IntroductIon

Evolution of banking: It has not so far been decided as to how the word “BANK” originated. Some authors opine that word is derived from the words Bancus or Banque which mean a bench. The explanation of this origin is attributed to the fact that the Jews in Lombardy transected the business of money exchange on benches in the market place; and when the business failed, the Bancus was destroyed by the people. Incidentally, the word Bankrupt is said to have been evolved from this practice. The opponents of this opinion argue that it was so, then how is it that the Italian moneychangers were never called Bunchieri in the middle ages. Other authorities hold the opinion that the word Bank which means joint stock fund. Later on, where Germans occupied part of Italy, the word Back was Italianated into Bank.

FORMAL DEFINATION: - “ Bank is an institution transecting the business of accepting, for
the purpose of lending or investment, of deposits of money from the public repayable on demand or otherwise, and withdraw able by cheque, draft order or otherwise & includes any post office saving bank” (the Negotiable Instruments Act 1881).

Early Growth: - Banking is infact is as primitive as human society, for ever since man came to
realize the importance of money as a medium of exchange, the necessity of a controlling or regulating agency or institution was naturally felt. Perhaps the Babylonians developed banking system as early as 2000 B.C King Hammurabi (1728-1686B.C) the founder of the Babylonian empire drew up a code where in he laid down standard rules of procedure fore banking operations by temples and great landowners. Later on, the Sumerians, Babylonians, Hittites and Assyrians standardized the values of the goods in silver, copper, bronze or electrum. It is not certain as to who invented money; but history records that Gyges (croesus), king of Lydia, casted electrum (a natural alloy) of gold & silver ingots of identical shape &of uniform weight with a triple emblem engraved on it as an official guarantee of value in 687 B.C In addition, in Greece, the temples of Epheuses & Delphi were the biggest ‘BANKS’ of their time, where the people deposited their money and other valuables. The earliest known public bank is said to be the bank of Venice, which was established in 1157 A.D. This was followed by some ‘Monte’ or ‘standing banks’ during 1336 to1349 in various city Italy.

Seeing the great demand, these money- lenders started organizing themselves; the banks started coming up at the principle seaports in southern Europe. Soon Venice and Genoa became the most important money markets of the time. In 1401 a German public bank was formed. This was followed by the formation of Genoa, in 1407. By the 16th century, some more public banks were formed in Venice, Milan, Amsterdam, Hamburg and Nuremberg. Ultimately in 1587, a state bank under the name of Banco Di Rialto was formed in Genoa. Later the Bank of Amsterdam was also founded in 1609. Similarly in 1690, the Bank of Hamburg came into existence, which accepted deposits of fine silver or of foreign currency.

Modern Banking: - Modern banking started in Britain when many of the Lombardy merchants
came to England in14th century. They were so powerful that even the kings had to depend on them for loans. They also changed money for travelers. The business of changing money was so attractive that the king Edward III established the office of Royal Exchanger for changing money for profit. Consequently, the goldsmiths started dealing in gold & silver. They issued receipts for this. Over a long period, they found large sums of gold & silver with them. They started the use of this to advance loans to others at high interest rate. Thus began the ‘issue’& ‘deposit’ banking of modern times. In 1965, a number of goldsmiths formed cooperation, known as Bank of England. This bank lent 1,200,000 pounds at 8% rate of interest to William III, who in return, allowed many privileges to the bank, especially the right to issue notes payable to bearer on demand up to the amount of this loan. This was known as ‘Fiduciary’ issue, not covered by gold. By 1700, the Bank of England was not only issuing notes but also conducting accounts for customers. In his, book ‘Lombardy Street’ Bagehot says, “Up to 1813 or thereabout in England, the main profit of banks was derived from the circulation & for many years after that, deposits were treated as very minor matters”. Types of Banks: - With the passage of time, due to variety of resources of money and the diversity in lending & investment operations, banks have been placed in various categories, such as commercial banks, mortgage banks, consumer banks, investment banks, development banks, cooperative banks, eximp banks& central banks etc.

Banking in Indo-Pakistan: The Indian society was quite familiar with banking. In those days banks existed in one form or other. The major function of banks is to lend the money to people & kings. In the words of R.C Dutta”Loans &usury were well understand in those days & Rishis lament their state of indebtness with the simplicity of primitive times”. (Civilization in ancient India vol p.39) The Vedic Epics clearly mentioned about giving & taking of credit & contracts of debts at dicing. Later on, Manu in his ‘Sammurti’ clearly mentioned these transactions by saying “A sensible man should deposit his money with a person of good family, of good conduct, well acquainted with the

law, veracious, having many relatives wealthy & honorable” (Law of manu by buhler p.286; Sacred books of the east.vol.25). The ancient bankers also transferred money from one place to another with the help of hundies. The land revenue also collected; services paid in cash. Loans were given to the people against the securities.

Banking in Pakistan
At the time of independence, commercial banking facilities were provided fairly well. There were 487 scheduled banks. A new country without resources, it was very difficult for Pakistan to run its own banking system. Therefore, according to Indian Independence Act in 1947, an expert committee was appointed to study the issue. The committee decided that the Reserve Bank of India should continue to function in Pakistan until 30th September 1948, so that problems of time & demand liability, coinage, currencies exchange etc be settled between India & Pakistan notes would continue to be legal tender till 30th Sept, 1948. According to plan in June1947, Hindus started transferring their assets from Pakistan to India. Moreover, the registered banks in Pakistan started transfer to India in order to bring collapse to the new state. By 30 June, the scheduled banks in Pakistan decreased from 487 to only 195. There were 19 foreign banks with the status of small branches were engaged in exports of agriculture crops from Pakistan, while only 2 Pakistani banks that is Habib bank & Australasia bank. The panic of uncertain future shook the confidence of people. The government, therefore, promulgated the Banking Companies Ordinance, 1947, to safeguard the interest of both the bankers & the customers. To add the difficulties, the Indian Government withhold Pakistan’s share of Rs 75 crore in cash balances. The urgency of assuming control of banking & currency very badly felt now. Therefore, the government of both the countries decided to advance the date, up to that Reserve Bank of India could serve as the monetary authority in Pakistan from 30 Sept 1948 to 30 June 1948. The foreign experts advised that due to acute shortage of resources the establishment of a central bank is not possible. Contrary to recommendations, the Governor General of Pakistan, Quaid-e-Azam Mohammad Ali Jinnah inaugurated the State Bank of Pakistan on July 1, 1948, after the State Bank of Pakistan Order was promulgated on May 12, 1948. Thus, a landmark made in history when State Bank of Pakistan assumed full control of banking and currency in Pakistan. The first Pakistan notes issued in October1948 in the denominations of Rs 5, 10, and 100. The central bank started creating a national banking system. For that they provided every facility to Habib Bank to expand its network & helped in the establishment of new banks. As a result, the National Bank of Pakistan came into being in 1949. In order to develop strong banking system, an order was promulgated in 1949, empowering the State Bank in order to control Banking Companies in Pakistan. The State Bank restricted the foreign banks to open their new branches in big cities where foreign trade was carried out, while Pakistani banks were allowed to open as many branches as possible within the country. The outbreak of Korean War in 1949 provided a great boom to Pakistani exports. However, after the end of war in 1952, there was a great fall in exports, while imports remain same. This caused a

very bad effect on our balance of payments. Therefore, Government reduced imports, provides incentives to business & industry by providing protective tariffs. This induced banks to provide working capital to industries. The State Bank of Pakistan sponsored the setting up of an Industrial Finance Corporation. The food shortage compelled the Government to develop Agriculture Development Bank. The devaluation on August 1, 1955, had a favorable effect on balance of payment in 1955-56. Pakistan now entered into the phase of planned economy after 1956. Naturally, there was increase in demand of currency. In addition, the banking facilities remained heavily concentrated in cities. Therefore, the State Bank gives priority to the establishment of banks in interior parts of country. Another important event was the establishment of the Credit Enquiry Commission in 1959, to examine the working of credit providing institutions to trade, commerce & industry & recommended measures for further improvements. More scheduled banks continued to establish. By1965, the numbers of scheduled banks stood at 36, the deposits increased to Rs 688.28 crore, while credit expansion to private sector rose to 575.87 crore. State Bank also established Eastern Mercantile Bank for the development of East Pakistan. In 1960 Rural Credit Fund was also setup with the capital of one crore to provide medium & long-term credit to rural areas. In 1964, the National Bank also came forward. Beside this, specialized credit & financial institutions have also developed, which cater the needs of specific sectors. Small & Medium Enterprise Development Authority (SMEDA), Khushali Bank & Medium Enterprise Bank (SME) is some newly established institutions for this purpose. All commercial banks were nationalized on January 1, 1974. It has now been realized that this step has proved counter productive, hence reversal has been initiated since January 1991, after amending the relevant laws. Other banks in private sector have also been encouraged. Consequently, a large number of commercial& other banks came into operation A new concept of interest free banking was introduced in 1981.Electronic banking & several other services like ATM, SWIFT, Transfer Credit & Charge etc have been made available.

Organization of Money Market in Pakistan: Having learnt from bad lessons of inefficiency, administrative & financial indiscipline, the government of Pakistan ultimately decided to deregulate the financial sector, allowing freedom to capital market & money market both. At present the money market, structure in Pakistan comprises the following.

1. State Bank of Pakistan: - State Bank was established on July 1, 1948. The present
structure, operation & authority is based upon The State Bank of Pakistan Act, 1956, according to which the State Bank is charged with regulating the monetary & credit systems in Pakistan. According to section 4 of The State Bank of Pakistan Act, 1956, it had mixed ownership wherein 5% of the paid up capital of Rs10 crore was held by the Federal Government & 49% by private sector. However, after nationalization the government assumed the ownership of all the shares on payment of compensation to share holders. All the affairs of the State Bank look after by a Governor, one or more deputy Governors & 7 directors nominated by government. According to November 2002, amendment in section in

10(3) the governor is appointed by the President of Pakistan & his term of office is three years. The Deputy governor is appointed for 5 years.

Independence of State Bank: - State Bank of Pakistan Act, 1997, has ensured the Independence
of the State Bank section 4B states that “ No government or quasi- governmental body or agency shall any directive, directly or indirectly, to any banking company or any other financial institution regulated by the bank which is inconsistent with the policies, regulations & directives issued by the Bank Companies Ordinance, 1962(L VII of 1962) or any other law in force” State Bank maintains its offices at Karachi, Hydrabad, Faisalabad, sukkur, Gujranwala, Multan, Lahore, Rawalpindi/Islamabad, Peshawar, D.I Khan and Quetta etc. The State Bank provides the policy guidelines & ensures that money market operates on sound professional basis.

2. Commercial Banks: - Commercial banks are companies “which transect the business of
banking in Pakistan”. These commercial banks have been the most effective mobilizers of savings working capital to trade, commerce & industry. Presently these banks are operating in the national & private sector after implementation of various amendments in the Banks Act, 1974 since 1994. Commercial banks in Pakistan have been authorized to engage in the following forms of business in accordance with section 7 of Banking Companies Ordinance, 1962.

“The borrowing, raising, or taking up money; the lending or advancing of money either upon
or advancing of money either upon or without security; the drawing, making, accepting, discounting, buying, selling, collecting, and dealing in bills of exchange, hundies, promissory notes, coupons, drafts, bills of lading, railway receipts, warrants, debenture certificates, scripts, participation, term certificates, term finance certificates, Musharika certificates, Modarba certificates & other instruments, as may approved by the State Bank, & other instruments, & securities whether transferable or negotiable or not; the granting & issuing of letters of credit; traveler’s cheques & dealing in bullion & species; the buying & selling of foreign exchange including foreign bank notes; the acquiring , holding, issuing on commission, underwriting & dealing in stock, funds, shares, debentures, debenture-stocks, bonds, obligations, securities & investment of all kinds; the purchasing and selling of bonds, scripts or other form of securities on behalf of constituents or others; the negotiating of loans & advances; the receiving of all kinds of bonds scripts of valuables on deposit or for safe custody or otherwise; the providing of safe deposit vaults; the collecting & transmitting of money & securities.” It means that the services of the present days Banks can be categorized as under: 1. 2. 3. 4. 5. Mobilizing money for its more productive use for economic development. Agency services & issuing guarantees etc. Lending & investment. General utility services. Underwriting of loans raised by the government or public bodies & trading by corporation. 6. Providing specialized services to customers, including international trade of financing.

7. Helping the Hajj pilgrims in submission of their Hajj applications & other State Bank matters. According to The State Bank of Pakistan Act, 1956, lays down that the banks having a paid-up capital & reserve of not less than Rs 500,000 & fulfilling some other requirements might declared as ‘Scheduled Banks’. By Dec 31, 1973, there were following 14 scheduled Pakistani commercial banks with 3,323 branches all over Pakistan and 74 offices in foreign countries 1. National Bank of Pakistan. 2. Habib Bank Limited. 3. Habib Bank (overseas) Limited. 4. United Bank Limited. 5. Muslim commercial Bank Limited. 6. Commerce Bank Limited. 7. Standard Bank Limited. 8. Australasia Bank Limited. 9. Bank of Bahawalpur Limited. 10. Premier Bank Limited. 11. Sarhad Bank Limited. 12. Pak Bank Limited. 13. Lahore Commercial Bank Limited. 14. Punjab Provincial Co-operative Bank Limited.

3. Exchange Banks: - Bank branches with their Head Offices abroad (excluding India)
known as ‘Exchange Banks’ at the time of independence seven exchange banks were operating in Pakistan & most of them were of British origin. At present about twenty foreign banks from European, American, Middle Eastern, African, South Asian & other countries are operating their more than 83 branches in the port & main commercial towns of Pakistan. These banks have been traditionally financing the foreign trade mainly, yet they have played a very important role in financing the country’s internal trade as well. Due to restricted field of operation of their own choice, the branches of these banks have remained concentrated in the port-towns & important trade centers only.

4.Co-operative Banks: - ‘Co-operative Bank’ means a Banking Society registered under the
Co-operative Societies Act, 1912;the section 7 of the Co-operative Society Act, 1925, defines a ‘Banking Society’ as “ a Society which accepts deposits of money on current account or otherwise subject to withdrawal by cheque, draft or order”. The Co-operative movement started in 19th century to provide credit to farmers in order to save them the paralyzing grip of the village money- lender. On the recommendations of the Famine Commission of 1901, the Co-operative Credit Societies Act, 1904, was passed with the object “to encourage thrift, self-help & cooperation among agriculturists, artisans & persons of limited means. The co-operative movement was organized on three-tier system in accordance with laws Primary societies at the base; Central banks or banking unions in the middle; & Provincial banks at the top. This system has however been changed after the promulgation of Federal Bank of cooperative Act, 1976 which established the Federal Bank of cooperatives.

5. Saving Bank: - These banks are the mobilizes of savings from those people who would
like to build up their savings. There is only one saving bank. There is only one saving bank in Pakistan i.e. Post Office Saving Bank & the Government of Pakistan controls it wholly. It accepts deposits from public & invests them in various Government projects. Its operation, therefore, is very limited.

6. Discount Houses: - These are the institutions which provide a short-term accommodation
against the discounting of treasury bills & other approved securities. Discount houses are a new development in Pakistan’s money market.

7. Micro Finance Institution: - Micro financing or financing small & medium enterprise is
a new concept in Pakistan. However, institutions providing short-term finance to this sector have been established in public & private sector both.

Specialized Credit Institutions National: - However, beside these institutions there are
some specialized institutions, which provide short term & long-term loans to provide industry & agriculture. The name of some of these institutions is as follows 1. 2. 3. 4. 5. 6. 7. 8. 9. Pakistan Industrial Credit & Investment Corporation. (PICIC) Industrial Development Bank of Pakistan. (IDBP) Agriculture Development Bank of Pakistan. (ADBP) Investment Corporation of Pakistan. (ICP) Small and Medium enterprise Development Authority. (SMEDA) House Building Finance Corporation. (HBFC) Equity Participation Fund. SME Bank Ltd. National Investment Trust. (NIT)

Specialized Credit Institutions International: - In addition to national institutions, some
international financial institutions have also been providing economic assistance to Pakistan, the following being the most important of them: 1. 2. 3. 4. 5. 6. 7. International Monetary Fund. (IMF) International Bank for Reconstruction & Development. (IBRD) International Finance Corporation. (IFC) International development Association. (IDA) Multilateral Investment Guarantee Agency. (MIGA) The Islamic Development Bank. (IDB) Asian Development Bank. (ADB)

The Banker’s Funds
The funds available to a banker for the purpose of his business comprises of the following: Bankers own paid-up capital, the reverse fund, & liquid assets.

Money received from depositors in current, fixed & term deposits

Bank’s Capital: - The amount with which a banking company in Pakistan has been registered is
called the Nominal or Authorized capital. It is further divided into paid-up & subscribed capital. The paid-up capital is that portion of capital, which the banking company has actually received from the public, while the subscribed capital is that part of issued capital, which is applied for by the public, including the shares issued to vendors or promoters. The minimum authorized capital for banking company in Pakistan is to be determined by the State Bank of Pakistan. Section 14 of the Banking Companies Ordinance, 1962, further lays down that no banking company shall carry out its business in Pakistan unless it satisfies the following conditions The subscribed capital of the company is not less than one half of the authorized capital & the paidup capital is not less than one half of the subscribed capital. The capital of the company should consist of ordinary shares only. The voting right of the shareholders should be strictly in proportion with the shareholders contribution to the paid-up capital of the company.

B. The Reserve Fund: - This fund consists of accumulated un-divided trading profits set aside
to provide for contingencies & any unusual call upon the bank’s resources. In the case of many Pakistani banks, the reserve fund has approached in amount more than the paid-up capital. Section 21 of Banking Companies Ordinance, 1962, has made it obligatory for every banking company to create a reserve fund in the following manner: If the amount of reserve fund along with share premium account is less than the paid-up capital, the banking company will subscribe at least 20% of the balance of profit of each year before the dividend is declared. If the amount in reserve fund along with share premium is equal or more than paid-up capital, the banking company will contribute 10% of balance of profit before any dividend is announced.

Liquid Assets: - In section 29 of Banking Companies Ordinance, 1962, every bank has to
maintain liquid assets in Pakistan. This amount should be such percentage of the total demand & time liabilities of the bank as may be notified by the State Bank of Pakistan from time to time. This liquid asset should be maintained in Pakistan in cash-on-hand & balances with State Bank; money at call & short notice; bills discounted; gold & bullion & unencumbered approved securities, including debentures, securities issued by the semi-government agencies, guaranteed by the Federal or Provincial Governments in Pakistan as also approved foreign exchange. State Bank of Pakistan has asked to maintain it at 15% presently.

Deposits: The Life-Blood of Bank
The bank collects money from those who have it spare and lend it to those who need it. In order to attract people to deposit money with banks, different types of deposits are being operated.

Current Deposits: -Current deposit is such a deposit in which you can deposit and withdraw
money any time. Multi-national companies keep this type of deposits. No interest is paid on these

accounts. There are a lot if transactions. The bank has to keep high reserve against total demand deposit. Mostly banks provide the facility of overdraft depending on the credit worthiness of the customer. Such facility helps the client to arrange any unexpected expensive

Fixed or term deposits: -These deposits can be withdrawn after specified periods are referred to as
Fixed or Term deposits. The period during which bank keeps such deposits varies from three months to five years. Interest, which is given, varies with the duration which amount is kept. The depositors are issued a receipt, usually an instrument marked as “Not negotiable” but it has never been recognized as negotiable. These deposits are the basis of all functions of the bank.

Payment of fixed/terms deposits before Maturity: - Sometimes the depositor wants to
withdraw the amount before the fixed time. The bank is always compelled by law to fulfill the demand of customers. In this case, the bank will calculate the interest up to the date of withdrawal.

Term deposit account in Joint Names: - Term deposits account may be in the joint names
of two or more persons. The payment to either of them will not discharge the banker unless authorized by all the joint depositors. In case of death of one or more of the persons, the deposit passes on the survivors, whom the bankers can safely pay.

Saving deposits: - In Pakistan, a saving account can be opened with a very small amount of
money, and the depositor is issued a cheque book for withdrawals. Profit is paid at a flexible rate calculated on six-monthly basis under the interest free banking system there is no restriction on the withdrawals from the deposit account but the account of money withdrawn is deleted from the amount to be taken for calculation of products for assessment of profit to be paid to the account holder. It discourages unnecessary withdrawals from the deposits. In order to popularize, this scheme for school and college, students and industrial labor also. The purpose of these accounts is to inculcate the habit of savings in the constituents. As such, the initial deposits required for opening these accounts are very nominal.

Pak Rupee Non-Resident Accounts: -Accounts in Pak Rupee of individuals, firms or
companies residing in countries outside Pakistan are known as ‘Non-Resident Accounts’. The State Bank Notification No: FE. 129 dated August 31, 1991, has categorized the following accounts as ‘Non Resident Accounts’ (i) Accounts of Pakistan nationals, permanently resident & domiciled abroad. However, accounts of Pakistan nationals holding office in the service of Pakistan in a foreign country are exempted. (ii) Accounts of Pakistan nationals who got out of Pakistan for a short duration in connection with study, business tour or pleasure trip etc. (iii) Accounts of foreign nationals ordinarily residing in Pakistan but go abroad for a short duration. (iv) Accounts of foreign nationals residing abroad. The Non- Resident Accounts in all the above four categories shall be treated as resident on accountholder’s permanent return or his temporary visit to Pakistan. In all such cases, permission of State Bank of Pakistan is not necessary and there will be no restriction on account-holder’s operating these accounts.

