilitator of the Zambian Banking System.

To enable the reader to

– Understand the features of Zambian Banking System
– Know the significant contribution of different types of banks
– Appreciate how important banking services for the economy

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HISTORY OF BANKING

Bank of England was set up in 1694 which was later on followed by other Central
banks of different countries. Mulaisho (1994, p.48). In Zambia, the financial system in the
mid-1960s was dominated by foreign commercial banks mainly serving the credit needs of
foreign and expatriate businesses. Mulaisho (1994, p.48). The general thrust of financial
policies after 1968 was to enable government to exert greater control over the financial
system and to ensure that credit allocation was more supportive of the government’s overall
economic strategy. Mulaisho (1994, p.48). Financial policies consisted of three main
strands: nationalization of foreign financial institutions, establishment of government
owned banks and development finance institutions, and administrative controls over
interest rates and, to a limited extent, loan allocation.

ROLE OF CENTRAL BANK IN ZAMBIA

The central bank (Bank of Zambia) has by law the general functions of:
- Maintenance of price and financial system stability through the formulation and
implementation of appropriate monetary and supervisory policies;
- Issuing of bank licences, supervising and regulating the activities of banks and
financial institutions to promote safe, sound and efficient payment mechanisms;
- Issuing of notes and coins;
- Acting as banker and fiscal agent to the Government;
- Supporting the efficient operation of the exchange system; and
- Acting as advisor to the Government on economic and monetary management.

The central bank also provides current accounts for commercial banks for
settlement of commercial banks’ transaction and it participates in the Zambia Clearing
House.

NATIONALIZATION OF FOREIGN FINANCIAL INSTITUTIONS AND THE

ESTABLISHMENT OF GOVERNMENT OWNED FINANCIAL INSTITUTIONS

Several banks and non-bank financial institutions were set up by the government to
serve various purposes. The Indo-Zambia Bank was established in 1984 as a joint venture
between the government and three state owned Indian banks, and in 1987 the Zambia
Export and Import Bank was founded to supply trade finance. Development finance
institutions were set up to provide concessional and/or long term finance to priority sectors
with funds mobilized from the government or external sources. These included the Zambia
Agricultural Development Bank and Agricultural Finance Company, which were
amalgamated to form the Lima Bank in 1987, and the Development Bank of Zambia.

According Chiumya (2004, p.9), in the period between 1970 and the early 1990s,
the banking sector consisted of four distinct groups – old foreign banks, state banks, new
foreign banks and the local banks. Chiumya (2004, p.9). Three of the major banks which
were foreign, Barclays Bank, Standard Chartered Bank and Grindlays Bank (now Stanbic
Bank) were concerned with serving the interests of foreign corporate entities. (Chiumya,
2004, p.9). In order to meet the needs of the local population and redress this imbalance,
the government established a number of banks such as the National Savings and Credit

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Bank (Natsave), Zambia National Commercial Bank (now ZANACO), Lima Bank and
Cooperative Bank. Chiumya (2004, p.9).

ZANACO was established by the government in 1969. Its objectives included the
provision of credit to Zambians and the extension of bank branches into the rural areas
(Musokotwane, p 12). The government however soon realised that ZANACO would be
unable to expand rapidly enough to meet the expectations placed on it, and in 1971
announced plans to nationalise all the foreign financial institutions, including the
commercial banks (Harvey 1991: 262).

The objective of nationalization was to control the ’commanding heights of the

economy and to prevent capital flight. Most of the non-bank financial institutions were
nationalized and amalgamated to form financial parastatals such as the State Insurance
Corporation and Zambia National Building Society (Musokotwane, pp 8-9). But with one
exception (the Nederland Bank) the banks were not nationalized because the foreign banks
threatened to withdraw their expatriate management and the Zambian government was not
confident that it could manage the banks without them (Harvey 1993: 7).

2. Course Module

NOTE: The notes below are not meant to be exhaustive of the topic under discussion.
Students are expected to create comprehensive notes using the text(s) provided and other
resources.

2.1. Session 1: EXPLAINING THE SYSTEM AND STRUCTURE

1.1 Banking Institutions and Central Bank

1.2 Non-Banking Financial Institutions

2.1.2. Required Reading:

2.1.3. Kenneth Mwenda (2010) Legal Aspects of Banking Regulation: Common
Law Perspectives from Zambia (Pretoria University Law Press: Pretoria, Ch.
1
2.1.4 Arora, A, Practical Banking and Building Society Law, 1997, London:
Blackstone.

2.1.5 Mulaisho, Dominic, 1994, ’The role of the central bank in economic
liberalisation’ in Nathan Chilepa Deassis and Stuart Makanka Yikona (eds),
The Quest for an Enabling Environment for Development in Zambia, Ndola:
Mission Press, pp 42-58
2.16 C. Chiumya, (2004). Banking Sector Reforms and Financial Regulation: Its
Effects on Access to Financial Services Low Income Households in Zambia
(Paper presented to the 3rd International Conference on Pro-Poor Regulation
and Competition in South Africa).

2.1.6 Learning Objectives:

After completing this chapter, the student will be able to demonstrate
knowledge of the following:
a. Defining ‘bank’ and ‘banking business’
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b. Banking Institutions and Central Bank

c. Non-Banking Financial Institutions

SUMMARY

1.2 BANKING INSTITUTIONS AND CENTRAL BANK

According to Mwenda (2010, p.11), the essential norms for effective banking
supervision have become the most significant global standard for prudential regulation and
supervision. The vast majority of the countries have approved the core principles and have
declared their intention to implement them. Mwenda (2010, p.11). Generally, banking
reforms can have an impact on the efficacy of the legal framework for banking supervision.
(Mwenda, 2010, p.11).

The central bank, like the rest of the economy, adapts to changes in the market
environment. Mwenda (2010, p.11). In the case of the Bank of Zambia, prior to 1991, the
Bank had numerous roles, including the promotion of economic growth through the
provision of credit to critical sectors such as agriculture, manufacturing, mining, etc, as
well as issuance of export guarantees to exporters. Mwenda (2010, p.11). As expected, the
multiplicity of functions led to conflict of interest. Mwenda (2010, p.11). For instance, on
one hand, the Bank was expected to control the growth of money supply while, on the other
hand, it was required to inject money into the system through the provision of credit to the
selected sectors. Mwenda (2010, p.11). The introduction of economic reforms by the
Government beginning the end of 1991 therefore brought about enormous challenges for
the Bank of Zambia. Mwenda (2010, p.11).

According to Mwenda (2010, p.11), to meet the new challenges, the Bank’s
operations needed to be more focused. Mwenda (2010, p.11). In this respect, the Bank of
Zambia Act was amended in 1996 to reflect the changed nature of the operating
environment. Mwenda (2010, p.11). By amending the Act, the Bank’s primary role was
solely “to formulate and implement monetary and supervisory policies that will ensure the
maintenance of price and financial system stability”. Mwenda (2010, p.11). This was
deliberate, as experience world-over has shown that you can only achieve sustained and
high economic growth in an economic environment characterized by low and stable
inflation. Mwenda (2010, p.11). Thus, by working to ensure price stability as well as
maintenance of a safe, sound and efficient financial sector, the Bank is contributing to the
achievement of sustainable economic growth and, ultimately, poverty reduction. Mwenda
(2010, p.11). In a nutshell, following the amendment of the Bank of Zambia Act in 1996,
the Bank’s main responsibilities comprise price and financial system stability. Mwenda
(2010, p.11). The Bank ensures financial system stability by licensing, supervising and
regulating the activities of banks and non-bank financial institutions so as to promote the
safe, sound and efficient operations and development of the financial sector. (Mwenda,
2010, p.11).

1.3 BANK REGULATION AND SUPERVISION

According to Brownbridge (1996, p. 17), major reforms to the system of prudential

regulation and supervision of the financial system began in 1994. Brownbridge (1996, p.
17). As in many other African countries the prudential framework put in place during the

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colonial period and the early years of independence was not adequate to effectively regulate
the banking system, especially as the latter evolved during the 1980s. Brownbridge (1996,
p. 17). There were serious deficiencies in both the banking legislation and the supervisory
capacities in the BOZ. (Brownbridge,1996, p. 17).

Brownbridge (1996, p. 17), prior to the economic reforms of the 1990s, the BOZ’s
main role was in ensuring compliance with government imposed allocative regulations.
Prudential regulation was not a priority, and bank inspections concentrated on checking
that banks complied with foreign exchange and interest rate controls as well as statutory
liquidity requirements (Bank of Zambia 1994). Brownbridge (1996, p. 17). The BOZ also
acquired an equity stake in ZANACO, which clearly would have compromised its role as
the bank regulator had the latter been taken more seriously. Brownbridge (1996, p. 17). To
some extent the lack of emphasis accorded to prudential regulation was justifiable: until
BCCZ and Meridien were set up in the early 1980s, the banks operating in Zambia were
either owned by well-established foreign banks or the government, and thus reasonably
secure in terms of the safety of deposits. Brownbridge (1996, p. 17). It was also the case
that the controlled economy provided a relatively safe environment for bank lending.
(Brownbridge, 1996, p. 17).

The fact that reforms to the prudential system were delayed until 1994 has almost
certainly cost the taxpayers heavily as a result of the Meridien collapse and may result in
further costs if many more of the local banks fail. Brownbridge (1996, p. 17). The potential
fragility among the local banks is at least partly attributable to the fact that the revisions to
the banking legislation were not enacted until three years after a more liberal attitude to
bank licensing was adopted. Brownbridge (1996, p. 17). Substantial new entry into the
banking industry was allowed before adequate prudential legislation and supervisory
capacities had been put in place. (Brownbridge, 1996, p. 17).

Between 1965 and 1994 the legislative framework governing the banking industry
was contained in the Banking Act and Bank of Zambia Act. Brownbridge (1996, p. 17).
Various aspects of these Acts impeded effective prudential regulation. (Brownbridge,1996,
p. 17).
First, the authority to license banks, and to withdraw licenses, lay not with the BOZ
but with the Registrar of Banks appointed by the Ministry of Finance (MOF). Brownbridge
(1996, p. 17). Second, the Banking Act did not provide the BOZ with the authority to issue
or update regulations pertaining to prudential requirements. (Brownbridge,1996, p. 17).
Third, the Banking Act was unclear as to what was required of directors and managers of
banks applying for licenses in terms of qualifications, experience, etc., and on what grounds
applications could be rejected. Brownbridge (1996, p. 17). The deficiencies in the licensing
regulations allowed banks lacking strong capital and managerial resources to be set in the
late 1980s and early 1990s. (Brownbridge, 1996, p. 17).

According to Brownbridge (1996, p. 18), the Banking Act did set out capital
adequacy standards relating capital and reserves to liabilities minus liquid assets, and
specified that minimum transfers should be made from profits into a reserve fund.
Brownbridge (1996, p. 18). But the capital adequacy provisions were largely meaningless
in the absence of appropriate regulations regarding provisioning for doubtful debts and
non-accrual of unpaid interest. Brownbridge (1996, p. 18). Hence a bank which was
technically insolvent could appear well capitalized. Brownbridge (1996, p. 18). Important

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omissions in the Banking Act were the lack of any references to insider lending and loan
concentration. Brownbridge (1996, p. 18). Moreover, building societies, the Post Office
Savings Bank and any other financial institution established by a written law of Zambia
were explicitly excluded from the Banking Act. (Brownbridge, 1996, p. 18).

Brownbridge (1996, p. 18). The banking legislation was revised with the enactment
of the Banking and Financial Services Act (BFSA) in 1994 which was repealed and
replaced by the Banking and Financial Services Act No.7 of 2017. Brownbridge (1996, p.
18). The BFSA gives the BOZ more legal independence from the MOF: The Registrar is
placed under BOZ control although the MOF must be consulted on licensing and other
matters. Brownbridge (1996, p. 18). It is more flexible than the previous Banking Act with
the BOZ (or the MOF on the recommendation of the BOZ) having the authority to issue
prudential guidelines and regulations (e.g. in regard to capital adequacy) and to demand
regular data from financial institutions relating to prudential matters. Brownbridge (1996,
p. 18). The BFSA is also far more comprehensive in terms of both the type of financial
institutions covered and the requirements demanded of these financial institutions and their
directors. Brownbridge (1996, p. 18).

The BFSA covers all financial institutions in Zambia. In granting licenses to

financial institutions the Registrar must take account of the financial resources, experience
and character of applicants and proposed directors. (Brownbridge, 1996, p. 18).

1.3 NON-BANKING FINANCIAL INSTITUTIONS

Mwenda (2010, p.54). The informal sector in Zambia, as in many other developing
countries, remains the most dynamic in terms of employment generation. Mwenda (2010,
p.54). Policies to support this sector, are being put in place and the Government of Zambia
perceives the role of microfinance to be crucial in this regard. (Mwenda, 2010, p.54).

Moreover, economic reforms, which included the liberalization of the financial

sector, undertaken in the early 1990’s; as well as the failure of state owned financial
institutions; led to a financial sector that focused on meeting the needs of the corporate
sector and working class elite. Mwenda (2010, p.54). This led to the increase in the number
of microfinance institutions (MFIs) operating in the financial sector. Mwenda (2010, p.54).

These MFIs were established to fill the gap that had been created with respect to
the provision of financial services to low income households and the poor. Mwenda (2010,
p.54). This development led to calls by politicians, regulators and MFIs – through the
Association for Microfinance Institutions of Zambia (AMIZ) – for the microfinance sector
to be regulated and supervised as part of the financial sector. Mwenda (2010, p.54).

1.3.1 Requirements for setting up a microfinance Institution in Zambia

The Banking and Financial Services Act (BFSA), 2017, gives the Bank of Zambia
the authority to license, regulate and supervise banks and other financial institutions
registered under the referred Act. The objective of the Bank of Zambia in this regard is to
ensure and promote a safe and sound financial system.

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The non-bank financial institutions sector includes leasing companies, bureau de

change, microfinance institutions, building societies, as well as institutions like
Development Bank of Zambia and National Savings and Credit Bank. The licensing
requirements may vary slightly depending on the category of financial institution.

1.3.2 Licensing Requirements

To operate a microfinance institution in Zambia, it is a requirement that the

institution be registered with the Bank of Zambia.

The appropriate forms, which can be collected from the Bank of Zambia or
downloaded from the Bank of Zambia website, must be completed and submitted by the
applicant to the Registrar at the Bank of Zambia:

(i) An application form (Form MFI) completed by the promoters of the

microfinance institution;
(ii) The Directors and Officers Questionnaire and Vital Statistics Forms filled out
by prospective directors, shareholders, chief executive officer as well as the chief financial
officer;
(iii) Certified copies of identities, that is, National Registration Cards or Passports;
(iv) In case of foreigners, Interpol Clearance certificates from their countries of
origin must be submitted;
(v) Certified copies of academic and professional qualifications; and
(vi) Curriculum vitae, including details of nationality and residence, for the senior
management and full names of three referees with their contact details (i.e. proposed
directors, chief executive officer and chief financial officer) of the proposed microfinance
institution.

The above stated forms must be accompanied by the following:

(i) Certificate of Incorporation and Articles of Association for the company;

(ii) Evidence of minimum required capital for the category of Microfinance

institution. The evidence shall be in the form of a letter from an audit firm registered with
the Zambia Institute of Chartered Accountants.

a) The minimum capital requirements for Microfinance institutions are shown:

- Minimum Capital Requirements for Microfinance Institutions (MFIs) Deposit–

Taking Microfinance Institution K2, 500,000.00

- Non Deposit–Taking Microfinance Institution K100,000.00

(iii) Source of the initial capital to be invested and that of any future funding shall
be disclosed to the Bank of Zambia

(iv) A business plan with financial projections and forecasts for a minimum of three
years from commencement date. This should include an income statement, balance sheet,
cash flow statement and a copy of the accounting policies to be adopted by the proposed

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microfinance institution. Underlying assumptions must be clearly stated in the business

plan;
(v) Audited financial statements (where applicable) of the company for the year
immediately preceding the application;

(vi) Any other documents in support of the application, as may be requested by the
Bank of Zambia.

1.3.3 Issuance of a microfinance institution/business licence

Upon approval of the application and payment of the annual licence fee, the
Registrar shall issue the applicant with a microfinance institution licence to conduct
microfinance business.

When a licence is granted, it is subject to a number of conditions and is valid until

revoked by the Bank of Zambia or surrendered by the microfinance institution.

Once a microfinance institution is registered, it becomes subject to the supervisory

powers of the Bank of Zambia as provided for in the Bank of Zambia Act and the BFSA.
A microfinance institution is also supposed to adhere to regulatory and prudential
requirements relating to, inter alia, reserves, capital adequacy, liquidity, restrictions on
lending and exposures to insiders.

All microfinance institutions operating in Zambia are supervised by the Non-Bank

Financial Institutions Supervision Department of the Bank of Zambia.

2.2. Session 2: EXPLAINING REGULATUONS OF THE FINANCIAL

SYSTEM

2.2.1. Required Reading:

2.2.2. Prof. Mwenda K.K.,(2000), Banking Supervision and Systematic Bank
Restructuring: An International and Comparative Legal Perspective’.
(London: Cavendish Publishing).
2.2.3. C Chiumya., (2004, Banking Sector Reforms and Financial Regulations: Its
Effects on Access to Financial Services for Low Income Household in
Zambia’ (Paper presented to the 3rd International Conference on Pro-poor
Regulations and Competition in South Africa).
2.2.4. K. T. Phiri (2004), The role of the Central Bank in the supervision of the
Commercial Banks.’ Obligatory Essay.
2.2.5. K. Vagneur (2004). Corporate Governance. (Edinburgh: Heriot – Watt
University Press).
2.2.6. J Carmicheal et al. (2004). Aligning Financial Supervisory Structure with
Country Needs (Washington D C: World Bank Institute).
2.2.7. R. Abrams and M. Taylor, (2000). ‘Issues in the Unification of Financial
Sector Supervision’ (Washington: International Monetary Fund).
2.2.8. Relevant Case Law

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2.2.9. Learning objectives:

After completing this chapter, the student will be able to demonstrate
knowledge of the following:
a. The Banking and Financial Services Act
b. The Securities Act
c. The Insurance Act
d. Pensions Act
e. The Competition and Consumer Protection Act No. 24 of 2010

SUMMARY

2.1 LEGAL FRAMEWORK REGULATING BANKS IN ZAMBIA

This chapter examines the legal framework for banking supervision and regulation
in Zambia. Reference will be made only to the national legal framework because not only
are there no international treaties on bank supervision but the guidelines and principles
developed by Basle Committee on Banking Supervision (BCBS) for the supervision of the
conduct of banks sets out requirements that limit their risk-taking. Mwenda (200). These
guidelines and standards will normally cover such areas as risk management, corporate
governance, know your customer (KYC), and anti-money laundering. Mwenda (200). The
BCBS provides an international forum for regular cooperation on banking supervisory
matter. Its objective is to enhance an understanding of key supervisory issues and improve
the quality of banking supervision worldwide. Mwenda (200).

