i

CERTIFICATION

I certify that this research paper titled An Analysis on the Legal Protection of Customers in

Electronic Banking in Tanzania which is done at Ziwa Jipe University for the partial

fulfillment of the requirements for the award of degree Bachelor of Laws (LL.B) is recorded

as independent research work earned out by Jesse Temba under supervision and guidance.

This research paper has not been submitted for award of the degree or other similar award.

Certified and signed onday of2011.

ERIC MPONEJA

SUPERVISOR

ii

DECLARATION

I, Jesse Temba, do hereby declare and attest that this research paper titled An Analysis on

the Legal Protection of Customers in Electronic Banking is my own original work for

Ziwa Jipe University and that the same has not ever been presented to any other University

for similar or other degree award. Nevertheless, this is not a copy or manipulation of any

report.

Dated ..day of2012.

JESSE TEMBA

iii

COPYRIGHT

All rights reserved, beyond single copy use, no part of this work will be produced, stored in

any retrieval system or transmitted in any form or by any means. Electronically, or

mechanically, including photocopying, recording or by any information storage or otherwise

without prior written permission of the author and or the Faculty of Law of Ziwa Jipe

University

Jesse Temba, 2012

All rights reserved

iv

ACKNOWLEDGEMENT

First and foremost, my sincere thanks and gratitude goes to Almighty God, unmoved mover,

who protected me and gave me power, vision and strength up to this stage of compiling this

research. I confess that he has been therefore me ever since I started the journey of my studies

until now.

I am greatly beholden to a number of people whose advice, encouragement, moral and

material support contributed to the preparation and completion of this research. However, it is

not possible to list all of them here; I will mention only a few.

In the first instance, I extend my heartfelt appreciations to my beloved parents, may father,

Felix .M. Temba and my beautiful mother Christina .M. Ntelya. I thank them for all the

support they gave me as their beloved son in the entire journey of my studies.

I also express my sincere gratitude and thanks to my supervisor Eric Mponeja whose efforts,

commitment and dedication and guidance and his critics made possible my task. His

knowledge and accumulated experience has been a great asset for me not only for this

research but also for career.

Special thanks go to my dear Brother, Simon Temba and Dear Sister Martha Temba and

Theresia Temba who provided me with a package of fruitful advice and moral support which

made this research successful. I appreciate for the help given by them, may God help them in

their studies and bless them in their entire life.

Uncountable thanks goes to my fellow colleague of LL.B at Ziwa Jipe University for the

productive assistance to enrich my report. Also, further appreciation should go to Eric

Mponeja, Eugene Nyalile, Simon Lepilal Laizer, Geofrey Gasper, Alice Mbaga and

Goodluck Haule.

v

DEDICATION

I dedicate this work for admiration and love to my father, Felix .M.Temba, and my mother

Christina .M. Ntelya who have been the driving force in my life. And to all Mbulu Primary

Students and Teachers.

vi

ABBREVIATIONS

ICT Information Communication Technology

USA United States of America

CRDB Cooperative Rural Development Bank

NMB National Micro-finance Bank

ATM Automated Teller Machines

E-commerce Electronic commerce

UK United Kingdom

UDTL United Dominion Trust Ltd

EFTPOS Electronic Funds Transfer at a Point of Sale

VSATs Very Small Aperture Terminals

NPS National Payment Systems

PIN Personal Identification Number

USD United States Dollar

NCEFT National Commission on Electronic Fund Transfers

UNCITRAL United National Commission on International Trade Law

vii

LIST OF CASES

Great Western Railway Co. v. London and County Banking Co.Ltd [1901] A.C. 414

Commissioners of Taxation v. English, Scottish & Australian Bank Limited [1920] A.C.683

