Clearing House – Importance of Clearing Department in Banking Industry
CLEARING HOUSE – IMPORTANCE OF CLEARING DEPARTMENT IN BANKING INDUSTRY: A CASE STUDY OF U. B. A. MAIN BRANCH ENUGU
A survey research was made in carrying this project, clearing department as a profit generating department in banking institution.
This research was carried out to reveal clearing as means of sustaining banks and suppressing frauds. The population size of the study comprises of all staff of Enugu main branch of United Bank for Africa PLC (UBA), which were 98 staff. And the sample size for the study was 79 staff.
Hypothetical statements were used to find out whether the clearing as a means of sustaining bank and suppressing fraud in banking institution.
These were about identifying whether clearing department really to describe how clearing department contribute in the profit of the banking institution, as was gotten from the questionnaires distributed to the staff.. from the result after the analysis it was concluded that clearing department should be known as one of profit generating departments in banking institution in general and United Bank of Africa PLC Enugu main branch in particular.
1.1 BACKGROUND OF THE STUDY
One of the functions of the commercial banks in Nigeria is clearing of cheques through Central Bank of Nigeria.
Clearing of cheque could be defined as the process by which the validity of cheque is confirmed before the collecting banker gave value to the value.
According to Nwabufor (1998:12): cheque clearing is necessary because some unscrupulous persons do issue cheques when they have no money in their accounts to back-up the cheque. He opined that due to this fact, banks need to device a means by which they will use to verify whether a cheque is actually backed up by deposits in the account of the person issuing out the cheque, and also that the cheques is properly drawn before they credit the account of the person depositing the cheques (drawee), this process means that the cheque when deposited, must get the drawer bank where the drawer has an account for verification.
It is only the bank that can confirm if there is enough money to carry the cheque by looking into the customers ledger account. They will also make sure that the cheque is properly drawn. He argued that if that bank is satisfied that there is enough money in the bank account of the drawer before the bank can get the value of the cheque.
1.2 STATEMENT OF THE PROBLEM
This function of cheque clearing is mainly carried out by clearing section of the current account department of funds transfer unit as many bank my name their own. Every commercial bank that issues and receives cheque must carry out this function of cheque clearing.
Apart from the use of notes and coins, debts are settled between parties by other means order, bill of exchange, travelers cheque, dividend warrant, promissory note, cheque issue, and bank draft. All these are negotiable instruments and when such instruments mentioned above are deposited into bank accounts the clearing department of the receiving bank has is as a duty to compile those instruments according to specification and passes them into the channel of the purpose of obtaining payment.
According to Anyanwaokoro (2001: 75) the processes involved in cheque clearing using single terms thus at the early stage of banking history, inter bank settlement were done directly between banks. He said that if the customer of one bank receives a cheque from the customer of another bank and pays the cheque into his account in his bank, his bank will take the cheque directly to the banks of the customer directly to the bank of the customer who issued the cheque or the drawer of the cheque.
The drawer’s bank will confirm whether or not that drawer has enough money in his account to carry the cheque. If these is money in he drawer’s account, they will credit the account of the presenters of the cheques bank or the drawee’s bank and drawee’s bank will in turn credit the drawee’s account; this process is too cumbersome and difficult, if for example, there are up to thirty commercial banks operating within a locality and several cheques were received by one of the banks, it will cost that bank too much time and money to go to all these banks one after the other to clear the cheques.
1.3 OBJECTIVE OF THE STUDY
For this difficulty, the central bank came to relieve from them such difficulty by introducing a clearing house where all the banks come together to clear their cheques in each working day. Each bank presents to the central bank the cheques of their banks paid into it by their customer to the payee bank.
The banks will thereby debit and credit each other’s account accordingly. With this process, payment by the use of negotiable instruments is made easy for the banks and cost is minimized.