Declaration on from Q.A 22. is not required from Non-Residents and Residents are to be maintained as discussed below: (a) The Non-resident Accounts in the names of persons or firms residing permanently outside Pakistan: The accounts are opened without the prior approval of State Bank of Pakistan and they are maintained in a separate ledger. The name of country where the Non-Resident Accounts holder is residing is also indicated clearly. When the Non-Resident foreign national comes to Pakistan for a short visit or temporary residence, the account is not treated as Non-Resident Accounts, as long as the account holder remains in Pakistan. In case a Pakistan national Non-Resident Account holder returns to Pakistan permanently or for a short temporary visit, the account is a ‘resident account’ as long as the account holder is in Pakistan, and as soon as he leaves the country the account is immediately redesignated as Non-resident. (b) Accounts of Pakistan nationals who proceed abroad temporarily or for short visit: When an account holder departs to a country outside Pakistan for a short period, the account is designated as ‘Non-Resident’ for the period of stay abroad Immediately on his, return to Pakistan the account of such a Pakistani is redesignated as ‘resident’. (c)Accounts of United Nations and its-Agencies/Organizations: In accordance with Section 5 of Article II of the United Nations (Privileges & Immunities) Act, 1948, the account of United Nations and its agencies are to be treated as ‘resident accounts’ and formalities pertaining to Non-Resident Accounts count do not apply to these institutions. (d )Joint Accounts of Residents and Non-Residents: There is no restriction on non-residents maintaining accounts jointly with residents. However, it must also be clearly understood that Non-Resident Account held jointly with a resident in a Pakistan is treated as Non-resident Account without the consideration whether the account is being operated severally or jointly by the resident. Prior approval of State Bank of Pakistan is not necessary to open such an account.

Accounts of Foreign Nationals Resident in Pakistan: Requirement of form Q. A. 22: - The accounts of all foreign nationals, who are resident in Pakistan and the accounts of
companies or firms (other than Banks) whose head offices or controlling offices are abroad but the accounts are operated on by persons in Pakistan are treated as non-resident accounts. The account-holders or persons in Pakistan authorized to operate such Non-Resident Accounts are to sign the form Q. A-22.

The form Q. A-22 is an understanding that the signatory will not provide any foreign exchange against Pakistan Rupees and that any transaction on the account not directly connected with his business in Pakistan or which involves remittances from abroad will be reported to the State Bank of Pakistan. The authorized banks in duplicate obtain this form when the account is opened, and a copy of it is sent to State Bank of Pakistan for its record. It is the responsibility of authorized banks to take all reasonable steps to ensure that the account holder is not making foreign exchange available to any person in Pakistan other than an Authorized Dealer against Pakistan currency or is not, by any other means, contravening the provisions of Foreign Exchange Regulation Act, 1947. If banks detect any such irregularities, the State Bank of Pakistan should be informed immediately. Unless the State Bank of Pakistan exempts any particular Non-residents Accounts all operations on such accounts are to be carried out as detailed below and the persons who operate will fill in form A. 7.

Debits from the Accounts: (i) Payment on behalf of the account holder direct to the institutions concerned in respect of insurance premium, club bills or other payments of regular nature. These payments must be supported by receipts and bills, vouchers etc. (ii) Payment of government and municipal dues supported by official claims and documents of receipts.

(iii) Disbursement in Pakistan from the amount received from abroad in the account through banking channel. (iv) Amount representing payment through cheques direct to the carrier or the travel agent for travel within the country by train, sea, or air for self, wife, children and parents. Travel abroad after approval of P-Form is included. (v) Amount needed for purchase of shares of public limited companies, securities of the Government of Pakistan, N.I.T Units, Prize Bonds, and Defence Saving Certificates etc. However, the purchase of these shares and securities etc is to be made by the bank itself on behalf of the NonResident account holder. (vi) Payments against bills for hotel expenses in Pakistan, of account holder and his family members. This payment is permissible only to hotels of the category of three stars and above. (vii) Cheques drawn for self or in favour of his dependents residing in Pakistan for their maintenance. (viii) Amount to reverse previous credits. (ix) Amount in respect of approved remittances in foreign exchange.

(x) Payment of loan installments direct to the financial institutions from whom the account holder had obtained loan.

Credit into the account: (i) Receipts on account of salary, allowances, bonus, commission etc. direct from the employer by cheque. (ii) Dividend and interest income on investment in shares and securities direct from the company by cheque etc. (iii) Income from landed property and agricultural rent against identity of depositor. (iv) Credit of remittances received from abroad through banking channel. (v) Return/Interest accrued on the amount lying in the Non-resident accounts. (vi) Sale proceeds of landed property as supported by a registered sale deed. (vii) Amount representing the maturity proceeds/surrender or paid-up value of insurance policies and sale proceeds of the shares of the public limited companies and/or securities of Government of Pakistan purchased earlier. (viii) Refund of amounts previously debited or overcharged. Any amount to be debited or credited beyond those mentioned above require prior approval of the State Bank of Pakistan. Form A-7 in respect of credits and debits to private Non-resident Accounts, which require to be reported to the State Bank, should be sent to the State Bank along with Schedule ‘K’. The responsibility for submitting Form A-7 with regards to credits to private Non-resident Accounts lies with the receiving bank. The receiving bank i.e. the bank which credits a Non-resident Account in its books, is responsible for ensuring that Form A-7 has been completed or approved by the State Bank where required, before crediting funds to private Non-resident Accounts. A cheque or draft received for the credit of a Non-resident Account of a company, firm or person, unless accompanied by Form A-7 should not be passed through the Clearing, but should be sent by the receiving bank to the paying bank, stating that a Non-resident Account is being credited, and requesting in exchange, a pay-slip accompanied by Form A-7 duly completed by the drawer or by the paying bank on his behalf and approved by the State Bank or authorized dealer as permissible. A similar practice should be allowed in the case of bank cheques, which represent payment of remittances received from overseas for the credit to the Resident Accounts of foreign nationals who have completed Form Q.A.22. The responsibility for submitting From A-7 with regard to debits to Non-resident Accounts lies with the paying banker. In case of debits in Non-resident Accounts, cheques representing payments other than those mentioned previously should be returned by the paying banker with the remark

“Non-resident Account: Approval of Form A-7 required”. The collecting bank will then arrange with the client, for whom the payment is drawn, to submit Form A-7 for approval. A statement as required by the State Bank of Pakistanis submitted fortnightly on Form Schedule-k. In this statement, the transactions during the fortnight are reported. It also shows the balances in the Non-resident Accounts at the beginning and at the end of fortnight.

Foreign Currency Accounts: -Government of Pakistan has introduced many important
reforms in Foreign Exchange Control in the country since February 1990, for the purpose of strengthening the Foreign Exchange Reserves. One of these reforms relates to Foreign Currency Accounts, which can be opened in United States Dollars, Pound Sterling, Euro and Japanese Yen in any of the authorized branches of commercial banks throughout the country. Any individual, firm and company, whether in Pakistan or foreigner, and whether a resident or nonresident in Pakistan, can open the Current, Savings Bank, Special Notice and Term Deposit Accounts in any in any of the above mentioned foreign currencies. These accounts can be opened and maintained singly or in the joint names, and Rupee Loan facility is available against the balances held in such accounts. Government of Pakistan has now imposed 10% withholding tax on the return accrued on these foreign currency accounts but exemption has been allowed from deduction of Zakat on the deposits and return accrued on them. In addition, over seas Pakistanis can sponsor their parents, relatives and friends for Hajj by making payment from these foreign currency accounts in Pakistan. Inquiries are made about the sources of fund for the Foreign Currency Accounts, and the State Bank of Pakistan has asked the banks to be vigilant to avoid the use of these accounts for money laundering and other illegal purposes. Moreover, State Bank of Pakistan regularly monitors the satisfactory operations of these accounts and issues guidelines & instructions for this purpose periodically.

Accounts of Customers: General
Before opening an account for a customer who is not already known to him the banker should make proper inquiries about the applicant. He should obtain references and introduction from responsible persons about the identity, integrity and reliability of the proposed customer.

1.Introduction and Preliminary investigation: -Before a banker opens a new account he
should determine the prospective customer’s integrity, responsibility, occupation and the nature of business, by the introductory references and introduction given at the time of account-opening. Negligence in this informal preliminary investigation may result in serious consequences not only for the banker concerned directly but also for other bankers and the general public who may be affected indirectly. The banker did not obtain introduction at the time of opening the account, it was negligence within Section 82 of the Bills of Exchange Act, 1882. In order to further strengthen and streamline this process, the Federal Ombudsman of Pakistan, vide his ruling on complaint No. II/31/5186 has directed the banks to retain with the account opening from a Photostat copy each of the National Identity Cards of the person desiring to open an account as well as that of the introducer. As per these directions, the concerned Branch Manager are required to

obtain the original Nationals along with their Photostat copies and then return the original after attesting the authenticity of the retained copy. Preliminary investigation is necessary because of the following reasons: (a) Avoid Frauds: If banker does not make the necessary inquiries mentioned above, he may enable dishonest persons to possess chequebooks for fraudulent purposes. If any such person happens to be undischarged bankrupt, the banker might be placed in an awkward position for having allowed such a person to open and operate a bank account. (b) Safeguard against unintended overdrafts: Sometimes due to a mistake, an account may be given an overdraft. For instance, the ledger-keeper, misreading the balance. Similarly, a credit entry belonging to a customer may be made by mistake in another customer’s account. In such situations, the excess amount withdrawn by the customer can only be realized if the customer is a respectable person. (c) Negligence: When a banker does not make the necessary investigation, he may be deprived of the statutory protection provided to a clearing banker under Section 131 of the Negotiable Instruments Act, 1881. This is because in such a case the banker will be deemed to have acted negligently. (d) Inquiries about clients: A banker has a business obligation to respond to inquiries from other bank etc.about his customer’s financial position. Though the banker gives only a general idea about the financial standing of his customer, he should nevertheless have the necessary information available with him.

2. Specimen Signatures: When an account is opened with a banker the customer gives the
banker a specimen of the form of signature which would appear on all his cheques to express his authority for the payment of cheques drawn on his banker. This specimen is taken generally on card, specially designed for the purpose, and as general rules for the customers, full name, and account number are also entered on it. Signatures other than in English or Urdu: If a customer signs in a language other then English or Urdu, he is requested to fill a Vernacular Form. This is a type of indemnity whereby the customer relieves the bank of any responsibility in case there is any misverification of signatures by the bank and the cheque is paid. The Vernacular Form is obtained because the bank officers are not used to verification of signatures other than in English or Urdu; hence, there is like hood of misverification.

Illiterate person: A person is not disqualified to become a customer of the bank merely because
of his illiteracy. The following precautions are to be taken. (i) Banker must obtain 2 or 3 passport-size photographs of the prospective customer. One copy is pasted on the account –opening form, the other copy is pasted on the specimen signature card, and the third copy of photograph is pasted with the cheque book.

(ii) Instead of specimen signature, the left-hand thumb impression from male, and left right-hand thumb impression from female account-holder is taken on the cards as well as on the accountopening form. (iii) An illiterate customer must come personally to operate his account, because he has to put his thumb impression on the cheque in the presence of the bank officer attesting his thumb impression. (iv) An illiterate account-holder should be advised not to issue cheques payable to other persons either for cash payment or for collection and clearing.

3. Married Women: A married women can open and operate a bank account with cash or a
cheque like any other account-holder. In case a married women requests for a loan, adequate securities belonging to her should be taken into consideration, because a banker has a remedy only against her own property, separate from her husband. Likewise a husband does not incur any liability for his wife’s debt unless it is established that she contracted as his agent on his behalf or the husband undertook to be responsible by guarantee or otherwise for certain debts.

4. Minor’s Account: According to Pakistani law, a person is regarded as a ‘minor’ until he has
attained the age of 18 years. Section 11 of Contract act, 1872 has declared a minor incompetent to enter into contact, therefore, any contract with a minor is void in Pakistan. However, the accounts are opened in the name of the request of the guardian who signs the account opening form himself, and gives his own specimen signature, for the operation of the account, but the title of the account remains in the name of both the minor and guardian and the banker should, however have make it clear in writing on the account form that the account will continue to be operated by the guardian even after the minor attains the age of majority.

Problems in Personal Accounts
A. Death of Customer: Section 122-A of Negotiable instruments Act, 1881 reads
“The duty and authority of a banker to pay a cheque drawn on him by his customer are determined by i) Countermand of payment. ii) Notice of customer’s death iii) Notice of adjudication of the customer as an insolvent. So after the confirmation of the customer’s death, all withdraws from his account should be stopped, and the account should be termed as “Deceased Account”. Credits into the account are allowed, while cheques should be returned, with the objection “Customer Deceased” A credit balance up to Rs 30,000 is generally paid to legal heirs on indemnity signed by all of them and witnessed by good customers. While more then Rs 30,000 unpaid on the production of Succession Certificate issued by competent court of law.

B. Lunacy of Customer: Section 11of the Contract Act 1872, has debarred all persons of
unsound mind from contacting, but this disqualification does not apply to contracts entered into by a ‘lunatic’ during the periods of his such periods. Therefore, a banker should not open an account into the name of a person who is known to be man of unsound mind.

As soon as the banker comes to know of the lunacy of his customer, he should stop all debit operations on the account after confirming the information. The entire credit balance of the customer’s account should be placed at the disposal of the ‘Manager in Lunacy’ appointed by a competent court of law under Lunacy Act, 1912. When a customer regains his soundness of mind and is discharged from the lunatic asylum, the bank should allow him to operate the account after he produces a certificate of sanity from a court of law.

C. Insolvency of Customer: Section 122-Aof the Negotiable Instruments Act, 1881, has
authorized a banker to determine the payment of a customer’s cheque with regard to his insolvency proceedings. When a customer is adjudicated a bankrupt, whether on his own petition or on the petition of other creditors, his property vests into the official assignee, and the banker should then refuse to honour the insolvent customer’s cheque. The banker must hand over to the assignee all assets of the bankrupt held by him which he is not entitled to retain. Unless the cheque is of large amount, it may be worthwhile to risk payment even after the knowledge of the act of insolvency, because the amount will be recovered by the official assignee under the doctrine of ‘Relation Back’.

Relation Back: According to the Insolvency Act, the bankruptcy relates back to the act of
bankruptcy on which the receiving order is made against the bankrupt. Therefore, the official assignee claims all the property which belonged to the insolvent on the date of the first available act of insolvency; by the debtor during the three months, immediately preceding the presentation of the petition was based on that particular act. On adjudication, the official assignee’s title dates back to this moment by the doctrine of ‘Relation Back’.

D. Joint Accounts: These are the accounts of two or more persons who are neither partners nor
trustees. When such an account is opened, it is necessary that the banker should obtain clear directions as to whether one or more of them shall operate upon the account. However, in the absence of such directions the banker should allow the operations under the signatures of all the joint account holders. The general principle of law regarding debts which a debtor can pay to one of the several joint creditors is not applicable to debts due from a banker to his customer.

Stop-payment in a joint account: Any one joint account holders may stop payment of a
cheque drawn by any other or others; but the removal of the stop-payment should be signed by all the joint account holders. If the joint account holders wish to delegate their authority on the account to an outside party, all the joint parties should sign the authority. The mandate given to one or more persons to draw on a joint account is automatically revoked by death, bank-ruptcy or insanity of either or of the account-holders.

Survivorship: The authority to operate upon should also state as to whom the balance is paid in the
case of death of one or more customers of joint account holders. Such instructions are not necessary because under the Law of Devolution, the whole amount is generally entitled to one or more survivors. In case of death of one partner in joint accounts of husband and wife the amount paid to the other partner.

In case of bankruptcy one or more of the joint account holders, the operation of the account should be immediately stopped, and instructions should be sought from solvent customers and the official assignee in whom the credit balance will vest. The mandate should clearly indicate about the with drawl of securities etc left for safe custody in joint accounts, as they cannot be handed over to survivors in the event of death of one of the joint account holders. These valuables should be delivered with the consent of the official assignee or Manager for lunacy, as the case may be.

Accounts of Special Customers:
Though every person, legally capable of becoming a party to a contract, can open an account with a banker, yet the capacity of certain classes of persons to make valid agreements is subject to well recognized restrictions, as in case of agents, trustees, executors, administrators, firms and joint-stock companies etc.

Partnership Accounts: Section 4 of the Partnership Act, 1932, reads “Partnership is the
relation between persons who agreed to share the profits of the business carried on by all or any of them acting for all”. Therefore, a partnership can be created either by an oral agreement or by a written agreement. The maximum number of partners in a banking business is 10, and for other business it is 20; but there is not partnership firm conducting banking business in Pakistan. According to Section 18 of the Partnership Act, a partner is the agent of the firm for the purpose of its business, but under Section 19(2-B) he has not implied authority to open a bank account on behalf of the firm in his own name. Therefore, banker should always open a firm’s account in the firm’s name & get the account opening form signed by all the partner who must also state the nature of firm’s business, the name and addresses of all the partners and the names of those who are authorized to operate on the account in the name of the firm .The authority should include powers to draw, indorse and accept bills and mortgage and sell property belonging to the firm. A person other than the partners may also be authorized to operate the account.

Operation of Firm’s Account: The account is to be operated according to instructions given at
the time of opening the account. According to Section 19 of the Partnership Act, 1932, every partner in a firm has an implied power to bind his co-partners by drawing and indorsing of cheques the drawing, accepting and indorsing of bills of exchange, and making and indorsing of promissory notes. Every partner has an implied authority also to countermand payment of any cheque drawn on the firm’s account; and the banker is bound to comply with the instructions issued by that partner. In addition to the account opening from duly signed by all the partners, and the specimen signature cards containing the specimen signatures of the persons authorized to operate the account, a Partnership Letter duly signed by all the partners in their personal capacity is also obtained, wherein all the partners assume the liability of the firm to the bank s joint-and-several.

Borrowing by a Partnership Firm: A partner in a trading firm has the implied authority to
borrow for the partnership firm and bind his partners for such borrowings in the ordinary course of

business, and “it follows, almost necessarily, that he should have power to pledge partnership property as a security of advance” (Partnership by Lendley, p137) A prudent banker will not rely on the implied authority of a partner to borrow for the trading firm. He would rather obtain the signatures of all the partners on any deposit, letter, charge and security documents. This procedure is helpful to the banker because, firstly, it becomes an evidence of the concurrence of all the partners in the proposed borrowing; and secondly, the Letter of Partnership contains an admission of joint-and-several liabilities which will be very useful in the event of personal liability of the partners arising on the debt. Section 19 of the Partnership act lays down that if one partner signs a legal mortgage, it is treated as equitable mortgage.

Admission of New Partners: Section 31 of the Partnership Act provides that an incoming
partner does not become liable to the creditors of the firm for anything done before he becomes a partner. He may, however, by an express agreement entered into at the time of new admission, but a fresh mandate or partnership letter, duly signed by all the partners, should be obtained to cover the future operations on the account. In case the account has a debit balance, and the new partner has not agreed to accept the debit balance of the old partners, the operation on the account should be stopped forthwith. Otherwise, the account will be subjected to the Rule in Clayton’s case whereby all future credits will reduce the old debt’s, and fresh withdrawals will be for the new firm. The new partner will have to sign his agreement to the retention of existing tangible securities covering the borrowing of the new firm.

Retirement of a Partner: If provisions have been made in the contract, the partnership can be
carried out even after the retirement of any of the partners. Otherwise, as a general rule, the retirement of a partner changes the constitution of the partnership, and the remaining partners cannot carry on the business. Section 32 of the Partnership Act lays down that unless expressly agreed, a retired partner is liable for the debts already incurred, and he remains liable for the future acts of the firm till the time he gives the notice of his retirement. When a banker receives the notice of retirement, he will make necessary changes in his record. If the account is in credit, the operation should not be stopped, presuming that the remaining partners are to carry on the firm’s business for the purpose of winding it up; where the account is overdrawn, and the banker wishes to retain the several liability of the retiring partners or desires to hold on to the security deposited by that partner, the operation on the account should be stopped to determine the liability; otherwise the Rule in Clayton’s case will operate against the banker. When the operation on the account is stopped, the retiring partner will remain severally liable for the debts due, and the banker can retain or realize his personal security, if any, to meet the debt.

Bankruptcy of a Partner: Section 34 of the Contract Act, 1872, provides that if there is no
agreement to the contrary, a partnership is dissolved as soon as the partner is adjudicated insolvent or bankrupt. The solvent partners are empowered to continue the business for winding it up; but they would be accountable to the official assignee for the insolvent’s share in the firm. It is advisable to take an undertaking from the solvent partners to the effect that they are continuing the firm’s business for the winding up of the old firm. Moreover, the banker should not pay the cheques signed by the insolvent partner before the order of his adjudicated or petition without the approval of the solvent partners.

If the account is in debit, and the banker desires to preserve his right against the insolvent partner, the operation on the account must be stopped to determine the liability of the insolvent partner; otherwise the Rule in Clayton’s case will operate.

Death of a Partner: The death of a partner dissolves the firm and the deceased’s personal
representatives have no right to act on his behalf, though they can claim the deceased partner’s share in the assets of the firm. The action of the banker will largely depend on the state of the account at the time of the receipt of notice of a partner’s death. If the account has a credit balance the operation on the account should not be stopped and the banker can presume that the surviving partners will account to the representatives of the deceased for his share in the assets, but in case of a debit balance the account should be stopped to fix the liability on the estate of the deceased partner. If this is not done the Rule in Clayton’s case will operate, i.e., the fresh credit will reduce the liability of the deceased partner, and debit entries will be the liability of the surviving partners.

