COMMERCE NOTES 2010

BANKING
1. WHAT IS A BANK?
 A bank is a financial institution that collects surplus funds from the general public, safeguards them and lends
them to those who may need them in form of loans and overdrafts and makes them available to the true
owners when they need them.

SERVICES OF COMMERCIAL BANKS TO CUSTOMERS

 Examples of commercial banks in Zambia include: Zambia National Commercial Bank, Barclays Bank, Finance
Bank, Standard Chartered Bank, etc.
 Banks provide a variety of services to their customers some of which are designed to help private clients and
others specifically for businessmen.
 The main services are as follows:-
- Banks lend money to customers in form of loans and overdrafts.
- Banks provide a safe custody for money and other valuables
- They supply cash to customers when they need it.
- They provide customers with several methods of making and receiving payments such as cheques, direct
debiting, standing orders, credit transfers, etc
- They provide customers with night safe facilities
- They receive payments on behalf of customers
- They act as an executor or trustee of a will for customers
- they give advice to customers on business investments
- they give foreign currency to traders engaged in foreign trade if required
- They issue customers with credit cards
- Banks discount bills of exchanges on behalf of its customers
- They buy and sell shares at the stock exchange on behalf of customers.
- They give trading information to traders on local and international markets
- They issue travelers' cheques which can be cashed at any bank as a means of payment in hotels and
shops. They are most useful to people who travel abroad to make payments for their requirements in
foreign countries
- They provide customers with Automatic Banking Facilities. These Auto Bank Services consist of machines
that are set into the walls of banks. The machines can access any customer's bank account, check the
creditworthiness of the customer and pay out cash at once. There is a limit to the amount of cash a
customer can withdraw in a day.

PREPARED BY MR. MWEEMBA WELCOME TO THE WORLD OF COMMERCE Page 1

 COMMERCE NOTES 2010

EXPLAINATION OF SOME SERVICES OFFERED BY COMMERCIAL BANKS

1. STANDING ORDER
 A Standing order is also known as a Stop Order or Bank Order
 A Standing Order is an instruction to the bank by its customer to pay a fixed sum of money at regular
intervals to a specified person or organisation.
 It is used when making regular payments of a fixed sum, which must not be paid at once, but repeatedly over
a period of time
 The bank makes payment on behalf of a customer as long as there is enough money in the customer's bank
account.
 The bank will continue paying until the customer instructs it to stop.
 A standing order is suitable when; paying for hire purchase installments, insurance premiums, mortgages, etc

ADVANTAGES OF A STANDING ORDER TO A BANK CUSTOMER MAKING PAYMENTS (DEBTOR)

 The customer does not need to remember dates on which to make payments
 It is safer and cheaper method of payment than sending cash or cheques by post.
 Payments are made promptly.

ADVANTAGES OF A STANDING ORDER TO A BANK CUSTOMER RECEIVING PAYMENT (CREDITOR)

 The customer receives payments immediately. And thus can make good business plans for his money.
 He is saved with troubles of sending reminders to debtors (customers).
 No time is wasted in counting money and depositing money at a bank

2. CREDIT TRANSFER
 A credit transfer is also known as a Bank Giro System.
 It is a facility provided to current account holders for making regular payments directly into the payees account.
 It can be used for making both single and multiple payments to large numbers of people or organisation with bank
accounts at other branches or within the same branch or at other banks.
 It is available to business customers, companies, and local and central government entities handling large salary
payments resulting in many cheques or carrying too much cash for wages.
i. Single payments or transfers are used when paying a single person or organisation e.g. when one is
paying ZESCO for electricity bills.
ii. Multiple payments or transfers are used when paying several people or organizations at once e.g. when
paying salaries to workers with bank accounts at different banks or within the same bank.

HOW PAYMENT IS MADE BY CREDIT TRANSFER

 The person making payment by credit transfer fills in a form at the bank stating the payee's name, bank and
branch, account number and the amount to be paid to each payee and pays the total by one cheque to the bank.
 The bank then transfers the money to the payee's accounts as instructed, usually electronically.
 A credit transfer is convenient for use when:-
(a) Making payment to several people at once e.g. paying salaries to employees at month
end or when paying several traders at once.
(b) A credit transfer may also be used when paying an individual person or organisation
regularly

ADVANTAGES OF A CREDIT TRANSFER TO THE BANK CUSTOMER MAKING PAYMENTS

- Funds are transferred directly into the bank accounts of people to be paid using only one cheque
- paper work is greatly minimized
- Credit transfers save time when paying several people.
- It is safer and more secure method of making payments
- No money is wasted for postage or cash or cheques.

