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Malaysian Banking Law – Step-by-Step Cheque Clearing System
Introduction
The cheque clearing system is the banking system used to process cheque payments between different banks. It allows the bank receiving the cheque and the bank paying the cheque to exchange information and settle payment safely.
The clearing system does not decide whether the cheque should be paid. Its role is to pass cheque information between banks and assist settlement. The final decision to honour or dishonour the cheque is made by the drawee bank, also called the paying bank.
Step 1 – Drawer Issues the Cheque
The process begins when the drawer writes and signs a cheque. The drawer is the person who owns the bank account and instructs his bank to pay money.
For example, Ali writes a cheque for RM5,000 payable to Ahmad. Ali is the drawer because he is giving an instruction to his bank to pay RM5,000 to Ahmad.
Step 2 – Payee Receives the Cheque
The payee is the person who is supposed to receive the money. In the example, Ahmad is the payee because the cheque is payable to him.
At this stage, Ahmad has the cheque, but he has not received the money yet. The cheque must first go through the banking clearing process before the money can be credited into his account.
Step 3 – Payee Deposits the Cheque into His Bank
The payee deposits the cheque into his own bank account. This bank is called the collecting bank because it collects the cheque payment on behalf of the payee.
For example, Ahmad deposits Ali’s cheque into his CIMB account. CIMB becomes the collecting bank because it is collecting payment for Ahmad.
The collecting bank acts as the agent of the payee because Ahmad authorises the bank to collect the cheque proceeds for him.
Step 4 – Collecting Bank Checks the Cheque
Before sending the cheque into the clearing system, the collecting bank performs basic checks. It checks whether the cheque appears valid on its face.
The collecting bank may check the date, amount, payee name, account details, endorsements, and whether the cheque appears altered or suspicious.
This is not the final payment decision. The collecting bank is only doing preliminary checks before sending the cheque for clearing.
Step 5 – Collecting Bank Sends Cheque Information to the Clearing System
After the preliminary checks, the collecting bank sends the cheque information into the clearing system.
The information may include the cheque image, cheque number, bank details, account details, amount, and payee information.
This is the main role of the clearing system. It receives cheque information from the collecting bank and forwards it to the correct drawee bank.
Step 6 – Clearing System Sends Information to the Drawee Bank
The drawee bank is the bank that is ordered to pay the cheque. It is also called the paying bank.
For example, if Ali wrote the cheque from his Maybank account, then Maybank is the drawee bank.
The clearing system forwards the cheque information to Maybank so that Maybank can check whether the cheque should be paid.
The clearing system itself does not pay the cheque. It only acts as the middle platform between the collecting bank and the drawee bank.
Step 7 – Drawee Bank Verifies the Cheque
The drawee bank checks the cheque carefully. This is the most important verification stage because the drawee bank must decide whether to honour or dishonour the cheque.
The drawee bank checks whether the drawer’s signature is genuine, whether the drawer has enough money, whether the cheque is properly drawn, whether the cheque is stale, whether there are stop-payment instructions, and whether there is any fraud or alteration.
Step 8 – Drawee Bank Honours or Dishonours the Cheque
After verification, the drawee bank makes a decision.
If the cheque is valid and there are sufficient funds, the drawee bank honours the cheque. This means the bank accepts the cheque and agrees to pay the amount.
If there is a problem, the drawee bank dishonours the cheque. This means the bank refuses payment.
Common reasons for dishonour include insufficient funds, forged signature, stale cheque, closed account, stop-payment instruction, or suspected fraud.
Step 9 – Decision Is Sent Back Through the Clearing System
After deciding whether to honour or dishonour the cheque, the drawee bank sends the result back through the clearing system.
If the cheque is honoured, the clearing system assists with settlement between the banks.
If the cheque is dishonoured, the clearing system sends the unpaid cheque result back to the collecting bank.
Step 10 – Settlement Between Banks
If the cheque is honoured, the paying bank must transfer the money to the collecting bank.
For example, Maybank deducts RM5,000 from Ali’s account and settles that amount with CIMB through the clearing system.
This stage is called interbank settlement because payment is settled between two banks.
Step 11 – Collecting Bank Credits the Payee’s Account
After settlement is completed, the collecting bank credits the money into the payee’s account.
For example, CIMB credits RM5,000 into Ahmad’s account.
