The Banking and Financial Institutions Act 1989 (Act 372) (hereafter BAFIA) is

the most important piece of legislation governing banking practices in Malaysia.

However, the existence of banking laws can be traced back to the year 1940 where

Companies Ordinance was enacted by the British. In the year 1957, a more specific

Banking Ordinance came into existence before it was replaced by the Banking Act 1973.

The BAFIA then superseded the Banking Act 1973. Therefore, it can be said that many

provisions in the BAFIA are in conformity with the old common law banking principles.

The definition of ‘bank’ and ‘banking business’ which is embodied in Section 2

of the BAFIA was derived from common law. The Section provides that ‘bank’ is a

person carrying on banking business and ‘banking business’ means the business of

receiving deposits on current account, deposit account, saving account or other similar

account; paying or collecting cheques drawn by or paid in by customers; and provision of

finance. This definition in the BAFIA was taken from the landmark English case of

United Dominions Trust v Kirby which was decided in the year 1966. The decision in this

case was an anomaly since the court took into consideration the reputation of the firm as

a banker eventhough it does not fulfill any of the criteria of a banker laid down by the

court. This evidently shows that the definition of banking business and a banker which

was laid down in the case was inadequate. Furthermore, in the case of Woods v Martin

Bank, the court departed from the traditional approach and held that giving financial

advice is also part of banking business. It appears that the definition provided in the

BAFIA is not helpful since it provides that to determine whether or not an institution is a

bank, the court has to review its business and compare it with that transacted by banks

generally. It treats that business of banking as being carried out in an uniform manner.

Nowadays, it is common for banks to diversify their activities which traditional banks did

not venture into. Banks do engage in businesses like securities, derivatives, investment

management, insurance and pensions in today’s modern banking. The expansion of

banking business in the era of electronic banking will need also requires the archaic

common law definition to be expanded. Cheques are used lesser and lesser to the extent

where the annual volume of personal cheques is less than half compared to the usage 10

years ago. Electronic banking mechanisms such as debit cards, an electronic transfer and

automated teller machine (ATM) has taken over the old paper transactions. Eventhough

Section 2 of the BAFIA requires the Minister to issue a license before a bank carries out a

banking business; there is no clear guideline in the Act as to how the Minister should

exercise his discretion and the criteria that he should follow. Therefore, it is submitted

that the definition of ‘banks’ and ‘banking business’ has to be amended to include a

wider and expansive definition compatible with recent needs.

Additionally, it is known that the law of banking concerns primarily the

relationship between a bank and its customer. The BAFIA however does not provide the

definition of ‘customer’ but it defines ‘depositor’ as a person entitled to repayment of a

deposit. The problem with the word depositor is that it has a narrower meaning compared

to customer since all depositors are customers but not all customers are depositors. Since

there is no definition in the Act, resort has to be made to the common law definition. In

common law, a person is deemed to be a ‘customer’ only when there is a contractual

relationship between him and the bank. The contract can be in the form of an account

with the bank or an undertaking by the bank to open an account or to carry out the

instructions of a customer. The courts however in some cases expanded the definition by

holding a person to be a customer even though there is no act of opening a bank account.

The Wood’s case is an example where the court held the plaintiff to be a customer of the

bank based only on the negotiations between them to open a bank account. Technology

advancement in banking transactions however has caused the common law definition of a

‘customer’ to be outdated. For example, in Malaysia the MEPS system was introduced

where a customer of a bank holding a Bank Card can actually withdraw from any of the

ATM machine of another bank. The issue will be whether the person who withdraws

form the ATM machine of another bank then becomes a customer for the bank. The issue

is important to be answered because there can be a situation where there might be a

dispute as to the payment of money between the card holder and the other bank which

owns the ATM machine. It will be an ideal solution if all persons using the MEPS service

are deemed to be customers of the ATM paying bank at the moment of the transaction so

that the customer may sue the bank in the event of a payment dispute. Electronic transfers

also expose the inadequacy of the common law definition of a customer. Money can now

be transferred via computers and it is becoming a preferred method of banking especially

with more international transactions taking place. Many of this type of transactions do not

require the transferor to open a formal account with a bank. It is suggested that the

BAFIA should be amended to include customers of electronic transfers since bankers

now are suppose to know who they are dealing with to combat money laundering. The

Association of Banks Malaysia has also issued the Code of Good Banking Practices in

1995 requiring banks to satisfy themselves with the identity of a person seeking to deal

with the bank in order to protect the bank and its customers. Therefore in order for the

banks to know the identity of the real customer behind the electronic transfer, the

transferor should be recognized as a ‘customer’ beyond the old common law definition in

order for banks to require particulars from an individual.

Common law courts have also enunciated the principle that banks owe a fiduciary

duty towards their customers. This is to enable a customer to recover losses from his

bank. Duty to exercise reasonable care and skill has been imposed on banks when dealing

with customer’s account. Banks have also been held liable as constructive trustee in

knowingly assisting a fraudulent breach of trust or receiving trust funds illegally. An

example is the case of Selangor United Rubber v Craddock where the bank was held

liable as a constructive trustee for knowingly assisting an agent to defraud his principal.

The plaintiff in this case sued the bank both in contract and equity. The claim in equity

was based on the allegation that the bank was aware of the circumstances which would

suggest to a reasonable banker that an agent was drawing cheque to defraud his principal.

The duty imposed on the banker by the court in this case seems to impose a high burden

on them where banks are supposed to make inquiries before making any payments. The

standard however was lowered down by the English Court of Appeal in the case of Lipkin

Gorman v Karpnale where the court took into account of practical realities of commercial

transactions and held that the test will now be an honest and a reasonable banker. The

usage of constructive trusteeship in holding banks liable has drawn many criticisms from

many authors of banking law including Prof E.P Ellinger. The usage of the equity via the

constructive trustee principle is viewed as a complicated and troublesome way when an

easier method is available through the law of contract. Another obvious problem is that

courts have for the past changed the knowledge requirement in holding a party to be a

constructive trustee. The latest development in this area was from the case of Royal

Brunei Airlines v Tan Kok Ming, Philip where the Privy Council held that an accessory

can be held liable in a fraudulent breach of trust by a trustee eventhough the accessory

had no dishonest or fraudulent intent. It is submitted that constructive trusteeship should

only be confined to cases of breach of trust and not to be extended to banking law cases

as it creates more uncertainty. Futhermore, the BAFIA should encapsulate specific

provisions regarding a bank’s liability in cases of wrongful of payment and the standard o

care which is required from the banks in such cases.

The common law principle of duty of secrecy which was imposed on bankers

when dealing with customers’ account is