Banking Law and Practice CAT 1 & 2 1

Mount University
Kenya
SCHOOL OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING

AND FINANCE

TITLE: BANKING LAWS AND PRACTICE

CAT 1 AND 2

a) Your customer Mr. Mumba requests for a loan to expand his mini shop. You receive all the

necessary confirmations / explanations and you are prepared to assist. As security he offers a

personal guarantee from his cousin Mtuta supported by charge over a residential home in

Nairobi.

(i) Describe the procedure you would follow in perfecting the guarantee as security. (8 marks)

1. Carry out status inquiries on the guarantor via their bank to ascertain recoverability if

there is an occurrence of default.

2. Make sure execution at the bank branch where the customer holds their account.

3. Acquire the guarantor's signature witnessed, minimizing future disputes on matters

authenticity.

4. Ascertain the guarantee form covers all liabilities on a progressive basis and is either

joint, several, or both, depending on the agreed structure.

5. For the residential property security:

o Obtain title documents and a solicitor’s report on the property.

o Conduct valuation of the land.

o Register the legal mortgage (if applicable) and serve notice to insurers

acknowledging the bank's interest.

(ii) Describe the main differences in the procedure if the guarantee was a limited liability

company. (2 marks)

 The bank should ensure that in the MOA of the company, there is power to guarantee

or not; otherwise, the guarantee is ultra vires and is invalid.

 The guarantee has to be performed either under seal, or by a board resolution of

authorized persons; a certified copy of such resolution has to be annexed to the

guarantee instrument

b) This morning your new securities offices Mr. Kamau attended her first committee meeting

over which several facilities secured by the issue of company debentures were approved.

Describe the main features of a debenture to her. (10 marks)

1. A written acknowledgement of the debt held by a company. This acknowledgment is

usually under seal.

2. Could be unsecured of secured. Fixed and floating charges offer security over assets

such as stock and land.

3. Debentures incorporates terms for payment, the interest charged, and remedies is

situations of default.

4. In instances of liquidation of a company, debentures are paid first prior sorting out of

shareholders.

5. Also, these debt instruments can create a charge over certain assets of a company,

which is enforceable through registration.

6. Another feature is a company must verify or check its power on matters borrowing

and issuing of debenture as per MOA and AOA.

7. Debentures must be registered within 21 days under the Companies Registry to be valid

against a liquidator or creditor.

8. Debentures are enforceable through sale of charged assets or appointment of a receiver

in event of default.

9. Bank evaluates the ability to repay and good margin level on asset valuation of a

company.

10. MOA and AOA guide how debentures are legally executed.

c) This morning a garnishee order nisi was served on you to attach the balance of Kim Gacheu.

You have an account in that name but you have a customer Kimani Gacheu, commonly known

as Kim Gacheu. Later in the day cheques were presented on this account that would, if paid have

left only a very small balance on the account. Required: Giving reasons, describe the course of

action that you should take. (5 marks)

Under the garnishee procedures:

1. In case your order does not have a perfect match to the name of your customer e.g. ("Kim

Gacheu") yet you have a cu stomer called "Kimani Gacheu" and normally referred to as

"Kim Gacheu," you should approach the issue sensitively [p. 25].

2. The prescribed legal name should be consistent with the account holder to have an

efficient order.

3. Until one hears clarification:

4. To prevent their liability, the account ought to be frozen.

5. Cheques advanced are supposed not to get honoured until identification and currency of

the order is rectified.

6. The bank will have to cement the identity match with legal counsel or even court

elucidation and then proceed.

d) Mr. Ali has been your customer of Mali Mingi bank for many years and uses his Automated

Teller Machine (ATM) card frequently for cash withdrawals. On receiving last month‟s

statement, he came to the bank disputing 5 ATM withdrawals made on his account early in the

month. Explain the bank‟s position. ( 5 marks)

1. The stance of the bank would normally have depended on having proper electronic

records of the ATM withdrawals.

2. Mr. Ali needs to provide proof of illegal activities (e.g. loss / theft of ATM card, PIN

hacking).

3. The bank is supposed to have measures to verify the loading of the ATMs so that any

transaction does not occur without authorization and unless it is proved that there has

been some fault (e.g. skimming operation, illegal capture of PINs) and the customer has

to bear the losses.

4. The customer is expected to exercise due diligence with regard to card security (e.g.

safe storage, report loss in a timely manner).

5. Provided that when the withdrawals were verified and did not exceed the limits set up

on the account, and that there is no negligence in the bank, the liability might not be a

matter of the bank.