UNIVERSITY EXAMINATION 2017/2018

SCHOOL OF BUSINESS AND ECONOMICS

DEPARTMENT OF ECONOMICS

NAME: HARED ABDIFATAH NUNOW

ADM.NO. BCOM/2016/58049

UNIT TITLE: BANKING LAW AND PRACTICE

UNIT CODE: BAF3106

1.a) Explain four rights that a banking institution have over its Clients. (4 Marks)

The Bank shall have the right, at its sole and absolute discretion, to request the Customer for all
necessary proof of the Customer’s name and any change thereof and the Bank shall be at liberty
to decline to act on any or all of the Customer’s instructions until such request is met to the sole
and absolute satisfaction of the Bank.
Customer Information.The Bank reserves the right, at its sole and absolute discretion, at any time
during the tenure of the Account to request the Customer for any information and/or
documentation that the Bank may require for the establishment and/or operation of the Account.

b) Discuss four circumstances that can lead to the termination of the banks authority to
pay money on behalf of a client. (4 Marks)

This occurs in the following circumstances

Where the customer‟s balance or limit is insufficient to cover the cheque.

Countermand of payment by the customer
Notice of an act of bankruptcy committed by he customer. iv) Notice of death/mental incapacity
of the customer v) Notice of presentation of a bankruptcy petition against the customer
Making of a receiving order against the customer.
Assignment by the customer of the balance on the account.
Service on the bank of a Garnishee Order attaching the balance of the customer‟s account; or
any injunction from the court prohibiting transactions.
Notice of defect in the presenter‟s title.
Notice that the customer or payee is an undercharged bankrupt xi) Notice of breach of trust by
the customer drawing the cheque.
c) Explain four feature of a bill of exchange. (4Marks)

It is an instrument in writing.

It contains an unconditional order to pay. It means that no conditions can be attached for
making the payment.

It mainly involves three parties: Drawer, Drawee and Payee. In most of the cases, the Drawer
and Payee are the same person as the Drawer draws the bill in his/her own favour. However it
must be remembered that the Drawer and Drawee cannot be same person (Its very stupid of me
to mention it but I have noticed that it helps in better understanding).

The Parties to bills of exchange must be certain.

The Drawer (a.k.a the Maker) must sign the bill.

The amount of money to be paid must be certain.

d) Explain three information a bank requires a to open an account for a partnership

business. (3 Marks)

Employment Identification Number (EIN)

If you're a sole proprietor, you will need an EIN, your Social Security number, and a driver's
license or passport, according to Levi King, founder and CEO of credit solutions and monitoring
firm. "These are used to prevent identity theft, fraud, terrorism, laundering, etc.," said
entrepreneur Jay Coates. King added that, while some banks allow sole proprietors to open
accounts without an EIN, it's still a good idea to create one to prevent the things Coates stated.
Rampenthal said that the EIN is an integral tool for managing taxes and paying employees.
"Sole proprietors may use their Social Security number for business tax purposes in lieu of an
EIN," he added. "You can obtain an EIN for your business by filing with the IRS."

Articles of incorporation
Articles of incorporation are used to show the bank how the business is structured, and to register
your business with the state and other entities."If you form a business as an LLC, limited
partnership, corporation or other separate legal entity, to open a bank account, you will need the
articles of incorporation that you filed with the state if you are the sole owner," said Tiffany
Wright, president of the resourceful CEO a financing advisory firm for small and
midsize businesses, and project director at cogent analytics LLC.

Business licenses
Rampenthal said that, regardless of business entity, banks will generally ask for your current
business license to prove you are legally permitted to conduct business in your region."This also
ensures that your business is accountable for all actions taken – including around taxes and
finances," he said. "Check with your state, county and local governments to determine if you
need any licenses to operate your business."

Identification documents
With any bank account, the opener is required to provide documents that prove their identity.
A business bank account is no different."These can include a government-issued picture ID such
as a driver's license or passport," Rampenthal said. "This is used in order to corroborate the
business owner is indeed the person who owns and/or runs the corresponding business."

1. a) Explain the disadvantages of using land on collateral for a bank Loan.

(5Marks)

Loss of Asset
The worst case scenario with any asset based loan is losing the asset in case of default. When
you place a car as collateral, for example, you are giving the car title to the lender. You will not
get the car title back until the loan is paid off. If you violate any of the terms of the loan, the
lender can come and seize your car. This will usually occur without notice. It is not uncommon
for an impound specialist to show up while you are at work or school and take your car away
without any warning.

Risk of Low Valuations

The amount of financing you get through land on loan is dependent on how the collateral is
valued. If the value of the collateral goes up over time, your loan limits will not go up. As a
result, you will have an asset collateralized for much lower than it is actually work. The lender is
in a much stronger position than you, the borrower, at that point. In contrast, with an unsecured
loan where no collateral is used, the borrower maintains the upper hand throughout the process.

Negligible Effect on Credit

Secured loans are not the fastest way to build a credit score. An unsecured loan will rebuild
credit much faster because it appears as additionally financial strength on a person's or business's
balance sheet. With a secured loan, the person has no more financing than they had previously
because they are placing the value of an asset down in trade for the new funds.

Over-Mortgaging
One risk of continually placing land on the line in return for financing is over-mortgaging your
own assets. This means that you will end up owing more on the loans than you have in equity. If
the value of the assets drops, you may owe more on the loans than the assets are worth if you
were to sell. This occurs in large numbers when real estate values drop. People who have taken
out second mortgages based on a high value of the home may end up "upside-down" on the
mortgage. This means if they sell the house they would end up having to pay additional money to
the mortgage company beyond what they sold the house for. Getting into too much debt is an
easy trap to fall in with asset based lending.
 b) Outline the documents required to open an account by a limited
company. (5Marks)

Certificate of Incorporation of Company

Board resolution for opening current account
Memorandum of Association (MOA) & Articles of Association (AOA)
Latest list of Directors as per the bank’s format
Registered office address proof of the company (Only required if different from the address
mentioned in the Certificate of Incorporation)
Identity proof of all Directors / Authorized Signatories
PAN card of Director
Passport

Proof of appointment of current director/s (in case Board of Directors has changed overtime)
Proof of resignation of Director/s (in case Board of Directors has changed overtime)
PAN Card of the company or PAN Card Application Acknolodgement (for New Companies
which are less than 90 days)
Share Holding Pattern of the company as per the bank’s format

2. Explain the objectives of crossing of cheque. (5 Marks)

There are different kinds of crossing a cheque as explained below.

Crossing of a cheque is done to make the cheque more secure and not easily prone to misuse.
Crossing affords security and protection to the true owner, since payment of such a cheque has to
be made through a banker. It can, therefore, be easily detected to whose use the money has been
received.

Cheques are crossed in order to avoid losses arising from open cheques falling into the hands of
wrong persons.

Crossing of a cheque does not affect its negotiability. Crossed cheques are negotiable by delivery
in case they are payable to bearer and by endorsement and delivery where they payable to order.
Holder of a crossed cheques, who has no account in any bank, can obtain payment by endorsing
it in favor of some person who has got an account in a bank.

Crossing also helps in identifying or tracing the person, who has wrongly received the payment
of the crossed cheque. So this way also safety of the cheque is ensured.

Reference.
Doyle E.P Practice of Banking, Macdonald & Evans Publishers 2. Kumar N, Mittal R, (2002),
Banking Law and Practice, Anmol Publications Pvt Ltd 3. Ross Cranston, (2002), Principles of
Banking Law, Oxford University Press 4. Other support materials: Various applicable manuals
and journals; variety of electronic information resources as prescribed by the lecturer