Woods v. Martins Bank [1959] 1 Q.B. 55

United Dominions Trust Ltd Vs Kirkwood [1966]2 Q.B 431

Joachim v Swiss Bank of Corporation [1921] 3 KB 110

Westminster Bank Ltd v Hilton(1926) 43 TLR 124),

Tournier v National Provicial and Union Bank of England [1924] 1 KB 1 KB 461

Greenwood Vs Martius Bank Ltd [1933] Ac 51

Tar Hing Cotton Mill Ltd v Lin Chong Hing Bank Ltd [1986] AC 80

Curtice v London City and Midland Bank Ltd [1908] 1 kb 293

Trust Bank Tanzania Ltd v. Le-Marsh Enterprises Ltd and Others, (2000) Commercial Case

No.4 in the High Court of Tanzania (Commercial Division) at Dar es salaam, (Unreported)

Lazarus Mirisho Mafie v M/S Shidolya Tours & Safaris (2008)Commercial case No.10

(Unreported)

R v Shephered [1993] 1 All ER 213

National Banks of Commerce v. Milo Construction Co. Ltd and Two others Commercial case

No. 293 of 2002 (unreported)

R v. Hasan Faraji Kimaro (2005) Criminal Case No. 137 RMs court Tanga (unreported)

Anyaebosi v R T Briscoe Nigeria Ltd [1987] 3 N.W.L.R. 84 (part 59).

viii

STATUTES FROM TANZANIA

The Banking and Financial Instructions Act, Act No.5 of 2006

Bank of Tanzania Act, Act No. 4 of 2006

The Civil Procedure Act [Cap 33 R.E 2002]

The Law of Contract Act [Cap 345 R.E 2002]

The Electronic and Postal Communication Act, No 3 of 2010

The Tanzania Bill of Exchange Act [Cap 215R.E 2002]

The Foreign Exchange Act, 1992(Act. No 1)

The Penal Code [Cap 16 R.E 2002]

Sale of Goods Act[Cap 214 R.E 2002]

Written Laws Miscellaneous Amendment Act, No.15 of 2007

The Constitution of United Republic of Tanzania, 1977 (as amended from time to time)

ix

STATUTES FROM OTHER JURISDICTIONS

Information Technology Act, No.21 of 2000 India

Electronic Communication Act, 2000 (U.K).

The Banking and Financial Institution Act,1989, (Malaysia.)

The Electronic Transactions Act, 2000 (Mauritius.)

The US Uniform Electronic Transaction Act, 1999, (USA.)

The English Bill of Exchange Act,1882 [Cap 61 45 and 46 vict]

The Stamp Act,1891[cap 39 54 and 55 vict]

Electronic Communication and Transactions Act, Act No 25/2002

Electronic Communication Act,1986(US)

The Computer Fraud and Abuse Act,1986(US)

The Cyberspace Electronic Security Act,2000(US)

The Electronic Signature in Global and National Commerce Act,2000(US)

Computer Crime Act, 1997 (Malaysia)

Electronic Fund Transfer Act, (15 USC 1693 et seq) of 1978

x

ABSTRACT

The research examines the legal protection of customers in electronic banking. It examines in

details the challenges posed by Information and Communication Technology (ICT) on the

law and practice in regulation of electronic banking.

The research commences by laying a theoretical foundation of the research topic, portraying

that electronic banking in Tanzania is a product of ICT. It proceeds by providing the

outstanding point, alerting that there is almost absence of the law protecting customer in

electronic banking. The researcher refers to a literal works of other scholars who have posed

the comments on electronic banking particularly a customer legal protection and adopts

documentary evidence as strong point of reference.

Further, the researcher provides an overview of the laws regulating banking business as far as

a legal protection of customers in electronic banking is concerned. It also as well discusses

the nature and obligations of a bankers-customer relating in electronic banking as it is a very

important element of this research and provides for risks that may be encountered by a

customer in electronic banking. It develops by showing the legal barriers when it comes to

offering a legally protections customers in electronic banking. The issue of admissibility of

electronic banking is of essence and has been touched very critically. It finishes in

appreciating the experiences observed from other countries and laying possible solutions.