These principles have become the most important global standards for prudential
regulation and supervision and the vast majority of countries have endorsed them by
declaring their intention to implement them. Mwenda (200). However, it is not yet clear as
to whether these principles have become customary international law. Mwenda (200).
Therefore, it can be concluded that the Basle Core Principles constitute soft law as of now,
in that they are globally the main guidelines for central bank supervision of the commercial
banks. Mwenda (200).

According to Chiumya (2004), the current regulatory framework of the banking

sector has performed relatively well since 2000 to date. Before then, the banking sector
witnessed a number of bank failure. Chiumya (2004). As of 2004, nine banks had closed
and this led to a loss of confidence in the financial system because people were discouraged
from placing their monies in the banks for fear of loss. Chiumya (2004). This can be
attributed to weak regulatory framework that consequently precluded effective supervision
of the sector. (Chiumya, 2004).

Banking instability can have serious adverse effects on a nation’s economy because
it can impair payment mechanism, reduce the nation’s savings rate, diminish the financial
intermediation process, and inflict serious harm on small savers. Chiumya (2004). To
prevent these adverse effects, efforts have been made by government to introduce
legislation on depositor’s protection. (Chiumya, 2004).

The regulatory framework of the banking sector has since 2000 strengthened
through the revision of the banking legislation such the Banking and Financial Services
Act No. 7 of 2017 which was primarily intended to strengthen BOZ regulatory and
supervisory powers in light of the best practices and international standards for prudential
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regulation and supervision. (Chiumya, 2004). This has been coupled with the formulation
of regulation against money laundering, corporate governance guidelines and minimum
capital adequate, among others. (Chiumya, 2004).

It must be noted that the greatest problem faced in regulation is not supervision but
enforcement. Supervision has to do with complying with the provisions of the enabling
legislation, whereas enforcement involves the actual implementation of those provisions.

2.1.1 The Banking and Financial Services Act

Mwenda (2000). The Banking Act of 1965 which was later repealed by the Banking
Act of 1972, was the first Act that regulated the conduct of banking business in Zambia.
Mwenda (2000). This Act was tailored to address the needs of the banking environment of
a newly independent state of Zambia had just gained independence in 1964. Mwenda
(2000). It was formulated specifically to regulate commercial banks and so as to be in line
with the Zambian economy. Among other things to enable government to compel
commercial banks to be locally incorporated in order to bring in large amounts of equity
capital and commercial banks were mandated under this Act to appoint Zambians as half
the number of directors in those banks. Phiri (2004, p.11). This was intended to help
government to place its citizen in leading roles in as far as national development was
concerned. Phiri (2004, p.11).

Phiri (2004, p.11). The Banking and Financial Services Act of 1994 repealed the
Banking Act of 1972 owing to the change of economic policy of liberalization which was
adopted by the new government. Phiri (2004, p.11). The change in government from a one
party state to a multi-party state led by the MMD resulted in radical reform from a state
controlled economy to a free market or liberlised economy. Phiri (2004, p.11). Therefore,
financial sector reforms were not only inevitable but expected and this was evident in
reforms to prudential regulation and supervision of banking and financial institutions
through the enactment of a new banking law in 1994. Phiri (2004, p.11).

The objectives of the Banking and Financial Services Act 1994 was repealed by the
Banking and Financial Services Act No. 7 of 2017 whose aims are to provide for the
regulation of the conduct of banking and financial services, safeguard the interests of
investors and customers of banks and financial institutions and to provide for matters
connected with or incidental to the foregoing. Phiri (2004, p.11). In this vein, the Act
endeavours not only to create both legal and institutional safeguards for depositors’ monies
but also to promote a safe, sound and efficient financial system. Phiri (2004, p.11).

2.1.3 Licensing and Structure

The power to licence, supervise and regulate financial service providers in Zambia
is defined under two sets of legislation, namely:

(i) The Bank of Zambia Act, Chapter 360 of the Laws of Zambia; and
(ii)The Banking and Financial Services Act (BFSA), Chapter 387 of the Laws of
Zambia. These two sets of legislation outline the functions, responsibilities and mandate of
the Bank of Zambia.

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In terms of Section 4(1) of the Bank of Zambia (BOZ) Act, the primary objective
of the Bank of Zambia is to "formulate and implement monetary policy and supervisory
policies that will ensure the maintenance of price and financial system stability so as to
promote balanced macro-economic development". To support this function, the Bank is
given the responsibility, among others, to "licence, supervise and regulate the activities of
banks and financial institutions so as to promote the safe, sound and efficient operations
and development of the financial system."

The Banking and Financial Services Act 2017 supports the BOZ Act by amplifying
the legal and regulatory framework of licensing, supervising and regulating financial
service providers in Zambia.

2.1.4 Grounds upon which the Registrar may refuse to grant a licence

In deciding whether or not to grant a banking licence, and in deciding what conditions
should be attached to such a licence, Mwenda (2010, p.42) the Registrar of Banks and
Financial Institutions can have regard to the capital adequacy of the applicant; the financial
condition, resources and history of the applicant and the applicant’s associates and
affiliates; the character and experience of the directors and major shareholders and of
persons proposing to be concerned in the management of the business to be undertaken
under the authority of the licence; the convenience and needs of the community intended
to be served by that business; and the prospects for profitable operation of that business.
Mwenda (2010, p.42).

In addition to the foregoing: section 10(1) of the Banking and Financial Services
Act 2017 provides that the Bank shall reject an application for a licence where—
(a) an applicant does not meet the requirements of this Act;
(b) a licence previously held by an applicant has been cancelled by the Bank;
(c) an applicant submits false information in relation to the application; or
(d) the name that a financial service provider is proposing to be registered is—
(i) identical with that of another financial service provider; or
(ii) resembles the name of another financial service provider and is likely to deceive
the public

2.1.5 Duration of licences and some of the terms to be found in licences

Pursuant to section 17 the Banking and Financial Services Act 2017, a licence granted
to an applicant remains in force until it is revoked by the Registrar of Banks and Financial
Institutions.

According to Mwenda (2010, p.43), generally, there is no property in a licence, and a

licence is not capable of being bought, sold, leased, mortgaged or in any manner
transferred, demised or encumbered. Mwenda (2010, p.43). An exception is, however,
provided where, in the event of an amalgamation of banks under the Banking and Financial
Services Act 2017 and on such terms and conditions as the Bank of Zambia may approve,
a licence can be transferred from one party to another. (Mwenda, 2010, p.43).

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2.1.6 Appeals against decisions of the Registrar

An applicant for a banking licence whose application has been refused by the Registrar
of Banks and Financial Institutions or the Bank of Zambia has the right to make his or her
case in writing to the said Registrar or the Bank of Zambia to reconsider the decision over
the granting of a licence. Mwenda (2010, p.43). This procedure applies, mutatis mutandis,
to appeals against decisions of the Registrar or the Bank of Zambia regarding the
revocation of licences. Mwenda (2010, p.43). If, after receipt of any representations from
the applicant or person affected by its decision, the Registrar or the Bank of Zambia
reaffirms its decision, the applicant or other person (hereinafter called the ‘appellant’) may,
within seven days of receipt of the notice reaffirming the decision, notify the minister that
he or she desires to appeal against the decision. (Mwenda, 2010, p.43).

2.1.7 Directors and managers of banks and incorporated financial institutions

While the Registrar of Banks and Financial Institutions authorises persons to

conduct banking and financial services business, the grant of such licence per se does not
automatically entitle a licensee to act as director or manager of a bank or an incorporated
financial institution. (Mwenda, 2010, p.45).

Section 34 (1) of the Banking and Financial Services Act 2017 provides that a
person shall not be elected or appointed as a director, chief executive officer or chief
financial officer of a financial service provider without the prior written approval of the
Bank.

Section 34 (2) states that despite anything to the contrary in the Companies Act,
2017, or any other written law, a person is not qualified for election or appointment as a
director or senior officer if that person—
(a) is not a fit and proper person to hold the relevant office in accordance with this Act;
(b) is below the age of twenty-one years;
(c) has been adjudged bankrupt by a competent court or has made an arrangement or
composition with that person’s creditors, in Zambia or elsewhere;
(d) has been convicted of an offence involving fraud or dishonesty;
(e) has a mental disability that makes the person incapable of performing the functions
of the office;

2.1.8 Disciplinary measures

Mwenda (2010, p.54), where a bank refuses to comply with an order of the Bank
of Zambia, or refuses to permit an examination to be made, or has otherwise obstructed
such an examination, the Bank of Zambia can take disciplinary action. Equally, the Bank
of Zambia may take disciplinary action where it is of the opinion that an authorized
examination shows:

(a) that the bank concerned conducts its business in an unlawful manner or engages in
a course of conduct that is unsafe and unsound; Mwenda (2010, p.54) or

(b) that for any reason (other than insolvency) the bank is unable or likely to become
unable to continue its operations in the ordinary course. Mwenda (2010, p.54).

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2.2 THE FRAGMENTED MODEL OF SUPERVISION OF THE BANKING

SECTOR IN ZAMBIA

There are three specialized financial sector supervisory agencies:

i) the Bank of Zambia;
ii) the Pensions and Insurance Authority; and
iii) the Securities and Exchange Commission.

The BoZ is responsible for formulating and implementing monetary policy,

managing the operation of the payment and settlement system, as well as licensing,
regulation, and supervision of financial institutions in order to ensure a safe and sound
financial system. In particular, the BoZ supervises commercial banks, development banks,
savings and credit banks, leasing companies, building societies, microfinance institutions
(deposit taking ones with capital above ZMK 250 million and non-deposit taking MFIs
with capital above ZMK 25 million), credit bureaus, bureaus de change, and payment
service providers. In addition, there are a number of small non-deposit taking microfinance
institutions with capital lower than ZMK 25 million which are neither licensed nor
supervised by BoZ

The PIA has regulatory and supervisory functions over insurance and reinsurance
companies and intermediaries, claims agents, assessors, loss adjusters, pension schemes,
fund managers, administrators and custodians. Even though the BoZ and the PIA are
corporate bodies that have regulatory functions, the authority to issue regulations
ultimately relies on the MOFNP, according to the laws that set up both agencies.

Historically, supervision of the financial business tended to follow sector lines, that
is, each financial sector had its own supervisory authority. Vagneur (2004, p.21). This is
what is known as the fragmented or sector-specific regulatory model of supervision. It is
one in which financial institutions are organized around, and supervised by specialist
agencies. Vagneur (2004). Thus bank supervision is by a bank regulator, securities markets
have their own supervisor and the insurance sector is overseen by an insurance specialist
agency. Vagneur (2004). This trend of having specialist agencies for each sector of the
financial market has not changed in most countries, Zambia inclusive. Vagneur (2004).
Accordingly, in countries which have adopted this model of supervision, there are
substantial body of laws and regulations governing a specific sector of the financial market.
Vagneur (2004). The purpose of these laws and regulations is to provide macroeconomic
stability and to protect individual depositors and investors of the financial markets.
Vagneur (2004).

Indeed, Zambia is one such country that has adopted the fragmented or sector-
specific regulatory model of supervision as there are three institutions that regulate the
financial sector in Zambia. Vagneur (2004). These are Bank of Zambia, Securities and
Exchange Commission and Pensions and Insurance Authority. Vagneur (2004). Under this
model, BOZ is responsible for the supervision of banks, non-bank financial institutions
(NBFIs) and micro finance institutions. Vagneur (2004). Further, BOZ is charged with
responsibility of formulating and executing monetary and supervisory policies with the
ultimate objective of achieving price and financial system stability. Vagneur (2004). Apart
from serving as a banker for all commercial banks, BOZ is an adviser to the Government.

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The Bank of Zambia currently derives its mandate from the Bank of Zambia Act 1996
Chapter 360 of the Laws of Zambia and the Banking and Financial Services as amended
Act No.7 of 2017. Vagneur (2004).

2.3 THE SECURITIES ACT NO. 41 OF 2016

The SEC is the authority responsible for the supervision and the development of
the capital market. It is also responsible for licensing, regulation and supervision of its
participants, namely securities exchanges, securities brokers and dealers, investment
advisors, and collective investment schemes.

This chapter shall the salient provisions of the Securities Act No. 41 of 2016 which
Act repealed and replaced the Securities Act Cap 354 of 1993. It became necessary to do
this owing to changes in the financial sector that needed the regulatory framework to align
with current needs and challenges of the market. The new Act makes provision for an
enhanced regulatory framework which will help with efficient and effective supervision
and enforcement of the market. Its constitutive Act charges it with the responsibility of
among other functions, regulating, supervising and developing the securities industry in
Zambia. Vagneur (2004).

The regulatory powers of the Commission require that: any person dealing or
advising on securities must be licensed by the Commission; that any securities market must
be licensed as a securities exchange by SEC; that all securities of a public company which
are publicly traded must be registered by SEC and; that collective investment schemes must
be authorized by the Commission. Vagneur (2004). It must be noted that the Zambian
securities market has been designed as a ‘unified market’ where trading is conducted
through the stock exchange, this entails that securities of public companies that are not
listed are, nevertheless, quoted and traded on a second tier market within Lusaka Stock
Exchange (LUSE). Vagneur (2004).

LUSE is essentially a market place where share and bonds can be bought and sold.
It is made up of stock-broking corporate members, who conduct trade on behalf of their
customers. Vagneur (2004). It is incorporated as non-profit limited liability company, and
the main instruments traded on the Zambian securities markets are equities, government
bonds and corporate bonds. Vagneur (2004). Notably, five banks are registered by SEC as
dealers on LUSE, and these are Banc ABC Zambia Limited, Stanbic Bank Zambia Limited,
Standard Chartered Bank Zambia Plc, Citibank Zambia Limited and ZANACO. Vagneur
(2004).

2.3.1 Collective Investment Schemes

Before any Collective Investment Scheme can be offered and promoted in

Zambia, it has to be authorized by the Securities and Exchange Commission.

It is an offence under Section 122 of the Securities Act 2016 to promote a

Collective Investment Scheme in Zambia which has not been authorized by the Securities
and Exchange Commission. Authorization to promote a collective investment scheme
must be obtained by making an application to the Securities and Exchange Commission.

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An application to the Commission for authorization should be accompanied by the

following;

• The scheme’s offering and constitutive documents

• The scheme’s latest audited report (if any) and if more recent, the latest unaudited
report.
• The management company’s latest audited report and resumes of its directors
• The trustee/custodian’s latest audited report
• A letter of consent to the appointment from the trustee/custodian

A letter of consent to the appointment from the auditors of the fund

The prescribed application fee

In addition to the documents specified above, an application for the authorization

of a non-Zambian based scheme shall include:

• A Zambian representative agreement and

• A Zambian covering document.

Authorized Local Collective Investment Schemes

• Laurence Paul Unit Trust Funds

• Madison Assets Management Company Unit Trust
• Intermarket Unit Trust
• Equity Capital Resources Unit Trust
• Mpile Unit Trust
• Mukuyu Growth Investment Fund
• Kukula Capital Fund
• BancABC Unit Trust
• Patumba Unit Trust
• Altus Unit Trust

Authorized Foreign Collective Investment Schemes

1. Imara Global Fund

2. Imara African Opportunity Fund
3. Franklin Templeton Investment Funds

The cited provision clearly shows that the Securities and Exchange Commission
(SEC) has power to authorise the establishment of collective investment schemes and to
regulate the conduct of business of collective investment schemes in Zambia as provided
for in the Act. Thus, any banking institution intending to set up a collective investment
scheme in Zambia must first seek the authorization of the SEC. Mwenda has pointed out
that the complications of this are that, whereas banks remain under the prudential
supervision of the Bank of Zambia, collective investment schemes set up by banks fall
under the supervision of the SEC.

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2.3.2 Registration
In order to register with the Securities and Exchange Commission the following
steps should be followed:

The first step would be for the company to convert to a public company and then
to file in a registration statement, accompanied with an application letter, sent through a
Designated Advisor (DA). The following documents need to be submitted along with the
foregoing:
• Certificate of incorporation
• Share certificate
• Board resolutions authorizing allotment and issue of shares
• Board resolution authorizing issue of the shares
• Audited Financial statements for the last three years or a shorter period

2.3.3 Mergers and Acquisitions

The law and procedure relating to Takeovers and Mergers is contained in the
Securities (Takeovers and Mergers) Rules, Statutory Instrument No. 170 of 1993. The
main objective of the rules is to afford protection to the minority shareholders of a company
which is the subject of a takeover.

The role of SEC is to monitor if the proper procedure as laid down in the Rules
(Offer Timetable) is followed and also to ensure that all relevant disclosures which are
necessary for a shareholder to make a well informed decision on the merits and demerits
of the offer are included in the offer document. The information must also be made
available to shareholders early to give them sufficient time to make a proper decision.

There are two types of takeover offers namely, voluntary and mandatory. A
voluntary takeover offer may be made by any person to the shareholders of the company. A
mandatory offer is required to be made by any person who acquires more than 35% of the
voting rights of a company or by any person or persons who holds between 35% and 50%
of the voting rights of a company and acquires more than 5% of the rights of the company
in any twelve-month period. The principle here is that if the major shareholder who is in
control of the company changes then other shareholders should be given the option of
existing at a fair price.

The fees payable for authorization of takeover and merger transactions are contained
in Statutory Instrument No. 82 of 2013.

2.4 THE PENSIONS AND INSURANCE AUTHORITY (PIA)

The PIA has regulatory and supervisory functions over insurance and reinsurance
companies and intermediaries, claims agents, assessors, loss adjusters, pension schemes,
fund managers, administrators and custodians. Even though the BoZ and the PIA are
corporate bodies that have regulatory functions, the authority to issue regulations
ultimately relies on the MOFNP, according to the laws that set up both agencies.

The Pensions and Insurance Authority (PIA) is the regulator of the pensions and
insurance industry in Zambia. It was established in 2015 through an amendment of the
Pensions Scheme Regulatory Act of 1997. The Pension and Insurance Authority (PIA) is
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independent regulator established by the Pensions and Insurance Act No. 27 of 2005 to
supervise the operations of insurance and pension schemes. As at 29 th March 2010, PIA
had licensed 231 insurance entities and among these four banks are registered as insurance
agencies. These are Barclays Bank Zambia Plc, Standard Chartered Bank Zambia Plc,
Stanbic Bank Zambia Limited and Finance Bank Zambia Limited.

