Cheque

Open cheque

An open cheque is one that can be cashed over the counter at the bank. The holder of the cheque can present it directly and receive cash.

Closed cheque (Crossed cheque)

A closed cheque has two parallel lines drawn across its face, often with the words "Account Payee" written between them. It must be deposited directly into the payee's bank account and cannot be cashed immediately at the bank counter.

Types of crossed cheque

i. General crossing cheque:

A general crossing cheque has two parallel lines drawn across its face with or without additional words like "and company" or "not negotiable." This type of cheque must be deposited directly into a bank account and cannot be cashed at the counter. It increases the security of the cheque because the money will only be credited to a bank account.

ii. Special crossing cheque:

A special crossing cheque has the name of a particular bank written between the two parallel lines. This means the cheque can only be deposited through the bank specifically named. It provides even greater security because only the mentioned bank can handle the cheque.

Stale cheques

A stale cheque is a cheque that has been outstanding for more than six months from the date it was written. When a cheque becomes stale, banks will refuse to honor it because it is considered outdated. To cash such a cheque, the drawer must issue a new cheque to the payee.

Post dated cheques

A post dated cheque is a cheque that bears a future date rather than the date it was issued. If it is presented to the bank before the date written on it, the bank will not honor it until that date arrives. Post dated cheques are often used for future payments or installment agreements.

Stopped cheques

A stopped cheque is a cheque for which the drawer has given instructions to the bank not to make payment. This may happen if the drawer suspects the cheque is lost, stolen, or if there is a dispute with the payee. Stopping a cheque ensures that unauthorized payments are avoided.

Blank cheques

A blank cheque is a cheque that has been signed by the drawer but the amount in words and figures has not been filled in. Blank cheques are very risky because anyone who gets possession of the cheque can fill in any amount and withdraw money from the account unless the cheque is crossed to prevent misuse.

Forged cheques

A forged cheque is a cheque that has been illegally created or signed by a fraudster to withdraw money from someone else's account. Forgery involves imitating the drawer's signature or altering the cheque's details. Therefore, it is important for account holders to keep their cheque books safe to prevent such frauds.

Lost cheque

A lost cheque occurs when a cheque is misplaced or stolen before it is cashed or deposited. In such cases, the drawer should immediately inform the bank to stop the cheque from being processed. If the lost cheque was crossed, it would be safer because the finder cannot easily cash it.

i. Drawer:

The drawer is the person who writes and signs the cheque. The drawer instructs the bank (drawee) to pay a certain amount of money to a specific person or organization. The drawer must have an account with the bank from which the money will be withdrawn.

ii. Drawee:

The drawee is the bank on which the cheque is drawn. It is the financial institution responsible for paying the amount specified on the cheque when it is presented for payment, provided the drawer has sufficient funds.

iii. Payee:

The payee is the person or entity to whom the cheque is made payable. The payee can either cash the cheque or deposit it into their own bank account. The payee's name is usually written on the cheque by the drawer.

iv. Endorser:

The endorser is a person (usually the payee) who signs the back of the cheque to transfer its ownership to another person. By endorsing the cheque, the endorser authorizes the bank to pay the cheque amount to another party.

v. Endorsee:

The endorsee is the third party to whom the endorsed cheque is transferred. After endorsement, the endorsee becomes the new holder of the cheque and has the right to cash it or deposit it into their account.

This is a tag from which a cheque is formed. It remains in the cheque book to remind the account holder of the people to whom cheques have been issued, the date, and the amount issued out. The counter foil does not require signing since it stays in the cheque book.

i. Convenience: Writing a cheque is quicker and more convenient than counting and handling large sums of banknotes and coins, especially for businesses and large transactions.

ii. Safety: A cheque is safer to use compared to carrying cash because if lost or stolen, it is harder for unauthorized persons to cash it, especially if it is crossed.

iii. Proof of Payment: A cheque acts as proof of payment because once it is processed and cleared by the bank, it provides evidence that the payment has been made.

iv. Easy to Carry: Cheques are lighter and easier to carry than carrying large amounts of physical cash, reducing the risk and effort involved in transporting money.

v. Storage: Cheques require very little storage space compared to bundles of cash, making it easier to manage financial documents.

vi. Easy to Transfer: Large sums of money can be easily and safely transferred from one party to another using a cheque, reducing the need for physically moving cash.

vii. Reference: The counterfoil or duplicate of the cheque remains in the cheque book, providing the drawer with a permanent record of the transaction for future reference.

viii. Easy to Pay Many People: An employer or organization can issue multiple cheques to pay different people, making salary or mass payment processes much simpler and organized.

ix. Easy to Send: Cheques can be easily sent through the postal system or other delivery means compared to sending physical cash, which is riskier.

x. It is Secure: By crossing a cheque, it becomes payable only into the account of the named payee, providing extra security and minimizing the risk of misuse by others.