PREPARED BY MR. MWEEMBA WELCOME TO THE WORLD OF COMMERCE Page 2

 COMMERCE NOTES 2010

ADVANTAGES OF CREDIT TRANSFER TO CUSTOMER RECEIVING PAYMENT

- The payee decides the date of payment
- Time is not wasted in counting money
- The customer is able to receive payment promptly

3. DIRECT DEBTING
 This is a facility used for making regular payments that vary in amounts from time to time to be paid at irregular
intervals.
 It may be used for example when paying electricity and water bills, annual subscription to professional bodies, etc

HOW DIRECT DEBITING OPERATES

 with the agreement of the debtor (i.e. the person to make payment), the creditor (i.e. the person to receive
payment ) is authorised to ask for payment on dates he or she wants from the debtor's bank
 The creditor takes the initiative to inform the bank of the amount owed. Amounts paid to the creditor may vary
and payable on varying dates fixed by the creditor.

ADVANTAGES OF DIRECT DEBTING TO THE BANK CUSTOMER MAKING PAYMENT

 Direct debit enables payments that vary in amounts to be paid from time to time. This reduces clerical work, as
there is no need to change or alter records whenever.
 The customer does not need to remember dates on which to make payments
 Payments are made promptly
 Cheques do not have to be written.

ADVANTAGES OF DIRECT DEBITING TO THE BANK CUSTOMER RECEIVING PAYMENTS

- Payment is received on dates wanted by the creditor
- Direct debit avoids outstanding debts and bad debts
- Payments are received promptly
- Direct debit is safer and more secure method of payment
- The creditor can ask for payment from the debtor’s bank at any time payment is due
- Time is not wasted in counting cash notes or in depositing money in a bank

DIFFERENCES BETWEEN A STANDING ORDER AND DIRECT DEBIT

STANDING ORDER
1. A standing order is used for making fixed sums
of money payable at regular (fixed) intervals
e.g. paying hire purchase installments.
2. with a standing order, it is the debtor (account
Holder) who takes the initiative to instruct his/her
Bank to transfer money to the creditor's bank account.
3. Alterations can be made to records whenever
there is an increase or decrease in amounts to
be paid
4. payments are made on fixed dates or intervals
5. Standing order is suitable for payments that
are made after short intervals e.g. monthly
payments for hire purchase.
DIRECT DEBIT
1. Direct debit is used for making payments that
vary in amounts from time to time and payable
at variable intervals
2. with a direct debit, it is the creditor (payee) who takes
the initiative to ask for payment due to him
from his debtor's bank.
3. Alterations are not made when there is an
increase or decrease in amounts to be paid.
4. payments are made on varying dates wanted
by the creditor.
5. Direct debit is suitable for payments that are
made after long intervals e.g. Annual
subscriptions to a club.

PREPARED BY MR. MWEEMBA WELCOME TO THE WORLD OF COMMERCE Page 3

 COMMERCE NOTES 2010

4. BANKS MAY ACT AS AN EXCUTOR OR TRUSTEE OF A WILL

(a) EXECUTOR
 An Executor is a person appointed to carry out the terms of a will on behalf of the deceased person.
 A bank may act as an executor
 The advantages of appointing a bank as an executor include the following:-
 The bank is never be ill and does not die. Therefore it can carry out the terms of a will without any disruption
 The bank staff is highly skilled with massive knowledge and experience, and therefore can administer any estate
with great successes.
 Banks are impartial in their dealings with customers
 losses through fraudulent acts are eliminated
 Most banks have international connections, and therefore can attend to the sale of assets anywhere in the world
and pay the beneficiaries wherever they are living.

(b) TRUSTEE
Trustee is a person appointed to look into the affairs of a person still alive e.g. looking into the affairs of a minor.
A bank can be appointed to act as a trustee.
The advantages of appointing a bank to act as a trustee are the same as those of an executor.

5. NIGHT SAFE FACILITY

 A Night safe facility enables bank customers to deposit money when banks are closed.
 Businesses such as hotels, bars and night clubs operate late in the night, after banks have closed and even trade
on public holidays. As a result they face the risk of keeping their money in the shop overnight.
 The night safe facility helps them overcome this problem.
 The banks provide the trader with a wallet or small portable safe in which he/she securely locks the cash taken
during the night.
 He/she then goes and drops it into the night safe through a metal slot or hole in the outside wall of the bank
 The trader may complete a deposit slip if he/she wishes to have the money deposited into the account.
 On the next working day, the bank clerks open the wallet and deposit the money into the trader's account or the
trader recollect it from the bank if he/she so wishes.
 In this way the trader is able to avoid the risk of keeping cash in the premises.

POINTS TO NOTE WHEN DEPOSITING MONEY

 Take precautions against thieves who may lay-way the person depositing money.
 Vary the routes you take when going to the bank for depositing money.
 Provide suitable protection at all times for the person depositing money.

6. CREDIT CARD
 Credit cards enable holders to buy goods and services on without having to pay cash at the time of purchase.
 Banks issue credit cards.
 The procedure for use of a credit card is as follows:-
a) Upon selection of goods wanted from a retail shop, the card holder presents the credit card to the shop owner.
b) The shop owner then prepares an invoice or voucher, quoting the card holder's name and his identification
number. The card holder would be required to sign the invoice or voucher. The signature on the voucher must
appear the same as the specimen signature on the credit card.
c) The shop owner then sends the invoice to the bank that issued the credit card requesting
it to pay money for goods and services supplied to the card holder.
d) At the end of a certain period, for example a month, the bank sends a bank statement to the
Card holder requesting him or her to settle his/her account by a specific date.

