INSTITUTE OF PUBLIC ADMINISTRATION AND MANAGEMENT

(University of Sierra Leone)

Lecture Note Three (3)

IPAM-USL - 2022/23 AY

Module title ELEMENTS OF BANKING

MODULE CODE BAF 217

Level & YEAR B.SC BANKING AND FINANCE YEAR 1

Lecturers in Charge MR. ABDULLAH BAH & MR. ANDREW SQUIRE

Lecturers’ Contacts bahabdullah@ipam.edu.sl / andrewsquire27@gmail.com

+232 76625303 / +232 79175636
 LECTURE NOTE THREE (3)

NEGOTIABLE INSTRUMENTS

Unit 1: Bill of Exchange

Unit 2: Cheques

Introduction
The banking system is there as a network to facilitate efficiency and effectively of the payment mechanism anchored on the strength of
negotiability and transferability of financial securities. Negotiable instruments are often times near cash instruments that are acceptable means of
payments in transactions, as well as for debt settlement. Some are marketable instruments and they are also of different types and for different
purposes and parties. They have evolve over the years have taken their pride of place among transactions system mechanism.

WHAT IS A BILL OF EXCHANGE? According to the bill of exchange act of 1990, a bill of exchange is an unconditional order in writing
addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed
determinable future date, a sum certain in money to or to the order of a specified person or bearer.
 PARTIES IN A BILL OF EXCHANGE TRANSACTION
Drawer: this is the maker of the bill (i.e. the person who writes or draws the bill), he is usually a seller or creditor who is entitled to receive
money from the debtor. The drawer after writing the bill of exchange has to sign it to make it legal document.

Drawee: this is the person on whom the bill is drawn, the drawee is usually a purchaser or debtor (i.e. the person directed to pay the stated sum
on presentment of the bill). He is to accept the bill by signing on it, this makes it a legal document. He is not liable if he does not accept the bill

Acceptor: this is the party who accepts the bill of exchange by signing on it, it is common for the drawee to also be the acceptor but there are
rare cases where a third party may accept on behalf of the drawee.

Payee: this is the person to whom the amount stated on the bill is payable. The payee may also be the drawer (i.e. if he holds the bill till
maturity) or any other to whom the bill was endorsed (i.e. the holder in due course). Where the bill has being endorsed to a third party and the
drawee defaults in the payment of the bill, the payee has a right of recourse to drawer until the bill is paid by the drawee.

Endorser: this is a person who endorses a bill to another person by signing on its back, he may be the payee or to whom the bill has being
previously endorsed.
 CLASSIFICATION/ TYPES OF BILLS
 On the basis of period/time
1. Demand bill
2. Term Bill

Demand Bills: these are bills that become payable upon presentment to the drawee (i.e. bills payable on demand. The demand bill has no
maturity date or time for payment. They are also called sight Bills.
Term Bill: these are bills payable after the expiration of a specified time period, the maturity period (i.e. the tenor of the bill) is usually stated on
the bill.

 On the basis of documentary backing

Documentary bill
Clean bill
Documentary Bill: A documentary bill is one that is backed by trade documents such as a bill of lading, marine insurance policy, invoice and
other documents in order to confirm the authenticity of trade transactions that took place between the buyer and seller.

Clean Bill: A clean is a bill of exchange that is not accompanied by any trade document as evidence for authenticity of transaction. The interest
rate is usually higher than documentary Bills.
On the Basis Of purpose

1. Trade Bill
2. Accommodation Bill

Trade Bill:
Trade Bills are drawn for the purpose genuine trade transactions. (I.e. a bill drawn and accepted against the sale or purchase of goods on credit).

Accommodation Bill: A bill drawn, accepted or endorsed without any considerations, such bills do not involve any sale or purchase of goods.
They are meant for raising funds for one or both parties by discounting in the money market.

On the Basis of Place

1. Inland bill
2. Foreign bill

Inland bill: an Inland Bills is one whose parties are resident in the same country (i.e. the drawer, drawee, acceptor, payee, and endorsers are all
resident in the same country)
Foreign Bill: A foreign bill of exchange is one that is drawn in one country and accepted in another country, they are subdivided into Export
Bills and Import Bills. Export bills are drawn by an exporter on a party outside Nigeria, while Import Bills are bills drawn on importers in
Nigeria by exporters in another country.
On the Basis of the Payee
1. Order bill
2. Bearer bill

Order bill: An order bill is a bill payable to the individual whose name is written on it or to a third party by endorsement and delivery.
Bearer Bill: this is a bill payable to any person who is legally in the possession of the bill as the maturity as at the maturity date of the bill.

ENDORSEMENT OF A BILL OF EXCHANGE

This is the process of transferring a bill of exchange from one person to another such that the benefits written on the bill the becomes payable to
the new holder, the process requires the current holder or his authorized agent to append his signature on the back of the bill, this is followed by
the delivery of the instrument (i.e the transfer of the document).

