The relationship arises between a banker and a customer with the opening of an account by the customer with a banker. The application for opening an account is considered as a letter of agreement for establishing the banker-customer relationship. The general view is that the banker-customer relationship is mainly that of a debtor and a creditor with certain special features.

However, today the range of banking services is more extensive, and indeed is expanding all the time, so it must be expected that other relationships will arise besides that of debtor and creditor. For instance, the relationship of principal and agent is present when the customer instructs his bank to buy or sell stocks on his behalf, and when items are held in safe-custody the relationship is that of bailer and bailee. Where the bank’s executorships service takes on the administration of a deceased’s estate the relationship is that of trustee and beneficiary. Duties akin to a trusteeship might also happen when a branch comes into possession of funds or property that belongs to a third party, as when the bank has sold property in mortgage, and has a surplus to pass to the subsequent mortgagee. Obviously the relationship with the customer in that situation is that of a mortgagor with a mortgagee. However, if the security had been given by a third party then another state of affairs would exist between the lender and his surety. There, duties and obligations would arise irrespective of the banker-customer relationship with the borrowing customer.

The nature of the relationship depends upon the type of services rendered by the banker, which has two aspects: one is legal and another is behavioral.

It is worth mentioning that the behavioral relationship is important from the view point of humanity, particularly for the customers who do not maintain account with the banker but buys, miscellaneous services like Demand Drafts, Mail Transfer of money or payment of electric bill, gas bill, opening and renewal of licenses of Television, and Radio. For example, a bankers’ good manners, courtesy, kindness, sympathy, and cooperation in helping to solve a customer’s problem, undoubtedly makes a good impression on the customer. The roads to progress and prosperity can easily be made through friendly behavior with the customers. If the bankers wish to develop their organizational image, they have to offer better services and cooperation, coupled with courteous service to gain a competitive edge.

The history of conventional banking reveals that these relationships have arisen on the basis of interest. However, interest is prohibited in Islam. It has been explicitly stated in the Holy Quran that “Trading is permitted but Riba is forbidden” [2: 275] It should be mentioned here that Riba usury and interest mean the same thing. By the elimination of interest from the transactions and with the introduction of banking based on Islamic Shariah (jurisprudence) the relationships took new dimensions.

BANKERS AND CUSTOMERS

Section 3(b) of the Negotiable Instruments Act-1881 defines a banker as a person transacting the business of accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise and withdrawable by check, draft, order or otherwise, and includes any Post Office Savings Bank.

There is no statutory definition of a ‘customer’ and one must turn to case law if any legal guidance is required as to what features need to be present to constitute a person being considered a customer of a bank. The Negotiable Instruments Act has not clearly defined a “Customer”, but it appears from Section-131 of the Act that constituents of the Bank who maintain some type of account(s) with him duly introduced for the purpose of having a certain amount of deposits therein withdrawable by checks or by any other means, are customers. More recently, however, where a bank gave investment advice to a person who was not in an account at the time, the court held that nevertheless the bank had incurred responsibilities to him, as to a customer (Woods vs. Martins Bank Ltd. 1959). It may be said, therefore, that a person becomes a customer as soon as a business relationship is established. It is not necessary for the account to have been open for a long period of time, or for the business to be conducted over a regular period. In fact, two conditions seem to be important for becoming a customer of a bank. These are as follows:

    (i)      There has to have been some habit of dealing between him and the banker with or without opening an account; and

    (ii)     The transactions so made ought to be in the nature of regular banking business.

A bank can even be a customer itself, where it has an account with another bank.

Responsibilities of Bankers to Customers

Both parties in this relationship, both banker and customer have certain responsibilities to one another. The Banker’s responsibilities to his customers are as follows:

    (a)    Negotiable Instruments Act-1881, Section-31 indicates that a banker must pay the customer’s check which has been drawn duly on his account subject to the availability of money in the Account;

   (b)    Maintenance of secrecy of a customer’s Account is the legal and moral responsibility of a banker, both while the account is open and even after it has been closed. Of course, secrecy may be disclosed:

• Against the order of the court of law or to the police and Income Tax authority;

• To serve the public interest; and

• Against the request of the customer in black and white.

     (c)    Collection of check, and depositing the proceeds to the Customer’s Account is the   

general banking duty of a banker. If these negotiable instruments are returned back without clearance, the bank should quickly inform the customer.

    (d)    The bank is entitled to a charge and or commission, except where special arrangements have been made. It is entitled to debit the customer account with charges, usually quarterly, or semi-annually without specific advice to the customer. A charge for an item such as the stop payment of a check or rejection of a check would usually be allowed.

    (e)    A bank must always follow its usual course of business when acting for its customers who can expect transactions to be dealt within a consistent manner.