For a long time, the only regulation related to insurance was the Insurance Act
1997, which lumped all forms of insurance, from health and life insurance to general and
motor-vehicle insurance under one umbrella. The following observations are also worth
noting.

The Insurance Act is the overall regulating act for the insurance industry. It details
the licensing, approved operating standards, personnel requirements, capital requirements
and reporting and compliance expected of insurance carriers and brokers. These
requirements are relatively steep for fintechs, especially start-ups with low financial
resources. For example, an insurance carrier must be able to demonstrate a minimum
capital requirement of ZMW10 million ($454,545)11 and the appointed chief executive
officer must have served in the insurance industry for no less than 10 years.

The Pension Scheme Regulation Act is the official act regulating the pensions
industry. Similar to the Insurance Act, it is currently skewed towards larger traditional
pension funds, setting steep requirements for capital adequacy and personnel. The Pension
Scheme Regulation Amendment establishes the PIA as a regulatory body to license,
regulate and supervise market operators in the pensions and insurance industry.

Micro-insurance guidelines and principles – in response to its mandate under the

NFIS, the PIA released a circular in April 2020 to all insurance carriers, brokers and agents,
on the guiding principles for operating micro-insurance products. These aim to make
insurance more accessible to lower-income customer segments. They currently apply only
to insurance carriers, brokers and agents fully registered under the Insurance Act.

• The PIA Act of 1997 covers all forms of insurance, including life insurance. This
makes capital requirements (ZMW10 million ($454,545))10 for being an insurance carrier
quite steep given the capital necessary for life cover. The NFIS provides a basis, however,
for revising the act, given that it calls for the development of micro-pension and micro
insurance regulations.

• Similarly to the capital market, involvement in the insurance industry is still a

largely manual and physical process. Digitalization offers the potential to streamline the
process, provided the right provisions are made within the existing act.

• The pensions industry also carries steep capital adequacy requirements to protect
customer funds and guarantee solvency, limiting the ability of start-ups to compete against
established pension fund providers.

• In April 2020, the PIA released guidelines on micro-insurance in an effort to make

the insurance industry more inclusive and able to reach lower-income customer segments.

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2.5 THE COMPETITION AND CONSUMER PROTECTION

There are three other non-specialized government authorities with regulatory and
supervisory powers in the financial sector, namely:
i) the Ministry of Finance and National Planning (MOFNP);
ii) the Ministry of Agriculture (MOA); and
iii) the CCPC. The MOFNP is the authority in charge of licensing, regulating and
supervising moneylenders. In addition, it appoints the boards of directors of the state-
owned savings and credit bank. The MOA is in charge of registering all types of
cooperatives as well as providing them with assistance and advisory services, promoting
the development of the sector, and issuing specific rules.

The CCPA of 2010 transformed the Zambia Competition Commission into the
CCPC, a body under the Ministry of Commerce Trade and Industry in charge of promoting
competition and protecting consumers against unfair trading practices in the entire
economy. The CCPC may recommend the Ministry the issuance of regulations under the
CCPA, as well as appoint inspectors to ensure compliance with the CCPA. The CCPC has
the responsibility for general consumer protection in Zambia, including in relation to
financial products and services.

Zambia is one of the countries with highest levels of financial exclusion, which
seems to be associated with high costs of financial products and low consumer confidence
in formal financial providers. According to the 2009 FinScope survey, only around 23% of
adult population are served by a formal financial institution and 37% use some form of
formal or informal financial product. Some respondents mentioned that financial products
were too expensive to acquire (e.g. charges, premiums or required minimum balances were
too high), while others did not know much about financial products or did not trust financial
providers.

Increased financial capability and consumer protection aim to help consumers

improve their knowledge and understanding of financial products and providers, and
strengthen their trust in financial sector. At the same time, consumer protection measures
also aim to improve business-to-consumer practices and quality of information provided to
consumers, thus promoting healthier competition among financial providers, as well as
instilling a culture of transparency, and improving corporate governance practices.

The existing legal framework for financial consumer protection is insufficient and
burdened with overlapping jurisdictions. The sector specific laws have limited provisions
related to consumer protection and contain a number of deficiencies (e.g. regarding
disclosure, business practices, etc.). Credit reporting is regulated by non-binding guidelines
issued by the BoZ, and statutory data protection provisions are limited. In addition, there
are overlaps between sector specific laws and the Competition and Consumer Protection
Act (CCPA). For example, both the CCPA and the Banking and Financial Services Act
(BFSA) contain provisions relating to competition in the banking sector, while the former
also includes consumer protection provisions applicable to customers of financial
institutions.

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2.6 ADVANTAGES AND DISADVANTAGES OF FRAGMENTED MODEL

Carmicheal et al. (2004, p.27). It is now important to consider the pros and cons of
the fragmented model of supervision. Carmicheal et al. (2004, p.27). One of the advantages
of distinguishing three broad types of financial business namely, banking, insurance and
securities trading is to enable the objectives of supervision, that is effectiveness and
efficiency of regulation to be fully met by specialist regulators as they are only concerned
with individual entities in a group. Carmicheal et al. (2004, p.27). Effectiveness relates to
whether the objectives are met, while efficiency relates to whether they are met in an
efficient way and without imposing unnecessary costs on customers and regulated firms
Carmicheal et al. (2004, p.27).

Another advantage of this model, and the reason why several countries have not
vested the powers of supervision in a single unified agency is to guard against a unified
regulator and supervisor agency that would become an extremely powerful institution and
thus begin to have political influence. Carmicheal et al. (2004, p.27).

The fragmented model has two main disadvantages. One is that the fragmented
structure creates the problems of competitive inequality, inconsistencies, duplication and
gaps that arise because similar products offered by, for example banks and insurance
companies are regulated differently because they are supplied by different types of
financial firms. Carmicheal et al. (2004, p.27). Another disadvantage is that multiple
agencies supervising different financial sectors impair the overall effectiveness of the
financial firms as they engage in regulatory arbitrage. Abrams and Taylor (2000) described
the problem of regulatory arbitrage in the following terms: “Regulatory arbitrage can
involve the placement of a particular financial service or product in a given financial
conglomerate where the supervisory costs are lowest or where supervisory oversight is
least, thus leading to firms designing new financial institutions to minimize or avoid
supervisory oversight.

2.3. Session 3: ANALYZING THE BANKER/CUSTOMER RELATIONSHIP

2.3.1. Required Reading:

2.3.2. Horn N.,(2002).“Legal Aspects of Bank-Customer Relationship in
Electronic Banking: Legal Issues in Electronic Banking (Kluwer Law
International)
2.3.3. M. Hapgood, (2007). Paget’s Law of Banking (13th ed.) London:
LexisNexis Butterworths
2.3.4. R. Cranston, (2002). Principles of Banking Law (2nd ed.) Clarendon: Oxford
University Press
2.3.5 E. P. Ellinger, E. Lomnicka & R. Hooley, Modern Banking Law (4th ed)
Oxford: Oxford University Press, 2006; J. C. T. Chuah, “General Aspects of Lender
Liability under English law” in W. Blair (ed)Banks, Liability and Risk (3rd ed.)
London: LLP 2001
2.3.6 R.K. Gupta. (2014). BANKING Law and Practice in 3 Vols. Modern Law
Publications.

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2.3.5. Learning Objectives:

After completing this chapter, the student will be able to demonstrate
knowledge of the following:

3.1 The definition of a customer

3.2 The express and implied terms
3.3 The rights and duties of the customer and the Bank
3.3.1 Banks duty as agent
3.3.2 Banks duty as trustee
3.3.3 Banks duty of secrecy and the exceptions thereof
3.3.4 Banks rights to payment, interest and other charges
3.3.5 Termination of banker/customer relationship
SUMMARY

3.1 BANKER / CUSTOMER RELATIONSHIP

Horn (2002, p.163). The relationship between a banker and his customer depends
upon the nature of service provided by a banker. Horn (2002, p.163). Accepting deposits
and lending and/or investing are the core banking businesses of a bank. In addition to its
primary functions, it deals with various customers by providing other services like safe
custody services, safe deposit lockers, and assisting the clients by collecting their cheques
and other instruments as an agent and trustees for them. Horn (2002, p.163). So, based on
the above a banker customer relationship can be classified as under:

a) Debtor/Creditor
b) Creditor/Debtor
c) Bailee/Bailer
d) Lesser/Lessee
e) Agent/Principal

From the above, it can be seen that different types of relationship exist between a banker
and customer. (Horn, 2002, p.163).

3.2 MEANING OF A BANKING COMPANY

In Zambia, as in many other jurisdictions, there has been legislative intervention in

the definition of terms such as ‘bank’ and ‘banking business’. Section 2 of Zambia’s
Banking and Financial Services Act 2017 provides that: bank” means a company
authorized to conduct banking business in accordance with this Act.

However, Arora (1997, p.15). At common law, there have been several attempts to
define the terms ‘bank’ and ‘banking business.’ The courts have been preoccupied with
treating a bank as a bank institution that undertake the business of banking. Arora (1997,
p.15). Then, then, how do we define ‘banking business’? The courts have not given an
adequate definition of the term ‘bank’, while they have succeeded in spelling out some of
the characteristics which must be fulfilled for an institution to be treated as carrying on the
business of banking. Arora (1997, p.15).

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In United Dominions Trust Ltd v Kirkwood, [1966] 2 QB 431, CA. Lord

Denning MR, drawing on the usual characteristics of banking, as spelt out in Paget’s Law
of Banking (1989, p.124) ruled: “There are therefore, two characteristics usually found in
bankers today: (1) they accept money from and collect cheques for, their customers and
place them to their credit; (2) they honour cheques or orders drawn on them by their
customers when presented for payment and debit their customers accordingly. These two
characteristics carry with them also a third, namely; (3) they keep current accounts, or
something of that nature, in their books in which the credits and debits are entered.”

3.2.1 Features of Banking

The following are the basic characteristics to capture the essential features of Banking:

(i) Dealing in money: The banks accept deposits from the public and advance the same
as loans to the needy people. The deposits may be of different types - current, fixed,
savings, etc. accounts. The deposits are accepted on various terms and conditions.

(ii) Deposits must be withdrawable: The deposits (other than fixed deposits) made by
the public can be withdrawable by cheques, draft or otherwise, i.e., the bank issue and pay
cheques. The deposits are usually withdrawable on demand.

(iii) Dealing with credit: The banks are the institutions that can create credit i.e.,
creation of additional money for lending. Thus, “creation of credit” is the unique feature of
banking.

(iv) Commercial in nature: Since all the banking functions are carried on with the aim
of making profit, it is regarded as a commercial institution.

(v) Nature of agent: Besides the basic function of accepting deposits and lending
money as loans, bank possesses the character of an agent because of its various agency
services.

3.3 WHO IS A CUSTOMER OF A BANK?

Gupta. (2014). The term ‘customer’ of a bank is not defined by law. The Banking
and Financial Service Act No. 7 of 2017 does not expressly define who a customer is.
Ordinarily, a person who has an account in a bank is considered is customer. Gupta. (2014).
Banking experts and the legal judgments in the past, however, used to qualify this statement
by laying emphasis on the period for which such account had actually been maintained
with the bank. (Gupta, 2014).

In Sir John Paget’s view “to constitute a customer there must be some recognizable
course or habit of dealing in the nature of regular banking business.” This definition of a
customer of a bank lays emphasis on the duration of the dealings between the banker and
the customer and is, therefore, called the ‘duration theory’. According to this viewpoint a
person does not become a customer of the banker on the opening of an account; he must
have been accustomed to deal with the banker before he is designated as a customer. The
above-mentioned emphasis on the duration of the bank account is now discarded.

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According to Dr. Hart, “a customer is one who has an account with a banker or for whom
a banker habitually undertakes to act as such.”

A person becomes a customer of a bank when an account is opened for him and at
the same time a contract is formed. In the English case of Commissioners of Taxation v
English, Scottish and Australian Bank Limited [1920] AC 683 where the appellate court
was of the o pinion that:

“The word customer ‘signifies a relationship in which duration is not of the essence.
A person whose money has been accepted by the bank on the footing that they undertake
to honor cheques up to the amount standing to his credit is … a customer of the bank in the
sense of the statute, irrespective of whether his connection is of short or long standing.”

For the purpose of KYC policy, a ‘Customer’ is defined as:

– a person or entity that maintains an account and/or has a business relationship with
the bank; – one on whose behalf the account is maintained (i.e. the beneficial owner);

– beneficiaries of transactions conducted by professional intermediaries, such as Stock

Brokers, Chartered Accountants, Solicitors etc. as permitted under the law, and

– any person or entity connected with a financial transaction which can pose significant
reputational or other risks to the bank, say, a wire transfer or issue of a high value demand
draft as a single transaction.

It has been judicially held that a person may become a customer by entering into a
contract with the bank by way of opening some sort of account. (See Tax Commissioner
v. English, Scottish and Australian Bank [1920] AC 683. See also, W. S. Weerasooria,
Law Relating to Banking And Inter-Related Services, Colombo). A person may also
become a customer by entering into relations or negotiations with the bank, which are to
be considered part of the contract ultimately concluded by opening an account. Thus, in
Woods v. Martins Bank Ltd [1959] 1 QB 55, the bank-customer relationship was held to
have commenced from the time the bank accepted the plaintiff’s instructions though at that
time there was no account, but only the likelihood that an account would be opened, shortly
afterwards.

3.4 BANK-CUSTOMER RELATIONSHIP

In the case of Foley v. Hill (1848) 2 HL Cas 28, it was held that the relationship
of bank and customer is one of contract. According to Paget, this relationship consists of a
“general contract”, together with “special contracts”. The former “is basic to all
transactions” and whereas the latter “could arise only as they are brought into being in
relation to specific transactions or banking services”. Hapgood, (2007, p. 145). The
distinction between general contract on the one hand, and special contracts on the other,
becomes useful when determining the duties and obligations of the bank from the
standpoint of the customer. Hapgood, (2007, p. 145). Unless contractually bound, banks
are generally free to decide whether they will provide particular services to their customers
or not. Cranston, (2002, p. 130). A bank is obliged to perform the ordinary services of

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banking arising out of the “general contract” sometimes, even without the request of the
customer.

Hapgood, (2007, p. 145). Conversely, in the case of “special contracts”, a bank

would not be obliged to perform the services arising out of such special contract, unless
specially agreed between the parties [i.e. the bank and the customer] which would generally
be outside the scope of the “general contract”. Hapgood, (2007, p. 145). Examples of some
services arising out of “special contracts” would most probably include standing orders,
direct debits, banker’s drafts, letters of credit and foreign currency for travel abroad, etc.
Hapgood, (2007, p. 145).

In the case of Joachimson v. Swiss Bank Corp. [1921] 3 KB 110 at 117, it was
held that in most of the circumstances, the relationship of banker and customer would
depend “entirely or mainly upon implied contract”. Implied terms would be important and
necessary for the bank-customer contracts due to couple of reasons.

Hapgood, (2007, p. 145). The general contracts between banks and their customers
would hardly incorporate all the terms in writing, whereas special contracts may commonly
incorporate printed terms and conditions of the bank. Hapgood, (2007, p. 145). It is unlikely
that customers would agree to all the terms when entering into a general contract with their
banks, such as opening an account. Hapgood, (2007, p. 145). Moreover, it would be
impracticable to reduce all the terms agreed between the bank and the customer to writing.
Above all, there may be implied terms in the bank-customer contracts, which are peculiar
to the banking practice, so that they cannot be displaced without affecting business
efficacy. Hapgood, (2007, p. 145).

3.4.1 Banker as Agent

A banker acts as an agent of his customer and performs a number of agency

functions for the convenience of his customers. For example, he buys or sells securities on
behalf of his customer, collects cheques on his behalf and makes payment of various dues
of his customers, e.g. insurance premium, etc. The range of such agency functions has
become much wider and the banks are now rendering large number of agency services of
diverse nature. For example, some banks have established Tax Services Departments to
take up the tax problems of their customers.

3.4.2 Relationship as Debtor and Creditor

On the opening of an account the banker assumes the position of a debtor. Hapgood,
(2007, p. 145). The bank is not a depository or trustee of the customer’s money because
the money over to the banker becomes a debt due from him to the customer. Hapgood,
(2007, p. 145). A banker does not accept the depositors’ money on such condition.
Hapgood, (2007, p. 145). The money deposited by the customer with the banker is, in legal
terms, lent by the customer to the banker, who makes use of the same according to his
discretion. The creditor has the right to demand back his money from the banker, and the
banker is under and obligation to repay the debt as and when he is required to do so. But it
is not necessary that the repayment is made in terms of the same currency notes and coins.
The payment, of course, must be made in terms of legal tender currency of the country.
Hapgood, (2007, p. 145).

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Banker’s relationship with the customer is reversed as soon as the customer’s

account is overdrawn. Banker becomes creditor of the customer who has taken a loan from
the banker and continues in that capacity till the loan is repaid. As the loans and advances
granted by a banker are usually secured by the tangible assets of the borrower, the banker
becomes a secured creditor of his customer. Hapgood, (2007, p. 145).

3.4.3 Banker as Trustee

Hapgood, (2007, p. 145). Ordinarily, a banker is a debtor of his customer in respect

of the deposits made by the latter, but in certain circumstances he acts as a trustee also. A
trustee holds money or assets and performs certain functions for the benefit of some other
person called the beneficiary. Hapgood, (2007, p. 145). For example, if the customer
deposits securities or other valuables with the banker for safe custody, the latter acts as a
trustee of his customer. The customer continues to be the owner of the valuables deposited
with the banker. The legal position of the banker as a trustee, therefore, differs from that
of a debtor of his customer. In the former case the money or documents held by him are
not treated as his own and are not available for distribution amongst his general creditors
in case of liquidation.

The position of a banker as a trustee or as a debtor is determined according to the

circumstances to each case. If he does something in the ordinary course of his business,
without any specific direction from the customer, he acts as a debtor (or creditor). Hapgood,
(2007, p. 145). In case of money or bills, etc., deposited with the bank for specific purpose,
the bankers’ position will be determined by ascertaining whether the amount was actually
debited or credited to the customer’s account or not. Hapgood, (2007, p. 145). For example,
in case of a cheque sent for collection from another banker, the banker acts as a trustee till
the cheques is realized and credited to his customer’s account and thereafter he will be the
debtor for the same account. Hapgood, (2007, p. 145). If the collecting banks fails before
the payment of the cheque is actually received by it from the paying bank, the money so
realized after the failure of the bank will belong to the customer and will not be available
for distribution amongst the general creditors of the bank.