Types of Endorsement
Blank Endorsement
This type does not specify the name of the individual to whom it is endorsed, thereby making it a bearers bill; the endorser simply signs his name
on the back of the bill. This kind of bill can be negotiated by delivery (i.e. the constructive or actual transfer of possession of the bill of
exchange).
Special endorsement: this type of endorsement carries the name(s) of the individual(s) to whom it is endorsed; it can be further negotiated to
another person by endorsement and delivery
Restrictive Endorsement: this type of endorsement carries the name(s) of the individual(s) to whom it is endorsed, it restricts the further
negotiation of the with a third party. It limits the right of the endorsee to transfer ownership of the bill.
Conditional Endorsement: this type of endorsement is dependent on the occurrence of certain event. However according to section 33 of the
bill of exchange act “where a bill purports to be endorsed conditionally, the condition may be disregarded by the payer and the payment to the
endorsee is valid whether the condition has being fulfilled or not.

DISCHARGE OF BILL OF EXCHANGE

A bill is discharged when all the orders it contains have been carried out. The discharge of bill releases the parties to a bill from liability. The
following are ways through which a bill can be discharged:
i. Where there is a payment in due course in due course by drawee or acceptor.
ii. Where the drawee or acceptor becomes the holder of the bill at or after maturity, this is referred to as the principle of “negotiation back”.
iii. Where through merger the acceptor becomes the holder of the bill at or after maturity.
iv. Where the holder or his authorized agent with the intention of discharging the bill cancels the name of the drawee.
v. Where there are material alteration on the bill such as change of date, or amount payable without the consent of the liable party.
vi. Where there is an express waiver or renunciation by the holder of the bill.
 CHEQUES
WHAT IS A CHEQUE?
A cheque is a bill of exchange drawn on a banker and payable on demand. It is one of the commonest negotiable instruments in Nigeria. It can
also be as an unconditional order in writing addressed by a customer to a bank/banker, signed by the customer issuing it, requiring the
bank/banker to pay on demand or at a fixed determinable future date, a sum certain in money to or to the order of a specified person or bearer.

CHARACTERISTICS OF A CHEQUE

A cheque should possess amongst other things the following attributes in order to ensure its payment:
1. Amounts in words and figure must correspond
2. It must be properly dated (i.e. the date must be current)
3. It must be properly signed by the drawer
4. Alterations must be confirmed by the drawer by signing such alterations
5. It must be signed by all the signatories if it is a company cheque
6. It must not be mutilated
7. The drawers account must be correctly specified
 PARTIES TO A CHEQUE
Drawer: this is the account holder that is the person who issues and signs the cheque.

Drawee: this refers to the banker/banker on whom the cheque is drawn, that is the party authorized to pay out the specified sum on presentment
of the cheque.

Payee: this is the party to whom the specified sum is to be paid, that is the part in whose benefit the cheque is issued.

TYPES OF CHEQUES
1. Open Cheques: An open cheque is one that is payable over the counter. Open cheques can easily be cashed, however open cheques are not a
very safe method of payment as they can be stolen and easily cashed they are also susceptible to fraud
2. Crossed Cheques: this type of cheques have two parallel transverse lines drawn across its face, the lines drawn across the face of the bill
signifies that the cheque is only payable through the bank and not payable over the counter. It is an indication that the drawee should pay the
specified sum into the account of the payee, So as to minimize fraud and guard against loss that would result from unauthorized possession and
cashing of the cheque.
 TYPES OF CROSSING
General crossing consist of two parallel transverse lines drawn across the face of the cheque with or without the words “and co”, “Not
Negotiable” or “Not negotiable and Co” written on it. General crossing allows payment to be made through any bank.
Special crossing consist of two parallel transverse lines drawn across the face of the cheque with words restricting its negotiability. Special
crossing allows payment to be made through the particular bank specified on the cheque.

Non-negotiable crossing: this does not imply that a cheque is not transferrable; cheques with non-negotiable crossing are negotiable so long as
their title is good. The holder of the cheque does not get a better title than the transferor had. Once the title of the transferor or endorser becomes
defective the title of the transferee is also affected hence the transferee cannot claim the right of a holder in due course.

Account payee crossing: an account payee crossing implies that the cheque can only be collected for the account of the payee specified in the
cheque; the banker can disregard the instruction at his only own risk and liability.

Order and Bearer’s Cheque: a bearers cheque is a cheque that is payable to the bearer (i.e. the individual who presents it before the bank), it
can be transferred by mere delivery. While an order cheque is one which the drawer or a subsequent specifies the individual to paid, it however
does not restrict the transferability of the cheques.
 Terminologies associated with cheque transactions
Stale Cheques: A cheque is said to be stale when it is presented after the expiration of the date specified on it. It implies that the cheque has
been in circulation for a considerable period of time without being presented to the bank at the appropriate time for payment. In other words stale
cheques are cheques whose validity period has elapsed or expired.

Post-Dated cheques: A post-dated cheque is one that is issued to the payee before the date stated on it, it is a cheque that is payable at a
specified future date. It should be noted on the part of the banker that post-dated cheques should not be cashed before the due date
Dishonoured cheques: a cheque is said to be dishonoured when it is presented to the bank for payment but the bank declined payment for
certain reasons, which may include: irregular signature, insufficient balance etc.
Countermand
Countermand written order, signed by the drawer (i.e. the customer) that is used by a drawer to notify the drawee (i.e. the bank) to stop the
payment of a cheque, he had previously issued. The bank ensures the order is properly signed before taking action.

SUMMARY
Negotiable instruments are of various types and they all aid the processes of making transaction easy. They have flexibility and transferability
features that most often involve two or three parties. They provide a convenient vehicle for transactions.