Banking Law - CBO - Chapter 1

Chapter 1 – Banking and Business Law
• Bank- Customer Relationships

• Rights of Banks and Customers
What is a Bank?
• A bank is an institution that takes deposits and makes loans.
• Banks deal in money and provides other financial services.
• Banks deal with people and offer them services.
• Therefore Banks have duties and rights with regard to the people they deal with.
The people also have rights and responsibilities vis-à-vis Banks.
• All these are guided by laws:
– Banking Law and Commercial laws.
• There are two kinds of persons:
– Natural persons (Individuals or human beings)
– Legal persons or Juridical persons (Companies)
Banking Law & Business Laws

1. Federal Law No. 10 of 1980 concerning the Central Bank, The Monetary System and
Organization of Banking. (Central Bank Law)
2. Federal Law No. 2 of 2015 abrogating Federal Law No. 8 of 1984 concerning Commercial
Companies. (Commercial Companies Law)
3. Federal Law No. 5 of the 1985 concerning Civil Transactions. (Civil Code) - pertains to civil or
private transactions; transactions of individuals. Deals with commercial transactions or
transactions for profit making companies
4. Federal Law No. 18 of 1993 concerning Commercial Transactions. (Commercial Law).
Commercial Companies Act deals with the types of juridical persons.
5. UAE Central Bank Regulations.
Banking is a business relationship
• Every interaction between the Bank and the persons is called a transaction.
 The relationship of the Bank and the persons it offers services is a business relationship
and must be guided by the laws.
The Central Bank Law
• The Central Bank Law defines the role of the Central Bank of UAE.
• it deals with oversight and licensing of Banks.
• It guides Banks as to what businesses they can do and what businesses they are
prohibited from.
As per Article 78 of the Central Bank Law (1980)
• It shall be considered a commercial bank any institution which, customarily, receives
funds from the public in the form of demand, under notice, or time deposits, or which
carries on the placement of debt instruments or deposit certificates to be used, in whole
or in part, for its account and at its risk, for granting loans and advances.
As per Article 78 of the Central Bank Law (1980)
• Commercial banks also carry on operations relating to the issue and collection of
cheques, place public or private bonds, trade in foreign exchange and precious metals,
or any other operations allowed for commercial banks either by law or by customary
banking practice.
Banks carry on many other activities unless they are prohibited by the Law.
For example, Commercial Banks may not engage in non- banking operations such as: -
• Carrying on commercial or industrial activities on their own account;
• Acquiring, owning, or trading goods, unless acquisition is for settlement of debts due
from others.
• Each type of activity or service offered by the Bank results in unique business
relationships.
• Usually the Banks deal with only those persons who hold an account with the Bank.
• These persons are called the customers of the Bank.
Customer of a Bank
• Customer of a bank is a person who has entered into a contract with a banker for
opening of an account in his or her name.
• The person can be a natural person or a legal person.
Banker Customer Relationship
Other (legal) relationships

• Lease
• Advisory
• Suretyship
• Guarantee
• Pledge
• Assignment
• Mortgage
The Laws that regulate Banker-Customer Relationships

• Federal Law No. 5 of the 1985 concerning Civil Transactions. (Civil Code)
• Federal Law No. 18 of 1993 concerning Commercial Transactions. (Commercial Code)
• Central Bank Regulations
• “Civil" is generally regarded as referring to private, personal transactions, and
• “Commercial" to transactions conducted in the course of business.
• A transaction can be both, depending on the standpoint of the contracting party.
The Commercial Code
• The Commercial Code contains detailed provisions on banking operations, which
include, among others, provisions governing bank deposits, bank accounts, guarantees,
documentary credits, bills of exchange, loans, promissory notes and cheques.
Relationship as debtor and creditor
• On the opening of an account, the banker assumes the position of a debtor.
• The money deposited by the customer with the banker is, in legal terms, lent by the
customer to the banker, who makes use of the same according to his discretion.
• The banker can use the money in any manner he likes and the customer cannot direct
the Bank.
A bank cash deposit is a contract by which one person delivers a sum of money, by any means
of payment, to the bank which undertakes to return it upon request or according to the agreed
conditions. (Article 371 of the Commercial Code)
• Accordingly, the depositor is the creditor and the Bank is the borrower.
• Customer-Depositor- Creditor
• Bank- Debtor-Borrower
• The creditor has the right to demand back his money from the banker, and the banker is
under and obligation to repay the debt as and when he is required to do so.
• But it is not necessary that the repayment is made in terms of the same currency notes
and coins.
• A depositor remains a creditor of his banker so long as his account carries a credit
balance.
Loan Relationship
• Banker’s relationship with the customer is reversed as soon as the customer’s account is
overdrawn.
• Banker becomes creditor of the customer who has taken a loan from the banker and
continues in that capacity till the loan is repaid.
• As the loans and advances granted by a banker are usually secured by the tangible
assets of the borrower, the banker becomes a secured creditor of his customer.
The Commercial Code describes a loan: -
‘A bank loan is a contract pursuant to which the bank delivers to the borrower a sum of money
as a loan or enters such sum in the credit side to his account with the bank according to the
conditions and time limits agreed. (Article 409 of the Commercial Code)
• This is a Creditor-Debtor relationship.
• Bank is the Lender and the Customer is the Borrower.
Bailment
• Bailer- Bailee Relationship
Article 962 of the Civil Code defines Bailment as follows:
‘Bailment is a contract whereby the bailor authorizes another person to take care of his
property and whereby that other person is obliged to take care of the property and to return
the thing itself.’
Bailor hands over the asset to the Bailee for safekeeping.
Article 967of the Civil Code - (1) The bailee must, in the safekeeping of the property bailed, take
the care of the reasonable man in and about the safekeeping of his own property, and he must
place it in a place of safety appropriate to such property.
The Bailee may stipulate remuneration for safekeeping.
Principal – Agent Relationship
A banker acts as an agent of his customer and performs a number of agency functions for the
convenience of his customers.
For example,
• he buys or sells securities on behalf of his customer,
• collects cheques on his behalf and makes payment of various dues of his customers,
insurance premium etc.
• Also transfers money
Agency is a contract whereby the principal puts another person (agent) in the place of himself
in an ascertained, permitted dealing. (Art. 924 of the Civil Code)
• The Bank is the agent and must act upon the instructions of the Customer (Principal).
Other Relationships
• Rental of safe deposit boxes is a contract pursuant to which the bank undertakes to
place a certain specified safe deposit box at the disposal of its customer, the lessee, to
be used for a certain specified period against a fixed remuneration. (Art 467 of the
Commercial Code)
• Advisory Relationship - Bank (Advisor) advises Customers (Clients)