In Foley v Hill (1848) 2 HLC 28, 9 ER 1002, it was held that a banker is not a
trustee of the customer. The relationship between them is that of a debtor and creditor.
Money deposited by a customer becomes the banker’s but creates an obligation on the
banker to repay an equivalent sum at any agreed interest rate to the customer. Thus a
customer’s claim against his banker for the loss of monies that had been drawn in his favour
out of a joint account with another customer that had subsequently been closed. (Note that
holding that the bank was a trustee would deny the banker ability to use the sums deposited
for lending to other parties. A trustee is not allowed to make profits out of the trust property
as all benefits must belong to the beneficiaries. This would make banking an unfruitful
undertaking).

3.4.4 Banker as Bailor/ Bailee

Merriam Webster Dictionary, defines bailment, bailor, and bailee. A bailment is the
delivery of goods by one person to another for some purpose upon a contract. As per the
contract, the goods should when the purpose is accomplished, be returned or disposed of

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as per the directions of the person delivering the goods. The person delivering the goods is
called the bailer and the person to whom the goods are delivered is called the bailee.

Banks secure their loans and advances by obtaining tangible securities. In certain
cases, banks hold the physical possession of secured goods (pledge) – cash credit against
inventories; valuables – gold jewels (gold loans); bonds and shares (loans against shares
and financial instruments) In such loans and advances, the collateral securities are held by
banks and the relationship between banks and customers are that of bailee (bank) and
bailer. (borrowing customer).

3.4.5 Banker as a Lesser / Lessee

Banks lease the safe deposit lockers (bank’s immovable property) to the clients on hire
basis. Banks allow their locker account holders the right to enjoy (make use of) the property
for a specific period against payment of rent.

3.5 OBLIGATIONS OF A BANKER

Though the primary relationship between a banker and his customer is that of a
debtor and creditor or vice versa, the special features of this relationship, impose the
following additional obligations on the banker: Obligations to honour the cheques The
deposits accepted by a banker are his liabilities repayable on demand or otherwise. The
banker is, therefore, under a statutory obligation to honour his customer’s cheques in the
usual course. Section 31 of the Negotiable Instruments Act, 1881, lays down that:

“The drawee of a cheque having sufficient funds of the drawer in his hands,
properly applicable to the payment must compensate the drawer for any loss or damage
caused by such default.”

3.6 OBLIGATION TO MAINTAIN SECRECY OF ACCOUNT

Ellinger (2006). The account of the customer in the books of the banker records all
of his financial dealings with the latter and the depicts the true state of his financial position.
If any of these facts is made known to others, the customer’s reputation may suffer and he
may incur losses also. Ellinger (2006). The banker is, therefore, under an obligation to take
utmost care in keeping secrecy about the accounts of his customers. By keeping secrecy is
meant that the account books of the bank will not be thrown open to the public or
Government officials and the banker will take all necessary precautions to ensure that the
state of affairs of a customer’s account is not made known to others by any means. Ellinger
(2006). The banker is thus under an obligation not to disclose deliberately or intentionally
any information regarding his customer’s accounts to a third party and also to take all
necessary precautions and care to ensure that no such information leaks out of the account
books. Ellinger (2006).

The banker's duty of confidentiality to the customer, as an implied term of the

contract between customers and their banks and building societies that these firms will
keep their customers’ information confidential. Ellinger (2006). This confidentiality is not
just confined to account transactions; it extends to all the information that the bank has
about the customer. Ellinger (2006). But from time to time, mistakes happen and for

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whatever reason banks end up releasing information that they should have kept secret.
Sometimes, the resulting breach of confidentiality is little more than technical (in other
words, nothing really flows from it), but occasionally it can have major consequences.
Ellinger (2006).

3.6.1 The Tournier principles

First of all, a banker’s duty of confidentiality is not absolute. The case of Tournier
v National Provincial and Union Bank of England (1924) KB 461, sets out four areas
where a bank can legally disclose information about its customer.

These principles still hold good today and are:

(i) where the bank is compelled by law to disclose the information

(ii) if the bank has a public duty to disclose the information

(iii) if the bank’s own interests require disclosure; and

(iv) where the customer has agreed to the information being disclosed.

If we decide that a bank disclosed information under one or more of these

circumstances, then we are unlikely to interfere. But in certain situations complaints have
been received involving circumstances where the bank should not have disclosed
information because none of the Tournier principles applied.

According Ellinger (2006). The duty of confidentiality extends beyond the date
when the banker-customer contracted is terminated. And exceptions to the duty can be seen
where the disclosure is under compulsion of the law. It should be noted, however, that the
duty of confidentiality on a bank is not an absolute concept. The common law recognizes
certain exceptions to the duty of confidentiality. These exceptions are mainly aimed at
preserving both the public interest and interests of the banks.

(i) Disclosure of Information required by Law. A banker is under statutory

obligation to disclose the information relating to his customer’s account when the law
specially requires him to do so. The banker would, therefore, be justified in disclosing
information to meet statutory requirements: For instance, under section 21(1) of the Anti-
Corruption Commission Act 1996, or where there is a duty to the public to disclose, or
where interests of the bank require such disclosure or where the disclosure is made with
the express or implied consent of the customer.

(iii) By order of the Court under the Banker’s Books Evidence Act, 1891. When
the court orders the banker to disclose information relating to a customer’s account, the
banker is bound to do so. In order to avoid the inconvenience likely to be caused to the
bankers from attending the Courts and producing their account books as evidence, the
Banker’s Books Evidence Act, 1891, provides that certified copies of the entries in the
banker’s book are to be treated as sufficient evidence and production of the books in the
Courts cannot be forced upon the bankers. According to Section 4 of the Act, “a certified
copy of any entry in a banker’s book shall in all legal proceedings be received as prima

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facie evidence of the matters, transitions and accounts therein recorded in every case where,
and to the same extent, as the original entry itself is now by law admissible, but not further
or otherwise.” Thus if a banker is not a party to a suit, certified copy of the entries in his
book will be sufficient evidence. The Court is also empowered to allow any party to legal
proceedings to inspect or copy from the books of the banker for the purpose of such
proceedings.

3.7 GARNISHEE ORDER AND ATTACHMENT ORDER

According to Gupta (2014, p.70). The obligation of a banker to honour his

customer’s cheques is extinguished on receipt of an order of the Court, known as the
Garnishee order. In Zambia a Garnishee Order is an order issued by court under provisions
of the Civil Courts (Attachment of Debts) Act Chapter 78 of the Laws of Zambia. The term
Garnishee has been derived from the French word ‘garnir ‘which means to warn or to
prepare. Gupta (2014, p.70). If a debtor fails to pay the debt owed by to his creditor, the
latter may apply to the Court for the issue of a Garnishee Order on the banker of his debtor.

Such order attaches the debts not secured by a negotiable instrument, by prohibiting
the creditor from recovering the debt and the debtor from the making payment thereof.
Gupta (2014, p.70). The account of the customer with the banker, thus, becomes suspended
and the banker is under an obligation not to make any payment from the account concerned
after the receipt of the Garnishee Order. Gupta (2014, p.70). The creditor at whose request
the order is issued is called the judgement- creditor, the debtor whose money is frozen is
called judgement- debtor and the banker who is the debtor of the judgement debtor is called
the Garnishee. Gupta (2014, p.70).

Gupta (2014, p.70). In simple words the garnishee is the person who is liable to pay
a debt to judgment debtor or to deliver any movable property to him. Gupta (2014, p.70).
Besides Judgment Debtor and decree Holder, Garnishee is a third person in whose hands
debt of the judgment debtor is kept. The Garnishee Order is issued in two parts: Gupta
(2014, p.70).

First, the Court directs the banker to stop payment out of the account of the
judgement- debtor. Gupta (2014, p.70). Such order, called Order Nisi, also seeks
explanation from the banker as to why the funds in the said account should not be utilized
for the judgement- creditor’s claim. Gupta (2014, p.70). The banker is prohibited from
paying the amount due to his customer on the date of receipt of the Order Nisi. Gupta
(2014, p.70). He should, therefore, immediately inform the customer so that dishonour of
any cheque issued by him may be avoided. Gupta (2014, p.70).

After the banker files his explanation, if any, the Court may issue the financial
order, called Order Absolute where the entire balance in the account or a specified amount
is attached to be handed over to the judgement- creditor. Gupta (2014, p.70). On receipt of
such an order to the banker is bound to pay the garnished funds to the judgement- creditor.
Gupta (2014, p.70). Thereafter, the banker liabilities towards his customer are discharged
to that extent. Gupta (2014, p.70). The suspended account may be revived after payment
has been made to the judgement-creditor as per the directions of the Court. Gupta (2014,
p.70).

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3.7.1 How a garnishee order works?

Gupta (2014, p.70). A default judgement is usually obtained by a creditor either

when a debt has gone unpaid, and debtor has not been able to come to any agreement with
the creditor about repaying the debt, or other alternative debt collection avenues have been
exhausted. If a garnishee order is made against someone, then his bank, financial
institution, or employer will likely be notified rather than the debtor. Gupta (2014, p.70).

Gupta (2014, p.70) says that the payment made by the garnishee into the court
pursuant to the notice shall be treated as a valid discharge to him as against the judgment
debtor. The court may direct that such amount may be paid to the decree holder towards
the satisfaction of the decree and costs of the execution. (Gupta, 2014, p.70).

3.7.2 Features of the Garnishee Order (Gupta (2014, p.70).

The bank upon whom the order is served is called Garnishee. The depositor who
owes money to another person is called judgement debtor. Features of the Garnishee Order
are as under;

• Garnishee Order applies to existing debts as also debts accruing due.

• Garnishee Order applies only to those accounts of Judgement Debtor which have
credit balance.
• The relationship between bank and judgement debtor is of debtor and creditor. Bank
is the debtor of Judgement Debtor who is a creditor of the bank.
• Garnishee Order does not apply to money deposited subsequent to receipt of
Garnishee Order. It also does not apply to cheques sent for collection but yet to be
realized. But if credit was allowed in the account before realization with power to
withdraw to customer, Garnishee order will be applicable on this amount.
• Garnishee Order does not apply to unutilized portion of overdraft or cash credit
account of the borrower as no debt is due to judgement debtor
• Bank can exercise right of set off before applying Garnishee Order.
• Garnishee Order is applicable only if both debts are in same right and same capacity.
• Garnishee Order issued in a single name does not apply to accounts in the joint names
of judgement debtor with another person(s). But if Garnishee Order is issued in joint
names, it will apply to individual accounts also of the same debtors. When Garnishee
Order is in the name of a partner it will not apply to partnership account but when
Garnishee Order is in the name of firm, accounts of individual partners are covered.
• If amount is not specified in the order, then it will be applicable on the entire balance
in the account. However, if it is for specific amount, the cheques can be paid from
the balance available after setting aside the amount as mentioned in the Garnishee
Order.
• Not applicable on fixed deposits taken as security for some loan.
• If loan given against fixed deposits, applicable on the amount after adjusting the
loan.

Gupta (2014, p.70). Where neither the garnishee makes the payment into the court,
as ordered, nor appears and shows any cause in answer to the notice, the court may order
the garnishee to comply with such notice as if such order were a decree against him. Gupta

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(2014, p.70). The costs of the garnishee proceedings are at the discretion of the court.
Orders passed in garnishee proceedings are appealable as Decrees. Gupta (2014, p.70).

3.8 RIGHTS OF A BANKER

3.8.1 Right of Appropriation

According to Gupta (2014, p.74). In case of his usual business, a banker receives
payments from his customer. Gupta (2014, p.74). If the latter has more than one account
or has taken more than one loan from the banker, the question of the appropriation of the
money subsequently deposited by him naturally arises. Gupta (2014, p.74). In case a
customer has a single account and he deposits and withdraws money from it frequently,
the order in which the credit entry will set off the debit entry is the chronological order, as
decided in the famous Clayton’s Case. Devaynes v Noble 35 ER 781, best known for the
claim contained in Clayton's case. Gupta (2014, p.74).

Thus the first item on the debit side will be the item to be discharged or reduced by
a subsequent item on the credit side. Gupta (2014, p.74). The credit entries in the account
adjust or set-off the debit entries in the chronological order. The rule derived from the
Clayton’s case is of great practical significance to the bankers. (Gupta, 2014, p.74).

3.8.2 Right of General Lien

One of the important rights enjoyed by a banker is the right of general lien. (Gupta,
2014, p.74). Lien means the right of the creditor to retain the goods and securities owned
by the debtor until the debt due from him is repaid. (Gupta, 2014, p.74). It confers upon
the creditor the right to retain the security of the debtor and not the right to sell it. (Gupta,
2014, p.74). Such right can be exercised by the creditor in respect of goods and securities
entrusted to him by the debtor with the intention to be retained by him as security for a debt
due by him (debtor). (Gupta, 2014, p.74).

(Gupta, 2014, p.74). Lien may be either (i) a general lien or, (ii) a particular lien.
(Gupta, 2014, p.74). A particular lien can be exercised by a craftsman or a person who has
spent his time, labour and money on the goods retained. (Gupta, 2014, p.74). In such cases
goods are retained for a particular debt only. (Gupta, 2014, p.74). For example, a tailor has
the right to retain the clothes made by him for his customer until his tailoring charges area
paid by the customer. (Gupta, 2014, p.74). So is the case with public carriers and the repair
shops.
A general lien, on the other hand, is applicable in respect of all amounts due from
the debtor to the creditor. (Gupta, 2014, p.74).

3.8.2.1 Special Features of a Banker’s Right of General Lien

(i) The banker possesses the right of general lien on all goods and securities
entrusted to him in his capacity as a banker and in the absence of a contract inconsistent
with the right of lien. (Gupta, 2014, p.74). Thus, he cannot exercise his right of general lien
if – (a) the goods and securities have been entrusted to the banker as a trustee or an agent
of the customer; and (b) a contract express or implied exists between the customer and the
banker which is inconsistent with the banker’s right of general lien. (Gupta, 2014, p.74).

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In other words, if the goods or securities are entrusted for some specific purpose, the banker
cannot have a lien over them. (Gupta, 2014, p.74).

3.8.3 Right of set- off

Gupta (2014, p.76). The right of set-off is a statutory right which enables a debtor
to take into account a debt owed to him by a creditor, before the latter could recover the
debt due to him from the debtor. Gupta (2014, p.76). In other words, the mutual claims of
debtor and creditor are adjusted together and only the remainder amount is payable by the
debtor. Gupta (2014, p.76). A banker, like other debtors, possesses this right of set-off
which enables him to combine two accounts in the name of the same customer and to adjust
the debit balance in one account with the credit balance in the other. For example, A has
taken an overdraft from his banker to the extent of K5,000 and he has a credit balance of
K2,000 in his savings bank account, the banker can combine both of these accounts and
claim the remainder amount of K3,000 only. This right of set-off can be exercised by the
banker if there is no agreement express or implied contrary to this right and after a notice
is served on the customer intimating the latter about the former’s intention to exercise the
right of set-off. (Gupta, 2014, p.76).

3.8.4 Right to charge Interest and Incidental Charges, etc.

As a creditor, a banker has the implied right to charge interest on the advances
granted to the customer. Gupta (2014, p.78). Bankers usually follow the practice of debiting
the customer’s account periodically with the amount of interest due from the customer.
Gupta (2014, p.76). The agreement between the banker and the customer may, on the other
hand, stipulate that interest may be charged at compound rate also. (Gupta, 2014, p.76).

3.9 CLOSING OF A BANK ACCOUNT – TERMINATION OF BANKER-

CUSTOMER RELATIONSHIP

Gupta (2014, p.82). Banker-customer relationship is a contractual relationship

between two parties and it may be terminated by either party on voluntary basis or
involuntarily by the process of law. Gupta (2014, p.82). These two modes of termination
are described below.

1. Voluntary Termination:

The customer has a right to close his demand deposit account because of change of
residence or dissatisfaction with the service of the banker or for any other reason, and the
banker is bound to comply with this request. Gupta (2014, p.82). The banker also may
decide to close an account, due to an unsatisfactory conduct of the account or because it
finds the customer undesirable for certain reasons. Gupta (2014, p.82). However, a banker
can close an account only after giving a reasonable notice to the customer. Gupta (2014,
p.82). However, such cases of closure of an account at the instance of the banker are quite
rare, since the cost of securing and opening a new account is much higher than the cost of
closing an account. Gupta (2014, p.82). If a customer directs the banker in writing to close
his account, the banker is bound to comply with such direction. Gupta (2014, p.82). The
latter need not ask the reasons for the former’s direction. Gupta (2014, p.82). The account

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must be closed with immediate effect and the customer be required to return the unused
cheques. (Gupta, 2014, p.82).

2. If the Bank desires to close the account:

Gupta (2014, p.82) says that if an account remains un-operated for a very long
period, the banker may request the customer to withdraw the money. Gupta (2014, p.82).
Such step is taken on the presumptions that the customer no longer needs the account.
Gupta (2014, p.82). If the customer could not be traced after reasonable effort, the banker
usually transfers the balance to an “Unclaimed Deposit Account”, and the account is
closed. Gupta (2014, p.82). The balance is paid to the customers as and when he is traced.
Gupta (2014, p.82). The banker is also competent to terminate his relationship with the
customer, if he finds that the latter is no more a desirable customer. Gupta (2014, p.82).
The banker takes this extreme step in circumstances when the customer is guilty of
conducting his account in an unsatisfactory manner, i.e. if the customer is convicted for
forging cheques or bills or if he issues cheques without sufficient funds or does not fulfil
his commitment to pay back the loans or overdrafts, etc. Gupta (2014, p.82). The banker
should take the following steps for closing such an account. (Gupta, 2014, p.82).

(a) The banker should give to the customer due notice of his intention to close the
account and request him to withdraw the balance standing to his credit. Gupta (2014, p.82).
This notice should give sufficient time to the customer to make alternative arrangements.
Gupta (2014, p.82). The banker should not, on his own, close the account without such
notice or transfer the same to any other branch. (Gupta, 2014, p.82).

(b) If the customer does not close the account on receipt of the aforesaid notice, the
banker should give another notice intimating the exact date by which the account be closed
otherwise the banker himself will close the account. Gupta (2014, p.82). During this notice
period the banker can safely refuse to accept further credits from the customer and can also
refuse to issue fresh cheque book to him. Gupta (2014, p.82). Such steps will not make him
liable to the customer and will be in consonance with the intention of the notice to close
account by a specified date. (Gupta, 2014, p.82).