CIRCUMSTANCES IN WHICH A CREDIT CARD MIGHT BE USED:-

- When shopping at retail shops

PREPARED BY MR. MWEEMBA WELCOME TO THE WORLD OF COMMERCE Page 4

 COMMERCE NOTES 2010

- When paying for meals at hotels, restaurants, etc

- When paying for accommodation at hotels, etc
- When paying for fuel at gaurages
- When drawing cash at benches of banks operating Access Credit Card Scheme.

ADVANTAGES OF CRDIT CARD TO CARD HOLDER (CUSTOMER)

 The card holder is allowed to have easy credit for goods or services and therefore can obtain a lot of goods from
the shop.
 Ownership of goods passes to him or her immediately he/she signs the invoice or voucher.

ADVANTAGES OF CREDIT CARD TO SHOP OWNER

 The shop owner receives payment promptly.
 The shop owner enjoys increased sales since banks pay him or her promptly.
 The shop owner suffers no bad debts.
DISADVANTAGES OF CREDIT CARDS TO CARDHOLDER
 The customer is tempted to overspend and run into financial problems.
 Not all businesses accept credit cards so cardholders are limited in choice of shops.
7. TRAVELERS’ CHEQUES
This is the most suitable way of carrying money when going out of the country. The travelers’ cheques are bought by or
issued to the traveler in local or foreign currency. The traveler signs them in the presence of the issuing bank official. They
can be exchanged for cash when they are signed again in the presence of another bank official in the foreign country. They
are safer to carry than cash as they are valueless until countersigned by the person to whom they were issued. Travelers’
cheques can be used to buy goods and services from any business. While he/she is away the traveler can approach any
shop or hotel where he/she would sign them a second time and receive value or cash for them. The shopkeeper or any
other person whose goods or services have been bought with travelers’ cheques will simply deposit them into their own
bank account, just like any other cheque.

TYPES OF ACCOUNTS
Banks provide a safe place to keep money. To keep money in a bank you need to have a bank account.
Commercial banks offer different types of accounts because the needs of customers vary.
However, the main types of accounts banks provide are as follows:-

1. CURRENT ACCOUNT
 A current account is used by individuals and businessmen who want to keep their money safe but would also like
to withdraw some of the money at any time the bank is open.
 It uses cheques for withdrawing cash from the account and also for making payments.
 For this reason, a current account is also referred to as a cheque account.
 There is no minimum balance required to maintain a current account.
 The account holder pay ledger fees (i.e. the charge levied by the bank for keeping your money safe).
 It is the only account that allows overdrafts.
 When a customer overdraws his account, the overdraft may be indicated by the letters DR or the overdraft figure
may be printed in red ink and hence the saying, “the customer is red”.
 The account holders will periodically receive bank statements which provide them with a record of deposits,
withdrawals and the current bank balance for the month.
 No interest is paid on deposits although some commercial banks allow. The current account does not earn
interest because the customer withdraws money any time and therefore the bank does not use his money.

PROCEDURE FOR OPENING A CURRENT ACCOUNT

Before a commercial bank allows a customer to open a current account, it will first of all ask the applicant to:-
(a) Provide a written proof of identity (NRC, driving license or passport).
PREPARED BY MR. MWEEMBA WELCOME TO THE WORLD OF COMMERCE Page 5
 COMMERCE NOTES 2010

(b) Fill in an application form, giving details of your name, address and occupation.
(c) Provide evidence of employment or regular income.
(d) Provide names and addresses of referees to support the applicant.
(e) Provide a specimen signature on a signature card for the bank to keep so that in future if you draw cheques that
signature on the cheques can be cross – checked so to avoid forgery of cheques.
(f) Once the bank is satisfied with the details given by the applicant, it would allow for a current account to be
opened. A cheque book would be issued to a new customer.

ADVANTAGES
 The customer is able to make payments by cheque and keep the used cheques as receipts of payments.
 Money can be withdrawn at any time.
 Full banking services are available to current account holders such as overdrafts, standing orders, direct debits and
credit transfers.
 The customer is able to receive financial advice on business investments.
 The customer is able to use night safe facilities.
 No minimum balance is required to maintain the account.
 Customers can withdraw cash country wide from ATM or other bank branches around the country.
 Customers are kept up to date with their finances through regular bank statements as well as from mini-
statements available at ATM.

DISADVANTAGES
 No interest is earned although some commercial banks allow.
 There are bank charges to be paid by the current account holder no matter how small the amount in the account
is.
2. DEPOSIT ACCOUNT
 This type of account is suitable for keeping money which one does not want to use immediately.
 A high rate of interest is paid on deposits depending on the amount deposited and the duration.
 A minimum balance is required to open and maintain a deposit account.
 No ledger fees are payable and no cheques are used.
 To deposit money in this account, one uses a deposit slip.
 To withdraw money you need to give the bank seven days notice.
 To withdraw money you complete a withdrawal slip
 Overdrafts are not possible.
3. FIXED DEPOSIT ACCOUNT
 This is a deposit account with a fixed investment
 The customer deposits a fixed amount of money for a fixed period of time ranging from one month to one year
and is not expected to withdraw it until the expiry date.
 Early withdraws are not allowed. The customer is charged if money is withdrawn before the agreed period.