In conclusion the research mainly observes the entire legal framework turning to be white

elephant when it comes to protecting customers in electronic banking thus recommending

mainly enactment of a specific piece of legislation catering for customers legal protection in

electronic banking.

xi

TABLE OF CONTENTS

ContentsCERTIFICATION ......................................................................................................................i

DECLARATION .......................................................................................................................ii

COPYRIGHT........................................................................................................................... iii

ACKNOWLEDGEMENT ........................................................................................................iv

DEDICATION...........................................................................................................................v

ABBREVIATIONS ..................................................................................................................vi

LIST OF CASES......................................................................................................................vii

STATUTES FROM TANZANIA.......................................................................................... viii

STATUTES FROM OTHER JURISDICTIONS......................................................................ix

ABSTRACT...............................................................................................................................x

TABLE OF CONTENTS..........................................................................................................xi

CHAPTER ONE ........................................................................................................................1

INTRODUCTION .....................................................................................................................1

1.0 Introduction..........................................................................................................................1

1.1 Background of the Problem .................................................................................................2

1.2 Statement of the Problem.....................................................................................................4

1.3 Objective of the research .....................................................................................................4

1.4 Significance of the study......................................................................................................5

1.5 Literature Review.................................................................................................................5

1.8 Hypothesis............................................................................................................................8

1.9 Research Methodology ........................................................................................................8

1.10 Chapterization ....................................................................................................................9

CHAPTER ..................................................................................................................................TWO..................................................................................................................................................11

2.0 Introduction........................................................................................................................11

2.1 Who is a Customer? ...........................................................................................................11

2.2 Who is a banker/what is a bank?........................................................................................13

2.3 Electronic Banking.............................................................................................................15

2.4 Methods employed in Electronic banking provision in Tanzania .....................................16

xii

2.5 Growth and development of electronic banking in Tanzania ............................................16

2.6 The nature of a banker-customer relationship in electronic Banking ................................18

2.7 Obligations arising out of banker- customer relationship..................................................20

2.8 Laws Regulating Banking Business in Relation to Electronic banking in Tanzania.........26

2.9 Conclusion .........................................................................................................................28

CHAPTER THREE .................................................................................................................30

3.0 Introduction........................................................................................................................30

3.1 Legal barriers in electronic banking in Tanzania...............................................................30

3.2 The risks that a customer is likely to encounter in electronic banking..............................32

3.3 Admissibility of electronic evidence as far as a legal protection of customers in electronic banking is concerned................................................................................................................39

3.4 The position of the Judiciary as far as electronic banking is concerned............................43

3.5 Possible ways of managing and controlling risks in electronic banking ...........................45

3.6 Suggestions on the securities policies and measures for electronic banking in Tanzania .45

3.7 Experiences observed & Learnt from countries as regards to affording a legal protection of the customer in Electronic banking .....................................................................................48

3.8 Relevance of Model Laws in Electronic Banking .............................................................51

3.9. Conclusion ........................................................................................................................52

CHAPTER FOUR....................................................................................................................52

4.0 Introduction........................................................................................................................53

4.1 Summation and Conclusion ...............................................................................................53

4.2 Recommendations..............................................................................................................55

BIBLIOGRAPHY....................................................................................................................57

1

CHAPTER ONE

INTRODUCTION

1.0 Introduction

The thrust of this research is to examine the legal protection of customers in electronic banking

in Tanzania. The banks invested significantly in Information Communication Technology (ICT)

by introducing different forms of electronic banking in Tanzania to facilitate electronic cash

movements such as automatic in-line cashier terminal and centralized database-processing

facilities.1

Currently, ICT owes the task of supporting and raising service efficiency in all businesses.