Dishonouring a cheque occurs when a bank refuses to pay the money specified on the cheque for one or more reasons. Below are the reasons why a cheque may be dishonoured:

i. Insufficient Funds in the Drawer's Account: When the account holder (drawer) does not have enough funds in their bank account to cover the amount stated on the cheque, the bank will refuse to honor the cheque. This is one of the most common reasons for dishonour.

ii. Drawer is Bankrupt: If the drawer is declared bankrupt, their assets, including their bank account, may be frozen, which prevents the bank from honoring the cheque. This occurs when the drawer is unable to pay off their debts.

iii. Drawer is Dead: If the drawer has passed away, the bank will not honor any cheques written by the deceased, as they are no longer legally allowed to authorize payments.

iv. Post-Dated Cheque: If a cheque is presented for payment before the date mentioned on it (a post-dated cheque), the bank will dishonor it. The bank will only process the cheque once the stated date has arrived.

v. Error on the Cheque (Mismatch in Figures and Words): If the numerical amount on the cheque differs from the written words (e.g., the number "500" is written as "five hundred" in words), the cheque will be dishonoured. The bank will not process it unless both figures match exactly.

vi. Stale Cheque: A cheque becomes stale if it has remained unpresented for over six months from the date written on it. After this period, the bank will refuse to honor it, as it is considered invalid.

vii. Signature Mismatch: If the signature on the cheque does not match the signature that is on file with the bank (the specimen signature), the bank will not process the cheque. This could be due to fraud or a simple error by the drawer.

Making a cheque secure is important to prevent fraud, theft, or unauthorized access to funds. Here are some ways to ensure the security of a cheque:

i. Crossing the Cheques: Crossing a cheque is one of the most effective ways to secure it. A crossed cheque can only be deposited into the account of the payee, meaning it cannot be cashed directly at the bank counter. This adds a layer of security, as it limits the ability to cash the cheque to the account holder.

ii. Avoid Leaving Unnecessary Gaps Between Words and Figures: When writing a cheque, it's important to avoid leaving unnecessary spaces or gaps between the words and figures. If there are large gaps, someone could potentially insert additional numbers or words, changing the amount. By filling the entire line, it reduces the risk of tampering.

iii. Avoid Signing Blank Cheques: A blank cheque can be very risky as someone could fill in any amount and withdraw funds from your account. Always make sure that the amount is written on the cheque before you sign it. If a cheque is accidentally left blank, it can be misused by fraudsters to access your money.

iv. Protect Your Signature: Your signature is a key element of cheque security. If someone gains unauthorized access to your signature, they could potentially forge it on a fraudulent cheque. Therefore, avoid exposing your signature unnecessarily and always ensure that you sign cheques in a secure environment.

v. Report Loss of Cheques or Cheque Books: If your cheque or cheque book is lost or stolen, it's important to report it immediately to both the bank and the police. This helps prevent someone from using the lost cheque or book to withdraw money from your account. The bank can block the cheque to prevent any unauthorized withdrawals.

vi. Keep the Cheque Book Secure: Your cheque book should be stored safely, preferably locked away in a secure location where only you have access to it. Do not leave your cheque book in easily accessible places, and make sure the keys to any lock are kept away from others to prevent unauthorized access.

There are several reasons why many people, particularly in Tanzania, may be reluctant to accept payments via cheque. Some of these reasons are rooted in practical issues, financial infrastructure, and trust concerns:

i. Lack of Information: A significant portion of Tanzania's population, especially in rural areas, consists of peasants and people with limited exposure to formal banking. Many of these individuals have not been educated about banking systems, including how cheques work. Due to a lack of knowledge, they may be unwilling to accept cheques, fearing they won't understand how to process them or even what to do in case of issues.

ii. Limited Bank Coverage: In Tanzania, banks are mostly concentrated in major cities or business hubs, leaving rural areas and small towns underserved. As a result, people in these areas may not have easy access to banking services. Without access to local branches or ATMs to cash cheques, people in these areas would be hesitant to accept cheques, as they cannot easily convert them into cash or use them for payments.

iii. Loss of Trust in Banks: Several closures of inefficient or mismanaged banks in the past have caused many people to lose trust in the banking system. There's a fear that if a cheque is issued, especially a post-dated one, the bank might close before the cheque is cashed, leading to the loss of money. The distrust in the banking system makes people wary of accepting cheques, as they cannot be sure the cheque will be honored.

iv. Lack of Bank Accounts: To deposit a cheque, the recipient must have a bank account, as cheques are meant to be deposited into accounts for clearing. Many people, particularly in rural areas or among the lower-income population, do not have bank accounts. Since the current banking policies require all cheques to be deposited into an account for clearing, individuals without accounts would not be able to accept cheque payments, making them reluctant to do so.

v. Small Transaction Amounts: Most people in Tanzania earn relatively low wages and engage in small-scale transactions. For example, a person might not find it convenient to use a cheque for a small purchase like a loaf of bread costing 700 shillings. The perceived inconvenience of dealing with a cheque for small transactions, which could involve additional time and effort to deposit and clear the cheque, makes many individuals reluctant to accept cheques, especially for everyday purchases.

vi. Time Consumption: People who require immediate access to their money may find cheques unattractive. Unlike cash, which can be used instantly, a cheque requires time to clear. The process of depositing a cheque, waiting for it to clear, and only then gaining access to the funds can take several days. For individuals or businesses in urgent need of funds, this delay can be a major drawback, leading them to avoid accepting cheques.