Insolvency of the Firm: In the case the firm is adjudicated as bankrupt or insolvent, the business
of the partnership vests in the official assignee who winds up the business. The operation on the account is stopped when the firm is adjudicated as insolvent; and the personal account of each and every partner also becomes inoperative in accordance with Section 39 of the Partnership Act. The debts of each estate are primarily payable out of the assets of each estate, and every surplus on private estate is applied towards the settlement of the creditors of the firm. The joint and several liability letter signed by all the partners puts the banker in an advantageous position in proving for his debts in the private estate of every partner pari pasu with the private creditors as well as proving in the firm’s estate.

Account of Local Bodies: These are autonomous institutions formed under the Local Bodies
Act, such as Municipal Corporations Municipal Committees, District councils and union Councils etc. They are governed by their own Managing Committees, comprising generally of elected members. They are administrated through notification issued under the Act from time to time. The chairman of these local bodies may be elected by the members or nominated by the government.

Opening and Operation of Account: When an account of Local Bodies is to be opened, the
banker must see that the request comes only from the person authorized to do so in the ControlLining Act. Account opening form should be signed by the authorized persons who should also mention clear instructions regarding the operation on the account; and specimen signature should be taken from the person authorized to operate the account. As a general rule no advance should be considered for a Local Body unless some statutory provision expressly or impliedly authorities the banker to do so. In case the related statutory provisions allow the borrowing, the banker must ensure that the purposes and the limitations are in accordance, with the authority, and the prior approval of the Government has been obtained before applying. If a Local Body borrows ultra vires, the repayment of the loan is also ultra vires “Therefore the banker who lends to an authority acting ultra vires when borrowing, may be forced to refund any money repaid to him by the authority, and also may mark up charged on the unauthorized loan” as was the case in Attorney General v. Tottenbam Urban District Council (1909).

Cheques and their Payment

Definition: -According to Section 6 of Negotiable Instruments Act, 1881,”Cheque is a bill of
exchange drawn on a specified banker and not expressed to be payable otherwise than on demand”. Since a cheque has been declared to be a bill of exchange, it must have all its characteristics as mentioned in Section 5 of the Negotiable Instruments Act, 1881.

The Requisites of a Cheque: - There is no prescribed form of words or design of a cheque,
but in order to fulfill the requirements mentioned in Section 6 above. The cheque must have the following properties. i) It should be in writing: - Although does not put any restriction on the writing material to be used for making cheque, but the practice of banking has made it obligatory that the cheque must be written. ii) The Unconditional order: - The drawer of the cheque must not put any condition for the payment of the cheque. For instance the payment of the cheque. For instance, the payment of the cheque will be conditional if the signing and dating a receipt of payment is desired before payment. iii) Drawn on a specified banker only: - A cheque can be drawn only by the banker and none else. Moreover, the name of the bank is also specified so there may be no mistake in demanding payment from the drawee bank. iv) Payment on demand: -A cheque is payable only on demand, and this demand can be lodged during a reasonable period which, at present, in Pakistan is 6 months from the date of its issue. After this period, a cheque becomes stale. v) Sum certain in money: - The cheque must contain the order for the payment of a certain sum of money. If the amount differs in figures and in words then according to Section 18 of Negotiable Instruments Act, 1881, then take the amount in words as ordered or intended. However, banks in Pakistan usually return such cheques unpaid on the plea that due to this discrepancy the instruments cannot be treated as cheque. vi) Payable to a specified person: - The cheque must be payable to a specific person or bearer of the instrument. vii) Signed by the drawer: - In order to make the instrument a valid cheque, the drawer must sign it or he should authorize somebody to sign it on its behalf because according to Negotiable Instruments Act, 1881, signature is essential to liability. In case if the cheque signed by somebody on the behalf of the customer, the banker must have prior information about this and account holder must supply the specimen signature of his attorney.

Parties to a Cheque
Negotiable Instruments Act, 1881, defines these parties as under;

(1) The Drawer: Section 7 of the Act says that the maker of the cheque is called the drawer. He
must be an account holder. In order to make the instrument a valid cheque the drawer must sign it exactly in accordance with the specimen signature supplied to the banker beforehand.

(2) The Drawee: Section 7 of the Act describes that the person directed to pay is called the
‘drawee’. In case of a cheque it is always a banker with whom the drawer maintains an account so as to constitute him the customer. Section 3(b) of the Negotiable Instruments Act, 1881, defines that “Banker means a person transacting the business of accepting, for the purpose of lending or investment, deposits of money from the public, repayable on demand or otherwise, and with drawable by cheque, draft, order or otherwise, and includes any Post Office Saving Bank.”

(3) The Payee: According to Section 7 of the Act, payee is the person named in the cheque to
whom or to whose order the payment is to be made. There may be more than one payee on a cheque to whom it may be paid jointly or alternatively.

Types of Cheques: Bankers in Pakistan deal with only two types of cheques:
(i) Open Cheque: They are payable in cash at the counters of a banker in accordance with the practice of the bankers. (ii) Crossed cheques: They are not payable in cash at the counters of a bank, but can be collected by only the banker who would credit the proceeds to his customer’s account after realization.

Payments of Cheques
Payment in Due Course: It is a banker’s primary contract to repay money received for his
customer’s account usually by honoring his cheques. However, the banker gets legal protection only when payment is in ‘Due Course’. According to Section 10 of the Negotiable Instruments Act, 1881, “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 do not afford a reasonable ground of believing that he is not entitled to receive payment of the amount therein mentioned”. The responsibility of the paying banker as regards payment or non-payment of cheques drawn on him is quite heavy. If the paying banker honours a cheque which should have been dishonoured, the paying banker may lose the money; and if he dishonours it when it should have been paid, he is liable to pay the damages for wrongful dishonour. The banker has either to honour the cheque or refuse its payment without delay at the time it is presented. Payments can be affected by cheques, drafts, pay orders, pay-slips, vouchers etc. The banker to whom the order to pay a cheque is addressed is called the ‘paying banker’. It is a contractual obligation to a banker to honour his customer’s cheques if the following essentials are fulfilled:

(1) Cheque should be in a proper form: The cheque should be drawn strictly in accordance
with the Section 6 of the Negotiable Instruments Act, 1881. In Pakistan, the customers use printed cheques supplied to them by the banker. There is, therefore, no likelihood of any difficulty arising in this connection. However, the banker must see that the customer or the holder has not changed the form of the cheque and made it a conditional one. If so, the cheque should be returned.

(2) Cheque should not be crossed: A crossed cheque cannot be honoured over the counter
to any person but a collecting banker. If the paying banker honours a crossed cheque contrary to the

crossing, the true honour may require the banker to pay him such damages as he might have sustained by the banker’s action.

(3) Cheques should be drawn on the particular branch: The payment of a cheque can
be made only by the branch of the bank particularly mentioned on the cheque where the customer is maintaining his account. If arrangements have been made, encashment of a customer’s cheque can be had at a branch other than the one where he maintains his account.

(4) Cheque should be payable to bearer or order: Section 3(c) of the Negotiable
Instruments Act, 1881, defines a bearer as “a person who by negotiation comes into possession of a negotiable instrument which is payable to bearer”. Therefore, the paying banker can make the payment of such a cheque to a person who is in legal possession of it. When the bearer encashes a cheque be may be required to acknowledge receipt of money on the cheque by signing on the back of it. Section 13(1) of the Act says “Cheque is payable to order which is expressed to be so payable or which is expressed to be payable to a particular person”. Therefore, the banker must establish the identity of the payee before making payment to him on an order cheque.

(5) Cheque should not be mutilated: When a cheque is torn, worn out or does not give
sufficient evidence of the customer’s intention, it is called ‘mutilated cheque’. The banker should see that the cheques presented for encashment is not mutilated, because if the banker ignores this point, he becomes liable. However, mutilation by accident may be excused if the drawer declares about this fact.

(6) No unauthorized material alterations: Section 3(f) of the Negotiable Instruments Act,
1881, defines that “material alternation in relation to a promissory note, bill of exchange or cheques includes any alternation of the date, the sum payable, the time of payment, the place of payment; and where any such instrument has been accepted generally, the addition of a place of payment without the acceptor’s assent.” Further Section 87 says, “Any material alternation of a negotiable instrument renders the same void against anyone who is a party thereto, unless it was made in order to carry out the common intention of the original parties; and any such alternation, if made by an endorsee, discharges his endorser from all liability to him in respect of the consideration thereof” Therefore, a banker must not pay a cheque bearing apparent material alternations not duly authorized by the drawer under his full normal signature, specimen of which has been supplied to the banker beforehand.

(7) Funds must be sufficient and available: The banker must see that there are sufficient
funds available in customer’s account to permit the honoring of the cheque presented. 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 payments of such cheque must pay the cheque when duly required so to do, and, in default of such payment, must compensate the drawer for any loss or damage caused by such defaults”. If the banker has received from his customer certain cheques to be collected and credited to his account and they have not been cleared and appropriated by the time a cheque against them has been

drawn and presented, the banker is authorized to return it with the remark: “Effects not cleared, present again”.

(8) The cheque should not be post-dated or stale: A cheque is out-of-date when it is
post-dated or stale. Post-dated cheques are those which are presented for payment before the due date. Non-payment of a post-dated cheque by a banker is justified for the following reasons: (a) A post-dated cheque is not a cheque payable on demand, rather it is like a bill of exchange payable at the future date. Thus paying it as a cheque could be violation of the Stamp Act also. (b) The customer may stop the payment before the due date of the cheque by informing the banker formally. If the banker has already paid before the due date, he may lose his money. (c) The customer may become insolvent, insane, or he may die before the cheque is due for payment. If the banker has already honoured the post-dated cheque, he will not be entitled to debit the amount to his customer’s account after the confirmation of any of the above states of the customers. (d) Since the payment of the post-dated cheque is not regarded as “in due course”, the banker paying such a cheque will not be entitled to statutory protection. (e) The banker has no right to debit the customer’s account on a post-dated cheque. If he does so, it may have serious repercussions when a cheque drawn by the customer is presented for payment on due date and is dishonoured on the ground of insufficiency of funds after the payment of the post-dated cheque. It is also the custom of the bankers in Pakistan not to pay cheques which are presented after a period of six months has elapsed since their apparent date of issue. Such cheques are called ‘Stale’. This custom is based on the practical application of Section 21 of the Negotiable Instruments Act, 1881 which says “A promissory note or bill of exchange payable on demand shall be deemed to be overdue when it appears on the face of it to have been in circulation for an unreasonable length of time”.

(9) Cheques should be presented during banking hours: The banker must honour
cheques drawn on him if they are presented on a working day and during the banking hours. In Pakistan, the banking hours are fixed by custom established by the State Bank of Pakistan; and changes in them are notified through all reliable public media for the information of all concerned.

(10) No legal bar prohibiting payment: The banker should see that none of the following
clauses is applicable on the cheque presented for payment: (i) Payment stopped by the drawer (customer) through a notice in writing. (ii) Knowledge of any defect in the title of the person who is presenting the cheque for payment. (iii)Notice of insolvency, insanity or death of the customer; or in case of a company, notice of its windingup received by the banker.

(iv)Notice of an assignment of the available credit balance in the account by the customer. (v) Knowledge that the customer contemplates a breach of trust or an act of insolvency. (vi)Notice of garnishee injunction or other court order restraining the customer from operating his account.

Bouncing Of Cheques
(a) Until recently bouncing of cheques has been a civil offence in Pakistan, for which the affected could file a plaint in Civil Court under Section 37(2) of Summary Chapter, and for amount beyond Rs. 0.5 million (Rs. 5.00 lacs) in the High Courts. However, the position has changed now. (b) With the promulgation of amendments in the Banking Companies (Recovery of Loans & Advances, Credit & Finance) Act 1997, bouncing of cheques has been made a banking offence. Section 19(4&5) of the Act prescribes the punishment also. According to the Sub-Section 4, if somebody dishonestly issues a cheque which is dishonoured subsequently, a Banking Court can punish him with an imprisonment up to one year or fine, or with both, unless he can establish that he had made arrangement with the bank to ensure the honoring of cheque and that the bank was at fault is not honoring the cheque. The amount of fine has been left at the discretion of the Banking Court. Sub-Section 5 further declares that in case the bounced cheque was issued by a company or body corporate, the Chief Executive by whatever name called and any director or officer involved of that company or body corporate shall be deemed to be guilty of offence and shall be liable to be proceeded against and punished accordingly. According to this law, the burden of proof for dishonestly issuing the cheques has been left with the maker of the cheque. This has been done to reduce the period of legal proceedings. (c) Recently promulgated Criminal Law (Amendment) Ordinance, 2002, has made bouncing of cheques a criminal offence under Section 489E. According to this Section, “Whoever dishonestly issue a cheque toward repayment of a loan or fulfillment of an obligation which is dishonoured on presentation, shall be punishable with imprisonment which may extend to three years, or with fine, or with both, unless he can establish, for which the burden of proof shall rest on him, that he had made arrangements with his bank to ensure that the cheque would be honoured and that the bank was at fault in not honoring the cheque.”The authority to take to take legal action as above has been rested in “Magistrate of first class.” This amendment has provided the option to the aggrieved to initiate action even under the Criminal Law in Pakistan.

Pass Book: There is no implied term in contract between banker and customer that the banker will
supply his customer either with a Pass Book or a statement of account containing a copy of customers account with the banker. Pass Book is a book in which the banker maintains the record of his customer’s account for latter’s use, and is so called because it ‘passes periodically between the banker and his customer.

Entries from the customer’s stand-point: “It is assumed that on the delivery of the Pass
Book the customer examines it; and there appears any error or omission, brings or sends it back to be rectified or, if not, his silence is regarded as an admission that the entries are correct”(Court of Chancery in Devaynes v. Noble, 1:1816). This position was however changed by subsequent decision and it was held that since the Pass Book entries are made by the banker, they can used as evidence against him. “The Pass Book belongs to the customer, and the entries made in it by the bank are statements on which the customer is entitled to act”(Mawji v. National bank of India, 1901:25 Bombay, 499:515)

Entries from the banker’s stand-point: In order to remain in a secured position the banker
should send the Pass Book to the customer as frequently as possible for his verification after making all the entries. In no case should the Pass Book remain at the bank for any undue period without giving the customer an opportunity of examining it. Credits should be entered in the Pass Book after they have been posted in the ledger, and not before. This is because “a credit entry may be regarded as a representation binding the bank, if the customer can show he has altered his position in reliance there on” (Mathew, J. in Deutsche Bank v. Berivo & co.) Moreover, it is the duty of the banker to keep a customer correctly informed as to the position of his account and if he wants a settled account, the only course open to him is to get a confirmation in writing.

Rectification of errors: In the absence of any change of position, a mistaken credit entry may be
rectified within a reasonable time, and the reversal entry must hold good. In vaghand’s case, the court of appeal observed that for their own protection the bankers should co-operate to formulate such customs establishing the status of the Pass Book as a settled account, and affirming the duty of the customer to examine and compare it with the returned cheques and bills, and notify the bank of any error appearing therein.

Revocation of banker’s authority
There are, however, certain circumstances in which the payment of a cheque can be refused by the banker. Section 122-A of the Negotiable Instruments Act, 1881, mentions at least the following: 1. 2. 3. 4. Countermand of payment. Notice of customer’s death. Notice of adjudication of customer as insolvent. Notice of customer insanity.

1. Countermand of payment (Payment stopped by drawer): It is an implied contract that the banker will deal with the customer’s amount according to the latter’s instruction. As such, if the customers stop payment of any of his cheques, the banker should take due notice of this. If the banker pays a cheque in spite of stop-payment instructions, he is liable for damages on the following two grounds: (a) For paying a stopped cheque, and (b) For wrongfully dishonouring other cheques which should have been honoured if the stopped cheque was not paid.

If stop-payment instructions are received by telegram or telephone, the banker should ask the customer to confirm his instructions in writing under his signature, because the banker is not bound by law to accept an unauthorized telegram or telephone message to this effect. But the prevailing practice is that if a cheque is presented before confirmation of stop-payment instruction is received, the banker postpones the payment of the cheque. When the payment of a cheque is postponed, the banker should be very careful not to damage his customer’s credit. In such a case, the appropriate reason to be given for non-payment would be: “Payment countermanded by telegram/Payment postponed pending confirmation, present again.” When instructions for stopping payment of a cheque are received, the time and date of receipt of the instructions should be immediately noted on the letter sent by the customer, and initialed by the officer concerned. The signature of the customer, and initialled by the officer concerned. The signature of the customer on the letter should be verified from the specimen signature-cards. The letter of instructions is then passed to the ledger keeper, who immediately finds out whether the cheque has already been already paid or not. If the cheque has not yet been paid, a rubber stamp of “stop payment” is affixed on the ledger-folio and the number of the cheque, amount, date and name of payee entered on it. A letter of acknowledgement is prepared in triplicate. The original is sent to the customer: the second copy is attached to the respective ledger folio; and the third copy along with the letter of the customer is filed in branch records. When the cheque of which the payment has been stopped is presented, the words “PAYMENT STOPPED BY THE DRAWER” should be written in red ink over the face of the cheque. The cheque is then returned with the reason Memo as “Stop payment instructions received”. The stop-payment memo is then removed from the ledger and kept attached with the letter of the customer in the file. On stop-payment memo, a note should be made of the date of presentation of the cheque and its return. If a customer wishes to revoke his earlier instructions regarding stopping payment of a cheque he should give fresh instructions to that effect in writing. The signature on the letter should be verified and a note made in the ledger-folio, giving reference to the fresh instructions. This latter is then filed along with the previous letter.

2. Notice of the customer’s death: The death of a customer cancels his mandate to the
banker. When the banker receives notice of the death of the customer he should henceforth stop all operations including payments from the deceased’s account. The title of the account and the balance of the deceased’s account then pass to his legal representatives; but they should not be allowed any operation until the legal representatives produce Succession Certificate, Probate of the Will or Letter of Administration. However, if the banker is unaware of the death of his customer, he may honour cheques drawn by his customer before his death. The banker must make himself absolutely certain about the death of his customer before any action regarding his account is taken. The information about the death of a customer should be noted at the top of the ledger-folio of the account. The date and source of information should be mentioned and a closing line should be drawn immediately below the last entry in the account.

3. Notice of customer’s insolvency: Insolvency means inability to pay or settle just debts.
After the order of adjudication is made the property of the insolvent vests in the Official Assignee or Official Receiver. The debtor is then not free to deal with his property. As such, his banker should

also refuse to honour the insolvent customer’s cheques. If he has knowledge of the customer’s insolvency he will not be justified in honoring his cheques. The banker may judge the customer’s insolvency if the customer commits any of the following acts: (a) Transfers all or a substantial part of his property to a third person for the benefit of his creditor’s generally (b) Transfers his property or a part of it with an intention to defeat or delay his creditors. (c) Transfers his property or a part of it which would be void because of fraudulent preference, if he were adjudged an insolvent. (d) If he commits the following acts with an intent to defeat or delay his creditors: (i) Departs from or remains out of the country, (ii) Departs from his residence or usual place of business of or absents himself, (iii)Secludes himself with an intent to deprive his creditors of the means of communicating with him. (e) Any of his property is sold in execution of the decree of a court for the payment of money. (f) He petitions to be adjudged an insolvent. (g) Gives notice to his creditors that he has or is about to suspend payments of his debts (h) He is imprisoned in execution of the decree of any court for payment of money. As soon as the banker comes to know of the adjudication of his customer as an insolvent he is bound to inform the Official Receiver or Official Assignee as to his bank’s position with the insolvent. If the insolvent customer’s account is in credit and the banker has no claim on it by way of lien, the balance may be transferred to the Official Receiver or Assignee. If the customer is a debtor to the banker the course of action will be quite different. If the customer had given certain securities against a debt the banker generally realizes his security; and when it is sufficient to meet his claim he proves for the difference. In case the debts are unsecured the banker has no choice but to rely on the dividend from the insolvent’s estate.

4. Notice of customer’s insanity: Insanity of customer automatically terminates the banker’s
authority to act as his customer’s agent. If the customer develops an unsound mind or becomes insane, and the banker has the knowledge of this, he should not honour his customer’s cheque anymore, but a cheque which is known to have been drawn when the customer was capable of transecting business can be honoured. When the banker finds it difficult to adjudge hi customer’s mental state, he should get in touch with the customer’s family or his lawyer. When the banker comes to know about the insanity of his customer or the banker receives notice that the customer has been declared insane, he should take the following steps:

(a). If any cheque of the customer is received, it should be returned with the remark “REFER TO DRAWER”. (b) A careful note of the Lunacy Order should be made in the account of the customer. (c) The account of the customer is then conducted according to the instructions of the Lunacy Order. (d) Unless the customer is satisfied by the court to have become again, the operations upon his account should remain suspended. If the customer is reported to be suffering from a temporary mental derangement, it is permissible in law to allow the customer’s kin to operate the account. However, in such a situation a certificate in the form of statutory declaration from two registered medical practitioners should be obtained, to confirm the temporary derangement. In addition, the banker must obtain the security, indemnifying him against any claim that may be afterwards made by the customer to recover any amount withdrawn from the account while he was incapable.