ADVANTAGES
 A higher rate of interest is paid on deposits
 No ledger fees are charged for operating a fixed deposit account.
 It is a risk free investment.

DISADVANTAGES
 Cheques cannot be used.
 The account does not provide overdraft facilities.
 The customer cannot make payments by credit transfer, standing orders and direct debits, etc.

DIFFERENCES BETWEEN A CURRENT ACCOUNT AND A DEPOSIT ACCOUNT

CURRENT ACCOUNT DEPOSIT ACCOUNT
1. Money can be withdrawn at any time. 1. Money is only withdrawn after an agreed

PREPARED BY MR. MWEEMBA WELCOME TO THE WORLD OF COMMERCE Page 6

 COMMERCE NOTES 2010

2. there is no minimum balance required to open period.

and maintain the account.
3. No interest is earned on deposit.
4. Cheques are used to withdraw money from the
account.
5. Customers are charged ledger fees for
operating a current account.
2. A minimum balance is required to open and
maintain a deposit account.
3. A high rate of interest is earned on deposits.
4. Withdrawal slips are used to withdraw cash
from the account. Cheques are not allowed to
withdraw cash from the account.
5. Deposit account holders are not charged ledger
fees.

4. SAVINGS ACCOUNT.
 A Savings account is used by people who wish to save fairly small amounts of money.
 It is intended for small savers with regular income but who do not qualify for a current account.
 A very low minimum balance is required to open and maintain the account.
 No ledger fees are charged.
 Low rate of interest is charged on deposits.
 No cheques are used.
 To deposit money into a savings account, you complete a deposit NOTE: standing orders, direct debits,
slip. credit transfers, bank overdrafts,
cheques are only provided to current
 To withdraw money from this account you complete a withdraw
accountholders. Ledgers fees are also
slip.
only charged to current accountholders
and not any other accountholder
5. JOINT ACCOUNT
 A joint account is any bank account that is maintained by two or
more people.
 It is mainly suitable for married couples, clubs or business
partners.
 Any bank account can be operated as a joint account.
 The two or more persons operating a joint account must disclose the relationship between them.
 A minimum balance is required to open and maintain the account.
 Withdraws are only done when the two or more persons have all signed on the cheque or withdraw slip.

CHEQUES
DEFINITIONS
1. A Cheque is an unconditional order in writing to the bank to pay a specified amount of money to a named person
or his order.
2. A cheque is a bill of exchange drawn on a banker payable on demand.
3. A cheque is a written order to a bank to pay on demand a stated sum of money to a named person or his order.
- Banks usually provide a cheque book to current account holders with cheque forms on which they write the
order.
- A cheque is considered an order because the money involved belongs to the account holder who instructing
the bank to make payments.
- He does not need to beg the bank.
- The bank is only a custodian looking after the money and should without question, make whatever payment
the account holder asks it to make.

EXAMPLE OF A CHEQUE

Drawee Date of payment

PREPARED BY MR. MWEEMBA WELCOME TO THE WORLD OF COMMERCE Page 7

 COMMERCE NOTES 2010

Payee Amount in words Drawer

BARCLAYS BANK
CHOMA BRANCH 0-7-3733

DATE: 21-07-09

PAY: MR PHIRI JAMES OR ORDER

THE SUM OF One Million two hundred thousand kwacha only

K 1,200,000

J. MULENGA
SIGN: Jmulenga

382 920 1-922-075574888

Cheque number Branch Account Drawer's Amount in

Number Number signature figures

PARTIES TO A CHEQUE
There are three parties to a cheque namely, drawer, drawee and payee.

(a) DRAWER
A drawer is a person who writes and signs a cheque. It is the person who orders a bank to pay
the person named on a cheque. In the above example of a cheque J. Mulenga is the drawer.

(b) DRAWEE
A drawee is the bank that is ordered to pay money. In the above example, Barclay's bank is the
Drawee.

(c) PAYEE
Payee is the person or organisation to be paid money. It is the person to whom the stated amount on the cheque
is payable. In the above example, Mr. James Phiri is the payee.

HOW TO DRAW OR COMPLETE A CHEQUE

 To draw a cheque either to pay somebody or just to withdraw some money for your own use , you need to write
four things on it namely:

1) the date of payment

2) The payee's name.
3) The amount in words and in figures.
4) Your signature.

 If you are withdrawing the money for your own use you write the word cash in the space provided for payee's
name.
 Many people refer to drawing a cheque as signing a cheque and they may also say changing a cheque when the

PREPARED BY MR. MWEEMBA WELCOME TO THE WORLD OF COMMERCE Page 8

 COMMERCE NOTES 2010

actual word is cashing a cheque.