Banking industry is one of the businesses that have exploited and used ICT to its banking

transactions and expand bank service opportunities to its customers. It conforms to the needs of

modern society that the internet plays an important role in peoples daily life .ICT has become

one of the tools that many customers can access to the internet banking services easily and

quickly.2 However, security issues presents a pressing concern to customers, this is because the

arguments by researchers and writers depict that there are legal issues of which customers are not

assured legal security against fraud and other related offences given lack of legal framework that

regulate this area in Tanzania.3

The researcher appreciates the fact that electronic banking is a new phenomenon in Tanzania

which has been brought by the rampant advancement of science and technology. Therefore, the

1 Mollel, A., & Lukumay, Z. (2008). Electronic Transactions and the Law of Evidence in Tanzania. Iringa: Peramiho Printing Press, p 5

2 Kasemsan, K., & Hunngam, N. (2010). Internet Banking Security Guideline Model for Banking in Thailand. p.1.Available at http:// www.ibimapublishing.com/journals/CIBIMA /CIMIMA/html, (Accessed on 15-2-2012)

3 Mambi, A. J. (2010). ICT law book, Dar es Salaam: Mkuki and Nyota Publishers Ltd, ,pp126-128

2

research includes a general diagnosis of the entire concept of a customer in electronic banking

and together with its general historical evolution. The research encompasses the general

overview of the legal aspect of banker-customer relationship in electronic banking. Moreover

customers are prone to encounter legal challenges that emanates from electronic banking to

customers. These prompt a full scrutiny of the reasons which subvert the Tanzania legal

framework to follow short as far as affording a protection to a customer in electronic banking is

concerned.

In this regards, it goes without a saying, doing research concerning issues brought by ICT

particular electronic banking is bit complex if not a challenging task. Therefore this will in some

respect involves the use of material beyond judicial and statutory provisions to determine

pertinent issues from generality to specificity. It implies, from generality entails examining the

whole legal framework regulating electronic banking and to specificity concentrating on the

aspect of a customer legal protection in electronic banking.

1.1 Background of the Problem

Electronic banking was firstly introduced in the United States of America (USA) in the early of

1990s and it has since extended globally gradually.4 Since the mid-1990 the Civil Service

Department of Tanzania has initiated a series of measures aimed at transformation to recognize

and promote the use ICT.5 The development of ICT has led to the paradigm shift in the banking

sector.ICT has revolutionized the banking sector making transactions faster and more

convenient.

4 Radhakrishna, G. (2009). Liability issues in internet banking in Malasysia.p1.Available at

http://www.ibimapublishing.com/journals/ (Accessed on 14-3-2012)5 Mollel & Lukumay (2008) p5

3

Tanzanian banking sector has made a noteworthy progress in deployment of ICT by introducing

a banking service known electronic banking. Banks like Cooperative Rural Development Bank

(CRDB), National Bank of Commerce (NBC) Bank, National Microfinance Bank (NMB) &

Tanzania Postal Bank have invested significantly in ICT by introducing different forms of

electronic banking to facilitate electronic cash movement.6 Such banks have cash machines

called Automated Teller Machines (ATM) with 24-hour access for the customers to cash and

perform other basic banking services.7

Apart from introducing ATMs several banks have introduced electronic cash management

proprietary software that links the customers computer to the Banks financial system (Pc

Banking).8 However, while electronic banking is taking place the law has been slow in protecting

customers in electronic banking. In addition, our laws have not incorporated tools of effecting

electronic transactions. The existing laws facilitate paper based transactions, which apparently

are not applicable to technological changes that are currently taking place in Tanzania.9

In, 2006, there was amendment of the Banking and Financial Institution Act but still this still

these amendments incorporated features that promote offline mode of transactions, in other word

it, promotes paper based transactions as a result it does not pave for recognition of electronic

transactions.10

6 Abdallah, A. (2011). The impact of ICT revolution in Tanzanias legal System: A critical analysis of

cybercrimes and computer forensic evidence. Unpublished Master Thesis, Open University of Tanzania. pp 28-29. Available at http://www,ict.into/osg/spu/cybersecurity // contribution/Tanzania-ulanga-paper pdf. (Accessed on 04-04 -2012)

7 Mollel, & Lukumay, (2008) pp 5-68 Bwana, A, J. (2003). Electronic banking and law in Tanzania: Approaches to its regulation, Tanzania

lawyer. p.29 Abdallah, A.(2011) p 2910 Mambi, A, J. (2010) pp 128-129

4

It was very promising for customers in the year 2010 when the Electronic and Postal

Communication Act,11 was enacted but despite the enactment of this law it does not afford

exhaustive legal protection of customers in electronic banking as it does not provide for

electronic transactions.