5. Legal orders attaching customer’s account: Under Section 60 and Order 21 of the
Criminal Procedure Code a Court is authorized to issue a Garnishee Order to a banker. A Garnishee Order is the judgment order of a court by which a creditor can get funds in the hands of a third party, belonging to the debtor attached. They are of two kinds: Garnishee Nisi and Garnishee Absolute orders the bank to pay the money from the garnished account as directed by the court. As a result of a Garnishee Order, he banker is stopped from honoring the cheques either for the whole amount of the customer’s account or a part thereof. Whether the whole credit balance of the client is attached or only a part of it depends upon the terms of the Order. If the Order does not specify the amount, it is assumed to be applicable to the whole amount of the account. For an account to be attachable by a Garnishee Order it must be debt which is due, or accruing due, at a definite date. The debt should actually be due and not a claim that may become due at a future date. It must be: (i) A deposit payable on demand; (ii) A deposit repayable on the fixed expiry of a fixed notice; (iii) A deposit repayable at a fixed future date or after the lapse of a specified time. A credit balances of a Joint Account, even if payable to either of them, cannot be attached by a Garnishee Order, but if issued on joint names, it covers even the private accounts of either party. The debts which did not exist when the Garnishee Order was served (i.e. future debts) are not affected by the Order. Therefore, the usual practice is to open a fresh account for all subsequent transactions. On receipt of a Garnishee Order the concerned banker should take the following measures: (i) Mark the date and time of receipt of the Order, (ii) Trace out the deposits in the name of the person named in the Order;

(iii) If the entire amount of the balance is attached, the balance in the account is encircled and a note for its reservation made by the officer; (iv) Right of set-off should be used if there is any claim of the bank on the customer; (v) The attached amount is deposited according to the instructions of the court; (vi) The customer is also intimated about the attachment Order, and is requested not to issue cheques against the amount that has been attached. Care should be taken while dealing with a Garnishee Order. The name, account number, address and other relevant particulars should be correctly identified before communicating with the court regarding the Order. If the Garnishee Order does not correctly identifies the account to be attached, the banker must report the fact to the court issuing the Garnishee Order. Similarly, the legal orders are also dealt with according to their specific requirements

6. Notice of assignment by the customer: When the banker receives order from a
customer about assignment of the credit balance of his account, all cheques drawn upon that credit account after that date should be returned.

7. Breach of trust in Trust Account: If the banker comes to know that the trustee of a Trust
Account intends to misuse the funds, he should refuse payment of all subsequent cheques.

8. Defect in title: If the banker has knowledge of any defect in the title of the person presenting
the cheque, he has the right to refuse the payment of the cheque.

9. Insufficient funds: A common for which the cheques may be returned is that the credit
balance in the customer’s account is not enough to pay the cheque. Before the cheque is returned for the reason, an Inquiry Memo should be circulated in the branch to all the departments concerned to find out if any credit has been received, for that customer’s account. If no credit has been received then it is the discretion of the banker concerned to pay the cheque or not. If it is decided to pass the cheque, a temporary overdraft is created. An entry to this effect is made in the Temporary Overdraft Register. Markup is charged for the period that the overdraft remains outstanding. If a cheque has to returned for want of funds, words such as “NOT SUFFICIENT FUNDS” should be avoided; instead, the remark generally used is “REFER TO DRAWER”

10. Other reasons for which the bankers generally return the cheques unpaid as under:
(a) Not arranged for, where the customer has no prior arrangements to overdraw the account. (b) Effects not cleared, may be presented again, where other instruments have been sent for collection, but fate is not known yet. (c) Exceeds arrangements, in case the amount is more than the limit on overdraft facility.

(d) Full cover not received, in case of bills lodged for collection. (e) Payee’s endorsement irregular, Bank’s confirmation required. (f) Payee’s endorsement irregular/illegible/required, where the collecting banker is asked to correct the irregularity. (g) Drawer’s signature differs/required. (h) Alterations in date/figure/words require drawer’s full signature. (i) Cheque is post-dated/out of date. (j) Cheque is mutilated, where material parts of cheque are doubtful. (k) Amount in words and figures differs. (l) Cheque crossed; must be presented through a bank. (m) Clearing stamp required/requires cancellation. (n) Addition to bank discharge should be authenticated. (o) Cheque crossed Account Payee only, while it is being presented for collection in favour of someone else. (p) Collecting bank’s discharge irregular/required. (q) Cheque should not contain extraneous matter. (r) No advice of draft. (s) Clearing stamp required on back/on front/to be cancelled. (t) Payee’s discharge on revenue stamp required.

Money Paid by Mistake
If a banker has made a payment by mistake he should naturally endeavour to rectify the mistake and recover the amount. The law with regard to it is not well defined, and the matter of recovery of the amount paid by mistake rests on certain conditions as mentioned below:

(i) Mistake of facts: The mistake under which the money has been paid must be one of ‘fact’ and
of general law so as to enable the banker to recover the same. If, for instance, the money payable to Mr. Shahid has been paid to Mr. Raees, this will be treated as a ‘mistake of facts’. If, however a person happens to pay a debt in ignorance of the Law of Limitation, the money thus paid cannot be recovered.

(ii) Money received malafide: If a person is aware of the fact that he is not entitled to the
money which he is receiving, it is payable to the payer on his claiming it. However, if the money has been paid on the strength of a Pass book entry, the payer cannot recover the amount.

(iii) Mistake between the parties: A mistake must pertain to some matter between the party
paying and the party receiving the money “you cannot recover back money because you have paid it in ignorance of some fact, which had you known it would have influenced you not to pay it, the fact being one with which the payee has nothing to do.”

However, recovery of money paid by mistake allowed in the following cases: (a) When the money is paid on a negotiable instrument: In London & River Plate Bank v. Bank of Liverpool (1876), Mathew J., expressed the view that “money paid on a negotiable instrument to an innocent holder could not be recovered if such an interval of time had elapsed as to prejudice his right against previous parties.” (b) When the money is paid and received by the people. Not as Principal, or had otherwise materially prejudiced his position by relying on the payment before he noticed the mistake. (c) No claim, if money is paid by mistake by a third party: A banker cannot set up a lien or claim for set-off against the money paid by mistake by a third party even where the money is paid to the banker as an Agent for the customer. The banker can extend his lien to the customer’s money or securities, but not to the money which is paid by a mistake of fact by a third person to whom it belongs.

Rule in Clayton’s Case
The “Rule in Clayton’s Case” is based on the principle of keeping the accounts by means of chronological entries in the debit and credit side. The rule came into being when a judgement was passed in 1816 in Deveynes v. Noble. The basic facts of the case are as under: “C” had a Current Account with a firm of bankers. One of the partners in the firm died, and later on the bank also failed. The banker was maintaining “C”s Current Account, in chronological order. On the date of partners death, the bankers had a balance $X in favour of “C”, to which he was entitled against all the partners. But between that date and the failure of the bank, “C” had drawn out more than this sum, and he paid in further sums which exceeded those received. “C” claimed that his drawings from the date of the partner’s death must be treated as if they have been paid out of his payments-in since that date, leaving $X still due from the banker’s firm as constituted when the partner died. He claimed to recover this amount from the estate of the deceased partner. It was held that since “C” had an operative Current Account, the payments-in on one side were intended to be appropriated to the payments-out on the other in the sequential order in which they took place, so that at the time of the failure of the firm of bankers the balance of X had been paid away.

Application: This rule is applied where a dispute arises over reducing or extinguishing liabilities
by setting-off of items on one side of the account against items on the other. It means that it is the first item on the debit side of the account that is discharged or reduced by the first item on the credit side; and the balance, if any, is carried forward to the next item and dealt-with in the same way. This rule is also important in connection with guarantees, where it may operate the same way to reduce or even extinguish the guaranteed advance.

Crossed Cheques and their Collection
Section 126, 127 and 129 of the Negotiable Instrument Act, 1881, prohibit the payment of crossed cheques in cash. These cheques can be paid only to a collecting banker

Crossing: After drawing a cheque the drawer puts two parallel transverse lines across the cheque
and the cheque is said to have been ‘crossed’. Crossing is a special feature of cheques and there are two kinds of it-General and Special

(1) General Crossing: Under Section 123 of the Negotiable Instruments Act, 1881, General
Crossing has been defined as under: “Where a cheque bears across its face an addition of the words ‘and company’ or any abbreviation thereof between two parallel transverse lines simply, either with or without the words ‘not negotiable’, that addition shall be deemed to be crossed generally”. According the above definition the essentials of crossing are: (a) Two parallel transverse lines, drawn across the face of the cheque either with or without the words ‘and company’ or any abbreviation of it written between these two parallel transverse lines; (b) Two parallel transverse lines drawn across the face of the cheque either with or without the words ‘Not Negotiable’ written in between them.

Cheque Crossed “Account Payee”: Section123-A of the Negotiable Instrument Act, 1881,
defines that, “ Where a cheque crossed generally bears across its face in addition of the words “Account Payee” between the two parallel transverse lines constituting the general crossing, the cheque, besides being crossed generally, is said to be crossed “Account Payee”. When a cheque is crossed ‘Account Payee’: (a) It shall cease to be negotiable; and (b) It shall be the duty of the banker collecting payment of the cheque to credit the proceeds thereof only to the account of the payee named in the cheque. This crossing gives a very clear indication to the collecting banker that the proceeds of the cheque should go only to the account specified in the cheque, and that they should not be collected for any other person. It is also implied that:

(a) It renders the instrument not negotiable; (b) If the collecting banker contravenes the provisions of this clause and credits the amount to some other account, he will do so at his own risk; (c) If he does not keep the payee’s account he should refuse to handle the cheque.

(2) Special Crossing: Special crossing has been defined under Section 124 of the Negotiable
Instruments Act, 1881, in the following terms: “ Where a cheque bears across its face an addition of the name of the banker, with or without the words ‘Not Negotiable’, that addition shall be deemed a special crossing, and the cheque shall be deemed crossed specially; and to be crossed to that banker.” It is evident from this definition that: (a) In case of a special crossing the two parallel transverse lines are not essential; (b) The name of the banker written across the face of the cheque is sufficient to constitute a special crossing (c) After the cheque has been ‘crossed specially’, the holder cannot receive the payment except through the banker named on the cheque. (d) If a crossed cheque is lost or stolen, there is no risk of wrong payment.

‘Not Negotiable’ Crossing: Section 130 of the Negotiable Instruments Act, 1881, reads:
“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 from whom he took he had.” It is, therefore, clear that ‘not negotiable’ crossing does not restrict in any way the transferability of a cheque. However, the holder in good faith, and for value, takes the instrument free from any defect in the title of his transferor, and is therefore, authorized to sue on the instrument in his own name. If a bearer cheque crossed ‘not negotiable’ is stolen or lost and thereafter presented for encashment, the person cashing it will have no title to the cheque, and is liable to refund the money to the true owner. Since he had no title to the cheque, he shall not be able to sue the drawer in case of its dishonour.

Advantages of Crossing
Crossing has following disadvantages: (1) It is an effective means of minimizing the risk of loss or forgery. (2) Crossing is a direction to the paying banker to pay the money generally to a bank or to a particular bank, as the case maybe.

(3) Only a banker can secure payment of a crossed cheque, as such it is easy to compel the holder to present it through a quarter of known respectability, and credit. (4) Since only a banker can secure payment of a crossed cheque, it can easily be treated for whose use the money was received. (5) Mere crossing of a cheque does not affect its negotiability.

Crossing is a material part of a cheque: Section 125-A of the Negotiable Instruments Act,
1881, runs: “ A crossing authorized by this act is a material part of a cheque; it shall not be lawful for any person to obliterate, or except as authorized by this Act, to add to or alter the crossing”. This definition makes crossing a material part of the cheque. Therefore, any alteration in it amounts to material alteration, which should be authorized only by the drawer, as every unauthorized material alteration is unlawful.

Authorized Persons: Section 125 of the Negotiable Instruments Act says that “Where a cheque
is uncrossed, the holder may cross it generally or specially. Where a cheque is crossed generally, the holder may cross it specially, the holder may add the words ‘not negotiable’. Where a cheque is crossed specially, the banker to whom it crossed may again cross it specially to another banker, his agent, for collection. When an uncrossed cheque, or a cheque crossed generally, is sent to a banker for collection, he may cross it specially to himself.” In accordance with Section 125, the following persons are authorized to cross a cheque: (1) The drawer of a cheque can, if he so desires, cross it, (2) In case of an open cheque, any holder of it can cross it generally or convert a general crossing into a special one or add the words ‘Not Negotiable’. (3) A specially crossed cheque can be crossed specially again to another banker by the banker in whose favour it was crossed, the latter being an agent, (4) Crossing can be withdrawn by the drawer only. In such a case, after canceling the crossing, he writes ‘Pay Cash’, across the cheque and puts his full signature thereto on the cheque.

Duties of a Paying Banker as to Crossed Cheques
Paying banker has the following duties: (i) Section 126 of the Negotiable Instruments Act, lays down that cheque crossed generally be paid only to a banker. (ii) A cheque crossed specially should be paid only to the banker to whom it is crossed or is an agent for collection. (iii) Section 127 of the Negotiable Instruments Act, 1881, allows a Second Special Crossing in favour of the banker who would be acting as the agent of the first banker for collection. Therefore, it is necessary to specify in the Second Special Crossing that the banker in whose favour it is made is the agent for collection on behalf of the first banker.

(iv) A banker must not pay a cheque by ignoring the crossing, as he is not legally justified in making cash payment over the counter to the payee.

Protection to paying Banker: Section 128 of the Negotiable Instruments Act makes it
obligatory to a banker that the payment of a crossed cheques should be only ‘in due course’; and ‘due course’ entails the payment in good faith and without negligence to a banker. If the banker makes payment out of ‘due course’ in contravention of Sections 10 and 126 of the Negotiable Instruments Act, he gets no legal protection, and will have to compensate the customer for any loss suffered by him by such payment. For, Section 129 of the Negotiable Instruments Act lays down that the banker “shall be liable to the true owner of the cheque for any loss he may sustain owing to the cheque having been so paid”. However, Section 89 provides a relief to the banker if a cheque presented for payment does not appear to be crossed or has had a crossing which has been obliterated at the time of presentation. In such a situation, the banker may make the payment apparent tenor of the instrument; and he will be discharged from all liabilities.

Opening of Crossed Cheques: Since crossing is material part of the cheque, its cancellation
amounts to material alteration. Hence, only the drawer of the cheque is authorized to cancel the general crossing, even through the instrument was crossed after being delivered to the payee. Since a Special Crossing specifically mentions the name of the banker through whom the instrument is to be collected, only the banker named in such a crossing is authorized to cancel. In both the cases, the opening of the cheque should not be recognized unless the full signature of the authorized person has been appended to the alteration.

Collection of Crossed Cheques
A banker has no legal obligation to collect cheques drawn upon other banks for the customers, through modern banks have assumed this important function of their own choice. Therefore, it is very important that since that they have assumed this function, the bankers the bankers should be very careful in their performance, otherwise they will face difficulties; more so if they provide this facility when the cheques are crossed.

Collecting Banker: A collecting banker is one who has assumed duty of collecting the proceeds
of a cheque for the customer or for himself. When he collects the proceeds for the customer, he acts as his agent, whereas in case of collecting for himself, he is a holder for value due by virtue of the fact that: (i) He makes the payment for collection; (ii) He credits the customer’s account with the value of the cheque before it is realized; (iii) The cheque is received in adjustment of an overdraft.

Duties of a Collecting Banker: A collecting banker has the following duties:

1. Collection of Drafts: Section 85-A of the Negotiable Instruments Act, 1881, has defined drafts as “an order to pay the money, drawn, by an office of a bank upon another office of the same bank”. 2. Establish the Bonafides of the Account Holder: The banker must make inquiry to ascertain the bonafides of the person who desires to become his customer. If the bank omits to do so or does not take proper introduction or reliable reference from the proposed customer he will be committing a breach of duty under Section 131 of the Negotiable Instruments Act, 1881. Prudential Regulation No. XII has clearly asked the bankers to ascertain the identification of the customers so that the account is not used for illegal transactions. 3. Examinations of Crossings: The collecting banker must examine minutely all the crossings and cheques handed over to him for collection. If the customer gives him a cheque crossed specially to any banker, he should not accept it for collection. Similarly, a cheque crossed “Account Payee Only” should be collected only for the payee named in the cheque and for no one else. 4. Examination of Endorsement etc: While making payment the paying banker normally relies on the collecting banker’s discharge. Therefore, it is very important duty of the collecting banker to examine all the endorsement and other material parts of all cheques and drafts before presenting them for collection, and giving his discharge on the instruments. 5. Notice of Dishonour: If a cheque is dishonoured on presentation, it is the duty of the collecting banker to inform his customer accordingly. Moreover the banker is entitled to debit a dishonoured cheque to his customer’s account in case he is already credited it. Protection of the Collecting Banker: Section 131 of the Negotiable Instruments Act, 1881, reads as under: “Subject to the provisions of this Act relating to cheque crossed ‘Account Payee’, where a banker in good faith and without negligence receives payment for a customer crossed cheque generally or specially to himself and the customer has no title or defective title thereto, the bankers shall not incur any liability to the true owner of the cheque by reason only of having received such payment”. The above definition lays down the following duties for the collecting banker: (1) The cheque should be crossed when it is received for collection by the collecting banker. If a cheque received by a banker is not crossed generally, he must ask the customer to cross it. Special Crossing is also necessary and is done by the banker himself. The Collecting banker is not protected in case of collection of open cheques. (2) Cheques or drafts must be collected for the customer only because banker collects them as an agent, and is not as holder for value. There are two reasons for it. Firstly, because the customer is entitled customarily to give negotiable instruments for collection, while a non-customer has no such privilege. Secondly, because the customer is a person about whose integrity the banker has already inquired into before accepting him as such. (3) The collection must be done in good faith and without negligence. ‘Good faith’ for a banker means acting honestly as a collecting banker, and it is assumed to be operative unless proved

otherwise. In order to prove having collected without negligence, a banker should take all such steps which a prudent businessman would take to guard himself against adverse effects. If a banker ignores the stop-payment instructions received from his customer; accepts irregular endorsement on the instruments; opens a Current or Saving Account without an introduction; or ignores the “Account Payee” crossing to collect proceeds for a person otherwise than a payee, he will be acting with negligence. (4) The collecting banker should inform his customer about the dishonour of a cheque, so as to enable him to recover the amount from the parties liable on it. If the banker fails to do so the customer may ask him for compensation for any loss which he would have suffered because of not being informed of dishonour of the cheque Conversion: A banker makes a wrongful presentation and contravenes the provisions for protection to a collecting banker; he may be guilty of ‘conversion’. Normally ‘conversion’ refers to unauthorized dealings and dispositions of property, but will not apply to debts. Since negotiable instruments have been regarded as chattels and property, the principle of conversion may be applied to these instruments as well because a wrongful payment amounts to delay in releasing of customer’s fund for banker’s own use. It is thus implied that a banker who takes a bill or cheque for value marked ‘not negotiable’ will be liable for conversions, because there is no statutory or other protection or other protection for a banker in such a case. Nevertheless, to a banker’s relief, he cannot be accused of conversion (a) when the instruments comes into his possession from a holder in due course; and (b) when a banker makes a payment in due course against a cheque which later on may be said to contain a forged endorsement.

Position of Paying Banker: the position banker is different from that of collecting banker. In
accordance with Section 129 of the Negotiable Instruments Act, 1881, in the absence of an express notice that the customer is committing a fraud.

Endorsements
The word “endorsement” is derived from the Latin word ‘indorsum’ means on the back. Ordinarily it means anything written or printed upon the back of a deed or writing.

Definition: Section 15 of the Negotiable Instruments Act, 1881, defines ‘endorsement’ as under:
“When the maker or holder of a negotiable instrument signs the same, otherwise than as such maker, for the purpose of negotiation, on the back or face thereof or on a slip of paper annexed thereto, or so signs for the same purpose a stamped paper intended to be completed as negotiable instrument, he is said to endorse the same, and is called the endorser.” The above Section explains than an endorsement (i) Means the writing of a person’s name on the back of a negotiable instrument; (ii) Can be given also on the face of an instrument

(iii) Has no particular form of words (iv)Can be given on a piece of paper annexed to be negotiable instrument (this annexed paper is called an “allonge”. (v) Should be given for the purpose of negotiation which has been defined in Section 14 of the Negotiable Instruments Act, 1881, as under: “When a promissory note, a bill of exchange or cheque is transferred to any person, so as to constitute that person the holder thereof, the instrument is said to be negotiated.” According to this Section, ‘negotiation’ means the transfer of a negotiable instrument to a third party is ‘constituted the holder of the instrument who is entitled to the possession of the same and sue thereon in his own name.

Classification of Endorsements
There are five main classes of endorsement:

1. ‘In blank’ & ‘In full’ endorsement: Section 16 of the Negotiable Instruments Act, 1881,
reads: “If the endorsee signs his name only, the endorsement is said to be ‘in blank’ and if he adds a direction to pay the amount mentioned in the instrument to, or to the order of, a specified person, the endorsement is said to be ‘in full’, and the person so specified is called the ‘endorsee’ of the instrument”. An endorsement ‘in blank’ is also known as a ‘General Endorsement’. Section 54 of that Negotiable Instruments Act, 1881, lays down as long as the endorsement continuous to be ‘in blank’ the instrument may be negotiated by mere delivery in the same manner as any instrument payable per bearer, even though the instrument was originally payable to order. An endorsement ‘in full’ is also known as ‘Special Endorsement’.

2. Restrictive Endorsement: Under Section 50 of the Negotiable Instruments Act, this is an
endorsement which prohibits further negotiation of the instrument. For instance, if a cheque is indorsed “pay X only” or “pay X for the account of Y” etc the endorsee has no power to transfer this rights to any one further.

3. Partial Endorsement: Under Section 56 of the Negotiable Instruments Act, 1881, this is an
endorsement which purports to transfer to the endorsee only a part of the amount payable on a bill of exchange or promissory note.

4. Conditional Endorsement: Under Section 52of the Negotiable Instruments Act, it is an
endorsement which makes the transfer of the instrument from the endorser to the endorsee after the fulfillment of stated conditions. For instance, the holder of the bill endorses: “Pay accounts or order without recourse to me” or “Pay or order at his own risk.”