    (f)    A bank acquires a general lien over its customer’s negotiable documents, which come into its possession, unless an express contract has been made which would be inconsistent with a lien (Brandao v. Barnett, 1846).

    (g)    The bank must give reasonable notice to its customer before closing an account that is maintained on credit. However, overdrafts are repayable on demand, unless there is an implied or actual agreement to the contrary.

    (h)    Supply of Pass Book or Statement of Account is the duty of a banker.

    (i)    If any fraudulent check comes to the hand of a banker, he should inform the customer immediately.

   (j)    The bank must repay the whole or part of the balance, if and when there is demand by the customer during banking hours, provided the demand is made at the branch where the amount is kept, or at a branch where prior alternative arrangements have been made, such as under credit-opened encashment facilities.

   (k)    A bank has no obligations to third parties, arising out of the duty to pay its customer’s checks, and the payee of checks issued by a customer cannot sue the paying banker.

Responsibilities of Customers to Bankers

• On the other hand, there are certain responsibilities of the customers. Those are given below:

• To ensure safety and security of the checkbook;

• To issue a check duly neither being careful to ensure that neither words nor figures can  be altered;

• If a check or checkbook is lost, the customer should inform the banker immediately; and

• Negotiable Instruments Act-1881, Sections-65 and 68 indicate that a check must be  drawn upon the bank branch where the money was deposited, during regular banking hours.

Measures to Improve Banker-Customer Relationship in an Islamic Bank

Abolition of Interest from transaction: Interest is considered a main deficiency factor in the relationships of a banker and a customer, under conventional banking system. The debtor-creditor relationship of a banker and a customer is frequently threatened by this factor.  The customer is obliged to pay a pre-determined rate of interest on the sum borrowed even though he may have incurred a loss. Even when a profit is made, the fixed rate of interest can prove an onerous burden if the rate of profit earned is less than the rate of interest payable. The fixed interest--based system in a loss situation could to bankruptcy in some cases. The dead weight of interest in times of a depressed economic activity characterized by low profitability makes industries “sick and makes their “recovery” extremely problematic.

Banker-Customer relationships in Islam are established on a profit/loss income sharing arrangement instead of interest. The Islamic Shariah prescribes how a society is to be organized, what will be the relationships of its members, and how the affairs of the members are to be conducted. Accordingly, the relationship between a banker and a customer was established under the Islamic banking system.

Assurance of Distributive Justice: The Conventional banking system does not ensure distributive justice of investment financing. Distributive justice means distribution of risk and returns between the financier, depositors and entrepreneurs in such a manner that no body is to receive or bear an undue share of benefit or loss. In case of bearing risks, the conventional banks shift it altogether to the entrepreneur borrower. To ensure the safe return of its principal plus interest it demands sound collaterals with the intention that if the entrepreneur for some reason is unable to repay the claims of the bank, the money can be realized from the sale of the collateral. This is a sheer injustice according to Islamic law.

While any return on capital in the form of interest is completely prohibited in Islam, there is no objection in getting a return on capital if the provider of capital enters into a partnership with a worker or entrepreneur and is prepared to share in the risks as well as the gains between them. The depositors of the bank may not be guaranteed a predetermined return on their savings, but they would be entitled to a share in the actual profits earned by the bank. Similarly, the bank would not be entitled to claim a pre-determined return on the capital provided by it to the borrower but can enter into a profit/loss income sharing arrangement with them. There are two specific profit/loss sharing financing arrangements of the Islami Bank, which are known as Musharaka and Mudaraba that can be mentioned here. In Musharaka arrangements the profits are shared in pre-agreed proportions, but the loss, if any, is shared in proportion to the capital contributed by the banker and the customer. In the Mudaraba arrangement, the banker provides capital, and profits are shared in pre-agreed proportions but losses, if any, are borne by the banker entirely. In this case, there is no financial loss to the borrower, except his labor and time.

