Thursday, October 01, 2020
   
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Bank Draft

A bank draft is a type of cheque where the payment is guaranteed to be available by the commercial bank issuing it. Typically, the commercial bank will review your account to see if sufficient funds are available for the bank draft to clear. Once it has been confirmed that sufficient funds are available, the bank effectively sets aside the funds from your account to be given out when the bank draft is used. The cost of a bank draft may vary among the commercial banks. Bank drafts are normally involved in transactions involving large sums of money and/or situations where trust can be an issue both locally and overseas. Suppose you are purchasing a new car from overseas or paying exam fees (e.g: to ACCA), sending a bank draft gives the assurance that you have enough money to purchase the vehicle or pay the exam fees and that your bank draft will not bounce.

There are several physical characteristics that distinguish bank drafts from cheques and other similar documents. These are:

  • The name of the person using the bank draft for payment does not appear on the document.
  • Although the person making the payment gets the bank draft, it is the recipient’s name which appears on the document.
  • There are added security measures such as a hologram on the bank draft.
  • In many cases, the document will be signed by two representatives of the bank rather than just one person.
  • The amount and the person to whom the bank draft is payable is specified therein and is payable on demand.

Benefits of using the Bank Draft:

  • The level of security is greater than with a personal cheque.
  • The bank draft is “drawn” on the bank itself rather than the person’s account. 
  • It is a very useful instrument for settlement of debts.
     

There are some limitations to the bank draft since the banks retain the right to cancel the payment on a bank draft and take back the money from the recipient if the cheque proves to be counterfeit or fraudulent. This can cause confusion as the bank may tell the recipient the bank draft has cleared shortly after they pay it in, then come back later to say it has been found to be counterfeit. Therefore, some people accepting bank drafts as a means of paying for mail order goods may insist on waiting until the counterfeit deadline has passed before sending the goods.