5. ‘Sans Recourse’ Endorsement: When an endorser wants to exclude his liability to the
endorsee or subsequent holder he indicates it clearly on the instrument by writing the words, ‘SANS RECOURSE’ or ‘Without Recourse’.

Principles of Endorsement
Since there is no exact form of endorsement prescribed in Banking Law, the bankers have developed their own principles in consonance with the basic legal requirements in this regard. Bankers in Pakistan generally observe the following principles. (i) The name of the endorser must appear exactly in the same spelling as written in the instrument as the payee or the endorsee. (ii) Endorsement in pencil is legally valid but it should be discouraged; bankers must insist on endorsement in ink. (iii) Endorsement made in typewriting or printed form is not treated as valid unless the payee gives a satisfactory evidence or confirmation about its genuineness. (iv) Endorsement made by an imprest stamp or in any other form of facsimile signature should not be accepted. (v) An endorsement made in a language not spoken in the area and which the paying banker also does not understand, should not be accepted without a certified translation. However, in the presence of collecting banker’s confirmation, certified translation is not necessary. (vi) It is not essential that endorsements, if more than one, should appear in the same serial order in which they were made.

Forms of Endorsements: Bankers in Pakistan accept Endorsements given in the following
forms:

Endorsement by individuals
(1) The name of the endorser should correspond exactly to the name of the payee written in the instrument. Even if the name of the payee or the endorsee in misspelt in the instrument, the endorsement must literally follow the wrong spelling. However, the payee may add his name in brackets with correct spelling, if he so desires.

EXAMPLE (a) PAYEE: Abdul Khalik REGULAR: Abdul Khalik (Abdul Khaliq) IRREGULAR: Abdul Khaliq (b) PAYEE: Abdul Hameed REGULAR: Abdul Hameed (Abdul Hamid) IRREGULAR: A. Hameed

Or Abdul Hamid Or Hamid
2. If the name of the payee is written in abbreviation, or if only the surname is written, he must sign his full name or add his initials to the surname in the Endorsement:

EXAMPLE (a) PAYEE: S. H. Naqvi REGULAR: Shamsul Hassan Naqvi IRREGULAR: S. Hassan Naqvi Or Shams H. Naqvi
3. Complimentary prefixes, suffixes and other courtesy words etc. should be excluded. Therefore, words like Mr., Mrs., Miss, Esq., Al-Haj, Hafiz, Moulvi, Qazi and Soofi etc. should not appear in the endorsement:

EXAMPLE (a) PAYEE: Mr. Abdul Ghani REGULAR: Abdul Ghani IRREGULAR: Abdul Ghani Sahib (Mr. Abdul Ghani)
4. Words describing title or profession etc of the payee prefixed to his name in the cheque should also not appear in the endorsement. However, this description, profession, or initials of his titles and academic degree may be allowed to follow his signature.

EXAMPLE (a) PAYEE: Sir Sultan Ahmed REGULAR: Sultan Ahmed (Kt) IRREGULAR: Sir Sultan Ahmed Or Knight Sultan Ahmed
5. In an instrument is payable to be payable to her own name, who is maiden or spinster, she may endorse by signing her full name as written on the instrument; but where she is described as ‘Miss’, she must sign her own name with her father’s name.

EXAMPLE (a) PAYEE: Miss Naheed Butt REGULAR: Naheed Rafiq Butt

Or Naheed D/o Rafiq Butt IRREGULAR: Miss Naheed Rafiq Butt Or Miss Naheed Butt Endorsements by married women
6. If the payee of the instrument is a married women, she may endorse it by her own name followed by words showing that she is the wife or widow of a certain man.

EXAMPLE (a) PAYEE: Mrs. Zarina Bano REGULAR: Zarina Bano Wife of Bashir Ahmed IRREGULAR: Zarina Begum Or Zarina
7. In case an instrument drawn payable to a married woman describing her by her husband’s name, she can indorse in her usual name followed to her husband’s name.

EXAMPLE (a) PAYEE: Begum Zarina Bashir REGULAR: Zarina Begum Wife of Bashir Ahmed IRREGULAR: Mrs. Zarina Bashir Or Zarina Bashir
8. When an instrument is payable to a married woman in her maiden name, her endorsement should show her present name as well as her maiden name:

EXAMPLE (a) PAYEE: Miss Zarina Mahmood REGULAR: Zarina Bashir Nee *Mahmood, (*Meaning ‘born as’) IRREGULAR: Mrs. Zarina Bashir Or Zarina Mahmood

Endorsement by illiterate person: In case of illiterate payees the left-hand thumb should be
impressed and a literate person should witness it with his full name and address:

EXAMPLE (a) PAYEE: Roshan Din ‘X’ REGULAR: (Roshan Din’s left hand thumb impression mark) WITNESS: Rajab Ali 56, Ahmed Street, Karachi. IRREGULAR: ‘X’ (Roshan Din’s thumb impression mark) WITNESS: Rajab Ali

Importance of Endorsement to a Banker
When an endorser endorses a negotiable instrument, he constitutes the endorsee a holder in due course because he: (a) Confirms to the endorsee and subsequent holders that the instrument transferred to him has a good title: (b) Further confirms that the instrument was a genuine one at the time of endorsement; (c) Also confirms the genuineness of the endorsement previous to his own However, the case is different where an endorsement is forged. If a negotiable instrument be negotiated by means of a forged endorsement, the person claiming under such an endorsement cannot acquire the rights of a holder in due course, though he may be a purchaser for value. Since the banker has no means to determine the genuineness of an endorsement in the normal course of business the Negotiable Instruments Act, 1881, places the banker in a privileged position with regard to the payments of a customer’s cheque. Section 85 of the Act provides that “Where a cheque payable to order purports to be endorsed by or on behalf of the payee, the drawee is discharged by payment in due course”. Section 85-A provides further protection to the banker against forged or unauthorized endorsement on demand draft drawn by one branch of a bank upon another of the same bank.

Liability of Endorser
The liability of the endorser is similar to that of the drawer. By endorsing a cheque he commits that on due presentation it will paid in ‘due course’ and that if it is dishonoured, he will compensate the holder.

According to Section 35 of the Negotiable Instruments Act, 1881, the liabilities of an endorser are as under; 1. Like the drawer of a bill of exchange or cheque, the endorser of these instruments is only a surety for the principal debtor and his liability is secondary and conditional. 2. By endorsing the negotiable instrument, the endorser takes the liability of acceptance or payment of the endorsed instrument when it falls due, according to its apparent tenor. 3. If the endorsed instrument is dishonoured, the endorser is liable to compensate the holder for the loss or damage which he may sustain on account of such dishonour.

Other Negotiable Instruments
Besides cheques, bankers also handle promissory notes, bills of exchange and bank drafts as negotiable instruments.

Negotiable Instruments: Section 13 of the Negotiable Instruments Act, 1881, reads:
“A Negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer.”

Negotiation: According to Section 14 of the Negotiable Instruments Act, 1881, negotiation has
been defined as, “When a promissory note, bill of exchange or cheque is transferred to any person, as to constitute that person the holder thereof, the instrument is said to be negotiated”.

Characteristics of Negotiability: An instrument is negotiable by virtue of the following
characteristics: (i) It is transferable from one person to another by delivery, or by endorsement and delivery of it, or as to entitle its holder to receive the money mentioned in it, or recover the same from all or any of the parties to it by suing in his own name. (ii) It constitutes a person as ‘holder in due course’ who “holds the negotiable instrument free from any defect of title of prior parties, and free from any defences available to prior parties among themselves, and may enforce payment of the instrument for the full amount thereof against all parties liable thereon.”(Section 53-A, Negotiable Instruments Act, 1881).

Quasi-Negotiable Instruments: Some documents of title to goods, such as bill of lading and
Railway Receipts, are transferable by endorsement and delivery under the custom of merchants; but these are not negotiable instruments as they are not money securities; and their transferee does not get a good title to the goods from a transferor whose title was defective. They are known as QuasiNegotiable Instruments

Defective Title: Explanation to Section 9 of the Negotiable Instruments Act says that the title of a
person to a Promissory-note, bill of exchange or cheque is defective when he is not entitled to receive the amount due thereon by reason of the provision of Section 58, which provides that no person is entitled to receive the amount of the instrument for the following reasons: (i) A person is a finder of an instrument lost by another; (ii) Has obtained it from the maker, drawer, acceptor or holder thereof by means of an offence or fraud or for an illegal consideration; (iii) Any person who claims it through such person who is not entitled to receive its amount.

Promissory Note
Section 4 of the Negotiable Instruments Act defines promissory-note as under: “Promissory-note is an instrument in writing (not being a Bank Note or a Currency Note) containing an unconditional undertaking signed by the maker, to pay on demand or at fixed or determinable future time, a certain sum of money only, to, or to the order of a certain person, or to the bearer of the instrument.” No precise form is necessary, but the above definition lays down that following are the essentials of a promissory-note: (i) It must be an unconditional written promise (ii) It must be signed by the maker called ‘promiser’ (iiii) It must contain a promise to pay a certain sum in money only. (iv) The money should be payable to or to the order of a certain person or to the bearer of the promissory-note. (v) It may be made by two or more persons, and they may be liable thereon jointly and severally. (vi) The amount promised in the promissory-note must be payable on demand or at a fixed or a determinable future time. It must be noted that the law has specifically excluded bank notes from this Section because under Section 25 of the State Bank of Pakistan Act, 1956, they are not merely money securities but are themselves as good as cash or any other legal tender in the country; and the amount expressed therein guaranteed by the Federal Government. A promissory-note is incomplete until it has been delivered to the payee or the bearer. Moreover, the sum promised in a promissory-note can be made payable by stated installments; and the promissory-note maybe made by two or more makers who may be liable thereon jointly and severally, according to its tenor.

Presentment for payment: Unless presentment for payment is excused in terms of Section 76
of the Negotiable Instruments Act, “Promissory-notes, bills of exchange and cheques must be presented for payment to the maker, acceptor or drawer thereof respectively by or on behalf of the holder as herein after provided. In default of such presentment, the other parties are not loable thereon to such holder”. A promissory-note payable otherwise than on demand must be presented for payment at maturity. Maturity of a promissory-note is the date on which it falls due. Three days of grace are also admissible in case a promissory-note is payable at a fixed or determinable future time and in such a situation, the maturity is the third day on which promissory-note is payable. But when such a day falls on a public holiday under Section 25 of the Negotiable Instruments Act, the instrument falls due on the immediately preceding business day.

Promissory-note made payable at a bank:- When a promissory-note has been payable at
a bank, he banker would be justified in paying it when due and debiting it to the maker’s account; but the banker will be liable in the event of a forged endorsement on the promissory-note.

Bill Of Exchange
Section 5 of the Negotiable Instruments Act,1881, defines a bill of exchange as “An instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay on demand or at a fixed or determinable future time, a certain sum of money only to or to the order of a certain person or to the bearer of the instrument”. Therefore, according to this Section; (i) A bill of exchange must be in writing and signed by the drawer; (ii) It must contain an unconditional order or direction. (iii) The direction should be to pay a certain sum in money only. (iv) The drawee should be directed to pay on demand or at a fixed or determinable future time. (v) The amount should be payable to or to the order of a certain person or the bearer of the instrument.

Parties to the bill of exchange:- According to Section 7 of the negostiable Instruments
Act’1881, there are three parties to a bill of exchange. The “parties” are explained as under

Drawer: Every person capable of contracting under Section 11 of the Contract Act may become the
drawer, drawee, acceptor, endorser, and payee or indorse of a bill of exchange or promissory-note. Section 30 of the Negotiable Instruments Act, 1881, lays down that when a person signs a bill of exchange as the drawer, he engages that on due presentment it shall be accepted and paid according to the apparent tenor, and that if the bill of exchange is dishonoured, he will compensate the holder or any endorser who is compelled to pay it. However, this liability is conditional to the notice of dishonour of the bill or cheque having been given to or received by the drawer.

Drawee and ‘Drawee in case of need’: Drawee is the person on whom the bill of exchange
is drawn and who has been directed to pay. A bill of exchange may be addressed to two or more drawees. When in the bill, or in any endorsement thereon, the name of any person is given in addition to the drawee to be resorted to in case of need, such a person is called ’drawee in case of need’. According to Section 31 of the Negotiable Instruments Act, 1881, the drawee of a cheque is duty bound to honour the instrument if he has sufficient funds of the drawer in this hands, provided the funds are properly applicable and the cheque has been duly presented to the drawee. However, it is not so in case of a bill of exchange.

Acceptor and’ acceptor for honour’: After the drawee has sign his assent on the bill of exchange, he becomes the acceptor. An acceptance may be general, i.e.,’ unqualified’, or ‘qualified’, when it contains the condition for payment. An acceptance may also be ‘partial’, i.e. to pay only a part of a amount for which the bill is drawn.
When a bill of exchange has been noted or protested for non-acceptance or for better security, any other person who has not been a party to the bill may accept the same by writing his assent for the honour of any party to the instrument with the consent of the holder and thus becomes an 'acceptor for honour'. According to Section 32 of the Negotiable Instruments Act, 1881, by accepting a bill of exchange the acceptor binds himself to pay it according to the apparent terms of acceptance. Thus the acceptor is the principal debtor to the holder of the instrument and his liability is absolute, unconditional and quite independent of the drawer. An 'acceptor for honour' is liable to all parties subsequent to the party for whose honour he has accepted the bill of exchange. However, an 'acceptor for honour" cannot be charged unless the bill, at its maturity, has been presented to the drawee for payment and has been noted and protested for dishonour at his end.

Payee or Endorsee: Payee is the person to whom or to whose order the promissory-note or bill
of exchange has been made payable. A bill may be payable to two or more payees jointly or severally. However, a holder may indorse the promissory-note or bill in favour of someone else known as 'endorsee’

Types of bills
Bills may be of the following types:

Sent bills or bills for Collection: When bills are handed over to a banker by his customer
in order that they may be collected when due and the proceeds credited to the customer's account, they are called 'bills for collection’.

Bills Negotiated: 'Bills Negotiated' or 'bills discounted' are those bills for which the banker has
given value at once, without waiting for the proceeds after collection.

Bills Retired: When a bill is withdrawn from circulation or taken up before it is due, it is said to be
'retired'. To retire the bill does not discharge it; and the bill must not be cancelled, because the drawer or any endorser can enforce it against any prior party when it falls due.

Bills in Set: Section 132 of the Negotiable Instruments Act, 1881, lays down that when bills of
exchange are drawn in two or more parts, they are called 'bills in set' and each part is on a seperate piece of paper; but all parts are worded exactly in the same language except that the parts are numbered as "the 1st of exchange", "2nd of exchange" etc.

Rebate: Rebate is the allowance made to an acceptor or other person liable on the bill who retires
his acceptance before it is due. The rebate is calculated at an agreed rate on the amount of the bill for the time it has yet to run.

Presentment for Acceptance
A bill of exchange is presented for acceptance to know whether the drawee intends paying the bill. Therefore, it is necessary to present the bill for acceptance before it is presented for payment. Section 131-F of the Negotiable instruments Act, 1881, reads: "A bill of exchange, in order to fix the acceptor with liability, must be presented for acceptance before it is presented for payment". In this connection Sections 61 and 62 of the Act provide the following guidance: (a) the presentment must be made by the holder of the bill or his duly authorized agent; (b) the presentment must be made to the drawee or to all the drawees in case they are more than one. It y also be made to the duly authorized agent, or, if the drawee has died, to his legal representatives or to his assignee in case he has been declared as insolvent; (c) presentment is not necessary when the bill is payable on demand or on a fixed future date, or when payable at sight;

(d) if the bill of exchange is directed to the drawee at a particular place, it must be presented at that place. (e) Presentment is necessary when it is payable after sight or when it expressly stipulates its presentment for acceptance. However, according to Section 105 of the Negotiable Instruments Act, 1881, the presentment must be made within a reasonable time after the bill is made. The nature of instrument, the usage of trade with regard to similar instruments, and the distance at which the persons concerned live from each other should be taken into consideration when determining as to what is reasonable time. Section 131-G of the Negotiable Instruments Act, 1881 however, lays down that presentment for acceptance is not necessary and the bill of exchange should be treated as dishonoured by nonacceptance in the following situations: (a) when the drawee is dead or is insolvent or is a fictitious person or a person not having capacity to contract by bill of exchange; (b) where, on the due date for presentment, the drawee cannot, after reasonable search, be found at the place at which the bill is to be presented; (c) where, after exercise of reasonable diligence, such presentment cannot be effected; (d) where, although the presentment has been irregular, acceptance has been refused on some other

When any one or more of these situations exist, the bill of exchange should be treated as dishonoured by non-acceptance in terms of Section 91 of the Negotiable Instruments Act, 1881, also.

Presentment for payment of bill of exchange
Section 64 of the Negotiable Instruments Act, 1881, lays down that presentment for payment should be made by holder or by his agent on his behalf to the acceptor, or in case of demand and sight instrument to the drawee. If there is default in presentment the other parties to the bill shall not be liable. The presentment is governed by various provisions of the Act as under: (a) Section 65 lays down that it should be made during the usual hours of business and if a banker, within banking hours . (b) Section 66 lays down that the presentment for payment of bill of exchange made payable at a specified period after date or its sight, should be . made at maturity. (c) Sections 68,69 and 70 lay down that presentment for payment should be made on the very same place as specified in the bill. If no particular place is specified, it should be presented at the known place of business or residence.

Date of payment of bills
A bill of exchange may be payable: (a) On demand, at sight or (b) at a fixed or determinable future time.

On demand and at sight:
According to Section 19 of the Negotiable Instruments Act,1881, a promissory-note or bill of exchange is payable on demand when: (i) it is expressed to be payable "on demand" or "at sight' or "on presentment" (ii) no time for payment is specified in the instrument; (iii) the promissory-note or bill of exchange is accepted or indorsed after it is overdue. The object of expression of time in these terms is not to delay or withhold payment, but it means that the payment must be made immediately or forthwith . -

Otherwise than on demand
When a promissory-note or bill of exchange is payable 'otherwise than on demand' it is a usance instrument and payable at maturity which includes three days of grace as well.

Maturity

Section 66 of the Act defines that "A promissory note or bill of exchange, made payable at a specified period after date or sight thereof, must be presented for payment at maturity”. The term "maturity" has been defined thus:” The maturity of a promissory-note or bill of exchange is the date at which it falls due" (Section 22, Negotiable Instruments Act, 1881). It further elaborates that every promissory-note or bill of exchange expressed to be payable otherwise than on demand "is at maturity on the third day on which it is payable".

Whe n day of maturity in a holiday
Section 23 further provides that where a bill of exchange or promissory-note is expressed to be payable at a stated number of months after date or sight, the stated period should terminate on the day of the month which corresponds with the day on which the instrument is dated or presented for acceptance or sight. "If the month in which the period would terminate has no corresponding day, the period shall be held to terminate on the last day of such month". For example, if a bill or note drawn on 31st January 2000 is made payable after one month, the date of maturity will be 3 rd March, 2000 (February 29 plus 3 days of grace). According to Section 24, when an instrument is made payable a certain number of days after date or after sight or after a certain event, the time of payment is determined by computing the number of days from the date on which it was made. After excluding the first day; e.g. a promissorynote or bill of exchange dated January 24, 2002, is made payable twenty days after the date: it is at maturity on 16th February (February 13 plus 3 days of grace, excluding 24th January). When the date of maturity is a public holiday, Section 25 provides that, "The instrument shall be deemed to be due on the next preceding business day". It may be noted that since July 1, 1997, public holidays include Sunday, all gazetted and bank holidays in Pakistan.

Persons Receiving Payment Holder:
Section 8 of the Negotiable Instruments Act, 1881, defines 'holder' in these words: "The holder of a promissory note, bill of exchange or cheque means the payee or endorsee who is in possession of it or the bearer thereof, but does not include a beneficial owner claiming through a “benamidar". The explanation of the above Section provides that when a promissory-note, bill of exchange or cheque is lost, and not found again or is destroyed, the person in possession of it or the bearer thereof at the time of such loss or destruction, shall be deemed to continue to be its holder. Generally, a holder is the person to whom an instrument is payable and who has got title to the instrument. Such a person is entitled to enforce payment. Therefore, it is clear that the unlawful possession of a bearer instrument does not constitute a holder.

Holder in Due Course
Sections 9 and 58 of the Negotiable Instruments Act, 1881, define Holder in Due Course as under: "Holder in due course" means any person who for consideration becomes the possessor of a promissory-note, bill of exchange or cheque if payable to bearer, or the payee or endorsee thereof, if payable to order, before it became overdue, without notice that the title of the person from whom he derived his own title was defective (Section 9)" Section 58 further explains, "When a promissorynote, bill of exchange or cheque has been lost or has been obtained from any maker, drawer, acceptor or holder thereof by means of an offence or fraud, or for an unlawful consideration, neither the person who finds or so obtained the instrument nor any possessor or endorsee who claims

through such person is entitled to receive the amount due thereon from such maker, drawer, acceptor or holder, unless such possessor or endorsee is, or some person through whom he claims, was a holder thereof in due course". Thus these definitions lay down the following qualifications for a holder in due course: (1) He must be a holder i.e. he must be either the payee or endorsee or bearer and in possession of the instrument, so that he may sue in his own name. (2) He must be holder for consideration. It means that the consideration should have been given at sometime in the chain between him and the party to be held liable to pay. The consideration may be past or present, or it may be adequate or inadequate. (3) He must have become the holder of the instrument before it became overdue. An instrument payable on demand is overdue when it remains in circulation for an unreasonable length of time, while in other cases the instrument is overdue at the expiry of the date of payment. (4) He should have become the holder without having any cause to believe that any defect existed in the title of the person from whom he acquired it. It means he shall have not received the instrument from a person who was not entitled to receive the amount thereon.