Rights of Bankers
1. The bank shall acquire ownership of the deposited money, and it shall be entitled to
dispose of the money thereof for the needs of its own activity with an obligation to
return it’s like to the depositor. (Art 371(2) of the Commercial Code)
2. A money deposit contract does not vest the depositor with the right to draw from the
bank sums in excess of the sums deposited. (Art 377 of the Commercial Code)
3. The borrower shall be bound to repay the loan and its interest to the bank within such
time limits and according to such conditions as are agreed. (Art 409 of the Commercial
Code)
4. The bank may withhold the contents of the safe deposit box and shall have a priority
right over the price resulting from the sale of its contents for collection of the rent and
the accruing expenses.
5. A cash deposit shall be considered a debt, and clearance may be effected between a
cash deposit and a debt owed to the bank by the depositor; and agreement to the
contrary shall be null and void. (Art 373 of the Commercial Code)
This is the statement of set-off.
6. The bank shall be entitled to a remuneration against the obligations it assumes. (Art.
462 of the Commercial Code)
7. Bank shall have the right to withhold the financial securities deposited and refrain from
returning same until recovery of its right. (Art 462(2) of the Commercial Code - Lien)
8. A cheque may not be issued unless the drawer has with the drawee, at the time of
drawing the cheque, sufficient money. (Art 599 of the Commercial Code)
9. Banks may set a minimum credit balance for each account, and impose charges if such
minimum was not maintained. (CBUAE Regulations)
10. The Bank has the right to terminate the customer’s account.
11. The Bank can freeze the customer’s account if the money is obtained through illegal
means.
12. Customer must provide all required information about himself which the Bank can
verify.
13. The customer agrees to keep the cheque book at a safe place and agrees to prevent
fraudulent misuse of the same. (Regulations)
Duties of Bankers
1. The bank undertakes to return the deposit to the customer upon request or according
to the agreed conditions. (Article 371 of the Commercial Code)
2. The bank is bound to send to the customer a statement of the balance of the account
once every month, unless otherwise agreed upon Article 378 of the Commercial Code)
3. The money deposit must be returned immediately upon request; the depositor may at
any time dispose of the balance or any part thereof. (Article 372 of the Commercial
Code)
4. The Bank will issue to the customer a cheque book for use in his account. (Regulations)
5. The Bank will ensure security of the customer’s information. (Regulations)
6. Bank must collect the customer’s cheques. (Regulations)
7. Bank must pay interest on savings and fixed deposits. (Regulations)
8. Bank must take care of the customer’s affairs in accordance with its contents, and in a
manner consistent with the requirements of good faith”.
9. Bank must follow written instructions of customer for transfer of funds. Article 380 of
the Commercial Code)
10. The Bank must pay the cheques issued by customer. (Article 620 of the Commercial
Code)
Duty of Secrecy
• The Bank must not disclose about his customer, except:
• To professional advisers and service providers of permitted parties;
• to any court or tribunal or regulatory or governmental agency;
• to agencies authorized by customer.
“Rights of Banks are duties of customers “
“Duties of Banks are rights of customers “
Claim about erroneous entries in accounts

• In case of denial and lack of legitimate excuse, legal action for the rectification of the
current account shall not be heard in regard to entries made one year after the date of
receipt of the statement of account, even if such legal action is based on an error,
omission or repetition of such entries;
• Where during such period one party have notified the other that he clings to his right of
rectification of the account, or where the customer proves, regarding a current account
opened with a bank, that throughout the said period he did not receive from the bank
any statement of account; in such both cases the action shall prescribe after the lapse of
five years from the date of closure of the account. (Art 408 of the Commercial Code)

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Chapter 1 – Banking and Business Law

• Bank- Customer Relationships

Banking Law & Business Laws

Other (legal) relationships

The Laws that regulate Banker-Customer Relationships

• Advisory Relationship - Bank (Advisor) advises Customers (Clients)

5. The Bank will ensure security of the customer’s information. (Regulations)

6. Bank must collect the customer’s cheques. (Regulations)

7. Bank must pay interest on savings and fixed deposits. (Regulations)

Claim about erroneous entries in accounts

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