At this point, Ahmad receives the money and the cheque clearing process is complete.
Step 12 – If the Cheque Is Dishonoured
If the drawee bank dishonours the cheque, the collecting bank will not receive payment.
The collecting bank will inform the payee that the cheque was unpaid or returned. The payee will not receive the money from that cheque.
For example, if Ali does not have enough money in his Maybank account, Maybank may dishonour the cheque. CIMB will then inform Ahmad that the cheque has been returned unpaid.
Role of the Clearing System
The clearing system acts as the middle platform between banks. Its role is to receive cheque information from the collecting bank, forward it to the drawee bank, return the drawee bank’s decision, and assist with settlement if payment is approved.
The clearing system does not decide whether the cheque is valid. It also does not decide whether the cheque should be paid. That decision belongs to the drawee bank.
Role of the Collecting Bank
The collecting bank is the bank of the payee. Its role is to receive the cheque from the payee, check the cheque, send cheque information to the clearing system, and credit the payee’s account once payment is received.
Legally, the collecting bank acts as the agent of the payee because it collects payment on the payee’s behalf.
Role of the Drawee Bank
The drawee bank is the bank of the drawer. Its role is to verify the cheque and decide whether to honour or dishonour it.
If the cheque is properly drawn and there are sufficient funds, the drawee bank should honour the cheque. If there is a valid reason, the drawee bank may dishonour the cheque.
Simple Flow
The cheque clearing system can be understood as follows:
Drawer issues cheque to payee. The payee deposits the cheque into the collecting bank. The collecting bank sends the cheque information to the clearing system. The clearing system forwards the information to the drawee bank. The drawee bank checks the cheque and decides whether to pay. The decision goes back through the clearing system. If honoured, settlement occurs between banks and the payee’s account is credited. If dishonoured, the cheque is returned unpaid.
Conclusion
The cheque clearing system is important because it allows banks to process cheque payments safely and efficiently. It connects the collecting bank and the drawee bank by transmitting cheque information and helping with settlement.
The collecting bank collects payment for the payee. The clearing system passes information between banks. The drawee bank decides whether to honour or dishonour the cheque. Once the cheque is honoured and settlement is completed, the collecting bank credits the money into the payee’s account.
Introduction
The cheque clearing system is the banking system used to process cheque payments between different banks. It allows the bank receiving the cheque and the bank paying the cheque to exchange information and settle payment safely.
The clearing system does not decide whether the cheque should be paid. Its role is to pass cheque information between banks and assist settlement. The final decision to honour or dishonour the cheque is made by the drawee bank, also called the paying bank.
Step 1 – Drawer Issues the Cheque
The process begins when the drawer writes and signs a cheque. The drawer is the person who owns the bank account and instructs his bank to pay money.
For example, Ali writes a cheque for RM5,000 payable to Ahmad. Ali is the drawer because he is giving an instruction to his bank to pay RM5,000 to Ahmad.
Step 2 – Payee Receives the Cheque
The payee is the person who is supposed to receive the money. In the example, Ahmad is the payee because the cheque is payable to him.
At this stage, Ahmad has the cheque, but he has not received the money yet. The cheque must first go through the banking clearing process before the money can be credited into his account.
Step 3 – Payee Deposits the Cheque into His Bank
The payee deposits the cheque into his own bank account. This bank is called the collecting bank because it collects the cheque payment on behalf of the payee.
For example, Ahmad deposits Ali’s cheque into his CIMB account. CIMB becomes the collecting bank because it is collecting payment for Ahmad.
The collecting bank acts as the agent of the payee because Ahmad authorises the bank to collect the cheque proceeds for him.
Step 4 – Collecting Bank Checks the Cheque
Before sending the cheque into the clearing system, the collecting bank performs basic checks. It checks whether the cheque appears valid on its face.
The collecting bank may check the date, amount, payee name, account details, endorsements, and whether the cheque appears altered or suspicious.
This is not the final payment decision. The collecting bank is only doing preliminary checks before sending the cheque for clearing.
Step 5 – Collecting Bank Sends Cheque Information to the Clearing System
After the preliminary checks, the collecting bank sends the cheque information into the clearing system.
The information may include the cheque image, cheque number, bank details, account details, amount, and payee information.
This is the main role of the clearing system. It receives cheque information from the collecting bank and forwards it to the correct drawee bank.