Payment of Bills by Banker
When a drawee accepts a bill payable at a place other than that of his business or private address, the bill of exchange is said to be "domiciled5 at the place of payment. A banker is under no legal obligation to pay bills domiciled with him unless he has expressly or impliedly agreed to do so. In such a situation the relationship between the customer and his banker is that of principal and agent. As such, the paying banker must consider the following points: (i) that the instrument presented for payment is a bill of exchange; (ii) that it is properly stamped; (iii) that acceptor's signature is genuine, for, a forged signature does not constitute a bill iv) that the bill is due; (v) that the amount in words and figures tallies; (vi) that all material alterations and endorsements have been authenticated; (vii) that the acceptor has not countermanded payment or be dead or bankrupt.

DISHONOUR OF BILL OF EXCHANGE

A bill of exchange may be dishonoured by non-acceptance or by non payment. Section 91 of the Negotiable Instruments Act reads: "A bill of exchange is said to be dishonoured by non acceptance when the drawee, or one of the several drawees not being partners, make default in acceptance upon being duly required to accept the bill, or where presentment is excused and the bill is not accepted". This means that when a bill is duly presented for acceptance and is not accepted within the meaning of the above Section, the person presenting it must treat it as 'dishonoured' by nonacceptance. In such a situation an immediate right of recourse accrues to the holder. According to Section 131-H of the Negotiable Instruments Act, 1881, "When a bill of exchange is dishonoured by non-acceptance, an immediate right of recourse against the drawer and endorsee accrues to the holder, and no presentment for payment is necessary". According to Section 92 of the Negotiable Instruments Act, 1881, a "bill is dishonoured by nonpayment when it is duly presented for payment which is refused or cannot be obtained or when payment is excused and the bill is overdue and unpaid".

Notice of Dishonour
Notice of dishonour is necessary against drawer and endorser, but not against the acceptor. When a bill is dishonoured, the holder thereof or some party liable thereon must give notice to all those parties whom he wants to make severally liable thereon and to some one whom he wants to make jointly liable in accordance with section 93 of the Negotiable Instruments Act, 1881.

Mode of Notice
Notice may be written or verbal, or partly written and partly verbal. The notice may be sent by post or by hand, "but it must inform the party to whom it is given, either in express terms or by reasonable intendment, that the instrument has been dishonoured, and in what way, and that he will be held liable thereon" according to Section 94, Negotiable Instruments Act, 1881. It is further explained that the notice must be given "within a reasonable time after dishonour, at the place of business or, (in case such party has no place of business) at the residence of the party for whom it is intended". Notice is not required when: (i) in spite of due and reasonable diligence notice cannot be served on the party; (ii) notice is waived; (iii) drawer and drawee are the same person; (iv) drawer is a fictitious person or has no capacity to contract; (v) the bill is presented to the drawer himself: (vi) And when the bill has been accepted or made for accommodation of the endorser.

Banker giving a notice
If a bill which a banker has discounted for a customer is dishonoured, he will debit it to his customer's account and return the bill to him. If, however, the customer's balance is insufficient, and the banker does not like to allow him an overdraft, the banker can hold the bill and give the notice of

dishonour to the customer and all parties liable on the bill immediately. The banker is authorized to retain the customer's balance and pending settlement, may debit the bill to a suspense account and keep the bill in his possession until it is paid. When the banker presents the bill for collection, he acts as his customer's agent. Therefore, he must give due notice of dishonour, otherwise he will be liable for any loss sustained by his neglect to do so.

Noting and Protesting
Noting is a minute made on a dishonoured bill or on a slip of paper affixed to the bill of exchange to secure official evidence that it has been dishonoured. Section 99 of the Negotiable Instruments Act lays down that the noting should he made by a Notary Public within a reasonable time after the dishonour. The noting must specify the date of dishonour and the reason for it in such words as ' No Orders', "No Effects' or ' No Advice'. If the instrument has not been dishonoured expressly, the reason may be noted as 'Office Closed', or 'Maker or Acceptor not found". The rules prescribe that the noting must also contain reference to the page in the Notarial Register, the date of noting Notary's charges and his signature and seal of office. These details are recorded in the form of a certificate called 'Protest',

Protest for better security:
If on the date of maturity, the acceptor becomes insolvent or his credit has been publicly impeached, the holder may request a Notary Public to ask the acceptor for a better security for its payment at maturity: and on its being refused, request-him to note the fact and issue a certificate to that effect. This certificate is called 'Protest for better security’.

Collecting Banker's duty as to noting and protesting:
When a bill which the banker has received for collection is dishonoured, he must carry out his customer's instructions as to noting and protesting; and if he neglects to do so, he will be liable. If the customer has not given any prior instructions in this regard, the banker usually would not ‘note’ a dishonoured bill.

Banker’s Draft
Drafts drawn by one branch on another branch or on the Head Office of the same bank or vice versa, are not cheques or bills, as these have no distinct drawer and drawee. Section 85-A reads: "Where any draft, that is, an order to pay money, drawn by one office of a bank upon another office of the same bank for a sum of money payable to order on demand, purports to be issued by or on behalf of the payee, the bank is discharged by payment in due course". Banker's drafts payable to order on demand are within the protection of Sections 10 and 131-A of the Negotiable Instruments Act. However, if a demand draft drawn on a bank by its own branch bears a forged endorsement, the person in possession of it cannot compel that bank to pay it. As far as possible the banker's draft should be crossed and it should never be drawn payable to bearer. When a person requires a draft he should be asked to complete the prescribed application form in which he should state the amount of the draft, the name of the payee, and the place of payment. This application form should be signed by the purchaser or by those persons who have been duly authorized to act on his behalf.

When a customer requests his banker to provide him with a banker's draft, the amount of which is to be debited to his account, he should enclose with his written request a cheque covering the amount of the required draft and other charges etc. payable to the banker.

Lost Drafts
When the purchaser of a draft informs the issuing bank that the draft issued to him has been lost, the drawee bank should be informed immediately that the payment of the draft may be postponed until the holder in due course presents it. Banks generally issue a duplicate draft in lieu of the original reported lost. Before the duplicate draft is issued, the purchaser indemnifies the bank against liability in case of the lost draft being presented by someone who has obtained a good title to it. The indemnity should cover the amount of the draft and all costs and expenses reasonably incurred by the bank in establishing the title of the person presenting the draft.

Inchoate Stamped Instruments
Inchoate means incomplete. When a person signs a stamped paper which is not complete or which is wholly blank, and hands it over to the holder, giving him authority to fill up the blank and subsequently create bill of exchange, it is an "Inchoate Stamped Instrument". Since the demand bills (i.e. bills payable on demand) and cheques are exempted from the excise duty they will not be included in this category of instruments. Section 20 of the "Negotiable Instruments Act, 1881, lays down the requirements as under; 1. The paper must be stamped in accordance with the Stamp Duty laws in force. Since the demand bills and cheques are exempt from excise duty, they will not come in this definition. 2. The stamped paper must be signed by one person and delivered to another person. 3. The stamped and signed paper rnust be delivered for the purpose of making or completing it into a negotiable instrument. If the paper is delivered for any other purpose it will not be considered under this Section. .4 . The duly signed and stamped blank paper must be completed within a reasonable time strictly in accordance with the authority given. Inchoate stamped instruments have the same risks as those involved in giving blank but signed cheques.

Other Categories of Negotiable Instruments 1. Inland and foreign instruments
A promissory-note,, bill of exchange or cheque which is drawn or made in Pakistan and made payable in Pakistan, or drawn upon any person resident in Pakistan, is termed as "inland instrument" according to Section 11 of the Negotiable Instruments Act, 1881. Any negotiable instrument not so

drawn, made, or made payable is treated as a "foreign instrument", according to Section 12 of the Act.

2. Bearer or order instrument
According to Section 3(c) of the Negotiable Instruments Act, 1881, bearer is a person who comes into possession of a negotiable instrument which is payable to bearer. Explanation (ii) of Section 13 (1) of the Act further explains that a cheque is payable to bearer which is so expressed, or when the only or the last endorsement is in blank. A person who is in lawful possession of a cheque, as a holder in due course, is entitled to claim payment due on it. He is required to acknowledge receipt of money on the instrument by signing on it. According to American Negotiable Instruments Law an instrument is also payable to bearer when the name of the payee does net purport to be the name of the any person, such as 'cash', 'wages' or 'self. Similar practice has been developed in UK and Pakistan also. A cheque drawn payable to or to the order of a specified person is popularly known as 'order cheque*, according to Explanations (i) & (iii) of Section 13 (I) of the Negotiable Instrument Act, 1881. An order cheque can be paid to the 'holder in due course ’ only after the identification of the payee or the endorsee named in such a cheque.

3. Instruments payable on demand.
A cheque is always payable on demand, and Section 6 of the Negotiable Instruments Act, 1881. lays down that it cannot be expressed to be payable otherwise than on demand. However, a promissory not and bill of exchange are payable on demand when no time for payment is specified on them, or when the payment is expressed to be 'on demand', or 'at sight' or 'on presentment', according to Section 19 and 21 of the Act.

4. Time instruments
A promissory-note or bill of exchange which is payable after a fixed period, or after sight, or on a specified day, or on the happening of an event which is certain to happen, is known as 'time instrument".

5. Documentary and clean bill
When documents of title to goods and other documents, like invoice, marine insurance policy, etc are attached to a bill of exchange to confirm the consideration, such a bill is called a 'documentary bill', when no such documents are attached to it, it is called a 'clean bill' .

6. Fictitious bill
When the name of the drawer or payee, or both are fictitious in a bill of exchange, the bill is said to be fictitious bill. Section 42 of the Negotiable Instruments Act, 1881, does not relieve the acceptor of such a bill from the liability to pay any holder in due course.

7. Ambiguous instrument
If the faulty language of an instrument does not confirm whether it is a bill of exchange or promissory-note, it is called an 'ambiguous instrument7. Section 17 of the Negotiable Instruments Act, 1881. confers the choice to the holder to decided it as either a promissory-note or a bill of exchange.

8. Escrow
When a negotiable instrument is delivered conditionally, or for the purpose as a collateral security, or for safe custody only, and not for the purpose of transferring absolutely, property in it. it is called an' escrow.' The liability to pay on escrow does not arise if the agreed conditions are not fulfilled, or the purpose for which the instrument was delivered is not satisfied.

9. Undated bills and notes
A negotiable instrument is not invalid because it is undated. If the instrument is otherwise properly drawn and fulfills the legal requirements, the date of its drawing or execution can be proved by oral or other evidence. The holder in due course may, however, insert the true date of issue or acceptance in it. Such an insertion is not regarded as a material alteration hence the instrument is payable accordingly.

OTHER BANKING INSTRUMENTS
The instruments other than negotiable instruments handled by the banks include Bank Notes, Dividend Warrants, Postal Orders, Interest Warrants, Coupons, Traveler’s Cheques and Letters of Credit etc.

Bank Notes
Section 2 (d) of the State Bank of Pakistan Act, 1956, defines that, "bank notes mean notes made and issued by the bank in accordance with Section 24 and include currency notes of the Government of Pakistan issued by the Bank". The sole right to issue Bank Notes in Pakistan has been given to the State Bank of Pakistan. Section 24 (1) of the State Bank to Pakistan Act, 1956, lays down that "The Bank shall have the sole right to issue Bank Notes made payable to bearer on demand in Pakistan in accordance with the provisions hereinafter made provided that the currency notes of the Government of Pakistan supplied to the Bank by the Government may be issued by it for a period which shall be fixed by the Federal Government on the recommendation of the Central Board” The Bank Notes issued by the State Bank are legal tender in Pakistan. According to Section 25 (A) of the State Bank of Pakistan Act, 1956, "every Bank Note shall be legal tender at any place in Pakistan for the amount expressed therein and shall be guaranteed by the Federal Government".

Dividend Warrants:
A dividend warrant is a draft issued by a company, directing its bankers to pay to a named member of a company his share of the divisible profits. They may be crossed, but are not frequently negotiable. They must be signed by the person to whom they are made payable; but per pro signature are not valid unless submitted to and approved by the issuers of the warrant. By mercantile custom Dividend Warrant payable to joint payees are discharged by the signature of any one of them. The Dividend Warrant are treated as cheques, however, if they are paid directly to the banker, indorsement or banker’s discharge is not required on them; but the relative counterfoils should be sent to the holder of the shares. Sometime there is a note on the Warrant that it should be presented for payment within a specified period from the date of a issue. If not so presented it should be returned by the share holder to the company for revalidation.

Postal Orders:
Postal orders are not cheques, because they are drawn by a Post Office on the Post Master of another Post Office. Therefore, the provision of the negotiable Instruments Act.1881, do not apply to them. They are expressly marked ‘Not Negotiable’ and nobody else is entitled to receive the amount of the Postal Order even if they are lost or stolen or fall into the hands of a innocent person. Section 45 of the Post Office Act, 1898, provides that the “Federal Government may authorize the issue of Postal Order for certain fixed amounts, and may make rules regarding the rate of commission to be charged thereon”. The terms and conditions of the issue and payment and cancellation of Postal Orders are to be made by the Federal Government only. In Pakistan no Postal Order can be issued for an amount exceeding ten rupees.

Interest Warrants:
Interest warrant are drafts for the payment of fixed interest due on government stocks and debentures issued by a municipality or public authority, etc. When payable to joint payees the signature of all are required for discharge of the interest warrants, unless credited to the account in their joint names. The warrant can be validly crossed, but per pro endorsements are not accepted.

Coupons:
Coupons are detachable certificates for the payment of the interest on bonds, debenture etc. They are issued in sheets, but each coupon is separately numbered with the same number as the relative bond or certificate and also with a number indicating the order in which it is to be detached for payment. The place of payment is also indicated on the coupon. The period or due dates for payment are generally stated on the coupon, which is usually at intervals of 6 months. WAPDA Bonds are special saving certificates issued be National Savings Centre carry such coupons for claiming return on the investments. Bankers should not credit the customer’s account until they have received the advice of the amount realized.

Drawn Bonds:
These are bonds redeemable by drawing at a named prize on the number of bonds drawn, being advertised in certain newspaper. The customers often leave the bond with their banker for the purpose of presenting them for payment after the serial numbers of bonds appear in the advertised list of draws. ‘Prize Bonds’ are good examples of these bonds in Pakistan. If the holder of the bond overlooks the drawing the issuer may refuse payment of the relative bond on its presentation for payment. If such a situation arise in case of bonds left with the banker, he would probably be liable to his customer. Travelers Cheques: They are generally issued for the convenience of persons traveling abroad, but some Pakistani bankers issue them in Pakistani currency also for use within the country as well. Before issuing, the bankers receive an amount equal to the face value of the cheques, and also charge a small commission. The travelers cheques are for fixed amount and are treated as Order Cheques payable only to the purchaser whose specimen signature appears on each travelers cheque itself. Foreign currency travelers cheques are issued and encashed in accordance with the provisions of the Exchange Control Regulation Act, 1947. While making payment, the paying banker must insist that the holder signs in his presence.

COMMERCIAL LETTERS OF CREDIT
International trade involves numerous factors such as payment for imports in the exporters country; shipment of goods within the limitations prescribed under Trade Control Regulations, and difficulties of enforcing legal rights in a foreign country, etc. Therefore, with a view to overcome these impediments a system has been enforced in order to deal with the above and other related factors so as to protect importers and exporters of goods against unwanted risks. The system is represented by 'Letters of Credit' and their operation is con-trolled under the articles of the "Uniform Customs and Practice for Documentary Credits" as adopted by the Council of the International Chamber of Commerce and enforced with effect from January, 1994 in the Brochure No 500.

Definition
The Article 2 defines a 'Letter of Credit' in the following terms: For the purposes of these articles, the expressions "documentary credit(s)" and "standby letters) of credit" hereinafter referred to as "credits)"), mean any arrangement, however named or described, whereby a bank (the issuing bank), acting at the request and on the instructions of a customer (the applicant for the credit), or on its. own behalf: (i)to make a payment to or to the order of a third party (the beneficiary), or is to pay or accept bills of exchange (drafts) drawn by the beneficiary, (ii) authorises another bank to effect such payment, or to pay or accept or negotiate such bills of exchange (drafts), or (iii) authorises another bank to negotiate, against stipulated documents, provided that the terms and conditions of the credit are complied with, Classes of Credit: There may be confirmed or unconfirmed credits. The credit is called 'confirmed' when the importer confirms to the exporter the terms of c^dit through the addressee banker. In such credits the confirming banker becomes liable for payment in terms of the letter of credit. The following are the other classes of credit: Documentary Letter of Credit: A documentary Letter of Credit may be defined as an authority issued by the opening bank on behalf of the importer in favour of the exporter with the stipulation that the drafts drawn thereunder will be duly honoured, provided that the terms and conditions as mentioned therein are duly complied with.

Revocable and Irrevocable Letters of Credit:
A "revocable credit* can be damended or cancelled by the openers before the expiry date of the Letter of Credit. However, once the negotiating bank has negotiated the documents strictly in accordance with the terms and conditions of the credit, this credit cannot be revoked. An 'irrevocable credit" cannot be altered or cancelled without the consent of all the parties, i.e. the opener, the opening banks: the confirming banker, and the beneficiary -This credit becomes confirmed as soon as the advising bank at the request of the opening banker confirms the credit to the beneficiaries. In this way the exporter gets the double satisfaction of receiving the payment for goods

from the confirming banker, provided he submits the shipping documents strictly in terms of the credit

Revolving Credit:
Under this credit the amount of credit is automatically renewed, revived or re-instated, and the opener can establish credit for the already utilized amount during the period of validity.

Red Clause Credit:
The 'Red Clause' is a special clause printed on the Letter of Credit, whereby the opening banker authorizes the advising banker to grant some advance payment to the exporter to enable him to purchase the goods or raw material for preparation the exportable items for shipment. The advising bank then reimburses itself by negotiating the documents presented by the exporter.

Green Clause Credit:
This is an improvement over the Red Clause Credit, and permits not only pre-shipment advances but also provides for storage of goods in the name of the opening banker. Such letters of credit have been in use mostly for Australian wool exports.

Transferable and Assignable Credit:
This credit is opened in favour of the middleman who purchases goods from the manufacturer or supplier, and supplies the same to the importer on his own without disclosing the name of the actual supplier.

Back-to-Back Credit:
Under this credit, the supplier, on the strength of a credit received in his favour, establishes another credit, of similar goods in favour of another supplier. Thus he buys goods from one person and supplies to another. In this way one credit backs another credit.

Deferred Payment Credit:
Under this credit, the payment is made in instalments for purchase of heavy machinery and other capital goods.

Acceptance Terms Credit:
It is a credit under which drawing is on usance oasis, if the drafts are subject to acceptance, it is an Acceptance Credit. Maximum usance is 4 months or 120 days under existing exchange control regulations. The State Bank of Pakistan has prescribed that "All letters of credit and similar undertakings covering imports must provide for payment to be made against full set of on board (shipped) bills of lading, air consignment notes, railway receipts, post parcel receipts (or in the case of bulk import of books from U.K. against "Statement of Dispatches" in lieu of post parcel receipts), showing dispatch of goods to a place in Pakistan while sea-way bills should not be accepted. All letters of credit must specify submission of invoices certifying the country of origin in addition to any other certificate prescribed in the import policy." The regulation under clause 14 of the Manual further elaborates

that, "It is not permissible to open clean, revolving, transferable or packing credits. Application for such letters of credit should be referred to the State Bank of Pakistan with full particulars." The Import Policy Order, 2002-03 further provides that imports will be permissible against irrevocable letter of credit, provided that import of books, journals, magazines and periodicals will also be permissible on Sight Draft or Usance Bills basis.

Advantages of a Letter of Credit:
Following are some of the main advantages of a Letter of Credit: 1. Since a letter of credit is opened only for the importers, with established credit standing, the exporter is sure of receiving the price of his commodity.

2. An exporter may obtain necessary finance immediately on shipment under a letter of credit. 3. The importer does not run any risk about the payment before the receipt of goods, because, the pay under a letter of credit is made only against delivery of shipping documents to the opening bank or its agent or correspondent; 4. A letter of credit may help the importer to meet his financial difficulties even before the goods are received by him. He may approach his financer or banker and may obtain some finance against the letters of credit. 5. A letter of credit enables the exporter to obtain finances for the operation of the production or purchase even before shipment, because, the bankers may agree to advance money against goods, whether finished or in the process of manufacturing, as their sale and payment of sale price is fully assured.