The banker should, however, not refuse to honour the cheques issued by the
customer, so long as his account has a credit balance that will suffice to pay the cheque.
Gupta (2014, p.83). If the banker dishonours any cheque without sufficient reasons, he will
be held liable to pay damages to his customer under Section 31 of the Negotiable
Instruments Act, 1881. Gupta (2014, p.83). In case of default by the customer to close the
account, the banker should close the account and send the money by draft to the customer.
Gupta (2014, p.83). He will not be liable for dishonouring cheques presented for payment
subsequently. (Gupta, 2014, p.83).

3. Termination by Law:

The relationship of a banker-customer can also be terminated by the process of law and
by the occurrence of the following events:

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(a) Death of customer:

Gupta (2014, p.83). On receiving notice or information of the death of a customer, the
bank stops all debit transactions in the account. Gupta (2014, p.83). However, credits to
the account can be permitted. Gupta (2014, p.83). The balance in the account is given to
the legal representative of the deceased after obtaining the letters of administration, or
succession certificate, or indemnity bond as per the prescribed procedure, and only then,
the account is closed. (Gupta, 2014, p.83).

(b) Bankruptcy of customer:

An individual customer may be declared bankrupt, or a company may be wound up

under the provisions of law. Gupta (2014, p.83). In such an event, no drawings would be
permitted in the account of the individual/company. The balance is given to the Receiver
or Liquidator or the Official Assignee and the account is closed thereafter. (Gupta, 2014,
p.83).

(c) Garnishee Order:

After receiving a garnishee order from a court or attachment order from the court, the
account can be closed as one of the options after taking the required steps. Gupta (2014,
p.83).

(d) Insanity of the customer:

A lunatic/person of unsound mind is not competent to contract under law. Gupta (2014,
p.83). Since banker-customer relationship is contractual, the bank will not honour cheques
and can close the account after receiving notice about the insanity of the customer and
receiving a confirmation about it through medical reports. Gupta (2014, p.83).

Session 4: EXPLAINING CHEQUES AND PAYMENT SYSTEM

2.4.1. Required Reading:
2.4.2. R.K. Gupta (2014). Banking Law and Practice in 3 Vols. Modern Law
Publications, Ch. 3.
2.4.3. Kenneth K Mwenda. (2010)., ‘Legal Aspect of Banking Regulation:
Common Law Perspectives from Zambia’

2.4.4. Learning Objectives

After completing this chapter, the student will be able to demonstrate
knowledge of the following:

a. Correctly describe legal rules governing cheques, paper payments systems

and electronic payment systems
b. Clearly explain different types of Accounts
c. What is the Clearing System in Zambia?

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SUMMARY

4.1 LEGAL RULES GOVERNING CHEQUES, PAPER PAYMENTS SYSTEMS

AND ELECTRONIC PAYMENT SYSTEMS

Payment Systems play a vital role in the economy of a country. A payment system
is a system used to settle financial transactions through the transfer of monetary value and
consist of the various mechanisms that facilitate for the transfer of funds from one party
(the payer) to another (the payee). A payment system includes the participants (institutions)
and the users (customers/clients), the rules and regulations that guide its operation and the
standards and technologies on which the system operates.

A well-designed and well-functioning payment positively contributes to the

financial stability of the country and to the well-functioning of the country's economy. The
role of the Bank of Zambia is to ensure that Zambian payment systems are not only safe,
but secure, reliable and efficient. This important responsibility is defined within the Bank
of Zambia Act (1996) National Payment Systems Act (2007).

In Zambia the Payment System is regulated by the National Payment Systems Act
is an act of parliament that was enacted on 12th April, 2007. The purpose of the Act is to
provide a legal backing for the operation of the various payment mechanism in Zambia.
The Act empowers the Bank of Zambia to provide regulatory function that ensure safe,
secure and reliable.

Cash payments (notes and coins) remain the predominantly used retail payment
media in shops and between individuals and have shown a growing trend in the last few
years. There is no maximum limit to the amount of notes and coins that can be accepted as
legal tender. For non-cash payments, cheque is the predominant media used by both
individuals and corporate entities.

4.2 Cash payments

Legal tender in Zambia is Kwacha and Ngwee, denominated as follows:

- Notes: Kwacha 100, 50, 20, 10, 5
- Coins: Kwacha K1, 50 Ngwee 10 Ngwee and 5 Ngwee

4.3 Non-cash payments

The main non-cash payment media used by the non-banks is the cheque. There are
other instruments like credit/debit cards which have recently been introduced by some
banks. The post office plays an important role in money transmission in rural areas through
telegraphic transfer and money orders.

4.3.1 Credit transfers

The use of credit transfer is very limited. The main credit transfer are government
transfers of salaries to various civil servants’ accounts with commercial banks to reduce
issues of many individual cheques. Banks with a wide network of branches accept, at a fee,
individual credit transfers to another branch account holder. There is no developed credit

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transfer system for utility companies like ZESCO (electricity bills) and ZAMTEL
(telephone bills). To some extent large corporate companies transfer certain payments by
instructing their bank to debit their account and credit the payee’s bank account. These
transfers are normally same day, large-value and settled through the central bank.

4.3.2 Cheques

Section 2 of the National Payment Systems Act No.43 of 1996 of the Laws of
Zambia defines a cheque as a bill of exchange drawn on a banker payable on demand or at
a fixed or determinable future time. Cheques are the most used payment media. Banks issue
cheques to their customers on various types of accounts on which cheques can be drawn.

Only banks with settlement accounts at the central bank issues cheques. A cheque
is an acceptable media especially for large amounts which would not be settled by cash.
However, its popularity and acceptability is limited by a number of factors, such as the
clearing period. Cheques deposited after 12:00 hours will be processed (Cleared) the
following business day and value given at 12:00 hours on the third day for local and up-
country cheques respectively and the high incidence of fraud.

However, in Zambia issuance of a cheque on an insufficiently funded account is a

criminal offence as established in the case of The People v George Wello Mpombo
(2010). In that case the defendant was charged with a count of dishonoured cheque contrary
to section 33 of the National Payment Systems Act No.1 of 2007 as read with Bank of
Zambia Act Chapter 387 of the Laws of Zambia. Most payments by employers to
employee, for utilities, goods and services are made by cheque.

4.3.3 Legal Aspects of a Cheque

A cheque is defined under section 2 of National Payment Systems Act as:

(i) A cheque is a bill of exchange drawn on a specified banker

(ii) Payable on demand
(iii) Drawn on a specified banker
(iv) Electronic image of a truncated cheque is recognized under law.

A cheque is nothing but a bill of exchange with special features (i) It is always
payable on demand (A bill of exchange can be payable on demand/at sight and/or after a
specific term called as usance bill) (ii) always drawn on a specified banker i.e., the drawee
of a cheque is the banker on whom the cheque is drawn. The banker with whom the
customer holds his/her account. This drawee bank is called the paying bank.

4.3.4 Parties to a cheque

There are three parties in Cheque Transaction:

(i) Drawer (Maker of Cheque), the person who issue the cheque or hold the account
with bank.
(ii) Drawee – The Person who is directed to make the payment against cheque. In
case of cheque, it is bank.

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(iii) Payee – A person whose name is mentioned in the cheque or to whom the drawee
makes payment. If drawer has drawn the cheque in favour of self, then drawer is payee.

Apart from the above three parties, others involved in payment and collection of
cheques are: (i) Endorser: The person who transfers his right to another person and
(ii) Endorsee: The person to whom the right is transferred

Gupta (2014, p.104). Payment by Cheque is safest way to conduct business

transactions as it helps to maintain record in account statement to whom the payment is
made by whom payment is received. So it becomes easier to tract the transactions through
bank account statement. (Gupta, 2014, p.104).

4.3.5 Different types of cheques (Gupta, 2014, p.104).

(1) Open Cheque: A cheque is classified as ‘Open’ when cash payment is allowed
across the counter of the bank.

(2) Bearer Cheque: A cheque which is payable to any person who holds and
presents it for payment at the bank counter is called a ‘Bearer cheque’. A bearer cheque
can be transferred by mere delivery without any endorsement.

(3) Order Cheque: An order cheque is a cheque which is payable to a particular

person. In case of order cheque, the word ‘bearer’ might have been cancelled and the word
‘order’ is written. The payee can transfer an order cheque by endorsement to another person
by sig
ning his name on the back of the cheque.

(a) Crossing of a Cheque

According to Gupta (2014, p.105). Crossing is an ‘instruction’ given to the paying

banker to pay the amount of the cheque through a banker only and not directly to the person
presenting it at the counter. Gupta (2014, p.105). A cheque bearing such an instruction is
called a ‘crossed cheque’; others without such crossing are ‘open cheques’ which may be
encashed at the counter of the paying banker as well. Gupta (2014, p.105). The crossing on
a cheque is intended to ensure that its payment is made to the right payee. Section 123 to
131 of the Negotiable Instruments Act 1881contain provisions relating to crossing. Gupta
(2014, p.105). According to Section 131-A, these Sections are also applicable in case of
drafts. Thus not only cheques but bank drafts also may be crossed. (Gupta, 2014, p.105).

(b) Cheque crossed generally

Section 123 of the Negotiable Instruments Act 1818 provides that where a cheque
bears across its face an addition of the words “and company” or any abbreviation thereof,
between two parallel transverse lines, or of two parallel transverse lines simply, either with
or without the words “not negotiable”, that addition shall be deemed a crossing, and the
cheque shall be deemed to be crossed generally. (Gupta, 2014, p.105).

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(c) Cheque crossed specially

Section 124 of the Negotiable Instruments Act 1818 provides that where a cheque
bears across its face an addition of the name of a banker, either with or without the words
“not negotiable”, that addition shall be deemed a crossing, and the cheque shall be deemed
to be crossed specially, and to be crossed to that banker. (Gupta, 2014, p.105).

(d) Payment of cheque crossed generally or specially

Section 126 of the Negotiable Instruments Act 1818 provides that where a cheque is
crossed generally, the banker on whom it is drawn shall not pay it otherwise than to a
banker. Where a cheque is crossed specially, the banker on whom it is drawn shall not pay
it otherwise than to the banker to whom it is crossed, or his agent for collection. (Gupta,
2014, p.105).

(e) Cheque bearing “not negotiable”

Section 130 of the Negotiable Instruments Act 1818 provides that a person taking a
cheque crossed generally or specially, bearing in either case the words “not negotiable”,
shall not have, and shall not be capable of giving, a better title to the cheque than that which
the person form whom he took it had. Thus, mere writing words ‘Not negotiable’ does not
mean that the cheque is not transferable. It is still transferable, but the transferee cannot get
title better than what transferor had. (Gupta, 2014, p.105).

(f) Double Crossing

According to Gupta (2014, p.106). A cheque bearing a special crossing is to be

collected through the banker specified therein. Gupta (2014, p.106). It cannot, therefore,
be crossed specially again to another banker, i.e., cheque cannot have two special crossings,
as the very purpose of the first special crossing is frustrated by the second one. Gupta
(2014, p.106). However, there is one exception to this rule for a specific purpose. If a
banker, to whom the cheque is originally specially crossed submits it to another banker for
collection as its agent, in such a case the latter crossing must specify that it is acting as
agent for the first banker to whom the cheque is specially crossed. (Gupta, 2014, p.106).

4.3.6 Direct debits

While cheques are the predominant non-cash payment instrument, banks and the
Government are promoting other paperless payment media such as direct debit and
standing payment order. These instruments are perceived as an improvement in providing
an efficient service to customers by reducing the number of cheques issued for salary
payments. Though currently these instructions are paper based, it is envisaged that large
organisations that generate a large number of these payments will prepare them in
electronic form for direct debiting of the organisations accounts and direct crediting of
employee accounts.

Direct debits for the settlement of utility bills has now been developed in Zambia.

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4.3.7 Payment cards

A variety of cards have been issued by the major banks and one non-banks for local
use only.

Debit Cards. On bank issues debit cards to its customers which are used in the
bank itself (through its branches), hotels, filing stations and some supermarkets. The
customer’s account is debited on the use of the card.

Credit cards. One non-bank, financial institution issues a credit card to its
customers which is used in selected outlets. Customers are given a time limit within which
to settle the bill.

ATM and POS networks. Have in Zambia have introduced ATMs at some of their
branches for cash withdrawals. These ATMs are for the exclusive use of each bank except
for a few remote (rural) branches.

4.3.8 Other payment instruments

Post Office. The Post Office service also plays a marginal role in finds transfer
through its branch network throughout the country. The main instruments used are:

- Postal orders;
- Money order; and
- Telegraphic money transfers

These are mainly local transactions. The Post Office also plays an important role in
retail money transmission through its network for the remittance of Government
pensions to retired civil servants.

Traveller’s cheque. Most banks issue intentional traveller’s cheques like VISA,
Thomas Cook, American Express and Master Card denominated in US Dollars or
British Pounds Sterling for international travel. Local traveller’s cheques denominated
in Kwacha are issued and acceptable in most outlets and for customers’ payments.

4.4 PRESENT INTERBANK EXCHANGE AND SETTLEMENT CIRCUITS

There are two distinct interbank exchange and settlement systems, one based on
bilateral settlement (bank to bank, interbank dealing) and other based on multilateral net
clearing and settlement (through the Clearing House). The interbank dealing caters for
large-value transactions of a time critical nature and provides same day value. The Clearing
House transactions are small value cheque payments. Settlement from the interbank
dealing and the Clearing House are through the books of the central bank at the end of day.

4.4.1 Clearing House

The Zambia Clearing House is a private organization comprising commercial banks

and the Bank of Zambia that operates and manages the clearing house for the clearing of
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cheques. Currently there are two clearing houses for cheques, one for local currency and
the other for foreign currency denominated in US dollars and British pounds sterling.

Section 2 of the National Payment Systems Act No.43 of 1996 of the Laws of
Zambia defines clearing house to mean a corporation, association, partnership or agency
that provides clearing or settlement services for a designated payment system but does not
include a stock exchange.

According to the National Payment Systems Act, clearing house rules means the
common rules or standardized arrangements issued by a clearing house for a payment
system that has been approved by the Bank of Zambia.

The transitional Zambia Clearing House deals in cheques denominated in local

currency while the foreign currency clearing deals in foreign currency denominated
cheques drawn on banks in Zambia. Settlement is through the banks correspondent banks.

4.5 Legal Aspects of a Paying Banker

Gupta (2014, p.108). The Negotiable Instruments Act,1881 deals with negotiable
instruments like promissory notes, bills of exchanges, cheques and similar payment
instruments such as demand drafts, dividend warrants, etc. Gupta (2014, p.108). A banker
in his capacity as a banker deals with the above mentioned negotiable instruments on
different occasions. For instance, in Zambia, the National Payment Systems Act lays down
the law relating to payment of a customer’s cheque by a banker and also the protection
available to a banker. The relationship between a banker and customer, being debtor-
creditor relationship the banker is bound to pay the cheques drawn by his customer. This
duty on the part of the banker, to honour his customers’ mandate, is laid down in Section
31 of the Negotiable Instruments Act. (Gupta, 2014, p.108).

Section 5 of the Cheques Act Chapter 424 of the Laws of Zambia grants protection
to a paying banker. Furthermore, sections 10, 85, 85A, 89 and 128 of the Negotiable
Instruments Act, 1881 grants protection to a paying banker.

4.6 Obligations of a Paying Banker

The customer who has deposited money with a bank being a creditor has the right to
ask back the money from the banker who is a debtor. The duty on the part of the banker to
pay has been laid down in Section 31 of the Negotiable Instruments Act, 1881 in the
following terms:

Section 31 “The drawee of a cheque having sufficient funds of the drawer in his
hands properly applicable to the payment of such cheque must pay the cheque when duly
required to do so, and, in default of such payment, must compensate the drawer for any
loss or damage caused by such default.”

1. Section 31 applies only to Bankers This is because as per Section 6 of the

Negotiable Instruments Act, 1881 “cheque” has been defined as “a Bill of Exchange drawn
on a specified banker and not expressed to be payable otherwise than on demand”.

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2. Sufficient funds: The banker should have sufficient funds of the drawer, i.e. there
should be sufficient credit balance in the customer’s account.

3. Properly available: The funds available in the customer’s account, should also
be properly available to the payment of the cheque. The funds may not be available to pay
the cheque if: (a) the banker has exercised his right of set off for amounts due from the
customer; (b) there is an order passed by a Court, competent authority or other lawful
authority restraining the bank from making payment.

4. When duly required to do so: The banker is duty bound to pay the cheque only
when he is duly required to do so. This means that the cheque must be properly drawn and
signed by the drawer.

5. Compensate the drawer: In case the banker refuses payment wrongfully, then he
is liable only to the drawer of the cheque and not to any endorsee or holder, except when
(a) the bank is wound up, in which case the holder becomes a creditor entitled to make a
claim; (b) the banker pays a cheque disregarding the crossing, the true owner can hold the
banker liable.

6. Loss or damage caused by default: A banker is liable to the drawer for any loss
or damage which may have occurred to the drawer due to the wrongful dishonour of the
customer’s cheque.

4.7 Protection to paying banker

(a) For a paying banker to claim protection under the Negotiable Instruments Act,
one of the criteria he has to satisfy is that the payment is in due course. As to what is
payment in due course has been stated in Section 10 which reads as follows:

“Payment in due course” means payment in accordance with the apparent tenor of
the instrument in good faith and without negligence to any person in possession thereof
under circumstances which does not afford a reasonable ground for believing that he is not
entitled to, receive payment of the amount therein mentioned.

From the above definition it can be seen that payment in due course requires the
payment to be made:

– in accordance with the apparent tenor of the instrument;

– in good faith; (see Raphael v. Bank of England (1855) 17 CB 161; Jones v.
Gordon [1877] 2 AC 616; Baker v. Barclays Bank [1955] 1 WLR 822)
– without negligence;
– to the person in possession of the instrument; and
– while making payment the banker should not have reasons to believe’ that the
person in possession of the instrument is not entitled to receive payment of the amount
mentioned in the instrument.

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4.8 Liability of Paying Banker when Customer’s Signature on Cheque is Forged

Section 128 of the Negotiable Instrument Act 1818 states that “where the banker on
whom a crossed cheque is drawn has paid the same in due course, the banker paying the
cheque, and in case such cheque has come to the hands of the payee the drawer thereof,
shall respectively be entitled to the same rights, and be placed in the same position in all
respects, as they would respectively be entitled to and placed in if the amount of the cheque
has been paid to and received by the true owner thereof.