Step 6 – Clearing System Sends Information to the Drawee Bank
The drawee bank is the bank that is ordered to pay the cheque. It is also called the paying bank.
For example, if Ali wrote the cheque from his Maybank account, then Maybank is the drawee bank.
The clearing system forwards the cheque information to Maybank so that Maybank can check whether the cheque should be paid.
The clearing system itself does not pay the cheque. It only acts as the middle platform between the collecting bank and the drawee bank.
Step 7 – Drawee Bank Verifies the Cheque
The drawee bank checks the cheque carefully. This is the most important verification stage because the drawee bank must decide whether to honour or dishonour the cheque.
The drawee bank checks whether the drawer’s signature is genuine, whether the drawer has enough money, whether the cheque is properly drawn, whether the cheque is stale, whether there are stop-payment instructions, and whether there is any fraud or alteration.
Step 8 – Drawee Bank Honours or Dishonours the Cheque
After verification, the drawee bank makes a decision.
If the cheque is valid and there are sufficient funds, the drawee bank honours the cheque. This means the bank accepts the cheque and agrees to pay the amount.
If there is a problem, the drawee bank dishonours the cheque. This means the bank refuses payment.
Common reasons for dishonour include insufficient funds, forged signature, stale cheque, closed account, stop-payment instruction, or suspected fraud.
Step 9 – Decision Is Sent Back Through the Clearing System
After deciding whether to honour or dishonour the cheque, the drawee bank sends the result back through the clearing system.
If the cheque is honoured, the clearing system assists with settlement between the banks.
If the cheque is dishonoured, the clearing system sends the unpaid cheque result back to the collecting bank.
Step 10 – Settlement Between Banks
If the cheque is honoured, the paying bank must transfer the money to the collecting bank.
For example, Maybank deducts RM5,000 from Ali’s account and settles that amount with CIMB through the clearing system.
This stage is called interbank settlement because payment is settled between two banks.
Step 11 – Collecting Bank Credits the Payee’s Account
After settlement is completed, the collecting bank credits the money into the payee’s account.
For example, CIMB credits RM5,000 into Ahmad’s account.
At this point, Ahmad receives the money and the cheque clearing process is complete.
Step 12 – If the Cheque Is Dishonoured
If the drawee bank dishonours the cheque, the collecting bank will not receive payment.
The collecting bank will inform the payee that the cheque was unpaid or returned. The payee will not receive the money from that cheque.
For example, if Ali does not have enough money in his Maybank account, Maybank may dishonour the cheque. CIMB will then inform Ahmad that the cheque has been returned unpaid.
Role of the Clearing System
The clearing system acts as the middle platform between banks. Its role is to receive cheque information from the collecting bank, forward it to the drawee bank, return the drawee bank’s decision, and assist with settlement if payment is approved.
The clearing system does not decide whether the cheque is valid. It also does not decide whether the cheque should be paid. That decision belongs to the drawee bank.
Role of the Collecting Bank
The collecting bank is the bank of the payee. Its role is to receive the cheque from the payee, check the cheque, send cheque information to the clearing system, and credit the payee’s account once payment is received.
Legally, the collecting bank acts as the agent of the payee because it collects payment on the payee’s behalf.
Role of the Drawee Bank
The drawee bank is the bank of the drawer. Its role is to verify the cheque and decide whether to honour or dishonour it.
If the cheque is properly drawn and there are sufficient funds, the drawee bank should honour the cheque. If there is a valid reason, the drawee bank may dishonour the cheque.
Simple Flow
The cheque clearing system can be understood as follows:
Drawer issues cheque to payee. The payee deposits the cheque into the collecting bank. The collecting bank sends the cheque information to the clearing system. The clearing system forwards the information to the drawee bank. The drawee bank checks the cheque and decides whether to pay. The decision goes back through the clearing system. If honoured, settlement occurs between banks and the payee’s account is credited. If dishonoured, the cheque is returned unpaid.
Conclusion
The cheque clearing system is important because it allows banks to process cheque payments safely and efficiently. It connects the collecting bank and the drawee bank by transmitting cheque information and helping with settlement.
The collecting bank collects payment for the payee. The clearing system passes information between banks. The drawee bank decides whether to honour or dishonour the cheque. Once the cheque is honoured and settlement is completed, the collecting bank credits the money into the payee’s account.
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