Rights and Liabilities of the Opening Banker
Bankers issue letters of credit normally pursuant to a term of sales contract as set out in the application for the credit by the customer. As such the issuing banker is an agent where, "The banker cannot owe a fiduciary or quasi-fiduciary obligation to his customer in a commercial credit transaction, because, by the very nature of the transaction entered into at the customer's request, the banker is obliged to split his loyalties and maintain a position of strict impartiality induced by the equal but diametrically opposed contractual pressures exerted by the beneficiary and the account party. The loyalty of the commercial credit banker is to the commercial credit agreement and to the commercial credit it- self, not to the parties" (Ward and Harfield). The terms on which the banker undertakes to issue the credit are fully set out in the letter of credit, usually in a standard form. It also contains a statement of condition under which the banker is authorized to pay the price of goods to the exporter together with the applicant's undertaking to indemnify the opening banker. The banker's undertaking under an irrevocable or confirmed credit is absolute. Therefore, once a credit has been communicated to the beneficiary through the banker, the banker has no option but to pay, provided the other terms have been fulfilled. Lord Jenkins said, "The opening of a confirmed credit constitutes a bargain between the banker and the vendor of the goods, which imposes upon the

banker an absolute obligation to pay”. If the banker stops the payment after the fulfillment of all the terms and conditions of the letter of credit, he can be used’ for non-payment. How- ever, if the issuing banker is not placed in funds by the customer at the time of issuance of credit, the banker has a right to be indemnified by the customer in respect of the amount to be paid to the exporter. Moreover, in such a situation the issuing banker can also hold the documents relating to the goods when delivered to him as security for the credit until such time as the indemnity has been satisfied. It is very important for the banker to comply rigidly with the instructions given by the opener, and consequently, must accept or reject within a reasonable time the documents he received from the negotiating banker, otherwise he will not be entitled to indemnity, and it will be taken for granted that he agrees to the irregular payment by the negotiating banker. Article (14) paras b, c and d of Uniform Customs and Practice (Brochure 500) provide that, "Upon receipt of documents the issuing bank and /or confirming bank, if any, or a Nominated Bank acting on their behalf, must determine on the basis of the documents alone whether or not they appear on their face to be in compliance with the terms and conditions of the credit. If the documents appear on their face not to be in compliance with the terms and conditions of the credit, such banks may refuse to take up the documents". It is further clarified that the issuing bank, 'may in its sole judgement, approach the applicant for a waiver of discrepancy (ies). This does not, however, extend the period mentioned in sub Article (13-b)". However, the information of the refusal must be given in the preclude time limit, which has ben laid down in sub-Article 14(d), stating "it must give notice to that effect by telecommunication or, if that is not possible, by other expeditious means, without delay but not later than the close of the seventh banking day following the day of receipt of the documents". It is further explained that, "Such notice must state all the discrepancies in respect of which the bank refuses the documents, and must also state whether it is holding the documents at the disposal of, or returning them to the presenter Usually the seller of goods does not rely on the credit of a banker in the country of import, and insists on a confirmation from a banker carrying on business in his own country. This banker is called the 'negotiating' or 'intermediary banker'. The contract between the opening banker and the negotiating banker is of a dual nature, wherein the main relationship is that of a principal and an agent. In order to claim the reimbursement for any payment he makes under the credit or under the indemnity of an agent the negotiating banker must comply strictly with the instructions given to him by the opening banker. The negotiating banker may be asked: (a) only to advise the credit to the beneficiary. In such a case he undertakes no responsibilities in the matter, either for payment against documents or against draft accompanied by documents; (b) to confirm the credit, in which case he takes all the responsibilities for payment to the beneficiary; (c) to negotiate drafts drawn either on the opening banker or on the buyer.

Negotiation of Documents
Article 4 of the Uniform Customs and Practice (Brochure 500) makes it very clear that, "In credit operations all parties concerned deal with documents, and not with goods, services and/or other performances to which the documents may relate". Article 5 elaborates that "Instructions for the issuance of a credit, the credit itself, instructions for an amendment thereto, and the amendment itself, must be complete and precise". This Article further states that, "In order to guard against

confusion and misunderstanding, banks should discourage any attempt to include excessive details in the credit or in any amendment thereto". Article 15 ofUCP-500 has absolved the banks from the responsibility about a number of issues pertaining to documentation that, "Banks assume no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any document(s), or for the general and / or particular conditions stipulated in the document(s) or superimposed thereon; nor do they assume any liability or responsibility for the description, quantity, weight, quality, condition, packing, delivery, value or existence of the goods represented by any document(s), or for the good faith or acts and /or omissions, solvency, performance or standing of the consignors, the carriers, the forwarders, the consignees or the insurers of the goods, or any other person whomsoever." Moreover, the banks are not responsible for delay or loss in transmission of massage or any errors or omission in the transmission. Article 16 of UCP-500 states, "Banks assume no liability or responsibility for the consequences arising out of delay and/or loss in transit of any message (s), letter(s) or documents(s), or for delay, mutilation or other error (s) arising in the transmission of any telecommunication. Banks assume no liability' or responsibility for error(s) in translation and/or interpretation of technical terms, and reserve the right to transmit Credit terms without translating them.” Article 18 further clarifies the disclaimers: (a) Bank utilizing the service of another bank or other banks for the purpose of giving effect to the instructions of the Applicant does so for the account and at the risk of such applicant. (b) Banks assume no liability or responsibility should the instructions they transmit not be carried out, even if they have themselves taken the initiative in the choice of such other bank (s). (c)(i) A party instructing another party to perform services is liable for any charges, including commissions, fees, costs or expenses incurred by the instructed party in connection with its instructions (ii) where a Credit stipulates that such charges are for the account of a party other than the instructing party, and charges cannot be collected, the instructing party remains ultimately liable for the payment thereof. (d) The Applicant shall be bound by and liable to indemnify the banks against all obligations and responsibilities imposed by foreign laws and usages.

Remittances Against Imports
Under paragraph 8, Chapter XIII of the Exchange Control Manual (2002 edition), the authorised dealers in Pakistan have been permitted to establish letters of credit providing for: (a) payment to beneficiary either in the country of origin of goods or in the country of shipment of goods; (b) payment to the beneficiary in a third country, not being the country of origin of goods or the country of shipment provided they are satisfied that the payment to the beneficiary in a third country does not involve extra expenditure; (c) shipment of goods of the origin of more than one country provided the beneficiary remains the same and the shipment does not involve extra expenditure.

It should also be noted rhs: the letrers cf cred:: established as per (a), (b) and (c) above should provide for payment in any of the following manners: (a) in any foreign currency. (b) in Rupees for credit to the non-resident bank account of the country of the beneficiary or of the country of origin/shipment of goods. (c) Through ACU Clearing Arrangement where letter of credit envisages shipment directly from ACU member countries. 'Forward Exchange Transaction' means the transaction which is recorded (booked) on the day of the agreement/contract, but the actual delivery of the exchange is mutually settled to be effected at a later future date. This is the mutual agreement between the buyer and seller, whereby the buyer agrees to make the payment on or by the due date of the contract and when the seller confirms to arrange the delivery of the exchange at the option of the buyer by the due date of that contract or vice-versa. Forward exchange transaction entries are also recorded in the Exchange Position Book of the banks, and are reversed on the date when the transactions take place or are converted into 'ready transactions' by effecting deliveries at the contracted rates as per the agreement. Forward booking is resorted to guard against the risks involved in exchange fluctuations, i.e. the fluctuations in the rate of conversion of a local currency in terms of foreign currency.

Forward Booking Under Import
Under various paragraphs of Chapter IV of the Exchange Control Manual (2002) Authorized Dealers have been permitted to enter the contracts for purchase or sate of forward exchange in cover for imports into Pakistan for a period not less than one month, provided that: (i) The contracts are to cover payments for import of permissible comrnodaties into PaKistan. (ii) The authorised dealer has the documentary evidence that a firm order for goods to be imported in Pakistan has been placed and accepted. (iii) Forward cover is provided only on the day of opening the letter of credit for the import and not earlier or later. (iv) Forward cover facility may be provided in respect of those three categories of items which are mentioned at paragraph 8 Chapter XIX of the Exchange Control Manual (2002), and repatriable, Foreign Currency Loans mentioned in paragraph 15 of chapter XIX of the Manual. (iv) FForward cover may be provided even if the letter of credit has been opened through another Authorised Dealer or contract on the basis of a certificate from the concerned dealer, confirming that no forward cover has been provided against the transaction . 2. Authorised Dealers may provide forward cover for any duration. However, no forward transaction may be for a tenor of less than one month. (Para 2). 3. Renewal of forward exchange contracts beyond the period of six months may be allowed upto 12 monthsapplicable) without penalties in the form of swaps and charges to cover due interest etc. 4. forward , cover facility will not be available for merchanting business by Pakistani intermediary. However, Pakistani intermediary trader may open a "Special For 'w Currency Account" with any-Authorized Dealer in Pakistan and canalise the receipts and payments through this account.

(i) A weekly statement on the proforma given in APP-V. of the Exchange Control Manual, 2002 is to be submitted as soon as the contract is finalized. (ii) A statement in quintuplicate in the form given in APP V. of the Manual is to be submitted at the time of depositing rupee equivalent of the cost of the foreign currency. 5.No forward booking can be made for public or semi-public sector agencies, i.e. Government Departments (whether Federal or Provincial) or Semi Government agencies in connection with their imports. 6.The authorised dealers may make forward sales, covering imports under Usance Bills also, provided that: (a) the date of delivery is not beyond the date of maturity of the bills, (b) the forward exchange contract is for not more than 4 months in ary case, and (c) the documents received with the bills are complete and are in order and the Authorised Dealer is satisfied that the remittance of the amount of the bills on maturity will be permitted in view of the provisions of Chapter XIII of Exchange Control Manual, 2002. * 7. In all other ceases, prior approval must be obtained from the State Bank of Pakistan for booking import contracts. 8. Authorised Dealers will have to ensure that the documents received against such booked contracts are lodged and retired at the same booked rate of the contracts and that the relative import document is also accordingly marked in order to avoid ready sales against these booked contracts. 9.The relative letters of credit are also to distinguishably marked by providing booked letter of credit or Contract No. thereon, evidencing that the forward exchange has been booked against such letters of credit. 10. Similarly, Usance Bills drawn under booked contract should also be noted down accordingly to avoid application of ruling rates thereon instead of booked rates . 11.Forward booking can also be made available to shipping companies/agents on their declaration on the prescribed form of their anticipated freight earnings only. Such a booking will be made strictly for three months only, and no extension will be allowed in any case. The balance outstanding against such contracts will be accordingly closed out after the expiry of the due date and after the difference in exchange is recovered under intimation to the State Bank of Pakistan. 12.All the contracts booked with the clients are firm and must strictly be taken up by their due dates. In case of non-fulfilment of the contracts by the due dates, the contract should be closed out and the difference in exchange accordingly recovered. The intimation for closing out such contracts should be sent to the area-controller of the State Bank of Pakistan, to whom such forward bookings had already been reported on the Daily Return Form on the dates when such contracts were booked. 13.The contracts which are closed out prior to maturity, wholly or partially, should also be reported accordingly to the State Bank of Pakistan, giving full details as to why it was

impracticable for the contract 10 be taken up. recovered accordingly in such cases also.

Difference in exchange rate will be

14.The extension should not be granted unless the extended period of shipment of the goods is covered by a valid import contract or the extension of the letter of credit has been duly authorised by the State Bank of Pakistan. If the goods are on the Free List, the extensions should not be granted at all.

Forward Cover Against Exports: contracts for purchase of foreign currencies upto six and
half months forward may be entered into by authorised dealers provided that: (i) the contracts are to cover firm transactions involving theexportof commodities from Pakistan; (ii) the contracts are in respect of commodities which are shipped on consignment basis. In such cases, authorised dealers should ensure that the foreign currency purchased is within a reasonable approximationto the amount as declared on the Shipping Bill and the relevant export Form. Before booking forward exchange in respect of export, the banker must ensure that the exporter has either submitted a valid credit or a firm contract pertaining to export. A photostat copy of the contract must be retained by the banker for his record. Confirmed and Unconfirmed Letters of Credit: A confirmed credit contains a banker’s written confirmation. When such a credit is advised to the beneficiary through another banker, it does not carry the confirmation or guarantee of the advising banker unless it is so stated. The terms of confirmed credit cannot be altered without the consent of all the parties thereto. An unconfirmed credit is one which does not carry a banker’s confirmation. Revolving Credit: When the credit is issued for the fixed amount to be availed of within a fixed period, a fresh credit is necessary after the credit has been fully utilized. However, when the credit is so worded that the amount for which it is available automatically reverts to the original amount, it is termed as “Revolving Credits”. For instance, where the revolving credits is upto a limit of Rs.100,000 and bill for Rs.20,000 under the said credit is presented, the credit is automatically restored to its original amount Rs.100,000 as soon as the bill is honoured. All letters of credit must have the following common points: Name and address of beneficiary must be givan in full. The amount of the credit should be stated as to the currency in which it is available and whether it is available in one amount only or in several. The tenor of the credit must clearly indicate the date on which the credit is to cerase to be available. The place where it is effective and a final shipping date should also be inserted. It should be made clear whether the draft are to be drawn on the customer opening the credit or on the bank. It should also be ‘sight’ or of a stated tenor. The letter should clearly indicate that the credit is irrevocable, and the confirmation of the correspondent bank must be available to it.

Exact instruction must be given regarding the documents against which payment is to be made. If the bank is relying on the goods as security, it is essential that the document should be in such a form as to make that the security available. The supporting bill of lading should be “clean on board” and marked “freight prepaid”. The insurance policy should cover the CIF ( cost insurance and freight ) value of the goods. The details of the goods covered by the credit should be kept to the minimum, because the more details in the credit run greater the risk of irregularities. Instructions regarding part shipment and trans shipment should be fully stated in the credit. Instruction should state whether the shipment is to be FOB (free on board), in which case the name of ports of loading and discharge must both be stated. In case of CIF, the port of destination should be clearly mentioned. Instruction should be obtained from the customer whether the credit is to be advised by air mail or cable, or by any other method. Generally, the banks in Pakistan obtain these instructions on a form of application prescribed for the credit. This form should be signed as an agreement by a competent person.

Principles and Forms of Lending. Principles of lending: Since the commercial banks mainly provide short term working capital to
trade, commercial and industry they should see that their lending solve the borrower’s financial problem. In doing so the bank should not assume the role of a partner in the business, but should return their primary status as a commercial financer only. Basically there are five principles which must be observed while advancing money to the borrowers. They are 1.Safety 2.Liquidity 3.Dispersal 4.Security 5.remuneration or Profitability

Safety
Bankers funds comprise mainly of money borrowed from numerous customers on various accounts, such as Current Account, Savings Bank Account, Call Deposit Account etc. It indicates that whatever money the banker holds is that of his customers who have entrusted the banker with it only because they have full confidence in the expert handling of money by their banker. Therefore, they have to observe the principle of ‘Safety First’. The bankers must be very careful and ensure that his depositor money is advanced to safe hands where the risk of loss does not exist. The five elements of character, capacity, capital, condition and cash flow can help a banker in arriving at a conclusion regarding the safety of funds allowed by him as advance.

Character: It is the most important factor in determining the safety of advance, for there is no
substitute for character. A borrower’s character can indicate his intention to repay the advance, since his honesty and integrity is of primary importance. If the past record of the borrower shows that his

integrity has been questionable, the banker should avoid him, specially when the securities offered by him are inadequate in covering the full amount of advance. It is obligatory on the banker to ensure that his borrower is a person of character and has intention to repay the money borrowed, including the agreed return thereon. This again can be judged with the help of his past record, his experience in that particular line, and lastly, the reputation he has built for himself in his business circles. If the limit is commensurate with the capital invested in the business, within the purview of this framework, a banker can presume that his money is safe in the hands of such a borrower.

Capacity: This is the management ability factor which how successful a businessman has been in
the past and what the future possibilities are. A businessman may not have vast financial resource, but with sound management abilities, including the insight into a specific business, he may make his business very profitable. Bankers should carefully evaluate the management structure, and succession plan for the key person in the management, to determine the capacity of the borrower. On the other hand if the person has no insight into a particular business for which he wants to borrow funds from the banker, and has no management ability, there are more chance of loss to the banker.

Capital: This is the monetary base, of the business, because the money invested by the proprietors
represent their faith in the business and its future. The banker should know not only the extent of funds from the entrepreneurs but the source of these funds. This can be confirmed from the analysis of financial statements. The role of commercial banks is to provide short term capital for trade, commerce and industry, yet some borrowers would insist that their banker provide most of the capital required. This makes the banker a partner. As such the banker must consider whether the amount requested for is reasonable in relation to the borrower’s own resource or investments.

Conditions: Business depends not only on internal but external factor also. These factors influence
the regular and seasonal activity of the business conditions. Weather condition effect the agriculture, which ultimately influences the textile, food, garments and a number of business and industries. Sometimes externals conditions influence the specific industries and there may be unusual boost or slowdown due to change in demand. Therefore, the bankers must carefully examine the conditions to foresee the situation which may effect the repayment of the advanced funds by the borrower.

Cash-Flows: The banker must evaluate whether the business will generate sufficient funds to
repay the principal amount of loan and agreed markup. In order to study this important element banker must study the cash flow statement and analyse the credit cycle being maintained by the borrower with his principal buyers. It is necessary to evaluate it because if the proceed of the goods sold are credited into the accounts of business the borrower will be able to repay his loan.

Liquidity
Liquidity means the possibilities of recovering the advance in emergency, because all the money borrowed by the customer is repayable in lump sum on demand. Generally, the borrowers repay their loans steadily, and the funds thus released can be used to allow fresh loan to other borrowers. Nevertheless, the banker must ensure that the money he is lending is not blocked for an undue long time, and that the borrowers are in such a financial position as to pay back all the amount outstanding against them on a short notice. In such a situation, it is very important for the banker to study his borrower’s assets to liquidity, because he would prefer to lend only for a short period in order to meet the shortfalls in the working capital, and not for acquiring fixed assets.

If the borrower asked for an advanced for the purchased of fixed assets, the banker should refuse because it shell not be possible for him to repay when the banker wants his customer to repay the amount. Hence, the banker must adhere to the consideration of the principle of liquidity very carefully.

Dispersal
As a principle, the dispersal of the amount of advances should be broadly based so that a large number of borrowing customers may benefit from the banker’s funds. The banker must ensure that his funds are not invested in only specific sector like textile industry, heavy engineering or agriculture etc. He must see that from his available funds he advances them to a wide range of sectors like commerce, industry, farming, agriculture, small business, house projects and various other financial concerns in order of priorities. Dispersal of advance is very necessary from the point of security as well, because it reduce the risk of recovery when something goes wrong in one particular sector or in one field.

Security
As a matter of professional vigilance the bankers must carefully examine each lending proposal and approve it on its own merit. However, the banker must carefully examine some cushion also to fall back upon in case of change in circumstances after disbursement of funds to the borrower. These changes may affect the safety and liquidity of the advance. Therefore, this cushion is to provide against such contingencies that the banker take security as a safety valve, so that he may realize it and recover the outstanding amount. This is possible if the banker has examined the security properly and calculated its value before approving the advance. It should always be kept in view that security provides a certain source of repayment against unexpected default by the borrower, and it is incorrect to consider and advance proposal from the point of view of security alone.

Remuneration
The banker needs sufficient earning to meet the following besides others: Return the payable to the money deposited with him. To meet various statutory monitory requirement under the banking law. Salaries and fringe benefits payable to the staff members. Overhead expenses and depreciation and maintenance of the fixed assets of the bank. An adequate sum to meet possible losses. Provision for a reserve fund to meet unforeseen contingencies. Payment of dividends to the shareholders. A major portion of the banker earning comes from the markup or returned charged on the money borrowed by the customers. The fixation of the rate of return to be charged for advances of various classes depends on the type of security offered to him and also on the duration for which the advance

ids allowed. When the security offered is sound and easily encashable, the banker may consider a lower rate of return on an advance for a fixed period as compared to that on an fluctuating overdraft. In order to meet his above mentioned expenses the banker run a great risk and he has to think twice that the money advanced should not become bad or doubtful. He should not lend his fund to the borrower with whom remuneration may be high, but also equally risky. On the other hand bankers should prefer a borrower who is willing to offer a higher rate of return on a comparatively lesser risk. Governments have been exercising credit supervision and control through central banks since the Second World War. The central banks allocates priorities for giving or not giving advances in a particular sector and regulates the minimum and maximum rate of return to be charged and the mergins to be retained by the lending bankers. This control may result in making it impossible to grant a particular advance, through it is perfectly sound from the point of view of banker’s own policy. Sometime it may also make it obligatory to advance in a particular sector where the banker is not ordinarily willing to accommodate the borrower. Credit control is very effectively exercised in Pakistan by the State Bank Of Pakistan, and the banker should never ignore any of the restriction issued by it. The central bank ensure that banks comply with its instruction and guidance for the credit control, and supervises the implementation through regular follow-up. The banks in Pakistan have to submit monthly, quarterly, half-yearly and annual returns to the State Bank Of Pakistan through which it supervises the credit operations in banks. Prudential Regulation No.25 has in fact, prescribed penalties for violation and irregularities by the bankers. However, they should not at the same time overlook the foregoing principles even while implementing the directives from the State Bank Of Pakistan.

FORMS OF LENDING
In addition to purchase and discounting of bills, bankers in Pakistan generally lend in the form of cash finance, over-drafts and loans.

Cash Finance (Cash Credit)
This is a very common form of borrowing by the commercial and industrial concerns, and it is made available either against pledge or hypothecation of goods, produce or merchandise. In cash finance, a borrower is allowed to borrow money from the banker upto a certain limit, either at once or as and required. The borrower prefers this form of lending due to the facility of paying markup or service charges only on the amount he actually utilizes. If the borrower does not utilize the full limit, the banker has to lose return on the un-utilized amount. In order to offset this loss the banker may provide for a suitable clause in the cash finance agreement, according to which the borrower has to pay markup or service charges on at least one-half or one quarter of the amount of cash finance limit allowed to him, even when he does not utilize that amount.

Overdraft
This is the most common form of bank lending. When a borrower requires temporary accommodation, his banker allows withdrawals on his account in excess of the balance which the borrowing customer has in credit, and an overdraft thus occurs. This accommodation is generally

allowed against collateral securities. When it is against collateral securities, it is called a “Secured Overdraft”, and when the borrowing customer cannot offer any collateral security except his personal security, the accommodation called a “Clean Overdraft”. The borrowing customer is in an advantageous position in an overdraft, because he has to pay service charges only on the balance outstanding against him. The main difference between a cash finance and overdraft lies in the fact that a cash finance is a bank finance used for long term by commercial and industrial concerns on the regular basis, while an overdraft is a temporary accommodation occasionally restored to.