Barley (1998: 62) reports that the banking institutions make money in clearing activities by charging commission on any cheque cleared. He made clear that the bank situated in an area where there is Central Bank branch do clear their cheques through his Central Bank Clearing System. This system enables cheques to be used for the settlement of debt between customers banking in different banks. He also made it known that for the banks’ cheque clearing system is a cheap and conveniented way of exchanging each other’s cheques. He opined also that there are some procedures, which is adopted by a bank which intends to clear cheques through the Central Clearing Houses.
1.4 SCOPE OF STUDY
PROCEDURE FOR CLEARING CHEQUES THROUGH CENTRAL CLEARING HOUSES.
(i) The bank will first receive cheques drawn on other banks but paid in by its customer.
(ii) The banks will list the cheques by maching them.
(iii) The cheques will then be sent to the clearing department of bank.
(iv) The following day after the cheques have been received and machined, the cheques are sent to the Central Bank for clearing by the banks representatives.
(v) The cheques will be exchanged with those cheques presented by other banks representatives that is, bank A will collect from the banks that brought bank A’s cheques and bank A will present to them all the cheques belonging to them which they received from their customers.
(vi) Presentation forms are completed and the respective debit and credit entries are made by the representative of every bank that comes for clearing at the Central Clearing House.
(vii) These cheques brought from the bank’s clearing house are sorted and sent to the respective branches of the same bank on whom he cheques are drawn.
(viii) The cheques are processed at the branch offices.
1.5 RESEARCH QUESTION
1. Is clearing department necessary in banking industries?
2. Do thy really waste time in the clearing house
1.6 HYPOTHESIS OF THE STUDY
Ho: The clearing department does not generate sufficient profits to banking institutions.
HI: The clearing department generates sufficient profit to the banking institution.
H0: Full computerization of the clearing department will not reduce the period if takes to clear cheques.
HI: Full computerization of the clearing department will reduce the period it takes to clear cheques.
There are some basic assumptions of this research which include:
(1) All the banking institution in the country have a clearing department.
(2) All the banking institution in the country are victims of problem of delays of the clearing houses during cheque clearing.
The main purpose of carrying out this research as initially stated is to pin point and discuss the major functions of the clearing department in the banking institutions in Nigeria and to show their contribution to the profit of these institutions.
This research study aims also at suggesting the ways of improving the operations of clearing department in banking institutions in Nigeria.
This research study is concerned with the clearing departments of the banking organization in Nigeria and on their cheque clearing. It will be limited to the staff of (UBA) United Banks for Africa PLC Enugu main Brach precisely.
1.8 SIGNIFICANCE OF THE STUDY
The findings of this study will be of immense benefit to the bakers their customers, the government and the countries economy in general with the improvement of the clearing system that will be suggested in this research, the delays and frustrations of the clearing exercise will be reduced. This will quicken the operations of the banks thereby generating more profits for the banks. In addition to this, the banks customers will be cleared and certified before collecting their money since these will be done as soon as the cheques are presented in clearing operations thereby increasing the capital base and profit of the banks.
The government will benefit from this increase in profit by taxing the increased profit of the banks and more revenue generated to the government. The government, when invested this revenue, there will be more money in the economy and more businesses thereby reducing unemployment.
In this write up, the researcher encountered a number of problems and constraints. The limited foreign literatures on the subject is the major problem among other problems encountered in this bank’s research study, other problems encountered are the cost of materials and transportation.
1.9 DEFINITION OF TERMS
(1) Banking Institutions: These are all types of financial institutions that do banking works to the customers. These banks include Central Banks, merchant banks, development bank, agricultural banks.
(2) Central Bank: This is the apex financial institution in Nigeria, which is responsible for printing and issuing Nigeria currency. They also do the work of clearing cheques for the commercial banks. Therefore, cheque clearing is done through the Central Bank of Nigeria
(3) Commercial Loans: These are the banks that deal with accepting deposits from customers and give bank credits to them also. They receive cheques from customers and clear them through Central Bank of Nigeria.
(4) Clearing Department: This is a department in the commercial banks where cheques are compiled, sorted and arranged for going to the clearing house where they are shared to the owners’ banks.
