Banking operations unit1

THE UGANDA INSTITUTE OF BANKING & FINANCIAL SERVICES

UIBFS

ISO 9001:2008 CERTIFIED

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Banking Operations


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LEARNING OBJECTIVES By the end of this module, the students should be able to:• Define the terms customer and banker• To thoroughly understand the nature of the banker/customer

relationship• Detail the duties of the banker and customer• Recognize when the bank’s duty of secrecy may be ignored• Understand account opening and closing procedures and types of

accounts • Understand in general common banking services and products offered • Understand the importance of Know Your Customer (KYC) principle• Explain the elements of the Code of Banking Practice and good banking

ethics


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Banker - Customer Relationships

Outline of Bank Services

Types of Accounts

Know Your Customer (KYC)

Savings and Fixed Deposit Accounts

Cheques, Money Transmission, and Other Payment Mechanisms

MODULE COVERAGE

Code of Banking Practice

Plastic Cards and Electronic Banking


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What is the nature of a bank-customer relationship?• Definition of a BankThe general definition of a bank is that it is a financial institution that deals with deposits

and advances and related services. Alternatively it’s defined as an establishment for custody of money which it pays out on customer’s order. It receives money from those who want to save as deposits and lends it to those who need it.

• In practice, however, the above definitions are unsatisfactory since there are so many financial institutions in Uganda and indeed all over the World today that accept money and pay it out on a customer’s orders and yet they are not banks.

• To be known as a bank and use the name bank in Uganda you must be licensed by Bank of Uganda under the banking act after fulfilling certain stringent criteria including minimum capital requirements.

• Definition of a customerIn Banking, a customer is a person who maintains an account with the bank or who has a

business relationship with the bank.


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Categories of Banker-Customer RelationshipsGeneral Relationship• Debtor-Creditor: When a customer has a net credit balance on his account he is a

creditor and the bank is a debtor. However, if a customer has a net debit balance with the bank then the bank is a creditor and the customer is the debtor

Special Relationships• Bank as a Trustee: Sometimes Banks are appointed under a will as executors and

therefore trustees for the beneficiaries.• Bailee – Bailor: customers sometimes entrust the banks with valuables for safe

custody. In this case the bank will be known as bailee and the customer bailor. • Agent -Principal: an agent is a person employed to represent another in dealings with

third parties. For instance a customer may instruct the bank to buy shares on his behalf. If the bank buys on his behalf the bank becomes an agent while the customer becomes the principal.

• Mortgagor – mortgagee: if a customer mortgages property to the bank as security for a debt, the bank becomes mortgagee while the customer becomes mortgagor.


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Fundamental characteristics of banker-customer relationships• Trust-based relationship –Trust plays an important role in building healthy

relationship between a banker and customer. The bank must therefore ensure that the relationship is strengthened and retained.

• A fiducially relationship – A fiduciary relationship is one that is based on trust. The customer entrusts the banker with his money trusting that the bank will at all times act in his best interests and benefit ensuring that funds deposited with it are safe and in some cases grow in value.


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Key elements for banker-customer relationshipsIn dealing with the customers, banks have to ensure that basic/ fundamental

issues of relationships are adhered to:i. Listen to the needs of the customer and provide solutionsii. Maintain high levels of credibility by delivering on their promisesiii. Where need arises, fully educate and sensitize customers about new

products, charges, situations and other related aspects. iv. Communicate to the customer clearly any changes in the terms and

conditions of operating the account and any charges introducedv. Ensure that staff are well trained and handle customers in the most

professional mannervi. Always leave the customer with an impression that will encourage him to

return to the bank and to talk nicely about youvii. Good customer relations - never leave a customer feeling negative


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Common duties of a bank to its customers The following are the common duties and obligations of a bank to the

customer, whether or not they are included in any service agreements:• Duty to maintain secrecy/confidentiality of customer’s account and

affairs. • To receive customers cash and cheques for collection• To repay money on demand in accordance with customers written

instructions• To give reasonable notice before closing a customer’s credit account• To advise a customer immediately a forgery of customer’s signature is

detected or brought to the bank’s attention• To provide a customer with a statement of account within reasonable

time or provide balance of account on request.


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Instances when a bank’s duty of secrecy can be ignored:• Under compulsion of law – an example is when there is a court order to

attach the balance on the customer’s account arising out of a judgment debt (garnishee order),fraud or payment of taxes(URA Distress orders)

• Under normal established banking practices • For protecting national or public interest – such as prevention of terrorism,

money laundering• For protecting bank’s own interest such as in a writ when suing the

customer for loan default• Under directive by the regulatory authority such as Bank of Uganda• Under express or implied consent of the customer If a bank is negligent and fails to adhere to its duty of secrecy, it may find itself

liable to pay damages to the customer and risk damaging its image and reputation


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If a bank is negligent and fails to adhere to its duty of secrecy, it may find itself liable to pay damages to the customer and risk damaging its image and reputation


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Duties of the customerThe customer has five main duties:• To exercise reasonable care when drawing cheques so as not to mislead

the bank or facilitate fraud and forgery• To notify the bank of known / suspected forgeries or misuse of the

account• To use the account for legal and lawful purposes (e.g. avoid money

laundering, willful forgery or fraudulent transactions on or with the use of the account)

• To pay all the dues, charges, interest, loan repayment installments, commissions and other agreed fees to the bank for services rendered

• To only issue cheques when there is sufficient credit balances or unutilized overdrafts on his account


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Termination of a banker - customer RelationshipThe relationship ceases on: • Death, bankruptcy or permanent mental impairment (lunacy) of a

customer or the bank.• The customer closing the account i.e. voluntary termination• The Bank closing the account after giving due notice.• Liquidation of the company (for corporate customers)• The completion of the contract or the specific transaction.


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• If a bank wants to close a troublesome account such as when a customer is in the habit of issuing cheques when there are no sufficient funds on the account, it should send him written notice with the following information:

• State the last date on which credits/debits will be accepted by the bank and effective date of closure

• Request return of unused cheques and plastic cards• Request customer on how to dispose of the credit balance on the

account(a bank cheque for the balance is normally prepared)• One month’s written notice is considered reasonable although for a

business account a period longer than a month may be required. Once the account is closed any cheques presented will be returned marked ‘account closed’. Credits coming in after closure should be suspensed and thereafter returned to the customer

Banking operations unit1

Business

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