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Question

Difficulty: MediumBanking: Functions and Services to Trade

A trader in Calabar selling a consignment of palm oil to a new buyer from Enugu refuses to accept an ordinary cheque due to the risk of default or unpaid funds. To guarantee payment before releasing the goods, the trader requests a payment instrument issued and guaranteed directly by a commercial bank. Which banking service or instrument fulfills this trader's requirement?

  1. Banker's draftAnswer
  2. B
    Promissory note
  3. C
    Standing order
  4. D
    Treasury bill

Answer

Banker's draft
A banker's draft is a cheque drawn by a bank on its own funds (or on another bank), ensuring that payment is guaranteed. Traders accept banker's drafts when dealing with unfamiliar buyers because the risk of a dishonoured cheque is completely removed.

Step-by-Step Solution

1
Identify the risk faced by the seller
The seller faces the risk of non-payment or dishonoured personal cheque from an unfamiliar buyer.
Personal cheques rely on the drawer's account balance, which may be insufficient.
2
Determine the banking instrument that eliminates payment default risk
A banker's draft is prepaid by the buyer and drawn directly by the commercial bank, making payment guaranteed.
The financial obligation shifts from the individual customer to the bank.

Key Concept

Banking Services to Trade - Means of Payment and Guarantees
Estimated Time:1m 0s
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Topics

Banking: Functions and Services to Trade

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