(5) Cheques Clearing: This is process of confirming validity of cheque before the collecting banker gives value to the cheque.
(6) Profit generating Department: This is any department in an organization that contributes to the profit of that organization.
(7) Profit: Profit could be defined as the surplus which becomes due to the owner or owners of the business as a result of a successful period of trading.
This chapter reviews literature relating to the themes and sub-theme of this study; major ideas of this section are grouped and presented under the following sub-headings.
2.1 THE NATURE AND CONCEPT OF CLEARING HOUSE AND SUSTAINING
This chapter contains the theoretical issues and discussions on the areas of the study. The chapter has the following sub-headings. Theoretical review. This covers the opinions, experiences, and information and theories of relevant authorities on the issues related to the cheque clearing exercise. The bulk of the theoretical framework was sourced form textbooks thesis, projects and seminar papers.
Empirical framework, which covered information on recent students on cheque clearing exercise.
2.2 ECONOMIC PROBLEMS OF CLEARING AND SUSTAINING
MILESTONES IN THE DEVELOPMENT OF THE CLEARING SYSTEM AN OVERVIEW
Nwosisi (1998: 115) refers to all the machinery and institutions involved in the collection and clearing cheques. He noted that cheques and other prescribed negotiable instruments used to obtain money from bankers go through the clearing system. He also noted that involvement of this central bank in the clearing exercise is a development that evolved over time. Nzeni and Agu (1998: 221) divided the origin of cheque clearing into periods; they include:
(a) The clearing in stage of periods (1771 – 1773) which begin in England between the periods mentioned above, at an inn in Lombard street, where clerks of private banks used to meet for refreshments. This later became a convenient place for the clerks also to exchange cheques with each other.
(b) The direct clearing stage or period when the process of clearing involved a collecting banker going from one bank to another to exchange cheque deposit by customers. At this time when there was no Central Banks, a banker wanting to collect a cheque or other credit instrument for his customer will take it direct by hand or by post to the paying banker who has to make necessary verifications and advice the banks on the fate o such cheques and other instrument.
(c) The clearing house stage or period which started from the establishment of the bank of England as a Central Bank in 1844 with the establishment of the bank of England (Central Bank) the clerks of the existing commercial banks began to meet at a place arranged by the bank of England along to meet at a place was designated the “Banker’s Clearing House”.
The bankers’ clearing house has now become a limited liability company. In Nigeria, the Central Bank of Nigeria at present provides a common meeting place for bankers in each clearing, are to meet for the exchange and settlement of clearing instruments
2.3 PROBLEMS OF THE MANAGEMENT
Izunna (1999: 114), according to him, the various cheques deposited for collection into the hands of bankers are classified into an in-house ad out –house cheque (or other bank, cheques. The banks usually have a separate cashier at the counter who receives cheques and other instruments, while other cashier at the counter receives cash; those cashiers that receive cheques and other prescribed instruments only are called “contra cashiers” or “dry counter” (Soneye 1998).
(a) In house cheque: the clearing techniques Nwosisi (1998: 16) defined any “in house” cheque as any cheque paid into the account of a customer with the same bank upon which the cheque is drawn.
A good example of it is where two customers of the same bank are involved one issuing the house cheque to another for settlement of debts or other obligations. These types of cheques do not need to be sent to clearing house for clearing. According to Odoh (1994: 222) the method of handling the cheques depends on whether the two accounts are kept in the same branch of the same bank or whether the accounts are kept at different branches of the same bank.
Where both accounts are kept in the same branch, the process of collecting the value of the cheque is very simple, the drawer’s ledger account is brought out for verification, which may be one manually or called up from the computer if the branch is computerized. If the cheque is properly drawn and there is sufficient amount in the account, the cheque is paid (Adigwe, 1997: 302) on the other hand, when an in-house cheques is drawn on another branch of the same bank, cheque is cleared through an internal settlement process.