TYPES OF CHEQUES
There are two types of cheques, namely bearer and order cheques.

BEARER CHEQUE
 This is a cheque made payable to bearer.
 That is to anyone who presents it to the bank regardless of the name on it.
 It has the word ''pay...................or bearer” written on its face.
 It is not a safe means of payment since anyone who presents it to the bank would be paid.
 It does not require any form of identification at the bank.
 Bearer cheques are rarely used nowadays because they are not safe means of payments.
 For example dishonest finder of a lost bearer cheque takes it to the bank and easily cashes it.

ORDER CHEQUE
 This is a cheque made payable to a named person or organisation on the cheque or their order.
 It has the words ''pay.............or order” written on it's face
 It is safe than a bearer cheque and banks usually check the identity of the payee before paying money against
order cheques.
 The named person or organization an order cheque can transfer such a cheque to someone else by endorsing it
i.e. signing it at the bank.

CHEQUE ENDORSING is signing a name at the back of a cheque. The purpose of endorsing a cheque being transferred
to another person is to enable ownership of a cheque to change from the payee to the new holder.

FORMS OF CHEQUES
POST DATED CHEQUE
 A post dated cheque is one which has a date in future of current date, the bank not credit the customer’s account
with the amount until the due date.
 Post dated cheque is a cheque that is dated ahead of the date it is being written. For example a cheque written on
the 10th November 2008 but dated 22nd November 2008 is a post dated cheque. The bank dishonors a post
dated cheque if it is presented for paying before the date written on.

STALE CHEQUE
 A stale cheque is a cheque which has stayed for more than 6 months without being presented for payment.
 That is it has stayed for more than six month from the time of drawing to the time of presentation.
 It is therefore invalid.

OPEN CHEQUE.
An open cheque is a cheque that:-
 has no parallel lines drawn across it's face
 Can be cashed over the counter at a branch and bank on which it is drawn i.e. drawee bank.
 Can be passed on to another person in settlement of debts by endorsing it.
 May be deposited into payee's bank account.
 Can not be safety posted to another person at a distant town.

CROSSED CHEQUE
A crossed cheque is a cheque that;
 Has two parallel lines drawn across its face with or without words between the crossing.

PREPARED BY MR. MWEEMBA WELCOME TO THE WORLD OF COMMERCE Page 9

 COMMERCE NOTES 2010

 Can not be cashed over the counter but must be deported into a bank account.
 Can be safely posted to a person at a distant is because a crossed cheque is deposited into a bank account and
therefore even if it is lost or stolen, a thief or anyone who finds it can not easily get cash out of it.

BLANK CHEQUE
 This is a cheque where by the drawer leaves out the amount to be filled in by the payee.
 Normally the drawer would limit the payee as to how much he or she should withdraw by indicating the amount
in the crossing e.g. under five hundred thousand.

DISHONOURED CHEQUE
This is a cheque that the bank refused to honour. When the bank dishonours a cheque, the bank clerk will always mark the
cheque R/D meaning refer to drawer.

REASONS FOR CHEQUE DISHONOUR

 When the signature on the cheque differs from the specimen signature.
 When the amounts in words differs from the amount in figures.
 When the cheque is stale.
 When the cheque is postdated.
 When there is no money in the drawer's account.
 When there is an insufficient fund in the drawers account.
 When there is an omission on the cheque (e.g. when there is no date, etc).
 When it is blank.
 When there are cancellations alterations without being counter signed.
 When the payee's name on his/her identity card is different from that on the cheque.
 When the drawer instructs the bank to stop making payment of cheques.
 When the drawer has closed the account.
 When the cheque is badly mutilated.

REQUIREMENTS OF A VALID CHEQUE

A Valid cheque must have the following:-
 Correct date: the cheque is valid for six months. After six months a cheque becomes stale.
 Payee's name clearly written on the cheque.
 Amounts in words must always be written exactly the same as the amount in figures.
 The drawer's normal signature.
 The cheque must always be written in ink and not in pencil.

TYPES OF CHEQUE CROSSINGS

 Cheque crossing is the act of drawing two parallel lines on the face of the cheque.
 The purpose of cheque crossing is to ensure that it is deposited into a bank account and not cashed over the
counter.
 There are two (2) ways of crossing a cheque namely, general crossing and special crossing.

(a) GENERAL CROSSING

A generally crossed cheque is a cheque which:-
 has two parallel lines drawn across its face
 The phrases, “Account payee only”, or “And company” or Not Negotiable” may be added in between the parallel
lines.
 But with No name of the bank written between the crossings.

PREPARED BY MR. MWEEMBA WELCOME TO THE WORLD OF COMMERCE Page 10

 COMMERCE NOTES 2010

 Can be deposited at any bank where the payee happens to have a bank account.
 Can be transferred to another person by endorsing it.

EXAMPLES OF GENERAL CROSSINGS

A.

The effect of these crossings on a cheque is that

cash cannot be received over the counter but that
OR the cheque must be deposited into a bank account.

B.