Loans
When customer borrow from a banker a fixed amount repayable either in periodic instalments or in lump sum at a fixed future time, it is called a “Loan”. When bankers allow loan to their customer against collateral securities, they are called “Secured Loans”, and when no collateral securities in taken, they are called a “Clean Loan”. The amount of loan is placed at the borrower’s disposal in a lump sum for the period agreed upon, and the borrowing customer has to pay markup for his use, while the banker feels satisfied in lend money in fixed amount for definite short period against a satisfactory security. Though these are terms finance yet all bankers finances in Pakistan are payable generally on demand.

The loans may be ‘bridge loans’ or ‘participation loans’:
Bridge loans are the accommodation for interim period. Sometimes banker do not disburse the amount of the loan which they have sanctioned to the borrower due to delay or deficiencies in the completion of documentation formalities. Whereas the borrower needs the money badly. In such situation it is customary with the banks to arrange some loans for a temporary period to a borrower as a stop gap arrangement. This is called a “Bridge Loans”. Generally the banks charge the markup rate on this arrangement as the applicable to cash finance. Participation loans is an arrangement where the number of banks join together to arrange funds for the borrower. Some industries projects are huge and the amount of loans they requires is so large that no bank could afford or would like to sanction to entire limit singly. In such cash to or more banks join together to lend jointly to one borrower in certain agreed ratio against a common security. Such loans are called ‘participation loans’. The consortium has a participating banker as the leader whose share is usually the largest. The asset or securities of the borrower are charged jointly and several in the same ratio as the contribution of the participating bank. A consortium agreement is also drawn up among the members specifying the mode of sharing risk and also the remuneration. This system has not been quite popular in Pakistan also.

Purchase and Discounting of the Bills
Bankers in Pakistan purchase and discount bills of exchange as a part of financing function. They also purchase out-standing cheques of reliable customer. When bills of exchange are accompanied by document of title to goods, they are called “documentation bills of exchanges”, otherwise “clean bills of exchanges”. If a bill of exchange is payable on demand, it is a “demand bill”, if otherwise, it is a “usance bills”. Some businessmen hand-over their bills, clean or documentary, to their banks foe

collection. It takes time till the bills are realized and the proceed are the credited into the customer’s accounts. This causes strain on the business financial resources temporarily. Banks allow the facility of purchasing bills from such regular customers and sanction in the favor a regular limit of “bills purchased”. Before sanctioning the limit bank satisfy themselves as to the credit worthiness of the bills. A suitable margin is also retained be the banks. ‘Bill purchased’ facility does not make the bankers purchaser or owners of the bills. In fact banks hold these bills as security for the advance they have made. Usance bill with maturity period of 90 days or so after date or sight are taken over by the banks and paid as discount to the parties before the date of maturity. This facility is called ‘bills discounting’, and sanctioned for very selected customers only. When discounting the banks deduct amount at the mentioned discount rate and the balance is paid to the party. After discounting the bills should be immediately sent for acceptance to the drawers or makers. However, the banks collect the bills from the drawer on maturity for full amount, and the difference between the present worth and the amount of the bills represent earnings for the bank for the period for which the bill was to run. Discounting of unsence bills, in fact is a clean advance, and banks allow this facility on credit worthiness, standing, and means of indorses, as also the drawers or makers who are to pay the bills on maturity.

Securities for Advances
Banks in Pakistan lend money in the form of ‘clean advance’ against promissory notes, as well as ‘secured advances’ against tangible and marketable securities. The bankers prefer such securities which do not run the risk of general depreciations due to market fluctuations because security is considered to be on insurance against as emergency. The concept of security for banks advance in undergoing consumer needs, small business, and small farmers, where security oriented feasibility and repayment capacity of the project or the borrower are the main consideration.

Classification of Securities
The securities have been classified according to the functional or operational aspects as under:

1. Personal or Intangible securities: These are personal exclusive undertaking by some
party to pay the amount of advances outstanding against a borrower. A demand promissory note, bills of exchange or a bond, guarantee and indemnity are some of the known forms of personal or intangible securities.

2. Tangible Securities: These are the securities which can be realized from sale or transfer.
Shares, stock land, buildings and goods are popularly known tangible securities.

3. Prime securities: These are also known as primary securities. These are main cover for
advanced and they are deposited by the borrower himself. When a depositor for term deposits offers his term deposit receipt to cover an advance, it is the primary security.

4. Collateral Securities: These are the securities provide as an additional cover for an
advance where either the security is not very stable in value, or where the realization of the securities to cover the outstanding amount of advance is difficult. Collaterals may be deposited by the third party also. A borrower may arrange the deposit of approved share owned by the third party for cover against his advance from a banker. In case of default by the borrowers, bank has the authority to sell these share and adjust the advance.

5. Movable Security: These are the securities which are legally and physically both in
possession of lending bank. Paper securities. Term deposit receipts, goods, vehicles merchandise are examples of these securities. and

6. Immovable Securities: These are the securities where the legal possession or

right to takeover is entrusted to the lending bank, but the physical possession remains with the borrowers. When a borrower offers a title document of land and building as the cover for the advance, the banks hold the document and authority to take the property in possession but for all practical purposes the property remains with the borrower. Based on the above classification, securities are in the following legal forms:

INTEREST FREE (OR ISLAMIC) BANKING
The Holy Qur'an forbids the dealings on riba and many a Muslim Jurists consider such dealings a crime fit for capital punishment. Although many Pakistanis expressed their feelings of revulsion against interest also which has been equated with riba yet they had to carry on their transactions on this basis for lack of alternatives. However, efforts are now being made in Pakistan to develop a banking system in consonance with the value system of Islamic Shari’ah. A change-over to Islamic principles, therefore, involves, a complete transformation in the nature and mechanics of interest based banking. The interest free system envisages the gainful use of one's savings with others on the basis of profit and loss sharing in a defined manner. Effective from January 01, 1981, the Nationalized Commercial Banks and now all other commercial banks in Pakistan have introduced the5 Profit and Loss Sharing (PLS) Deposit Scheme, the salient features of which are as under: Profit & Loss Sharing (PLS) Deposits:' The Commercial Banks are accepting the Savings and Term Deposits under this system in the following manner; 1. PLS - Savings Accounts: Any eligible citizen in Pakistan can open this account with a minimum ofRs.100/- This amount of money is confirmed as the initial deposit. There is no limit on the maximum amount of money that can be deposited in a PLS-Savings Account. PLS Savings Accounts can also be opened for charitable institutions, provident and other funds of benevolent nature; of the Local Bodies, Autonomous Corporations, companies, associations, educational institutions, firms etc.. All the PLS Savings Accounts are allotted distinctivenumber and in order to be eligible for sharing profit or loss, the accounts must have a running minimum-credit balance of Rs-100/- each. The proportion of the profit or loss on PLS Savings Account is determined by the banks once every7 six months i.e. as on 30th June and 31 st December each year. There is no limit on withdrawals from PLS Savings Accounts and depositor are allowed to withdraw the money any number of times, within the available balances

In order to maintain these accounts, new "Rules for PLS Savings Accounts" has been introduced. 2. PLS Term Deposits Accounts: The Commercial Banks accept deposits in multiples ofRs.1.000/- in these accounts. The minimum period for the PLS Term Deposits Accounts SIs 3 months and it variesas under: (a) For 6 months and over but less than one year (b) For 1 year and over but less than two years (c)) For 2 years ana over DUI isss man J years (d) For 3 years and over but less than 4 years (e) For 4 years and over but less than 5 years (f) 5 years and over These accounts can be opened either by depositing cash or by conversion of an existing interest bearing deposit. Profit and loss is determined and distributed half yearly i.e. as on 30th June and 31 st December each year. The depositors are issued Term Deposits Receipts and if the receipt is encashed before the date of maturity without completing the minimum period of six months, and the deposit is withdrawn from the PLS System the depositor is not entitled to sharing any profit or loss. A set of rules have been introduced to cover the PLS Term Deposits accounts also. Investment of PLS Deposits The PLS deposits are required to be invested in the following areas of operations with effect from January 01,1981: (i) Commodiry operations of Federal and Provincial Governments and their agencies on the basis of mark-up in prices. (ii) Export bills purchased/negotiated under letters of credit on the basis of exchange-rate difference on Foreign Currency Bills and Commission on Rupee Bills. (iii) Investment in ordinary shares, NIT Units, Participation Term Certificates and in PLS based Transactions of the Investment Corporation of Pakistan on the basis of dividend or profit and loss sharing. (iv) Providing finance to House Building Finance Corporation on the basis of profit and loss sharing during the relevant period. The avenues of investment of PLS Deposits were further expanded later on and from March. 1981 the following areas were brought under this scheme: (i) Documentary Inland Bills drawn against letters of credit purchased/discounted on the basis of mark up. (ii) Financing of trading operations of Rice Export Corporation of Pakistan, Cotton Export Corporation and Trading Corporation of Pakistan, on the basis of mark-up in prices. (iii) Consortium Financing: The Nationalized and now privatised Commercia Banks have also started Consortium Financing since July, 1981, under the lead of a large commercial bank or Investment Corporation of Pakistan. Financing of fixed investment for trade and industry in private sector is being done under this arrangement through Participation Term Certificates. In some cases discounting of equity has also been undertaken.

Further Expansion in the Avenues of Investment:In 1982, the Nationalized and now privatised Commercial Banks further expanded their investment activities under PLS svstem and introduced the Musharika Financing and Hire Purchase Financing Scheme. Musharikah Financing: Section 2 of part I of the 1s-lamization of Financial Transactions Ordinance. 2002. defines Musharikah as, "a business relationship established under a contract by the mutual consent of the parties for sharing of profits and losses arising from a joint enterprise or venture". Therefore, 'Musharikah1- is an arrangement of business or its financing in which parties contribute their money or effort or skills or a combination of all these components. In this arrangement profits are shared in pro-agreed proportion but loss, if any, is borne by the capital only. Since no specific law has so far been enforced to regulate the conduct of Musharikah, is governed terms and conditions agreed upon by the parties concerned in the Musharikah agreement The 'Musharikah Financing Scheme' launched by the Nationalized and the Privatised Commercial Banks has been designed to meet the working capital requirements of trade and industry in the corporate sector only. Since the financing of Musharikah is being done from the PLS deposits banks are very carefully examining that the line of business of the borrower should not be repugnant to Shari'ah.The Musharikah financing scheme launched by the Nationalized and the disinvested Commercial Banks stipulates that the capital provided by the banks shall be in the form of a checking account like a cash credit or overdraft account in which the deposits and withdrawals of funds are at the convenience of the borrowing company, whether a public limited or private limited. Management: Musharikah agreement stipulates that the entire management or operation of the Musharikah business shal! remain with the borrowing company and the banks shall evaluate and monitor its performance. The banks are thus maintaining their debtor and creditor relationship as required in the Banking Companies (Amendment) Ordinance, 1962, and Third Amendment Ordinance of 1980. The banks are giving due recognition to the managerial skills and good performance of the borrowing company, and a portion of the profit is being awarded to the company as 'Management Fee' or 'Management Bonus'. Sharing of Profit: Profit sharing ratios are determined in accordance with the profit projections compatible Vv'ilh the company's past performance or in the light of future plans keeping in view the general economic climate. The capital provided by the banks is not a part of company's equity but investment to the working capital, therefore, the profit will be shared strictly in proportion to the capital of the company. The companies generally prepare their final accounts once in a year. therefore, bank's share on Musharika investments becomes receivable only once in a year, however, the Musharikah Agreement stipulates that the companies shall provisionally pay the bank's share in profits at the projected rate at the end of each calendar quarter. The final adjustment is however made from the payment of the last quarter of company's accounting year. If the profit earned by a company is more than the projected figures a little more shall be paid to the bank in the last quarter, and if the profit earned is less than projected bank shall be paid a smaller sum at the end of the last quarter. Banks allow a rebate to the companies for prompt payment. Sharing in Loss: The system has some in-built checks to'avoid the losses, however, in case a company suffers a loss, it will be shared by the bank strictly in proportion to the totals of the daily products of bank's Musharikah investment and company's own capital. The accounting for loss can be done in two ways: (a) by debiting it to the company's reserve, if any, and (b) by debiting company's capital, if there is no reserve.

(a) If a company has a reserve fund, the company's share in loss can be debited to it and bank's share in loss can be debited to the Musharikah investment account of the bank in the books of the company. The bank, in turn shall debit the amount of loss to its PLS income account, providing credit to Musharikah investment account of the company in the books of the bank. This wili reduce the balance in Musharikah investment account by the extent of bank's share in loss. (b) In case a company has no reserve fund where the-amount of company's share of loss could be debited, the loss will be carried over in the balance sheet as a fictitious asset as it cannot be debited to company's capital. However, the banks have adopted a standard procedure for accounting of loss in Musharikah financing. Under this procedure the loss suffered by a company may be carried forward as a fictitious asset in company's balance sheet in accordance with usual accounting practice but the bank's and company's share in loss shall be shown separately. Bank's Musharikah investment account in the company's books shall be reduced to the extent of bank's share in loss and the company shall issue redeemable shares for the amount in favour of the bank and it will balance the liability side of the company's balance sheet. Ijarah (Leasing) Section 2 (X-10) of the Islamization of Financial Transaction Ordinance,2002, defines 'Ijara' as "an agreement whereby a person agrees to transfer the usufruct of a property to another person for a mutually agreed rent, terms, and condition while the ownership of the corpus of the leased property remains vested in lessor." Hence it is the form for financing the capital assets. In this-form the bank (the lessor) purchases a specific property or asset for a specified time. Then the asset is leased to customer (lessee) for a specified rent for the duration of its economic life. The bank (lessor) retains the ownership of the asset and the customer (lessee) has the right to use it as long as it pays the rentals as per agreement. At the end of the specified period the asset reverts back to the bank (lessor), however, quite often the customer (ies-see) is given an option to purchase the asset from the bank (lessor) at a mutually agreed amount. At present five different types of leases, as per requirement of the customer (lessee), are popularly acceptable. They are Operating Lease, Financial or Finance Lease, Sale-and-Lease-Back. Full Service Lease and Leveraged Lease. Hire Purchase Financing (Ijarah Wa Iqtina) The Musharikah investment was introduced for financing the working capital requirements of trade and industry. Since November 1982. the Nationalized and now all the Commercial Banks have introduced anotner scneme ofHire-Purchase financing for the fixed investment needs of various sectors of the economy. Under this scheme the banks consider the financing of various types of machinery, equipment and commercial and industrial vehicles etc., both imported as well as manufactured in Pakistan. The salient features of the scheme are as under: 1. Fixation of Monthly Rental/Hire Instalment:: It is so fixed that the actual amount invested by the bank alongwith some rental income is fully amortised during the validity of the agreement and within the normal useful life of the article concerned. In fixing the monthly instalments to be paid by the hirer, banks link the rental income of the bank with the profitability of the hirer's business. The grace period, if any, allowed for the commencement of deposit of instalment by the hirer and to-. tal period agreed for the amortisation of banks' investment is also taken into account. 2. Ownership of the article: The property in the article financed continues to vest in the bank till ownership is transferred by the bank in favour of the hirer on payment of all the agreed instalments or a settlement is reached in any other form.

3. Registration of vehicles: Vehicles financed under this scheme are registered in the joint names of the bank and the hirer, bank as the owner and user as hire-purchaser. 4. Insurance: All articles financed under the scheme are kept fully insured in the name of the bank by the hirer at his own expenses. In case of vehicles financed under this scheme the hirer is to keep such vehicle comprehensively insured in the joint names of the bank and the hirer. A bank clause is to be attached in all insurance policies. 5. Default: In the event of default as mentioned in article IV of the Hire Purchase Agreement, the " banks are entitled to terminate agreement and may, at their absolute discretion, proceed to retake the possession of the article and also to recover the defaulted hire instalments or rent from the hirer together with such expenses, costs and damages as may have accrued, incurred and sustained by the bank. In case the hire agreement is terminated before the expiry of the hire period, the hirer is bound to hand over the physical possession of the article to the bank in good working condition (6) Income: The hirer is to deposit a certain amount of monthly instalment from a given date in his Hire Purchase Finance Account. The sanctioning authority will separately advise the amount of monthly rental which will be debited to the hirer's Hire Purchase Finance Account every month from the date of commencement of deposit of hire instalment by the hirer and credited to PLS Income Account. Mudarabah Financing: Mudarabah is business in which a person participates with his money while the other with his skill or efforts or both his skill and efforts. NIT Units and Mutual Funds are the best example ofModarba in Pakistan. Section 2(14-1) of the Islamization of Financial Transactions Ordinance, 2002, defines 'Mudarabah* as "an agreement in which a person participates with his money and another with his enterprise and/ or expertise including banks, unit rusts, mutual funds, or any other person or institution, by whatever name called". Types of Modarba: At present the following two types ofModarba are quite common: Multipurpose Modarba which has more than one objective or purpose Specific-purpose Modarba which is established for a specific purpose. Modarba Companies; Banks and Financial institutions are not authorised to float a Modarba. Only such companies which are registered as a Modarba Company can do so . These companies are registered under the Modarba Companies ( Flotation and Control) Ordinance. 1980, which prescribes the following conditions for registration: (i) Modarba Company can be in the public or private sector. (ii) It should be Registered with the Registrar, Joint Stock Companies under the relevant laws. (iii) It should be engaged in floating and managing Modarba only and no other business. (iv) Its paid-up capital should not be less than Rs. 10.00 Million (Rupees One Crore). (v) The members of management and staff should not have been convicted of fraud, a breach of trust or offences involving moral turpitude. (vi) The directors, officers and other employees should not have been adjudged insolvent, or suspended payment or compounded with their creditor. (vii) The promoters should be persons of means and integrity, possessing the required knowledge and skill of the business, (viii) The directors and officers of the Modarba company, or their relatives shall not obtain loans, advances or credit form the Modarba fund or against iis security. (ix) Profit and Loss Account and the balance sheet alongwith auditor's and company's report shall be sent to all the Modarba Certificate holders within six months from the close of accounting period.

Murabaha (Bai Muwajjal) Section 2(15-i) of the Islamization of Financial Trans actions Ordinance, 2002, defines a Murabaha as, "a sale of goods by a person to another under an arrangement whereby the seller is obliged to disclose to the buyer the cost of goods sold and an agreed margin of profit included in the sale price of goods agreed to be sold , either on cash basis or on a deferred payment basis." This is the form designed specially to finance trade and working capital needs. In this form the bank provides finance for the purchase of goods, imports and raw material etc. either directly to the supplier or through the customer, and when the goods. and other items of imports etc. arrive they are sold to the customer at the price which includes markup also. Since the customer makes the payment at a later date Murahaba is also called 'BaiMuwajjal or deferred payment transaction.The customer can pay the amount either in lumpsum or in instalments, as per terms and conditions of the agreement between the banker and the customer. Progress of the System Further steps are being taken to provide legal coverage to the Interest Free or Islamic Banking System in Pakistan.• Promulgation of lslamization of Financial Transactions Ordinance, 2002, is a very significant move in this direction. The preamble of this law states categorily that "it is expedient to take such measures as may be necessary to restructure the national economy on the basis of Islamic Injunctions as laid down in the Holy Quran and the Sunnaninin pursuance of Clause(f) Article 38 of me Constitution of Islamic Republic of Pakistan, 1973, and to bring all financial laws and financial transactions in conformity with the injunctions of Islam". Section 2 (ii) of part I defines the mechanism to implement the system through a Shariah Board, which has been established under the Prohibition of Riba Ordinance, 2002. Section 4 of part II of the Financial Transactions Ordinance, 2002, identifies Shariah Compliant modes of Financing, as under: (a) Musharikah (b) Mudarabah (c) Equity participation in a company (d) Salam (e) Istisna (h)Musawamah

(f) Ijara (Leasing)

(g) Murabaha

however, this section further authorises the Federal Government, the State Bank of Pakistan or SECP (Security and Exchange Commission of Pakistan ) to develop other Shariah compliant modes or forms of financial arrangements or transactions for general or specific purposes. The Federal Government, the State Bank of Pakistan and Security and Exchange Commission have been entrusted with the responsibility of issuing direction relating to Shariah Complaint modes of investment and financing from time to time in consultation with the Shariah Board. i The new modes mentioned in this ordinance are now defined as under: Istisna: Financial Transactions Ordinance, 2002, defines "Istusna" as "advance payment of goods to be manufactured. assembled, built or constructed, or caused so to be done, at an agreed price, in which the goods with specifications are to be delivered at a specified future date and place". This mode of financing specifically caters for manufacturing or building of a specified commodity and its delivery or availability at an agreed future date and place. It is not necessary in Istisna that the full price is paid in advance, however, once the agreement has been finalised the parties cannot back out. This mode of financing can be applied in housing finance and financing for machinery and plants, where the delivery of the built or manufactured units is to be effected in future.

Salam (Advance payment against delivery): Section 2(XIV) of the Ordinance defines it as, "a sale whereby the seller agrees to supply specified goods to a buyer by a future date in consideration of price paid in advance at a time specified in the contract." Thus it is evident that the buyer does not get his specific goods on the spot, and the seller undertakes to supply the specific goods to the buyer at a future date against the price fully paid in advance. This mode of financing is best suited for the needs of small business, traders, and farmers. Miisawamah: Section 2 (i-16) of the Islamization of Financial Transactions Ordinance, 2002, defines it as, "a sale of goods by a seller to a buyer at a price agreed upon at the time of sale, without reference to the cost of goods sold". This mode is also trade related and can be applied in wholesale transactions.