LO2: SOURCES OF BANKING LAW

Banking law, like most areas of law, does not come from a single source. It is built from several key origins that work together to form the legal framework for the banking industry. For an Assistant Banker, understanding these sources is vital for managing banker-customer relationships correctly.

a) Legislation (Statutes)

Legislation, also known as statute law, refers to laws that are formally created and passed by a country's parliament or legislature. It is one of the most important sources of banking law because it provides a clear and written set of rules that banks and their customers must follow. These laws are often very detailed and regulate specific areas of banking to ensure stability and fairness.

For example, in many countries, there are specific acts that govern the banking sector. These laws define what a bank is, what activities it can carry out, and what rules it must follow. They cover things like:

• The licensing and regulation of banks.
• The management of customer accounts.
• Rules on anti-money laundering and combating the financing of terrorism.
• Regulations for electronic payments and mobile banking.
• Laws that protect consumers from unfair practices.

These acts are a primary reference for any legal matter in banking. If there is a dispute, a court will first look to see what the relevant legislation says on the matter.

b) Judicial Precedence (Case Law)

Judicial precedence is a source of law that is created by judges in courts. When a judge makes a decision in a specific case, that decision becomes a precedent, or a rule, that must be followed by other judges in future cases with similar facts. This is a core part of the common law legal system. The principle is known as stare decisis, which is Latin for "to stand by things decided."

In banking, judicial precedence is very important because not every situation can be covered by legislation. When a new issue arises, or when a law is not clear, a court's ruling helps to clarify and develop the law. For example, a legal case might define what constitutes a "reasonable time" for a bank to clear a cheque, and that ruling then becomes a precedent that other banks and courts must follow.

How it works in practice:

• A legal case is brought before a court, for example, a dispute over a bank's duty of care to its customers.
• The judge hears the arguments and makes a ruling.
• The judge's reasoning and final decision form the precedent for all similar future cases.

Therefore, an Assistant Banker must not only understand legislation but also be aware of important court decisions that have shaped banking practice. These rulings help to fill in the gaps left by written law and provide a comprehensive legal framework.

c) Customary Law 📜

Customary law is a source of law based on the long-standing practices and customs of a community that have been accepted as legally binding. These traditions are not written down in legislation but are followed because of historical usage and a general belief that they represent the correct and proper way to do things.

While modern banking is primarily governed by legislation, custom and practice still play a role in banking law. Certain practices have become so ingrained in the banking industry that they are considered legally binding. For example, the custom of bankers to observe secrecy about their customers' accounts is a key part of the banker-customer relationship, even though it is now also protected by modern law. In some African countries, local business practices and customs, particularly in informal financial sectors, can also be considered a source of legal precedent.

d) Common Law 👩‍⚖️

Common law is a legal system that is based on judicial precedence (or case law), as opposed to statutes written by a legislature. It is a body of law created by judges through court decisions. When a judge makes a ruling, it becomes a precedent that judges in similar future cases must follow. This system allows the law to evolve and adapt to new situations over time.

In the context of banking law, common law is a foundational source. Many of the principles that define the banker-customer relationship, such as the duty of a bank to act with reasonable care, were not originally written in legislation but were developed and refined over centuries through a series of court cases. These principles have become so fundamental that they are now often codified (written into law) in modern banking legislation.

It is important to understand the relationship between common law and legislation. While legislation can override common law principles, the common law remains relevant for interpreting statutes, filling in gaps, and addressing issues not specifically covered by written law. For an Assistant Banker, being aware of common law principles is crucial for understanding the basic duties and responsibilities owed to customers.

Advantages And Disadvantages of Each Source of Banking Law

1. Legislation (Statutes) 📜

Advantages

1. Clarity and Certainty: Laws are written down, making them easy to understand and providing a clear legal framework for everyone.
2. Uniformity: Legislation applies to all banks and customers, ensuring a consistent and standardized approach across the entire financial system.
3. Responsiveness: It's a quick way to introduce new laws to handle major changes in the economy or technology (e.g., new rules for online banking).
4. Comprehensive: Legislation can cover a wide range of issues in a single, well-structured document.
5. Democratically Enacted: Laws are passed by elected officials, reflecting the will of the people and providing legitimacy.