4.9 Legal Aspects of the Collecting Bank (collection of a cheque)

Gupta (2014, p.113). Collection of cheques, bills of exchange and other instruments
on behalf of a customer is an indispensable service rendered by a banker to his customer.
Gupta (2014, p.113). When a customer of a banker receives a cheque drawn on any other
banker he has two options before him – (i) either to receive its payment personally or
through his agent at the drawee bank, or (ii) to send it to his banker for the purpose of
collection from the drawee bank. Gupta (2014, p.113). In the latter case the banker,
deputed to collect the amount of the cheque from another banker, is called the ‘collecting
banker’. Gupta (2014, p.113). He presents the cheque for encashment to the drawee banker
and on its realization credits the account of the customer with the amount so realized. Gupta
(2014, p.113).

A banker is under no legal obligation to collect his customer’s cheques but collection
of cheques has now become an important function of a banker with the growth of banking
habit and with wider use of crossed cheques, which are invariably to be collected through
a banker only. Gupta (2014, p.114). While collecting his customer’s cheques, a banker acts
either
(i) as a holder for value, or
(ii) as an agent of the customer.

The legal position of the collecting banker, therefore, depends upon the capacity in
which he collects the cheques. Gupta (2014, p.114). If the collecting banker pays to the
customer the amount of the cheque or credits such amount to his account and allows him
to draw on it, before the amount of the cheque is actually realized from the drawee banker,
the collecting banker is deemed to be its ‘holder for value’. Gupta (2014, p.114). He takes
an undertaking from the customer to the effect that the latter will reimburse the former in
case of dishonour of the cheque. (Gupta, 2014, p.114).

4.10 Statutory Protection to Collecting Bank

Section 131 of the Negotiable Instruments Act 1881 grants protection to a collecting
banker and reads as follows:

Section 131 Non-liability of a banker receiving payment of cheque: A banker who

has in good faith and without negligence received payment for a customer of a cheque
crossed generally or specially to himself shall not, in case the title to the cheque proves
defective, incur any liability to the true owner of the cheque by reason only of having
received such payment. (Gupta, 2014, p.114).

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Explanation: A banker receives payment of a crossed cheque for a customer within

the meaning of this section notwithstanding that he credits his customer’s account with the
amount of the cheque before receiving payment thereof. (Gupta, 2014, p.114).

The provisions of the above section have been applied to drafts as per Section 131 A
of the Negotiable Instruments Act. (Gupta, 2014, p.114).

Conditions for protection: Though Section 131 grants protection to a collecting

banker, the protection is not unconditional. For the collecting banker to claim the protection
under Section 131 he has to comply with certain conditions and they are:

1. The collecting banker should have acted in good faith.

2. He should have acted without negligence.
3. He should receive payment for a customer.
4. The cheque should be crossed generally or specially to himself.

4.11 Duty to open the account with references and sufficient documentary proof

Gupta (2014, p.118). The duty to open an account only after the new account holder
has been properly introduced to is too well grained into today’s banker’s mind that it would
be impossible to find an account without introduction. Gupta (2014, p.118). The necessity
to obtain introduction of a good customer is to keep off crooks and fraudsters who may
open accounts to collect forged cheques or other instruments. (Gupta, 2014, p.118).

In this regard the English Decision Ladbroke vs Todd (1914) 30 TLR 433 can be
referred to. In this case a thief stole a cheque in transit and collected the same through a
banker where he had opened an account without reference and by posing himself as the
payee whose signature the thief forged. After the cheque was collected the thief withdrew
the amount. The bank was held liable to make good the amount since it acted negligently
while opening the account in as much as it had not obtained any reference. (Gupta, 2014,
p.118).

4.12 Negligence of collecting bank in collecting cheques payable to third parties

The collecting bank has to make necessary enquiries before any third party cheques
are collected on behalf of its customer. In Ross vs London County Westminster and
Parrs Bank Ltd. [1919] 1 KB 678, cheques payable to “the Officer in charge, Estate
Office, Canadian Overseas Military Force” were used by an individual to pay off his debts.
There was an instruction in all the cheques that it was negotiable by the concerned officer.
However, it was held that the fact that the cheques were drawn in favour of the Officer in
charge should have put the banker on enquiry and since no such enquiry was made by the
banker the bank is liable on the grounds of negligence.

4.13 Duty to take into account the state of customer’s account

Gupta (2014, p.118). The collecting banker is required to take into account the status
of the customer and also the various transactions that have taken place in the customer’s
account so as to know the circumstances and the standard of living of the customer. Gupta

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(2014, p.118). If for example, a person is an employee and the nature of his employment
is that of a clerk his salary would be known to the bank and any substantial credits by way
of collection of cheques would be suspected and it would be the duty of the banker to take
necessary precautions while collecting such cheques. (Gupta, 2014, p.118).

For instance, in Nu-Stilo Footwear Ltd. vs Lloyds Bank Ltd. [1956] 7 Legal
Decisions Affecting Bankers P. 121, the plaintiffs who were manufacturer of ladies
footwear were defrauded by their Secretary and Works Accountant who converted 9
cheques payable to the plaintiffs into his account. The Secretary opened the accounts in the
defendant bank in a false name and as reference gave his real name. The bank thereupon
called the reference and got a satisfactory reply which included the fact that the account
holder had recently come down from Oxford and intended setting up a business of his own.
The Secretary thereupon presented 9 cheques totally aggregating to £ 4855. Since these
cheques were drawn on the plaintiffs they sued the defendant bank who had collected the
cheques. The Court held that the collecting bank was negligent in as much as the collecting
bank did not take necessary precautions because the amounts collected were inconsistent
with the business of the account holder and therefore necessary enquires should have been
made by the bank.

4.14 Duty to verify the instruments or any apparent defect in the instruments

Sometimes the instrument which is presented for collection would convey to the
banker a warning that a customer who has presented the instrument for collection is either
committing a breach of trust or is misappropriating the money belonging to some other. In
case the banker does not heed the warning which is required of a prudent banker then he
could be held liable on the grounds of negligence as can be seen from the case of
Underwood Ltd. v Bank of Liverpool Martin Ltd. [1924] 1 KB 775, the Managing
Director of a company paid into his private account large number of cheques which were
to be paid into the company’s account and the bank was held negligent since it did not
make enquiries as to whether the Managing Director was in fact entitled to the amounts
represented by these cheques. (Gupta, 2014, p.118).

4.15 LETTERS OF CREDIT

According to Gupta (2014, p.163). A Letter of Credit is issued by a bank at the

request of its customer (importer) in favour of the beneficiary (exporter). Gupta (2014,
p.163). It is an undertaking/ commitment by the bank, advising/informing the beneficiary
that the documents under a LC would be honoured, if the beneficiary (exporter) submits
all the required documents as per the terms and conditions of the LC. (Gupta, 2014, p.163).

4.15.1 Importance of letter of credit in trade activities

According to Gupta (2014, p.163). The trade can be classified into Inland and
International. Due to the geographical proximities of the importers and the exporters, banks
are involved in LC transactions to avoid default in payment (credit risks). Gupta (2014,
p.163). To facilitate trade and also to enable the exporter and importer to receive and pay
for the goods sold and bought, letter of credit is used as a tool. Gupta (2014, p.163). Letter
of credit mechanism that the payment and receipts (across the globe) are carried out in an
effective manner. (Gupta, 2014, p.163).

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4.15.2 Letters of Credit – Parties

1. Applicant (importer) requests the bank to issue the LC

2. Issuing bank (importer’s bank which issues the LC [also known as Opening banker
of LC])

3. Beneficiary (exporter)

Different types of banks:

– Opening bank (a bank which issues the LC at the request of its customer [importer])

– Advising bank (the issuing banker’s correspondent who advices the LC to

beneficiary’s banker and/ or beneficiary)

– Negotiating bank (the exporter’s bank, which handles the documents submitted by
the exporter. The bank also finances the exporter against the documents submitted under a
LC)
– Confirming bank (the bank that confirms the credit)

– Reimbursing bank (reimburses the LC amount to the negotiating/ confirming bank)

4.15.3 Types of LC’s

(a) Sight Credit – Under this LC, documents are payable at sight/ upon
presentation

(b) Acceptance Credit/ Time Credit – The Bills of Exchange which are drawn,
payable after a period, are called usance bills. Under acceptance credit usance bills are
accepted upon presentation and eventually honoured on due dates. (Gupta, 2014, p.119).

(c) Revocable and Irrevocable Credit – A revocable LC is a credit, the terms and
conditions of the credit can be amended/ cancelled by the Issuing bank, without prior notice
to the beneficiaries. An irrevocable credit is a credit, the terms and conditions of which can
neither be amended nor cancelled without the consent of the beneficiary. Hence, the
opening bank is bound by the commitments given in the LC. (Gupta, 2014, p.119).

(d) Confirmed Credit – Only Irrevocable LC can be confirmed. A confirmed LC

is one when a banker other than the Issuing bank, adds its own confirmation to the credit.
In case of confirmed LCs, the beneficiary’s bank would submit the documents to the
confirming banker. (Gupta, 2014, p.119).

(e) Back-to-Back credit – In a back to back credit, the exporter (the beneficiary)
requests his banker to issue a LC in favour of his supplier to procure raw materials, goods
on the basis of the export LC received by him. This type of LC is known as Back-to-Back
credit. Example: An Indian exporter receives an export LC from his overseas client in
Netherlands. The Indian exporter approaches his banker with a request to issue a LC in

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favour of his local supplier of raw materials. The bank issues a LC backed by the export
LC. (Gupta, 2014, p.119).

(f) Transferable Credit – While a LC is not a negotiable instrument, the Bills of

Exchange drawn under it are negotiable. A Transferable Credit is one in which a
beneficiary can transfer his rights to third parties. Such LC should clearly indicate that it is
a ‘Transferable’ LC. (Gupta, 2014, p.119).

4.15.4 Documents handled under Letters of Credit

Gupta (2014, p.165). Documents play a crucial role in trade transactions.

Documents are integral part of LCs. Gupta (2014, p.165). The banks involved in LC
transactions deal only with documents and on the evidence of the correct and proper
documents only the paying banks (opening bank/confirming bank) need to make payment.
In view of these factors, banks have to be careful while handling documents/ LCs. (Gupta,
2014, p.165).

At various stages, different banks (Negotiating bank {beneficiary’s bank},

confirming bank, opening bank) have to verify whether all the required documents are
submitted strictly as per the terms and conditions of credit. Gupta (2014, p.165). The
important documents handled under LCs are broadly classified as

(a) Bill of Exchange: Bill of exchange, is drawn by the beneficiary (exporter) on

the LC issuing bank Gupta (2014, p.165). When the bill of exchange is not drawn under a
LC, the drawer of the bill of exchange (exporter), draws the bill of exchange on the drawee
(importer). Gupta (2014, p.165). In such a case, the exporter takes credit risk on the
importer, whereas, when the Bill of Exchange is drawn under LC, the credit risk for the
exporter is not on the importer but on the LC issuing bank. Gupta (2014, p.165). Banks
should be careful in ensuring that the Bill of Exchange is drawn strictly as per the terms
and conditions of the credit. Some others important aspects are:

(i) It should be drawn by the beneficiary on the opening bank (ii) It should clearly
indicate the amount and other details

(iii) Depending upon the LC terms a Bill of Exchange may be drawn as a sight bill
or an usance bill (iv) It should clearly indicate the LC number. (Gupta, 2014, p.165).

(b) Commercial Invoice: This is another important document. Commercial

invoice is prepared by the beneficiary, which contains (i) relevant details about goods in
terms of value, quantity, weights (gross/net), importer’s name and address, LC number (ii)
Commercial invoice should exactly reflect the description of the goods as mentioned in
LC. (iii) Another important requirement is that the commercial invoice should indicate the
terms of sale contract (Inco terms) like FOB, C&F, CIF, etc (iv) Other required details like
shipping marks, and any specific detail as per the LC terms should also be covered. (Gupta,
2014, p.165).

(c) Transport Documents: When goods are shipped from one port to another port
the transport document issued is called the bill of lading. Gupta (2014, p.165). Goods can
be transported by means of airways, roadways and railways depending upon the situations.

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Gupta (2014, p.165). In case goods are transported by means of water ways, the document
is called bill of lading, by airways it is known as airway bills and by roadways called as
lorry receipt and by railways it is known as railway receipt. Gupta (2014, p.165). In case
of a single transaction, when different modes are used to transport the goods from the
beneficiary’s country to the importer’s destination, a single transport document can be used
viz., Multi model transport document. (Gupta, 2014, p.165).

For ease of reference the most commonly used document i.e., Bill of Lading is
discussed here.

(d) Bill of Lading (B/ L):

Gupta (2014, p.166). The B/ L is the shipment document, evidencing the movement
of goods from the port of acceptance (in exporter’s country) to the port of destination (in
importer’s country). Gupta (2014, p.166). It is a receipt, signed and issued by the shipping
company or authorized agent. Gupta (2014, p.166). It should be issued in sets (as per the
terms of credit). (Gupta, 2014, p.166).

4.15.5 Other important features:

As per the terms and conditions of the credit, a bill of lading should clearly
indicate: Gupta (2014, p.166).

(i) the description of goods shipped, as indicated in the invoice

(ii) conditions of goods “Clean” or otherwise (not in good condition/

shortage/damaged)

(iii) drawn to the order of the shipper, blank endorsed or in favour of the opening
banks
(iv) the gross and net weight

(v) Freight payable or prepaid

(vi) Port of acceptance and port of destination

Insurance Policy/ Certificate: This document is classified as a document to cover risk.

(a) It must be issued by the insurance company or their authorized agents

(b) It should be issued in the same currency in which the LC has been issued

(c) It should be issued to cover “All Risks”

(d) The date of issuance of the policy/ certificate should be on or before the date of
issuance of the shipment, and should clearly indicate that the cover is available from the
date of shipment

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(e) Unless otherwise specified, it should be issued for an amount of 110% of CIF
value of goods

(f) The description of the goods in the policy/certificate should be as per the terms
of the credit

(g) The other important details like the port of shipment, port of destination etc
needs to be clearly indicated

Other documents:

Gupta (2014, p.166). As per the terms of LC, all required documents have to be
submitted by the beneficiary. Documents like Certificate of Origin (issued by the Chamber
of Commerce), indicates the origin of goods. The origin of goods should not be from any
prohibited nations. Gupta (2014, p.166).

Packing list, required certificates, etc. should be drawn as per the terms and
conditions of the credit. Gupta (2014, p.166).

4.16 Types of Accounts

(i) Savings bank account

– The Savings Bank Rules must be made available to account holders while opening
the accounts.

– Photographs of all depositor’s/account holders whether resident or non-resident should

be obtained in respect of all types of deposit accounts including fixed, recurring,
cumulative, etc. except: -

(i) Banks, Local Authorities and Govt. Departments (excl. public sector undertakings or
quasi Government bodies);

(ii) Accounts of Staff members (single/joint)

– Banks need not insist for the presence of account holder for making cash withdrawal of
‘self’ or bearer cheques unless circumstance so warrants.

– Photographs cannot be a substitute for specimen signatures.

– Only one set of photographs need be obtained and separate photographs need not be
obtained for each category of deposit.

– While opening the accounts, the account holders should be informed in transparent
manner the requirement of minimum balance and other charges, etc. Revision in charges
also needs to be advised from to time.

– Banks may purchase cheques, drafts, etc. deposited in the account for clearing in case of
suspension of clearing operations temporally or apprehension of prolonging the

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suspension. This facility is extended to customers upon examining the credit worthiness,
integrity, past dealing, occupation, etc. so as to guard themselves from the possibilities of
such instrument being dishonored subsequently.

– Savings Bank Pass Books must be provided invariably to all customers. In case of
account statement, the same should be mailed to the customers regularly. These facilities
should be provided at Bank’s cost. Updating the pass book periodically should also be
arranged by the banks.

(i) Term Deposit Account

– Banks are required to issue term deposit receipt indicating therein full details, such
as, date of issue, period of deposit, due date, applicable rate of interest, etc.

– Term Deposit Receipts can be freely transferable from one office of bank to
another.
– In order to extend better service, banks should ensure sending of intimation of
impending due date of maturity well in advance to their depositors. Change in rate of
interest should be advised well in advance to the customers.

– Deposits repayable in less than three months or where the terminal quarter is
incomplete, interest should be paid proportionately for the actual number of days reckoning
the year at 365 days or 366 days in case of leap year.

– Banks may allow premature withdrawal of Term Deposits at the request of the
depositor and interest on the deposit for the period that it has remained with the bank will
be paid at the rate applicable Banks have the freedom to fix penal interest on such
withdrawal. No interest need be paid where premature withdrawal takes place before
completion of the minimum period prescribed.

– Bank can permit addition/deletion of name/s of joint account holders. However,

the period and aggregate amount of the deposit should not undergo any change. Banks may
also allow splitting of joint deposit, in the name of each of the joint account holders
provided that the period and the aggregate amount of the deposit do not undergo any
change.

– Banks may renew the frozen accounts upon obtaining suitable request letter for
renewal. No renewal receipt be issued but suitable noting may be done in the deposit
account. Renewal of the deposit may be advised to the concerned Enforcement Authority
by registered post/Speed Post/Courier. Overdue interest may be paid as per the policy
adopted by the banks.

– Banks are required to ensure that their branches invariably accept cash over the
counters from all their customers who desire to deposit cash at the counters. No product
can be designed which is not in tune with the basic tenets of banking i.e. acceptance of
cash.
– Notwithstanding the legal provisions, opening of fixed/recurring and savings bank
accounts be permitted in the name of minor with mother as guardian provided bank take

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adequate safeguards in allowing operations in the accounts by ensuring that such accounts
are not allowed to be overdrawn and that they always remain in credit.

(ii) Current Accounts

– Banks while opening current account must obtain a declaration to the effect that
the account holder is not enjoying any credit facilities with any other bank. Banks must
scrupulously ensure that their branches do not open current accounts of entities which enjoy
credit facilities (fund based or non-fund based) from the banking system without
specifically obtaining a No-Objection Certificate from the lending bank(s).

– Bank may open account of prospective customer in case no response is received

from its existing bankers upon waiting for a fortnight. The situation may be reviewed with
reference to the information provided by the prospective customer as well as taking needed
due diligence on the customer.
– For corporate entities enjoying credit facilities from more than one bank, the banks
should exercise due diligence and inform the consortium leader, if under consortium, and
the concerned banks, if under multiple banking arrangement.

