LAW

Published on
Malaysian Banking Law – Banker’s Rights: Commission, Interest and Right of Set-Off
Introduction
Apart from owing duties to customers, a bank also possesses several important legal rights arising from the banker-customer contractual relationship. Three of the most significant rights are:
  1. Right to Commission or Service Charges
  2. Right to Interest
  3. Right to Set-Off (Combining Accounts)
These rights enable banks to recover the costs of providing banking services, earn income from lending activities, and protect themselves against outstanding debts owed by customers.


1. Right to Commission or Service Charges
Legal Principle
A bank is entitled to charge its customers reasonable commissions, fees, and service charges for services provided.
These charges may include:
  • Maintaining bank accounts;
  • Processing remittances or fund transfers;
  • Issuing bank drafts;
  • Providing trade finance facilities;
  • Managing overdraft facilities;
  • Other banking services.
In practice, such charges are usually standardized and are commonly determined according to banking industry practices and guidelines established by banking associations and regulatory requirements.
The customer’s obligation to pay such charges arises from the contractual agreement between the bank and the customer.


Case Scenario
Facts
Ahmad opens a current account with XYZ Bank.
Over several months, he uses the bank to:
  • Transfer money overseas;
  • Request bank drafts;
  • Maintain a business current account.
At the end of the month, XYZ Bank deducts:
  • RM10 account maintenance fee;
  • RM25 remittance fee;
  • RM15 bank draft processing fee.
Ahmad argues that the bank has no right to deduct these charges because he never specifically approved each fee.


Solution
The bank is likely entitled to recover these charges.
When Ahmad opened the account, he agreed to the bank’s terms and conditions, which normally contain provisions allowing the bank to impose service charges for banking services rendered.
Therefore, the deductions are valid provided:
  • The charges are disclosed;
  • The charges are consistent with the contractual terms;
  • The bank complies with applicable banking regulations.


Practical Application
Examples commonly encountered include:
  • ATM replacement card charges;
  • Telegraphic transfer fees;
  • Cheque book charges;
  • Foreign currency conversion fees;
  • Annual credit card fees.
Banks rely on this right daily to recover operational costs.


2. Right to Interest
Legal Principle
A bank has the right to charge interest on money lent to a customer.
The interest rate is usually determined by:
Express Agreement
A written agreement specifies:
  • Interest rate;
  • Method of calculation;
  • Frequency of compounding.
Implied Agreement
In some situations, an agreement may be implied from the conduct of the parties.
For example, where a customer overdraws his account and the bank permits the overdraft, the bank may charge its normal interest rate applicable to unsecured lending.


Case Scenario
Facts
Siti has RM500 in her current account.
She issues a cheque for RM2,000.
Instead of dishonouring the cheque, the bank honours it and creates an overdraft of RM1,500.
One month later, the bank charges interest on the overdraft amount.
Siti argues that she never signed a loan agreement and therefore should not pay interest.


Solution
The bank is likely entitled to charge interest.
Although no formal loan agreement exists, the bank effectively advanced funds to Siti when it honoured the cheque despite insufficient funds.
By accepting the benefit of the overdraft facility, an implied agreement arises under the usual course of dealings between banker and customer.
Consequently, the bank may charge its normal overdraft interest rate.


Practical Application
This commonly occurs where:
  • Customers exceed overdraft limits;
  • Banks permit temporary overdrawing of accounts;
  • Credit facilities are granted informally before formal documentation is completed.
Interest compensates the bank for the use of its money.


3. Right of Set-Off (Combining Accounts)
Legal Principle
The right of set-off allows a bank to combine accounts and apply money standing to the credit of one account against debts owed by the customer on another account.
The purpose is to prevent a customer from claiming money from the bank while simultaneously refusing to repay debts owed to the bank.
In effect, the bank may:
  • Reduce the amount payable to the customer; or
  • Reduce the customer’s indebtedness to the bank.


Conditions for Exercising Set-Off
A bank may generally exercise the right only when:
(a) The Debt is Certain
The amount owed must be clearly ascertainable.
(b) The Debt is Due and Payable
The debt must already be payable and not merely a future obligation.
(c) No Agreement Prohibits Set-Off
There must be no express or implied agreement preventing the bank from exercising the right.
(d) Accounts Must Be Held in the Same Right
The accounts must belong to the same customer in the same legal capacity.


Meaning of “Same Right”
The bank generally cannot combine:
Account A
Account B

Personal account
Trustee account

Personal account
Company account

Executor account
Personal account
These accounts are held in different legal capacities.


However, the bank may combine:
Account A
Account B

Personal savings account
Personal current account

Current account
Overdraft account
because they belong to the same person in the same legal capacity.


Case Scenario
Facts
Ravi maintains:
Account 1
  • Savings Account: RM20,000 credit balance.
Account 2
  • Personal Loan: RM15,000 outstanding and overdue.
Ravi demands withdrawal of the RM20,000 from his savings account.
Instead, the bank transfers RM15,000 from the savings account to settle the overdue loan.
Ravi claims that the bank wrongfully took his money.


Solution
The bank is likely entitled to exercise its right of set-off.
The requirements are satisfied because:
  • Ravi owes a definite amount (RM15,000);
  • The debt is overdue and payable;
  • No agreement prohibits set-off;
  • Both accounts are held by Ravi personally in the same capacity.
Accordingly, the bank may combine the accounts and use the credit balance to discharge the debt.


Practical Application
Banks frequently exercise set-off where:
  • A customer defaults on a loan;
  • A credit card debt becomes overdue;
  • An overdraft remains unpaid;
  • Several accounts are maintained with the same bank.
This right provides an efficient method of debt recovery without commencing court proceedings.


Critical Analysis
The right of commission and interest reflects the commercial nature of banking. A bank is not a trustee holding money for free; it operates as a business and is entitled to remuneration for services and lending activities.
The right of set-off is particularly important because it protects banks from the risk of having to repay a customer while simultaneously being unable to recover debts owed by that same customer.
However, the right is not unlimited. Courts require strict compliance with the conditions of certainty, maturity of debt, and the “same right” requirement to ensure fairness to customers and to prevent abuse of power by banks.


Conclusion
Under Malaysian Banking Law, a bank possesses important contractual rights against its customers:
  • Right to commission or service charges for banking services provided;
  • Right to interest on loans, overdrafts, and other credit facilities;
  • Right of set-off allowing the bank to combine accounts and apply credit balances against debts owed by the customer.
These rights arise from the banker-customer contract and play a vital role in ensuring the efficient and secure operation of the banking system while balancing the interests of both banks and customers.

​L
Picture
0 Comments

Author

Learn the fact about law