9.1 What is a cheque

A cheque is a written, unconditional order by a customer (the drawer) to his or her bank (the drawee) to pay a stated sum of money on demand to a named person (the payee) or to the bearer. Under the Bills of Exchange Act (Cap 27), a cheque is a bill of exchange drawn on a banker and payable on demand. Although electronic payments have reduced cheque use, cheques are still used by businesses, schools, county governments and individuals for supplier payments, rent and fees, and the teller must understand them thoroughly to accept deposits correctly. Example: a school bursar in Narok deposits a parent's cheque for Ksh 45,000 in fees at the school's bank, and the teller checks the cheque before accepting it.

Parties to a cheque

• Drawer: The account holder who writes and signs the cheque, ordering the bank to pay.
• Drawee: The bank on which the cheque is drawn, where the drawer's account is held; it pays the cheque if it is in order and funds are available.
• Payee: The person or organisation named on the cheque to receive the money.
• Endorser and endorsee: Where an order cheque is transferred, the payee who signs on the back is the endorser and the person it is transferred to is the endorsee.
• Collecting bank: The payee's bank, which presents the cheque for payment through clearing and credits the payee's account.

Essential features of a cheque

• In writing: It must be written or printed, on the bank's cheque form.
• Unconditional order: It must order payment without conditions; "pay if the goods arrive" is not a cheque.
• Drawn on a specified banker: The drawee bank and branch are printed on it.
• Sum certain in money: The amount must be definite, written in words and figures.
• Payable on demand: It is paid when presented, not at a future date.
• Signed by the drawer: It must carry the drawer's authorised signature or signatures according to the account mandate.
• Payable to a named person or bearer: It must state who is to be paid.
• Dated: The date determines when it can be presented and when it becomes stale.

Types of cheques

• Open (uncrossed) cheque: Can be paid in cash over the counter at the drawee branch to the payee or bearer.
• Bearer cheque: Payable to whoever presents it; risky because a lost cheque can be cashed by a finder.
• Order cheque: Payable to the named payee or to whoever the payee orders by endorsement.
• Crossed cheque: Has two parallel lines across the face and can only be paid into a bank account, not in cash.
• General crossing: Two parallel lines, with or without "and company"; payable into any bank account.
• Special crossing: The name of a particular bank is written between the lines; it can only be paid through that bank.
• Account payee only cheque: Crossed and marked "account payee only", meaning it must be credited only to the payee's own account; banks do not accept such cheques into third-party accounts.
• Banker's cheque: Drawn by a bank on itself, at a customer's request and against funds already debited, so it is more secure than a personal cheque.
• Post-dated cheque: Carries a future date and cannot be paid before that date.
• Stale cheque: Presented after its validity period, which by Kenyan banking practice is six months from the date of issue; it will be returned unpaid.

Cheques in the Kenyan payment system

• Cheque truncation: Kenyan banks clear cheques by image through the Automated Clearing House; the physical cheque stays with the collecting bank and only its image and data travel, which shortens clearing time.
• CTS-compliant cheques: Only cheques printed to the cheque truncation standard, with security features such as ultraviolet features, watermarks and a magnetic ink (MICR) code line, are accepted for clearing.
• Value limit: The Central Bank of Kenya set a maximum value of Ksh 1 million for a single cheque in clearing, so larger payments are made by RTGS or other electronic means.
• Clearing period: The payee's account is credited only after the cheque is cleared; until then the funds are uncleared and cannot normally be withdrawn.

Advantages and disadvantages of cheques

• Safety compared with cash: A crossed cheque cannot be cashed by a thief.
• Record of payment: The cheque and bank statement provide evidence of payment.
• Convenience for large or distant payments: Avoids carrying cash.
• Delay: Funds are not available until cleared.
• Risk of dishonour: The cheque may bounce for insufficient funds, and fraud by alteration or forgery is possible.