4.16.1 Levy of Service Charges

Banks should ensure that the service charges fixed are reasonable and they are not
out of line with the cost of providing such services. Customers with low volume of
transactions are not penalized.

1.1 Session 5: DISCUSSING INSOLVENCY

2.5.1. Required Reading:
2.4.5. Pwc. (2020). An analysis of the Zambian Corporate Insolvency Act
2.4.6. Mwenda K., (2007). ‘The Future of corporate insolvency law and secured
transactions in commonwealth Africa; Africa Growth South Africa Agenda South
Africa July-September 2007, 43

2.5.2. Learning Objectives

After completing this chapter, the student will be able to demonstrate
knowledge of the following:
5.1 Legal Framework regulating Banks in Zambia:
Corporate Insolvency Act No, 9 of 2017 and Banking and Financial
Services Act No.7 of 2017.
5.4 Consequences of Insolvency of Company
5.4.1 Powers of Liquidation/Receiver
5.4.2 Priority of Claims
5.4.3 Other consequences as seen from regulation.
SUMMARY

5.1 LEGAL FRAMEWORK REGULATING THE BANKING INSOLVENCY

IN ZAMBIA

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Traditionally, insolvency legislation in Zambia has been part of the Companies Act
Chapter 388 of the Laws of Zambia. In 2017 the Parliament of Zambia enacted the
country’s first stand-alone Corporate Insolvency Act No. 9 of 2017. The new legislation
was brought into force through a Commencement Order, Statutory Instrument No. 47 of
2018, issued in June 2018. The prescribed forms for the implementation of the act were
issued in July 2019, through statutory orders No. 40 and 41 of 2019.

5.1.1 Definition of Insolvency

Part X of the Banking and Financial Services Act No. 7 of 2017 provides for
Insolvency, dissolution and liquidation of financial service providers. In particular section
2 of Act No.7 of 2017 defines insolvency as a situation where a financial service provider
—
(a) is unable to pay debts as they fall due;

(b) has assets that are insufficient to meet liabilities; or

(c) has regulatory capital which is below the prescribed minimum;

Furthermore, Black’s Law Dictionary defines insolvency as the condition of being

unable to pay debts as they fall due or in the usual course of business.

Section 120 (1) of Act No. 7 of 2017 states that despite the Corporate Insolvency
Act, 2017, or any other law, an insolvent financial service provider shall not—

(a) receive deposits; or

(b) enter into any new, or continue to conduct existing, banking or financial service
business, except that which is necessary or incidental to the orderly realization,
conservation and preservation of the assets of a financial service provider.

The insolvency provisions in the Zambian Companies Act, like those in many other
commonwealth countries are premised on English law. Many jurisdictions including
England have undertaken insolvency law reform to introduce modern and workable
concepts such as those aimed at facilitating corporate rescue, enhancing director’s
responsibility, providing for expeditious and non-court based procedures, among others.
Since a Bank is a company will still be regulated both by the provisions in the Corporate
Insolvency Act No. 9 of 2017 and the Banking and Financial Services Act No. 7 of 2017.

However, as with the legislative changes in other countries, the focus of the
reformed insolvency legislation has changed, this move has come with the recognition that
the rescue approach (rather than the traditional recovery only approach) leads to a better
overall outcome for all parties involved. The key objectives of this new insolvency act are
to:
i. aligns Zambian insolvency law with international best practice;
ii. enhance transparency and accountability in insolvency proceedings; and
iii. provide a mechanism for salvaging financially distressed but viable companies.

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5.2 INSOLVENCY PROCEDURES UNDER THE BANKING AND FINANCIAL

SERVICES ACT NO. 7 OF 2017

Insolvency provisions in the Act are in following parts, first, provisions relating to
the resolution to voluntarily wind-up or dissolve financial service provider and duties of
financial service provider on voluntary winding- up or dissolution. Secondly, notice of
voluntary winding-up or dissolution and rights of depositors and creditors. Thirdly,
distribution of assets on voluntary winding- up or dissolution.

5.3 WINDING UP OF COMPANIES (BANKS)

Winding up is the process of settling accounts and liquidating assets in anticipation

of a company’s dissolution.

5.3.1 Commencement of the winding up process

The Corporate and Insolvency Act provides for either voluntary winding up or
winding up by the court.

5.3.2 Resolution to voluntarily wind-up or dissolve financial service provider

Section 121(1) of the Banking and Financial Services Act No.7 of 2017
provides that a financial service provider shall not, except with the written approval of the
Bank, pass a resolution for the voluntary winding-up or dissolution of the financial service
provider in accordance with the Corporate Insolvency Act, 2017, or any other law.

(2) A financial service provider seeking the approval of the Bank for voluntary
winding-up or dissolution, in accordance with subsection (1), shall submit—

(a) a certified copy of the resolution; and

(b) an audited declaration of solvency by the directors to which shall be attached a

statement of affairs of the financial service provider showing the—
(i) assets and total amount expected to be realised therefrom;
(ii) liabilities; and
(iii) estimated expenses of the winding-up, made up to the latest practicable date
before the resolution to wind-up was made.

(3) The Bank shall approve a voluntary winding- up if the Bank is satisfied that the
financial service provider is solvent and has sufficient liquid assets to repay its depositors
and all its other creditors in full and without delay.

(4) Where a bank or financial institution passes a resolution for voluntary winding-
up or dissolution, the bank or financial institution shall record the date, hour and minute of
the passing of the resolution.

(5) A director, senior officer or other employee of a financial service provider who
makes a false declaration, causes or permits any false declaration to be made, contrary to
subsection (2), commits an offence and is liable, upon conviction, to a fine not exceeding

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five hundred thousand penalty units or to imprisonment for a term not exceeding five years,
or to both.

5.3.3 Duties of financial service provider on voluntary winding- up or dissolution

Section 122(1) of Act No. 7 of 2017 states that if a financial service provider
receives approval from the Bank for a voluntary winding up or dissolution, the financial
service provider shall—

(a) surrender its licence to the Bank, within seven days of receipt of the approval,
and shall cease to do business and may exercise its powers only to the extent necessary to
effect its orderly winding up or dissolution in accordance with the Corporate Insolvency
Act, 2017, and this Act; and

(b) repay in full its depositors and other creditors.

5.3.4 Notice of voluntary winding-up or dissolution

Section 123(1) of Act No.7 of 2017 provides that a financial service provider shall,
within fourteen days after receiving approval for a voluntary winding-up or dissolution, by
registered mail, or in the prescribed manner and form notify—

(a) every depositor and creditor of the financial service provider of the intended
voluntary winding-up or dissolution; and

(b) a person entitled to funds or property held by the financial service provider as a
trustee, fiduciary, lessor of a safe-keeping facility or bailee, of the proposed winding-up or
dissolution.
(2) A notice, for the purposes of subsection (1), shall include such information as
the Bank may specify.

(3) A copy of a notice, specified in subsection (1), shall be kept and displayed in a
conspicuous place in the public part of each branch and the financial service provider shall
cause the notice to be published in the Gazette and in a newspaper of general circulation or
any other media in Zambia.

5.3.5 Rights of depositors and creditors

Section 124(1) of Act No.7 of 2017 states that an approval by the Bank for the
voluntary winding-up or dissolution of a financial service provider as provided in this Part,
shall not prejudice the right of a depositor or creditor to payment in full, or to the return of
funds or property held, by the financial service provider.

(2) All lawful claims shall be paid promptly and all funds and other property held
bythe financial service provider shall be returned to the rightful owners within such
maximum period as the Bank may direct in writing.

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5.3.6 Distribution of assets on voluntary winding- up or dissolution

Section 125(1) of Act No. 7 of 2017 states that where the Bank considers that a
financial service provider has discharged all the obligations specified in this Act, the
remainder of its property shall be distributed to the shareholders, in accordance with the
Corporate Insolvency Act, 2017, and this Act.

(2) A distribution shall not be made, in accordance with subsection (1), before—

(a) all claims of depositors and other creditors have been paid in full;

(b)in the case of a disputed claim, the financial service provider has turned over to
the Bank, sufficient funds to meet any liability that may be judicially determined; and (c)
uncollected funds, payable to a depositor or creditor, have been turned over to the Bank to
be dealt with as unclaimed funds in accordance with this Act.

5.3.7 Powers of Bank where assets insufficient or completion unduly delayed

Section 126 of Act No. of 2017 provides that the Bank of Zambia may take
possession of the financial service provider being voluntarily wound-up or dissolved, if the
Bank subsequently finds out that—

(a) the assets of a financial service provider are not sufficient to fully discharge all
obligations; or

(b) completion of the winding-up or dissolution has been unduly delayed.

5.4 POWERS OF LIQUIDATOR

Section 128(1) further states that in effecting a compulsory winding-up or

dissolution of the financial service provider, in accordance with this Act the Bank may, in
addition to any other powers, exercise the powers of the financial service provider
concerned.

(2) Without limiting the generality of subsection (1), the Bank as liquidator of a
financial service provider shall have the power to—

(a) bring, carry on or defend an action or legal proceedings in the name and on
behalf of the financial service provider; and

(b) carry on the business of the financial service provider only for the beneficial
winding-up or dissolution of the financial service provider.

5.5 PRIORITY OF CREDITORS

Section 132(1) of Act No. 7 of 2017 states that despite the Corporate Insolvency
Act, 2017, or any other written law, in any compulsory winding-up or dissolution of a

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financial service provider the following shall be paid in priority to all other debts in the
order set:

(a) expenses incurred in the process of compulsory winding- up or dissolution;

(b) depositors;

(c) taxes and rates due;

(d) wages and salaries of employees of the financial service provider for a period
of three months;

(e) charges and assessments due to the Bank; or

(f) other claims against the financial service provider in such order of priority as
the Court may determine on application by the Bank.

(2) After payment of all claims submitted and accepted, the remaining claims with
interest that are not submitted within the time allowed in accordance with this Part shall be
paid, in the order of priority of their submission and at a rate to be fixed by the Bank.

(3) If the amount available for payment for any class of claims, referred to in
subsections (1) and (2), is insufficient to provide payment in full, the claims within a class
shall abate in equal proportions and for the purposes of this section each paragraph of
subsection (1) constitutes a separate class of claims and the claims referred to subsection
(2) constitute another separate class of claims.

(4) If the amount available for payment for any class of claims, referred to in
subsection (1) is insufficient to provide payment in full, the claims shall abate in equal
proportions.

(5) The Bank shall establish a scheme for the protection of depositors.

5.6 THE CORPORATE INSOLVENCY ACT NO. 9 OF 2017 INTRODUCES A

NEW INSOLVENCY PROCEEDING – BUSINESS RESCUE

The Corporate Insolvency Act No. 9 of 2017 introduces the business rescue (BR)
route of insolvency.

5.6.1 Commencement of business rescue

Business Rescue proceedings can be started through a board resolution if the

company’s board believe that:

a) the company is ‘financially distressed’; and

b) there appears to be a reasonable prospect of rescuing the company; and there is

need to:
i. maintains the company as a going concern; or

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ii. achieve a better outcome for the company’s creditors than is likely to be the case
if the company were to be liquidated; or

iii. realize the property of the company to make a distribution to one or more
secured or preferential creditors.

Alternatively, an affected person may apply to the court for an order to place the
company under supervision and begin Business Rescue proceedings.

The Business Rescue process benefits from a moratorium during the period of the
BR proceeding that prevents any legal or enforcement action from being taken against the
company by any other creditor. This allows the appointed administrator to execute his
mandate to rescue the business without the pressure of enforcement action or litigation
from other creditors

2.4. Session 6: DEFINITION AND JUSTIFICATION FOR SECURITY

2.6.1 Required Reading:

2.5.2 R.K. Gupta (2014). Banking Law and Practice in 3 Vols. Modern Law
Publications, Ch. 7.
2.6.2 Mohd Khairul Affendy Ahmad et al. (2010). Security Issues on Banking
Systems. (IJCSIT) International Journal of Computer Science and
Information Technologies, Vol. 1 (4), 268-272.
2.6.3 Solly Patel (2008). Conveyancing and Legal Drafting., Zambia Institute of
Advanced Legal Education (ZIALE)
2.6.4 J. Hudson, (1995). The Case against Secured Lending, 15 Int’l Rev. L. &
Econ. 47.
2.6.5 P. Wood, (1995)., Comparative Law of Security and Guarantees (London:
Sweet & Maxwell.

2.6.4 Learning Objectives

After completing this chapter, the student will be able to demonstrate
knowledge of the following:
6.1 Taking security from companies
6.1.1 Land
6.1.2 Debentures as a Security for the Loan/Advance
6.1.3 Mortgages
6.1.4 Floating and Fixed Charges
6.1.5 Guarantees
6.1.6 Stocks and Shares
6.1.7 Pledges
6.1.8 Lien Policies

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SUMMARY

Hudson, (1995, p.453). Security is the process by which a creditor obtains an extra
source for the repayment of his debt. In the financial context, it is an essential part of what
may loosely be described as the enforcement of claims. Hudson, (1995, p.453). he subject
is of interest to central bankers in their capacity as custodian of their countries’ financial
systems. It is not proposed to enter into the debate as to whether security is necessary,
desirable, or efficient. Hudson, (1995, p.453). It is true that much lending is unsecured.
Hudson, (1995, p.453). Markets have sprung up to provide ready sources of unsecured
credit, such as the commercial paper market. Hudson, (1995, p.453). However, lenders like
security, if they can get it, and this is the commercial reality of the situation. Hudson, (1995,
p.453).

The law of security is essentially about methods of taking and realizing collateral.
Hudson, (1995, p.458). Generally, this implies a proprietary right on the part of the creditor
in the property constituting the collateral. Hudson, (1995, p.458). To that extent, the law
of security straddles the law of property and the law of obligations. Hudson, (1995, p.458).
An exception is the guarantee, which involves the personal promise of the guarantor
without in itself creating any interests in his property. Hudson, (1995, p.458). Lenders
regard guarantees as "security," but on a strictly conceptual basis they fall outside the law
of security. Hudson, (1995, p.458).

Types of property:

Most, if not all, legal systems draw a distinction between immovable (land) and
movables (other forms of property). Hudson, (1995, p.453). Subject to that, virtually every
type of property that has an economic value is potentially available as security: land, goods,
debt and equity securities, contractual claims, cash proceeds, inventory, receivables, and
so forth. Hudson, (1995, p.453).

6.1 LAND AS SECURITY

According to Gupta (2014, p.197). Bankers in the olden days were very much
averse to accept land and building as a security, but this prejudice has over a period of time
changed and land and building as a security has become an acceptable collateral in most
advances, more particularly to corporate customers. Gupta (2014, p.197). The advantages
and disadvantages of this form of security cannot be universally applied to all lands and it
depends on the nature of the land offered. Gupta (2014, p.197). We shall now discuss both
the advantages and disadvantages

6.1.1 Advantages

(i) The advantage that land has over other types of securities is that its value
generally increases with time. Gupta (2014, p.197). With every fall in the value of money,
the value of land goes up and due to its scant availability in developing areas its value is
bound to increase. Gupta (2014, p.197).

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(ii) It cannot be shifted, a fact which sometimes is also a disadvantage. Gupta (2014,
p.197).

6.1.2 Disadvantages

(i) Valuation is at times difficult

The value of a building depends on several factors such as location, size of property,
state of repair, amenities, etc., and in the case of factories and industrial buildings, the
machinery, nature of industry, etc. Gupta (2014, p.197). This makes the valuation very
difficult. Buildings and the materials used in the buildings are not alike. Gupta (2014,
p.197). In fact, buildings must be valued on a conservative basis because of limited market
in the event of sale. Gupta (2014, p.197).

(ii) Ascertaining the title of the owner

The banker cannot obtain a proper title unless the borrower himself has title to the
property to be mortgaged. Gupta (2014, p.197).

(iii) Difficult to realize the security

Land is not easily and quickly realizable, due to the lack of ready market. Gupta
(2014, p.197). It may take months to sell and sometimes if the market is not favorable, it
may fetch a lower price than what was anticipated. Gupta (2014, p.197).

(iv) Creating a charge is costly

The security can be charged either by way of legal mortgage or by way of an

equitable mortgage. Gupta (2014, p.197). An equitable mortgage may be created by a
simple deposit of title deeds with or without a memorandum. Gupta (2014, p.197).
Although equitable mortgage is less expensive, a banker always prefers legal mortgage to
an equitable mortgage. Gupta (2014, p.197). Since the remedies under a legal mortgage are
better than those under an equitable mortgage. Gupta (2014, p.197). However, completing
a legal mortgage involves expenses including stamp duty and lot of formalities. (Gupta,
2014, p.197).

6.1.3 Precautions to be taken by the banker

Gupta (2014, p.198). The following are some of the precautions which a banker
should take before lending out money to a customer who intends to his land as security:

(i) Financial soundness of borrower: The banker should place more reliance on
the financial soundness of the borrower. Gupta (2014, p.198).

(ii) Borrower’s title: The banker should get a lawyer to verify the title to the
property and the right of the borrower to mortgage. Gupta (2014, p.198).

(iii) Enquiry regarding prior charges: The borrower should produce a certificate
from the Registrar’s office listing the charges over the property over a period of time that

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the property is free from encumbrances. Gupta (2014, p.198). This is commonly
understood as non-encumbrance certificate. Gupta (2014, p.198). If any prior charges exist,
the banker’s right will be subject to such prior charges. Gupta (2014, p.198).

(iv) Valuation of the property: Valuation can be done in any of the following
ways: (a) By utilizing the services of recognized valuers who would be engineers or
architects. (b) Making enquiries with local real estate agents. (c) By local authorities. (d)
Latest sale transaction of neighbouring properties. (e) Calculations based on the annual
rental value. Gupta (2014, p.198).

(v) Registration: Where the principal money secured, a mortgage charge is

required to be registered unless the charge is an equitable mortgage. Gupta (2014, p.198).

(vi) Documentations: The mortgage deed must be drafted carefully considering all
the legal stipulations. It should be witnessed by at least two persons. In case of simple
mortgage, it attracts ad-valorem stamp duty. Gupta (2014, p.198).

(vii) Insurance of the property: To avoid loss of security by fire, natural

calamities, it is prudent that in the case of buildings the banker insist on the insurance of
the property for its full value at the borrower’s expense. Gupta (2014, p.198).

6.2 DEBENTURES AS A SECURITY FOR THE LOAN/ADVANCE

Section 3(b) of the Companies Act No.10 of 2017 of the Laws of Zambia defines a
debenture as a document issued by a bank in the ordinary course of its banking business
that evidences or acknowledges indebtedness of the bank.