The effect of this type of crossing on a cheque is that the cheque

cannot be made out for more than the amount written in the
crossings (i.e. K500, 000)

C. The effect of this type of general crossing on a cheque is that the

Cheque must be paid into a bank account of the payee named
on the cheque. The cheque should not be transferred to another
Person.

“Not Negotiable” crossing does not stop the cheque from being
transferred from one person to another in settlement of debts. Its
D. effect on the cheque is that the person receiving a NOT
NEGOTIABLE CHEQUE will have no better title to a cheque
than the person from whom he is receiving the cheque. For
example, the person who receives a cheque from a thief, he/she
has no better title to the cheque than a thief i.e. he has no right to
claim the money than a thief. The not negotiable crossing
warns the new owners to receive cheques only from genuine
owners.

SPECIAL CROSSINGS
A Specifically crossed cheque is a cheque which:-
 Has two parallel lines drawn across its face with the name of the bank and branch written between the crossings.
 Must be paid into a bank account at a bank and branch named between the crossings.
 Cannot be deposited at any bank where the payee happens to have a bank account, but only at the bank named

PREPARED BY MR. MWEEMBA WELCOME TO THE WORLD OF COMMERCE Page 11

 COMMERCE NOTES 2010

between the crossings.

 Cannot be passed on to another person in settlement of debts

EXAMPLES OF SPECIAL CROSSINGS

A. The effect of this crossing is that the cheque must be paid into a
bank account at Livingstone branch of Barclay's Bank Zambia
Ltd.

B.
The effect of this crossing is that the cheque must be paid into the
payee's account at Livingstone branch of Barclay's Bank Zambia
Ltd.

ADVANTAGES OF CHEQUES
 Cheques are safer and more convenient than cash.
 A cheque can be made for any amount and is not bulky. It reduces the risk of carrying large amounts of cash
around.
 A cheque can be stopped if it is lost or stolen or when drawer dies.
 Large amounts of money are safely and easily carried in cheque form than in cash.
 Used cheques act as receipts for payments made.
 Cheques are generally acceptable as a means of payment.
 Cheques can safely be sent by post especially when crossed.

DISADVANTAGES OF CHEQUES
 Some people do not have bank accounts so paying them by a crossed cheque may simply inconvenient them.
 Banks charge a fee for issuing cheque books and may charge each transaction paid by cheque.
 Cheques are not really suitable for paying smaller amounts e.g. when buying only one tablet of soap.
 A cheque can be refused in payment because it is not a legal tender.

CHEQUE CLEARING SYSTEM

This is a system by which cheques are passed tor payment. A cheque that has been cleared for payment is called a Cleared
Cheque.
OPERATION
Representatives of banks come together and look at cheques issued and received by their various customers.
Each bank has its own cheque clearing department that ensure that all cheques given to the bank are cleared.

PREPARED BY MR. MWEEMBA WELCOME TO THE WORLD OF COMMERCE Page 12

 COMMERCE NOTES 2010

TYPES OF CHEQUE CLEARING

There are basically four types of cheque clearing namely, branch clearing, town clearing, internal clearing and general
clearing.

1. BRANCH CLEARING
This usually works where the payee and the drawer live in the same town and are using the same bank and branch.
For example, Mr. Lungu of Choma paying Southern Water and Sewerage Company of Choma, both banks at Barclays Bank,
Choma Branch.

Drawer (Mr. Lungu) Cheque Payee (SWASCO)

Barclays Bank Zambia Ltd. Barclays Bank Zambia Ltd.
CHOMA CHOMA

Send Bank Cheque

Statement

BARCLAYS BANK
CHOMA

2. INTERNAL CLEARING
This works where the payee and the drawer live in different towns but use the same bank but different branches.
For example Mr. Phiri who lives in Choma banking at Finance Bank, Choma Branch, paying Mr. Chilufya of Kitwe banking at
Finance Bank, Civic Centre Branch.

3. TOWN CLEARING
This works where the drawer and the payee live in the same town but use different banks.
For example, Mr. Mfuzi who banks at finance bank Choma branch paying Mrs. Malikana who banks at ZANACO Choma
branch

4. GENERAL CLEARING
This is used where the payee and the drawer live in different towns and use different banks and branches.
For example, Mr. Mweemba of Barclays Bank Choma branch, paying Mr. Smith of Lusaka who saves with Finance bank,
town centre branch.

CLEARING SYSTEM

DRAWER (Mr. Mweemba) CHEQUE PAYYEE (Mr. Smith)

PREPARED BY MR. MWEEMBA WELCOME TO THE WORLD OF COMMERCE Page 13

 COMMERCE NOTES 2010

BARCLAYSBANK DR. (+) FINANCE BANK CR. (-)

CHOMA BRANCH TOWN CENTRE
BRANCH

BARCLAYS BANK FINANCE BANK

HQ HQ.