This type of cheques received at the collecting branch is added to similar cheques received through the clearing house and forwarded to the paying branch (where the drawer’s account is kept) by means of sending letters. When the cheque gets to the drawee branch (or paying branch); the branch usually verifies the cheque by calling for the drawer’s ledger. If the cheques are properly drawn and there are sufficient funds in the account, the cheques are paid (Chukwu 1999: 62) the settlement of the amount is accomplished by debit and credit notes sent to the bank’s head office treasury department. By these, the colleting branch is credited, while the paying branch is debited (Izundu, 1998: 131) where a bank operates on-line computerized system, there is usually no need for settlement letter (sl.), the drawer’s account is automatically debited by the computer which also credits the payee’s account. Under an on-line system, cheque drawn on one branch can be paid at another branch, Iwquchukwu (1999: 142), they include
(a) Local cheque, which include those cheques and other instruments drawn upon another bank or bank branch that is located in the same town or locality with the collecting bankers. For instance, the United Bank for Africa PLC, Enugu Main Branch cheque is at Union Bank of Nigeria PLC Enugu. It is a local cheque because both the paying banker and the receiving banker are in the same town or locality. At present, such cheques take five working days to clear.
(b) Intra-state cheques, which are those cheques drawn on banks that are in the same state or locality and cleared in the same area covered by Central Banking Clearing House.
(c) Inter- State or other state cheques are cheques drawn on banks located in another state outside the clearing area or state. For instance, a cheque drawn on Afribank PLC. Enugu but deposited at First Bank PLC Onitsha Branch is an Inter-State cheques. This type of cheque takes 12 working days to clear.
2.2 THE VARIOUS METHODS OF CLEARING CHEQUES AND OTHER FINANCIAL DOCUMENTS.
There various methods or clearing cheques and other financial documents Chukwu (1999: 63) enumerated some techniques of clearing cheques; they are:
(a) Special Clearing or direct presentation this is applicable to cheques/financial documents drawn on banks in non-clearing areas.
(b) General or Bankers clearing methods, which in applicable to cheque/financial documents drawn on banks in the clearing areas.
(c) Correspondent bank clearing: The point to note however is that the clearing system is mainly concerned with the clearing of cheques or financial documents of other banks. In the clearing of cheques drawn on other banks and deposited with a banker for collection, the collecting baker can decide to clear the cheque by special clearing house or clearing through the correspondent bank.
(d) Special clearing or direct clearing: This is usually applied in situation where a customer wants to speed up the collection of his cheques, (Madu, 1998: 69). Special clearing system simply implies that the collecting banker will take the cheque, directly to the paying bankers to obtain the payment in respect of the cheque or to pay cash. In some cases they may decide to settle through the Central Bank or the Inter-Bank settlement company (Iwuchukwu, 1999: 143).
(e) General or Bankers’ clearing house: this method according to Izuanna (1999: 15) Involves the method by which the customer’s cheque is added to other cheques and jointly presented for clearing through the clearing houses.
In this case, no special attention is given to particular cheques and jointly presented for clearing through the clearing house since each cheque has to go through the normal clearing process. Each cheque has to wait until the required number of clearing days is completed. This method of clearing is more convenient since it saves times and resources for going from one bank to another.
Under this method, each banker takes othe rbakers cheques to him to the Central bank clearing house. These cheques going out to other banks are called “out” cheques. (Anyanwaokoro 2001: 224) while returning from the clearing house, each banker comes back with cheques drawn on him but which were deposited in other banks for collection such cheques are called “in” cheque (Odoh, 1994: 223).
The figure 2.1 below illustrates the movement of all member banks when clearing cheque. Each participating member can be a paying bank and a collecting bank, since at the clearing house, each bank gives cheques and collects cheques.
Agu (1998: 223), stated that the C. B. N. clearing system involves the collection of proceeds of cheques in a clearing instrument paid by bank customers in a clearing zone. According to him, the system (the C.B.N clearing system) involves the following stages:
1. Bank clearing clerks within a clearing zone assembled at the Central Bank Clearing House by 9 am on every working day.
2. At the clearing house, these banks representatives will exchange of cheque exercise that are fully detailed on their presentation forms.