However, Gupta (2014, p.198) defines a ddebenture as a document issued by a

company acknowledging its indebtedness to the bearer or a registered holder. A fixed rate
of interest is payable at stated periods on such debentures. In the case of mortgage
debentures, a charge is created on the assets of the company issuing such debentures in
favour of a trustee who is responsible to take care of the interest of individual investors.
(Gupta, 2014, p.198).

6.2.1 Advantages

(i) Easy to sell.

(ii) Not subject to violent price fluctuations.

(iii) They can be transferred at minimum cost.

(iv) Bearer debentures are fully negotiable.

(v) They rank in priority to shares and mostly secured by a charge on the company’s
property.

6.2.2 Disadvantages

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(i) If interest is not paid regularly on the debentures it would affect its price and
marketability.

(ii) If the charge on property of company is not registered, the subsequent charges
will get a priority.

(iii) Debentures may be issued by companies having no power to borrow money.

6.2.3 Precautions to be taken while taking debentures as security

(i) The nature of the debentures must be ascertained, i.e., whether they are
unsecured or secured, the later, being preferred.

(ii) The borrowing powers of the company issuing the debentures must be
ascertained, and to verify that the same has not been exceeded.

(iii) Deposit of the debentures plus a memorandum of deposit is necessary.

(iv) The nature and value of the assets charged must be examined frequently.

(v) The banker must find out whether there are any un-cancelled redeemed
debentures.

6.3 MORTGAGES

Patel (1998) defines a mortgage is a conveyance of an interest in real property as

security for the payment of a sum of money on the condition that interest will be
extinguished or reconveyed when the sum is fully repaid. Patel (1998). The person
borrowing the money is called the mortgagor and the lender is called the mortgagee. Patel
(1998). The use of the word “Mortgage” is generally, but not necessary restricted to those
instances where the security given is land or an interest in land. Patel (1998). The Law of
Property Act 1925 of the United Kingdom is not applicable in Zambia. The law governing
mortgages is contained in the Conveyancing Act 1881, 1882, 1892, 1911 all being English
Acts and in Chapter 185 of the Laws of Zambia. Patel (1998).

6.3.1 How mortgages are created

A mortgage may be either (i) legal or (ii) equitable.

(i) Legal Mortgage

Patel (1998). A legal mortgage is recognized by the strict law. A legal mortgage is
conditional transfer of a mortgagor’s legal interest in property. Patel (1998). This is done
by an absolute conveyance of the property to the mortgagee as security only, with a
covenant for the reconveyance of the property if the money is repaid on the fixed date.
There is no freehold tenure in Zambia. (Patel, 1998).

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Rights of the Mortgagee under Legal Mortgage:

(i) to call in the money at any time after the day fixed for repayment and to sue the
mortgagor personally on his covenant to re-pay in the mortgage instrument if
default in payment is made.
(ii) to foreclose.
(iii)to take possession but only under a strict liability to account to the mortgagor.
(iv) to sell under his power of sale after notice has been given or on breach of some
other condition e.g to insure.
(v) This power is expressly reserved to the mortgagee by Section 66 of the Lands &
Deeds Registry Act provided the mortgage is created by a Deed and is registered in
accordance with Section 4 of the Act. Under this power to sell the mortgagee can
transfer the whole estate (Section 66(2) Cap. 185)

(ii) Equitable Mortgage of a Legal Estate

Whereas an Equitable mortgage is not recognized by the strict law, but by

equity only. Patel (1998). It is a right over property by way of security. It is a mere
agreement or declaration in writing (not necessarily in form of a deed) setting out
the mortgager’s intention to give a legal mortgage of his property in security for a
loan. Patel (1998). This will have effect of giving the mortgagee an equitable
interest in the property which he will hold as mere security. This is done by deposit
of the Title Deeds to the Legal estate, with the mortgagee. (Patel, 1998).

The Remedies of the Equitable mortgagee:

(i) To sue for the amount of the debt

(ii) To apply to the court for
(a) a receiver
(b) foreclosure
(c) judicial sale

6.3.2 What is the Equity of redemption?

According Patel (1998) and equity of redemption is the date fixed for repayment is
the ‘legal date for redemption’. Patel (1998). If the mortgagor does not repay by this date
he loses his legal right to the land. Patel (1998). From this time onwards he has merely an
equitable right to redeem, amounting to an equitable interest in the property Patel (1998).

The Mortgagor’s possession of both (a) a legal right to redeem on the contract date,
and (b) an equitable right to redeem later, is called his ‘equity of redemption’, and is an
equitable interest in land which he could sell, leave by will, mortgage, etc. (Patel, 1998).

6.3.3 The Mortgagee’s Power of Sales

Patel (1998). In what circumstances may the mortgagee exercise his statutory
power of sale of the mortgaged property?
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The power is expressly provided for him under Section 65 and 66 of Cap. 185, but
can only be exercised if the mortgage was created by deed; The mortgagee may sell the
property if:
(i) The payment of the mortgage money or any part of it is in arrears for three months.
(ii) If the payment of interest is in arrears for two months.
(iii) There is breach by the mortgagor of some other condition e.g. his duty to insure the
property and;
(iv) The mortgagor has failed to put the default right even after he has been given notice
that the mortgagee will sell the property if he did not.

Patel (1998). The mortgagee has a statutory power of selling the security after the
money becomes due in certain events and this power may be modified by the parties in any
manner they choose. When the mortgagee exercises the power, the sale operates despite
the consequences of any improper exercise of the power. The statutory power of sale only
applies if the mortgage is by deed, and does not arise until the loan becomes repayable:
The events in which the mortgagee’s power of sale becomes exercisable under the
statutory provisions (i.e. apart from any special agreement between the parties) are;

(a) When notice to repay the principal has been given and not complied with within 3
months;
(b) When interest is 2 months in arrears;
(c) When there has been a breach of some provision of the mortgage deed other than
the covenant for payment of principal and interest.
6.3.4 Mortgagee’s Power to appoint a receiver

Patel (1998). The mortgagee has the statutory power to appoint a receiver, but
subject to the same conditions as apply to the exercise of the statutory power of sale. Patel
(1998). The effect of the appointment and the position of the receiver is beyond the scope
of this course, but the matter is one which can be subjected to special conditions by the
terms of the deed. Patel (1998).
6.3.12 The Appointment of a Receiver i.e. Manager

The Mortgagee can appoint a receiver without a court order. Patel (1998). The
receiver takes over the management of the property and so gets the income from it and
pays this to the mortgagee until the debt is paid off. Note: the receiver is the agent of the
mortgagor (i.e. borrower) even though the mortgagee (i.e. bank or lender) appoints him.
Patel (1998).

6.4 FLOATING AND FIXED CHARGES

Gupta (2014, p.217). Fixed and floating charges are used to secure borrowing by
a company. Such borrowing is often done under the terms of a debenture issued by the
company. Gupta (2014, p.217). Charges on a company's assets must be registered with
the Registrar of Companies and may also need to be registered in some other way, e.g. a
charge on land and buildings must also be registered at the Land Registry. Gupta (2014,
p.217).

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Gupta (2014, p.217). (Charges registered under the Companies Act is classified
into (i) fixed charge and (ii) floating charge.

Fixed charge is created on a specific property or properties of the company. Gupta

(2014, p.217). This charge gives right to the creditor so secured, to sell the said property
and claim the proceeds towards the dues payable by the company. Gupta (2014, p.217).
A fixed charge is attached to an identifiable asset at creation. Assets can include land,
property, machinery, copyright, trademark and much more. The business does not
typically sell these fixed assets, and the fixed charge is applied to protect the repayment
of the company debt. Gupta (2014, p.217). It’s important to note that a fixed charge
repayment ranks before that of a floating charge repayment in company insolvency.
Gupta (2014, p.217).

Floating Charge is a charge that is general and not specific. Gupta (2014, p.217).
A rough definition of a floating charge is a mortgage on movable assets in general as
compared to a mortgage of a specific chattel or chattels. Gupta (2014, p.217). The charge
is not fixed on any specific asset but “floats” over a class or type of assets e.g. working
stock of a company or supermarket. Gupta (2014, p.217). A floating charge is the same
thing as a debenture but can only apply to a company, not an individual.

A floating charge is a particular type of security, available only to companies.

Gupta (2014, p.217). It is an equitable charge on (usually) all the company's assets both
present and future, on terms that the company may deal with the assets in the ordinary
course of business. Gupta (2014, p.217). Very occasionally the charge is over just a class
of the company's assets, such as its stock. Gupta (2014, p.217).

The special features of floating charge are:

(i) the charge floats over present and future property of the company

(ii) it does not restrict the company from assigning the property, subject to charge
to third parties, whether by way of sale or security Therefore, a floating charge is an
equitable charge

In the case of Illingworth v Houldsworth (1304) A.C. 365, the floating charge
was defined as a charge which operates as an immediate and continuing charge on the
property charged and has the effect of charging all the property in the hands of the
borrower at the date of the charge.

Further, Romer L J in re Yorkshire Woolcombers’ Association Ltd [1903]

defined a floating charge as

“…..I certainly think that if a charge has the three characteristics that I am about
to mention it is a floating charge. (1) If it is a charge on a class on assets of a company
present and future; (2) if that class is one which, in the ordinary course of the business
of the company, would be changing from time to time; and (3) if you find that by the
charge it is contemplated that, until some future step is taken by or on behalf of those
interested in the charge, the company may carry on its business in the ordinary way as
far as concerns the particular class of assets I am dealing with.”

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The special nature of the floating charge is that the company can continue to use
the assets and can buy and sell them in the ordinary course of business. Gupta (2014,
p.217). It can thus trade with its stock and sell and replace plant and machinery, etc.
without needing fresh consent from the mortgagee. Gupta (2014, p.217). The charge is
said to float over the assets charged, rather than fixing on any of them specifically. This
continues until the charge 'crystallizes', which occurs when the debenture specifies. This
will include any failure to meet the terms of the loan (non-payment, etc.), or if the
company goes into liquidation, ceases to trade, etc. Gupta (2014, p.217). When the
charge chrysalizes it fixes on the assets then owned by the company, catching any assets
acquired up to that date. Gupta (2014, p.217).

6.5 GUARANTEES

According Gupta (2014, p.119). Banks grant loans and advances (fund based) and
provide other credit facilities (non- fund based) such as, bank guarantee and letters of
credit. Gupta (2014, p.119). Non fund based limits are granted by banks to facilitate the
customers to carry on with the trading and business activities more comfortably. Gupta
(2014, p.119). Bankers can earn front end fees and these non-fund based items become
contingent liabilities for banks. (Gupta, 2014, p.119).

There are three parties to the contract of guarantee. Gupta (2014, p.119). They are
called Surety, Principal Debtor and the Creditor. These parties are also called as the
guarantor, borrower and the beneficiary. (Gupta, 2014, p.119).

Banks deal with two types of guarantees: (i) Accepted by the bank, and (ii) Issued
by the bank. (Gupta, 2014, p.119).

(i). Guarantees accepted by the Bank:

At the time of lending money, banks accept securities. Gupta (2014, p.119). In
addition to the tangible assets a borrower arranges to furnish a personal security given by
surety (guarantor). Gupta (2014, p.119). This is called third party guarantee, who
undertakes to pay the money to the bank inclusive of interest and other charges, if any, in
case the principal borrower fails to repay or if the borrower commits default. Gupta (2014,
p.119). Banks also obtain Corporate guarantees issued by companies who execute
corporate guarantee as authorized by the Board of Directors’ resolution. (Gupta, 2014,
p.119).

(ii) Guarantees issued by the Bank:

Gupta (2014, p.119). A Bank Guarantee is a commitment given by a banker to a third

party, assuring her/ him to honour the claim against the guarantee in the event of the non-
performance by the bank’s customer. Gupta (2014, p.119). A Bank Guarantee is a legal
contract which can be imposed by law. The banker as guarantor assures the third party
(beneficiary) to pay him a certain sum of money on behalf of his customer, in case the
customer fails to fulfill his commitment to the beneficiary. (Gupta, 2014, p.119).

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6.6 Stocks and Shares as a Security for the Laon/Advance

6.6.1 Shares

These may be classified into preference shares (which enjoy preference both with
regards the payment of dividend and repayment of capital) and equity shares, i.e., shares
which are not preference shares. Gupta (2014, p.119).

Advantages

(i) Value of the security can be ascertained without any difficulty.

(ii) In normal times, stocks and shares enjoy stability of value and are not subject
to wide fluctuations.
(iii) Stocks and shares require very little formalities, for taking them as security.
(iv) It is easier compared to real estate to ascertain the title, more so with the advent of
depositories.
(v) Creating a charge of this is less expensive than real estate.
(vi) They yield income by way of dividends, which can be appropriated towards
the loan account.
(vii) Being a tangible form of securities they are more reliable.
(viii) The release of such securities involves very little expense and formality

Disadvantages

(i) Being easy to realize, they are fraud prone and as such they must be properly secured.

(ii) In the case of partly paid shares, the following demerits are there:
(a) The banker may have to pay the calls.
(b) Partly paid shares are subject to violent price fluctuations.
(c) They are not easily realizable because of the restricted market for such shares.

6.7 PLEDGE OF SECURITY

Gupta (2014, p.208). Pledge means bailment of goods for the purpose of providing
security for payment of debt or performance of promise. Gupta (2014, p.208).

6.7.1 Valid Pledge - Important requirements

There should be delivery of goods (bailment). The bailment (delivery of goods)

must be by or on behalf of the debtor. The bailment (delivery of goods) must be for the
purpose of providing security for the payment of a debt or performance of a promise. Gupta
(2014, p.208).

For example, an agriculturist is sanctioned a gold loan by his banker. The borrower
delivers his gold ornaments to the bank as a security for the gold loan. The borrower
pledges gold ornaments to raise the loan. In this case, the agriculturist has created a valid
pledge. Gupta (2014, p.208).

(1) there is bailment of gold (delivery of gold)

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(2) The bailment of gold is made by the debtor (borrower)

(3) The bailment of gold is provided as a security to the gold loan (debt)

6.7.2 Pledge – important features

(i) The person, whose goods are bailed is called pawnor or pledger, and to whom
the goods are pledged as pawnee or pledgee.

(ii) Ownership of the property is retained by the pledger, which is subject only to
the qualified interest which passes to the pledgee by the bailment.

(iii) The essential feature of a pledge is the actual or constructive delivery of the
goods to the pledgee. By constructive delivery it is meant that there will be no physical
transfer of goods from the custody of the pledger/ pawnor to the pledge/ pawnee. All that
is required is that the goods must be placed in the possession of the pawnee or of any person
authorized to hold them on his behalf.

(iv) The delivery of the goods may be ‘physical’ when goods are actually
transferred and ‘symbolic’ as in the case of delivery of the key or ‘constructive’ as in the
case of attornment.

(v) Pledge can be created only in the case of existing goods (and not on future
goods) which are in the possession of the pledger himself.

(vi) Since the possession of goods is the important feature of pledge and therefore,
pledge is lost when possession of the goods is lost.

(vii) An agreement of pledge also known as deed of pledge may be implied from
the nature of the transaction or the circumstances of the case

(viii) To protect the interests of the concerned parties the agreement in writing
should clearly indicate the terms and conditions. A valid pledge can be created by (i) the
owner of the goods (ii) a mercantile agent, subject to the following terms and conditions
are satisfied (iii) the seller of goods, who continues to hold the goods even after sale, can
create a valid pledge. The pledgee must act in good faith and without notice of the previous
sale.

6.8 LIEN

The banker has general lien on all deposits. If the deposit receipt is given as a
security for raising a loan or discharging an obligation then the lien on such deposit receipt,
is a particular lien, and it would exist till the debt is cleared or the obligation is fulfilled.

6.8.1 Lien – Important aspects:

General lien covers the entire amount due to the bank from the borrower/ debtor.

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6.8.2 Banker’s General Lien:

This is applicable in the following situations:

– when a banker receives goods and securities for a purpose
– lien is applicable for the goods and/or securities which are belonging to a person
who has delivered them to the banker
– there is no contract to the contrary and the debt is not barred by limitation

A banker’s lien is also called as an implied pledge. A banker has the right to retain
and if necessary can also sell the goods and/or securities charged in his favour. As pledgee,
a banker can sell the goods/securities pledged to him.

A banker cannot exercise his right of lien in following situations:

1. In case when goods and securities are not obtained by him in the ordinary course
of business:

2. In case of Safe Custody, when a banker accepts goods/securities of a customer

to be kept in safe custody. In this case the relationship of banker and customer is that of
the bailee and bailer. Here the banker acts as a trustee and not as a lender/creditor.

3. When the goods or security are left inadvertently or through oversight in the bank
premises, the banker cannot exercise his right of lien on them.

4. When money is deposited by a customer with a request to transfer to another

branch, the banker cannot exercise the right of lien. This is applicable even the applicant
for the transfer of funds is a borrower as well.

5. The banker cannot have the right of lien and right of set off at the same time.

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3. Bibliography

R.Abrams and M. Taylor, (2000). ‘Issues in the Unification of Financial Sector

Supervision’ (Washington: International Monetary Fund).
Relevant Case Law
M. Brownbridge (1996) Financial Policies and the Banking System in Zambia, IDS
Working Paper No. 32.
J. Carmicheal et al. (2004). Aligning Financial Supervisory Structure with Country Needs
(Washington D C: World Bank Institute).
C.Chiumya., (2004, Banking Sector Reforms and Financial Regulations: Its Effects on
Access to Financial Services for Low Income Household in Zambia’ (Paper presented to
the 3rd International Conference on Pro-Poor Regulations and Competition in South
Africa).
H. Charles, (1991). ’On the perverse effects of financial sector reform in anglophone
Africa’, South African Journal of Economics, 59 (3): 258-286
R M Goode (2004) Commercial Law (Penguin Group, London)
K. Mwenda (2010) Legal Aspects of Banking Regulation: Common Law Perspectives from
Zambia (Pretoria University Law Press: Pretoria
D. Mulaisho, (1994). ’The role of the central bank in economic liberalisation’ in Nathan
Chilepa Deassis and Stuart Makanka Yikona (eds), The Quest for an Enabling Environment
for Development in Zambia, Ndola: Mission Press, pp 42-58
S. Musokotwane,(1970-1986).’Domestic resource mobilization and development in
Zambia:
S. Patel (1998). Conveyancing and Legal Drafting, Zambia Institute of Advanced Legal
Education,
K. T. Phiri (2004), The role of the Central Bank in the supervision of the Commercial
Banks.’ Obligatory Essay.
K. Vagneur (2004). Corporate Governance. (Edinburgh: Heriot – Watt University Press).

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