CLEARING HOUSE
(BOZ)

HOW BANKS FINANCE TRADERS

The following are some of the ways in which banks finance traders both in home and foreign trade:-

1. BANK OVERDRAFTS
 A bank overdraft is an arrangement whereby a bank customer is allowed to withdraw more money than his/her
balance in the current account up to an agreed limit.
 It is a short term finance obtained to solve temporary financial difficulties such as meeting the day – to – day
business expenses such as paying for electricity, wages, etc.
 When the account is withdrawn, it is debited with the sum of an overdraft and the figure overdrawn may be
printed in red.
 Deposits made into the account reduce the overdraft and may even cancel the overdraft balance.
 Interest on overdraft is calculated on amount actually overdrawn and is charged on a daily outstanding balance.
 The rate of interest on an overdraft is not fixed.
2. BANK LOAN
 A Bank loan is a long term finance obtained to acquire capital items such as buying a motor vehicle, building a
factory, etc.
 A loan is obtained as a fixed sum of money.
 The amount of the loan is credited to the customer's account as though the customer is depositing his/her own
money.
As a loan is being credited to a customer's account, a separate loan account is also opened to which the amount
of loan and interest is charged or debited.
 A loan is repaid in fixed installments.
 A fixed rate of interest is paid on the full amount of the loan.
 Interest on loan is paid whether the customer uses the money or not.
 Before the loan is granted, the bank will require some form of security in form of an immovable asset which can
be surrendered to the bank so that in case of default by the borrower, the bank can sell it to recover the amount
of loan. This is necessary because the money the banks lend out normally belongs to their customers, so they
must be careful to lend it only if they can be sure that it would be repaid.

DIFFERENCES BETWEEN A LOAN AND AN OVERDRAFT

LOAN
1. A Bank loan is a long term finance obtained
to acquire capital items such as buying a
motor vehicle, building a factory, etc.
2. A loan is obtained as a fixed sum of money.
OVERDRAFT
1. An overdraft is a short term finance
obtained to solve temporary financial
difficulties such as meeting the day – to –
day business expenses such as paying for

PREPARED BY MR. MWEEMBA WELCOME TO THE WORLD OF COMMERCE Page 14

 COMMERCE NOTES 2010

3. When a loan is granted a separate loan electricity, wages, etc.

account is also opened to which the amount
of loan and interest is charged or debited
4. A fixed rate of interest is charged t on a bank
loan.
5. A loan can be obtained by anyone who meets
the bank requirements whether he/she has
an account with the bank or not.
6. A bank loan is repaid in fixed installments
7. To obtain a loan you always require collateral
security preferably an immovable asset which
the bank would hold onto until the loan is
repaid.
8. Interest on a loan is charged on the full
amount of the loan whether the customer
uses the loan or not.
9. A loan is a formal way of borrowing
10. A loan is an expensive way of borrowing
11. Money put in a current account would have
no effect on a loan account.
2. An overdraft is not obtained as a fixed sum
of money.
3. When an overdraft is granted no separate
overdraft is opened.
4. The rate of interest charged on an
overdraft is not fixed.
5. Overdrafts are granted only to current
accountholders.
6. An overdraft is not repaid in fixed
installments but that any deposits made
into the account reduce the overdraft and
may even cancel the overdraft balance.
7. An overdraft may at times not require
security.
8. Interest on an overdraft is charged only on
the actual amount withdrawn and is
charged on a daily outstanding balance.
9. An overdraft is an informal way of
borrowing
10. An overdraft is a cheaper way of
borrowing.
11. Money deposited in a current account
reduces or cancels out the overdraft.

MAIN FACTORS THE BANK MANAGER CONSIDERS BEFORE GRANTING A LOAN OR AN OVERDRAFT
1. Amount of money needed by a prospective applicant for a loan or overdraft.
2. The purpose for which the loan or overdraft is needed.
3. Customer’s creditworthiness i.e. the ability of the customer to repay the loan or overdraft.
4. Collateral security i.e. an immovable asset which can be surrendered to the bank so that in case of
default by the borrower, the bank can sell it to recover the amount borrowed.
5. The period during which the prospective customer is required to repay the loan in full
6. The customer’s turnover with the bank.
7. Government guidelines.

FACTORS A FIRM CONSIDERS BEFORE CHOOSING A METHOD OF FINANCING

- Amount of money (loan or overdraft) needed
- The cost of borrowing
- Period of repayment
- Amount of money available to be lent out
- Collateral security required
- Purpose or reason of borrowing
- Financial commitments with other firms/businesses
- How previous loans have been used
- The speed of repayments

THE RIGHTS OF A CUSTOMER IN BANKING

The following are the rights of a customer in banking:-

- The bank should honor the customer’s payment instructions provided that they are properly drawn
especially cheque payments
- The right to privacy or secrecy of bank account details
- The right to be provided with bank statements within reasonable time or be provided with account

PREPARED BY MR. MWEEMBA WELCOME TO THE WORLD OF COMMERCE Page 15

 COMMERCE NOTES 2010

balance on request.
- The right to withdraw money during banking hours.
- The right to deposit money or cheques.
- The right to be informed immediately if any forgery of his/her signature is detected.

- The right to be given reasonable notices of closure of his/her bank account.