3. The position of every bank with other banks at the clearing house will be established and declared by the Central Bank official at the end of the exchange of cheque exercise.
4. The Central Bank official will take steps to ensure that all accounts are balanced, by preparing the necessary debit or credit entries of the C.B.N account of those banks involved.
At the end of the clearing session, banks clearing clerks will return to their respective banks with all cheques collected (exchange at the clearing house) for onward dispatch to their various branches.
2.3 CORRESPONDENT BANK CLEARING
Some banks such as the community banks, that are members of the clearing houses clear their customer cheques through correspondents banks are members of the bankers clearing house.
Hence, the community banks and the merchant banks clear their customer’s cheques through their correspondent commercial banks in particular. The cheques deposited with the community banks are redeposited with their correspondent banks for clearing.
Ezekwe (1999: 118) reports that the correspondent bank clearing involves four stages.
1. The cheque is deposited into the clearing banks (e.g. the merchant bank or community banks).
2. The cheque is re-deposited into a correspondent bank (which is usually a commercial bank) which takes the cheque to the clearing house, from where it is presented to the paying bankers.
3. In sending the value, the paying banker credit the account of the correspondent bank then credits he bank of First deposit which is the collection banker.
4. The collecting banker credits the account of the depositor of that cheque. Figure 2.2 stages involves in the clearing of cheques through correspondent bank.
It is estimated that those banks which have adopted online banking concept in Nigeria had lost as much as N22.1 billion as at the end of September, 1997 as a result of the C.B.N current show clearing system (Agu, 1998: 225)
In Nigeria, it is hoped to reduce the period it takes to clear cheque through automated clearing system. In this regard, the Nigerian Interbank Funds Transfer and Settlement, (Okafor, 1995: 67). The aims and objectives of the company, include supporting and participating in the development of infrastructure of enhancing the speed and efficiency of the national payment system.
THE RULES GOVERNING THE CLEARING SYSTEM IN NIGERIA:
Orjih, (1996: 173), discussed concisely the rules governing the clearing system in Nigeria, these rules include the following:
(i) The rule for local clearing is that cheques sent on clearing should be cleared after 4 working days.
(ii) For stock clearing or intra-state clearing the rule is that the cheques should be assumed cleared after 12 working days. State clearing/intra-state clearing is a clearing process that is adopted when the banker involved in the clearing are located in the same state of the federation but not in the town.
(iii) The rule of country clearing of inter-state clearing is that a cheque sent for clearing under his arrangement is assumed to have been cleared after 21 working days.
2.6 EMPIRICAL FRAMEWORK
This section of the literature discusses the studies carried out by other researchers on the process of cheque clearing in Nigeria. Abiodun (1997: 15) carried out a study on the reliance of automated banking system to the commercial banks clearing practice.
THE MAJOR FINDINGS OF THE RESEARCH WERE AS FOLLOWS
(i) The introduction of the magnetic ink character recognition had enabled banks to sort cheques faster and send them as quickly as possible to the partial success recorded in clearing activities can be ascribed partly to his scheme.
(ii) It is hoped that this scheme will be introduced in all the clearing zones nationwide in order to achieve the expected nation payment system such as BAPS (Banker’s Automated Payment System) as it is being practiced in developed countries. Another study by Eze (1999: 50) on the C.B.N branches on a vast computer terminal to quicker the clearing process, a total of 116 banks officials were used as the sample size. It was recommended that to reform the clearing house and the payment the (C.B.N) should introduce an electronic system to handle the clearing exercise.
2.7 SUMMARY OF CLEARING SYSTEM
The report from Anyanwaokoro (2001: 26), revealed that on a normal working day, bank usually receives many cheques that are paid in by customers for collection. He noted that the process involved in presentation and clearing of those cheques are as follows:
(A) Day one, in which the following activities take place.
(i) Crossing and recoding of cheques.
(ii) Sorting and consolidation of cheques
(iii) Preparation of presentation forms
(B) Day two, the following events take place in the clearing house
(i) Exchange of cheques at the clearing house
(ii) Completion of presentation forms.