Disadvantages

1. Inflexibility: Legislation can be slow to adapt to specific or unusual cases that weren't considered when the law was written.
2. Vague Language: The broad nature of a statute can sometimes lead to uncertainty, requiring a court to interpret its meaning.
3. Slow to Amend: Changing a law can be a long and complex political process, making it difficult to correct problems quickly.
4. Can be Politically Motivated: Laws may be influenced by political interests rather than what is best for the banking industry or its customers.
5. Risk of Gaps: A law may not foresee every possible scenario, leaving gaps that can only be filled by other sources of law.

2. Judicial Precedence (Case Law) ⚖️

Advantages

1. Flexibility: Judges can create new law to deal with unique cases not covered by existing legislation, allowing the law to evolve naturally.
2. Practical: The law is developed from real-world disputes, so it is grounded in practical applications and not just theory.
3. Detailed Principles: Court judgments provide a lot of detail and reasoning, offering a deeper and more precise understanding of legal principles.
4. Consistency: The principle of stare decisis ensures that similar cases are treated in a similar way, providing consistency in the legal system.
5. Fills Gaps: Case law fills in the gaps left by legislation, making the legal framework more complete.

Disadvantages

1. Slow Development: A new law can only be created when a case is brought to court, which can take a very long time.
2. Complexity: Understanding case law requires specialized legal knowledge. It can be hard to find and interpret the relevant precedents.
3. Inconsistency: Sometimes, different courts might make conflicting rulings, leading to confusion and uncertainty.
4. Reactive: This source of law is reactive, meaning a problem must occur and be taken to court before a legal principle can be established.
5. Rigidity: A precedent can be difficult to change, even if it has become outdated or seems unfair, and can only be overturned by a higher court.

3. Customary Law 🤝

Advantages

1. Practicality: It is based on practices that have worked for a long time and are generally accepted by those in the banking business.
2. Community-Driven: Customary law is created by the practices and beliefs of the community, reflecting what people see as right and just.
3. Efficiency: It can provide solutions to problems without the need for formal court proceedings or new legislation.
4. Evolutionary: It can adapt slowly over time as business practices change.
5. Informal: It can provide a quick and simple way to settle disputes.

Disadvantages

1. Unwritten: Because it is not written down, it can be difficult to prove in court, leading to disagreements about what the custom actually is.
2. Uncertainty: It lacks the clarity and certainty of legislation, which can cause confusion.
3. Limited Scope: It has a very limited role in modern, highly regulated banking, which requires formal, written rules.
4. Slow to Change: Traditions and customs are often resistant to change, even if they become outdated or inefficient.
5. Can be Discriminatory: Some old customs might be unfair or discriminatory to certain groups, and it can be hard to challenge them.

4. Common Law 👩‍⚖️

Advantages

1. Adaptability: It allows the law to evolve to meet the needs of a modern, changing society.
2. Fairness: It is based on a body of judgments and principles, ensuring a consistent application of justice.
3. Fills Legal Gaps: Common law provides a safety net, addressing issues not covered by legislation.
4. Comprehensive: Over centuries, it has built a detailed and rich body of legal principles that can be applied to many situations.
5. Practical: It is developed from practical disputes, ensuring it is relevant to real-life situations.

Disadvantages

1. Lack of Certainty: It can be difficult to predict how a judge will rule in a new situation where no exact precedent exists.
2. Slow: The legal process of a court case to set a new precedent can be very slow and expensive.
3. Rigidity: The principle of stare decisis can sometimes make the law too rigid, as judges are required to follow past decisions even if they seem unfair.
4. Reliance on Legal Expertise: It relies heavily on lawyers and judges to interpret past cases, making it less accessible to the public.
5. Bias: A judge's personal bias can sometimes influence a ruling, creating a precedent that may not be completely impartial.

Registration of a New Bank

To get a license for a new bank, a company must go through a formal and detailed process with the country's central bank, like the Reserve Bank of Zimbabwe (RBZ). The purpose of this is to ensure that only serious, well-capitalised, and professionally-run institutions are allowed to operate as banks.