Supply of Venture Capital: The relation between a conventional banker and a potential entrepreneurial customer is not properly established due to the fact that lending by conventional banks is collateral-oriented. It does not allow lending to a large number of potential entrepreneurs who can add to gross domestic product (GDP) by their productive endeavor but do not possess sufficient security to pledge with banks to satisfy their criteria of creditworthiness. A Conventional banker is committed to pay a predetermined rate of interest to depositors. The banks in their lending operations are most concerned about the safe return of the principal lent along with the stipulated interest. As a result, “venture capital” cannot be provided to the innovative entrepreneur, who has a new idea for creating products or services.  Particularly, in agriculture, small farmers are deterred from adopting new cultivation practices on account of this reason. Collateral oriented lending means the circulation of wealth among the wealthy persons of the society that sharpens the difference between the rich and the poor. Islam does not allow this to occur. The Quran says wealth may not make a circuit only among the wealthy of you”(57: 7). Islam brought a golden opportunity to the potential entrepreneurial customer to establish a relationship with the banker without security under Mudaraba, Musharaka and other lending principles of the Islami Bank. The Islami Bank encourages entrepreneurs by providing funds to them and by agreeing to share in both profits and losses. Thus entrepreneurial activities, if pursued within the framework of the Shariah can easily contribute to the GDP. It should be mentioned here that in the Islamic system, the supplier can share profit and user of funds in any ratio as mutually agreed but loss has to be borne by the respective parties strictly according to their capital participation ratio. Shariah does not permit any variation even by mutual consent. Of Course, due allowances have been provided against loss resulting from negligence or violation of contract. The rigid Shariah provision in respect of loss is a permanent mechanism to protect the rights of the entrepreneurs. Thus we find Islamic banks have built-in institutional arrangement for establishing a fair relationship with the entrepreneur by satisfying the need of venture capital for them.

 Elimination of Banking Fraud: Bank frauds are on the increase. The customers’ deposited money has fraudulently been drawn from the bank. It is the banker’s contractual obligation to pay depositor’s money from his own sources. This resulted in deterioration of relationships between a banker and a customer. Similar is the position of advances disbursed by the banks to different types of borrowers. If some borrowers default, the Bank will bear the loss and relationships with the customers will deteriorate. Religion plays a dominant role in building up the character of men. When a person is religious, it is believed, he will remain honest and will not commit anything wrong morally. But conventional banking was not established according to the rules of religion.

Allah approved Islam as the only way of life. The Quran says, “To-day I have perfected your religion for you and completed My blessings on you and approved Islam as the way of life for you [5:16]. An Islamic bank, behind which the Islamic faith acts, is based on Islamic Shariah. So it enjoys the opportunity to employ the devoted Muslims in the banking profession. It may also increase the religious values among the customers by imparting training to them so that they possess a mind free of fraud. It recognizes that a religious man always keeps himself away from fraud.

Application of Zakat: The distinguishing feature of an Islamic bank is to build up Zakat pool out of its own resources calculated on capital and reserves. Customers also can deposit their Zakat funds to the Islamic bank Zakat pool. This arrangement of Zakat ties the religious relationship of a banker and a customer. The Zakat Fund does have a target-oriented program. The target group consists mostly of the poorest and the weakest in the society. It may be noted that Zakat is a charge on the economic assets of the rich. Hence, the Zakat-based program of the Islamic bank is a mechanism for the redistribution of the economy’s assets from the rich to the poor. As such, it widens the relationship of the banker and the customer.

Rendering Improved Customer Service: Better customer services can ensure better relationship between a banker and a customer. Logically, customers can claim some services as debtors, creditors, buyers and some as fellow Muslim brothers and still some more as fellow men in general. Islam is well known as a complete code of life, based essentially on the many verses of the holy Quran and many sayings of the Prophet (peace be upon him). So it is the duty of an Islamic Bank to satisfy the needs of the above parties.

Legal Reformation: To give the legal shape to the banker-customer relationship in Islam, some existing conventional banking laws and related laws need to be changed according to Islamic Shariah. In Pakistan, 13 (thirteen) existing laws have been changed to Islamize its banking system.

 Charity Functions: The resources of a conventional bank are used for the purposes and activities having high social priority but for commercially viable projects only. These banks have no operations designed for charity-based projects. So, the conventional bankers have limited relationships with their customers.

Termination of Banker-Customer Relationship

As the banker-customer relationship can be established, so it can also be terminated. It arises between a banker and a customer with the opening of an account by the customer with a banker. So, the relationship terminates if the account is closed for any reason.

Banker-customer relationship may be terminated due to the following reasons:

      i)    If a banker does not pay the check of a customer, which has been drawn duly on his account, not withstanding the availability of deposited money in the account;

      ii)     If the secrecy of the customer’s account is not maintained legally and morally by the banker;

     iii)   If the banker does not provide banking services to the customer properly. For example, if checks, bills etc. are not collected without informing the customer;

      vi)    If the banker does not supply Pass Book or Statement of Account to the customer;

      v)    If any fraudulent check comes to the hand of a banker and if he makes payment without informing the customer). If the banker makes any charge on transactions which is not permissible in Islamic Shariah. For example, if interest is charged or a bribe is alleged;

      vi)    If the banker fraudulently embezzles the customer’s money;

      vii)   If the customer diverts the investment into the business which is not permissible in the Shariah;

     viii)   If the customer shows unwillingness to pay Zakat on the deposited money with the bank, even though he is a Muslim;

      ix)   If the customer defaults on a loan; and

      x)    If any agreement is otherwise violated either by the banker or by the customer.