(iii) Balancing and completion of days clearing.
(iv) Verification and payment of cheques drawn on the branch
(v) Dispatch of other branch cheques
(C) Day three is the day for which all the unpaid cheques are returned back to the clearing house along with new cheques
(D) Day four and afterward is the day for the crediting of customer’s cleared cheques.
Cheques verification and important aspect of cheque clearing.
Cheque verification according to Okafor (1995: 66), is a relevant exercise in cheque clearing. After returning from the clearing house the banks representative usually record all the bank’s inward cheques colleced from the clearing house in the inward register. After this exercise, they (the clearing clerks) sort out the ledger and accounts of the drawers of those cheques that are drawn on the branch or call up the accounts from the computer (if is a computerized branch) the cheque (along with the ledgers) are then taken to the appropriate officers of the branch for payment.
If the cheques are regularly drawn and there is sufficient fund in the accounts, the officer signs his signature across he face of the cheque and the cheque is regarded as paid (Ezekwe, 1999: 120) in a situation where the cheque is irregular or where there is sufficient fund on the account, the officer signs his signature across the face of the cheque, and the cheque is regarded as not paid (Ezekwe, 1999: 120). In a situation where the cheque is irregular or where there is insufficient fund on the account, the cheque is usually returned to the clearing house the next day.
2.8 THE AUTOMATED CLEARING SYSTEM IN NIGERIA A CRITICAL EXAMINATION OF ITS IMPACTS ON THE COUNTRY’S BANKING SECTOR.
Izunna (1999: 17) reports that the C.B.N introduced a computer device called the magnetic ink character Reader (MICR) in 1990 to id the sorting of cheques by the banks.
The objective of the MICR cheque is to enable the bank sort cheques faster and send them as quickly as possible to drawee banks with this new technology the clearing of up-country cheques will be done in one day instead of the present eleven days.
This will help in redressing the payment difficulties currently experienced by the banks, particularly those banks that have already adopted the on line banking system (Ezekwe 1979: 121)
Due to the old used system by C.B.N, the process of cheques clearing is experiencing a several set back as could be seen from table 2.2 those banks which have adopted the on-line banking
2.9 SUMMARY OF RELATED REVIEWED LITERATURE.
Therefore, clearing department is considered necessary in the banking institution and it is advisable that every bank should have clearing department if no for anything but for the payment of banks.
DISCUSSION, IMPLICATION, RECOMMENDATIONS
This chapter contains the summary of the major findings of the research. The chapter also contains the conclusion, recommendation of the study and suggestion for further research.
5.1 DISCUSSION OF RESULTS
This discussion and analysis made in this study revealed the facts explained below. Majority of the respondents (75.95%) stated that clearing department generates profit in banking institutions. All respondents (100%) in addition noted that the clearing department generates profit banking institutions since clearing is done on current account in which banks change interests. All the respondents (100%) agreed that clearing departments obtain profit from the commission gotten from other banks cheques which cheques had not been cleared or on proceeds from other banks.
All the respondents agree that clearing department is worth having in the banking institutions. This is because, it promotes the transaction of using cheques thereby reducing the burden of carrying bulky cash.
Moreover, it is this clearing department that all cheques collected are sorted and arrange for the clearing purpose and are distributed to the owners banks. So every bank must have a clearing department.
5.3 IMPLICATIONS OF THE RESULT
The acceptance of the alternative hypothesis in Nigeria shows that the clearing department generates sufficient profits to the banking institution in Nigeria. Also the acceptance of the alternative hypothesis showed that the full computerization of the clearing department will reduce the period it takes to clear cheques in Nigeria.
So clearing department is one of the profit generating departments in banking institution. And it generates profit from the commission from other banks cheques and also proceeds collected from other banks.
CLEARING HOUSE – IMPORTANCE OF CLEARING DEPARTMENT IN BANKING INDUSTRY: A CASE STUDY OF U. B. A. MAIN BRANCH ENUGU