- The right to be treated fairly and reasonably in all dealings
- The right to be provided with services and products that meet the required banking standards.
- The right to be given information on bank services and products in plain language and be helped if there
is any aspect, which the customer does not understand.
- The right to be helped in understanding how his/her bank account operates.
- The right to be provided with safe, secure and reliable banking and payment systems services.
- The right to be provided with bank credit facilities, products and services without discrimination on the
basis of colour, gender, sex, disability, language, etc.

THE CENTRAL BANK

- The Bank of Zambia is Zambia’s central bank whose headquarters is in Lusaka.
- The central bank is run by a Governor and a board of directors. The Bank Governor is appointed by
the state president for a maximum term of five years, which is renewable.
- The central bank is the nation’s banker. Its main customers are the government and commercial
banks.
- Normally, individuals, companies and or businesses cannot open accounts with the central bank.
 The main roles of the central bank are:-
1. To make sure that there is monetary stability in the country.
2. To make sure that the domestic financial system works well and
3. To make sure that there is enough money available to pay for goods and services.

FUNCTIONS OF THE CENTRAL BANK

To achieve the above roles, the bank of Zambia performs a wide range of important functions including
the following:-
1. ISSUING BANK NOTES AND COINS
The central bank is responsible for arranging printing, minting, storing and circulation of bank
notes and coins.

2. KEEPING THE GOVERNMENT’S ACCOUNT

- The central bank act as a banker to the central government and other government departments
- The central bank keeps government accounts in the same way an individual person keeps an
account at a commercial bank.
- The government deposits money it receives in the central bank from various sources such as
taxes, customs duties, etc.
3. THE BANKERS’ BANK
All commercial banks maintain a deposit account at the central bank. It is from this account that
commercial banks can replenish their cash stock and pay debts owed to other banks.
4. SERVICING THE NATIONAL DEBT
The government, just like individuals, borrows money. The government can borrow from other
countries or from international financial institutions such as the World Bank, International
Monetary Fund (IMF), etc. or even from the public. It is the central bank that manages such loan
accounts.
5. LENDER OF LAST RESORT
The central bank may lend money to commercial banks as a last resort, if they cannot get money
from any other source. This may occur if, for example, commercial banks lend part of their
customers’ money to borrowers and their customers come to withdraw it only to find that there
is no money at the commercial banks.

PREPARED BY MR. MWEEMBA WELCOME TO THE WORLD OF COMMERCE Page 16

 COMMERCE NOTES 2010

6. SUPERVISION OF THE BANKING SYSTEM

The central bank supervises the commercial banks and other financial institutions to make sure
the banking system is in the country is strong and customers’ money is safe
7. BANKERS’ CLEARING HOUSE
The central bank has a department responsible for helping in the clearing of the cheques which
move between various banks.
8. THE ADVISOR TO THE GOVERNMENT
The central bank advises the government on monetary policy matters such as inflation, taxation
and exchange rates.
9. MANAGEMENT OF THE COUNTRY’S FOREIGN RESERVES
The central bank controls the amount of foreign currencies that are available for buying goods
and services from other countries.

REVISION QUESTIONS
1. Mr. Lungu buys 30 cases of sugar from Zambia Sugar PLC at K150, 000 per case, less 20% trade discount. Mr.
Lungu pays Zambia Sugar PLC by cheque, specially crossed having deducted 21/2% cash discount from the invoice
price. Mr. Lungu banks at Barclays bank, Choma branch and Zambia Sugar PLC banks at Finance Bank, Mazabuka
branch.

(a) Calculate the amount of the cheque drawn by Mr. Lungu [3]
(b) Sketch the cheque [7]
(c) Explain the effect of special crossing [3]
(d) Explain how the banks involved arrange for the cheque to be cleared [7]

ANSWERS
(a) List price (150,000 x 30) = K4, 500,000
Less 20% trade discount = K 9 00,000
◦ Invoice price 3,600,000
◦ Less 21/2% 90,000
◦ Amount paid k3,510,000

(b)

PREPARED BY MR. MWEEMBA WELCOME TO THE WORLD OF COMMERCE Page 17

 COMMERCE NOTES 2010

BARCLAYS BANK (Z) LTD 1-7654-90

CHOMA BRANCH
DATE: 23/11/10

PAY: Zambia Sugar PLC OR ORDER

SUM OF :Three Million five hundred and ten thousand Kwacha Only K3,510,000

MR LUNGU
SIGN: LUNGU

350-989 340-3-76541097-02

(c) The effect of special crossing on the cheque is that:

- The cheque must be deposited into a bank account at the bank and branch named within the crossings and
should not to be cashed over the counter.

K3, 510,000
(d) DRAWER (MR. LUNGU) PAYEE (ZAMBIA SUGAR PLC.)

(Barclays bank, Choma branch) (Finance Bank, Mazabuka branch)

BARCLAYS BANK HEADQUARTERS FINANCE BANK HEADQUARTERS

(DR.) (CR.)

CENTRAL BANK
CLEARING HOUSE

PREPARED BY MR. MWEEMBA WELCOME TO THE WORLD OF COMMERCE Page 18