The registration process can be broken down into three main stages:

Stage 1: The Preliminary Application

This is the initial step where the promoters or founders of the new bank submit a formal proposal to the central bank. The goal here is to get a provisional green light before going to the expense of a full application. This stage involves providing:

• A Detailed Business Plan: This document must explain the bank's vision, mission, and how it plans to operate. It should outline the type of banking services it will offer (e.g., commercial, merchant, or microfinance), its target market, and its long-term financial projections.
• Information on Promoters and Directors: The central bank will scrutinize the backgrounds of the people behind the new bank. They must be considered "fit and proper," meaning they have a good reputation, relevant experience in finance, and no criminal history.
• Proof of Capital: The promoters must show they have access to the minimum required capital, which is a significant amount set by the central bank. This ensures the bank is financially stable from the start.

Stage 2: The Formal Application

If the preliminary application is approved, the company can move to the full application. This stage is much more detailed and requires a lot of documentation. The central bank will conduct a thorough investigation into all aspects of the proposed bank. This includes submitting:

• Comprehensive Financial Statements: Detailed financial forecasts, including projected balance sheets, income statements, and cash flow statements for the first three to five years.
• Corporate Governance Structure: Documentation showing the proposed organizational structure, including the board of directors, management committees, and risk management policies.
• IT Systems and Security: A full plan of the bank's proposed IT infrastructure, including security protocols, data protection measures, and disaster recovery plans.
• Detailed Policies and Procedures: Manuals outlining how the bank will handle everything from loan applications to customer complaints, anti-money laundering (AML) and know-your-customer (KYC) procedures.

Stage 3: The Licensing and Commencement of Operations

After a successful review of the formal application, the central bank will grant the new bank a provisional license. This is a critical period where the bank must get ready for business. It involves:

• Inspection of Premises: The central bank will inspect the bank's physical premises to ensure they are secure and ready for operation.
• Final Verification: The bank will need to show that all its proposed systems, policies, and procedures are fully in place and operational.
• Granting of the Final License: Once all conditions are met, the central bank will issue the final banking license, allowing the bank to officially open its doors to the public.

This entire process is designed to protect the public from poorly managed banks and to maintain the integrity of the country's financial system.

Importance of Regulating Banks 🏛️

Bank regulation is crucial for maintaining the stability and integrity of a country's financial system. It involves a set of rules and guidelines that banks must follow, typically enforced by the country's central bank. Without regulation, the banking sector could be a source of economic instability, fraud, and a loss of public trust.

1. Protecting Depositors and Customers

The most important reason for regulating banks is to protect the money that people and businesses entrust to them. Regulations ensure that banks operate in a safe and sound manner, and they have enough capital to absorb potential losses. This prevents a scenario where a bank collapses and depositors lose their life savings. Deposit protection schemes are often part of this, where a certain amount of a customer's money is guaranteed by the government even if a bank fails.

2. Maintaining Financial Stability

Banks are interconnected, and the failure of one bank can have a domino effect, leading to a collapse of the entire financial system (known as a systemic crisis). Regulation helps to prevent this by ensuring banks do not take excessive risks. Regulations on capital adequacy and liquidity ensure that banks have enough cash on hand to meet their obligations, even during difficult times. This reduces the risk of a widespread banking crisis.

3. Promoting Competition and Efficiency

Regulation can also be used to promote fair competition within the banking sector. By setting clear rules, regulators can prevent monopolistic behaviour and ensure that no single bank has too much power. This encourages banks to be more efficient and to offer better services and lower prices to their customers.

4. Combating Financial Crime

Banks are a key battleground for fighting financial crime, such as money laundering and terrorism financing. Regulations require banks to implement strict Anti-Money Laundering (AML) and Know Your Customer (KYC) procedures. These rules force banks to verify the identity of their customers and report any suspicious transactions, making it much harder for criminals to use the financial system for illegal activities.

5. Ensuring Public Trust

Public trust is the foundation of the banking system. If people do not trust that their money is safe in a bank, they will stop using banks, which would be disastrous for the economy. By enforcing high standards of conduct, transparency, and accountability, regulation helps to build and maintain public confidence in the banking sector.