1.2 Statement of the Problem

The statement of the problem tabled by this research is that the current legal framework in

Tanzania is inadequate as to afford legal protection of customers in electronic banking.

Argumentatively, most of the pieces of legislation in Tanzania regulating bank business are

offline oriented and therefore Tanzania has yet to have cyber laws which regulate electronic

banking. This fact is revealed by the survey conducted at the office of chief Parliament

Draftsman. According to this survey Tanzania does not have laws that recognize electronic

transaction.12

1.3 Objective of the research

The objectives of this research are as follows: -

(i) To identify legal risks that a customer is likely to face in electronic banking especially

where there is inappropriate legal framework that governs electronic banking in

Tanzania.

(ii) To provide recommendation recommendations suggesting the need for amendment

or enactment banking laws so as to afford legal protection of customers in

transactions.

11 Act No. 3/201012 Mollel, & Lukumay, (2008) .p 9

5

1.4 Significance of the study

This research is of paramount importance because it will raise awareness to the legislators and

the customers on the shortcomings of law as regards to customers protection in electronic

banking and the associated legal and financial risks that are likely to be encountered by the

customer in electronic banking. Also the research will be vital to students who are studying

banking law and e-commerce law in expanding their knowledge on electronic banking. This

research will be of great assistance to those who will research on other aspects concerning

electronic banking. The recommendation of this research paper will bring tremendous changes if

they will be implemented as far as legal protection of customers in electronic banking is

concerned.

1.5 Literature Review

Until now literature on legal protection of customers in electronic banking is scarce. However,

given the nature of the problem and the complexity of issues underpinning this area, this section

reviews the few existing pieces of literature from Tanzania and selected foreign jurisdictions to

define the nature and dimension of the problem. The latter countries include India, Malaysia, and

United Kingdom (UK). The reasons for selection of these countries are first and foremost, that

these countries share a similar legal system and tradition with Tanzania; the common law legal

system. Besides, they are also the pioneers in addressing the problem dealt with in this research.

Bwana, J.13 has lengthily discussed the implementation of electronic banking in Tanzania.

The work of this author is precious as it includes the risks that a customer is likely to encounter

in electronic banking as a result of inappropriate legal framework. The author has also classified

13 Bwana (2003) pp 1-10

6

the relationship between banks and customers in electronic banking in Tanzania as being purely

on contractual basis. However due to new features of electronic banking there is a need to come

up with a piece of legislation to govern this specific area of electronic banking which subjects

customers into security risks.

Mollel, A.14argues that information communication technology is more and more gaining

magnitude in almost all sectors of national development in developing countries. Electronic

transactions are replacing the old and traditional methods of transacting in all walks of life.

However, the full-fledged application of information communication technology for

development in most of these countries is seriously hindered by lack of comprehensive legal and

regulatory framework for the subject. The author points out that these challenges spin around

integrity, authenticity and security of electronic records.

Mambi, A, J.15 has discussed extensively on Information Communication Technology in

Tanzania. As regard to electronic banking, he is of the view that there is a lack of certainty on

electronic banking in Tanzania and possibly the region of East African Community whereby

electronic banking is growing explosively. As a result of inappropriate legal framework

electronic banking may expose a customer to legal risks on question of privacy, cyber crimes and

other related electronic financial result. The current legal framework on financial and other

related transactions do not suit electronic transactions hence a barrier to e-commerce

development. The laws do not accommodate online transactions or payment in cyberspace rather

than off-line transactions.

14 Mollel, A. (1996).The legal and regulatory framework for ICT in developing countries: Case study of

ICT and the law of evidence in Tanzania.pp1-16. Available at http://cs.joensuu.fi/ipid2008/abstracts/Mollel Andrew_ICT4D PAPER.pdf ( Accessed on 1-2-2011)

15 Mambi, (2010) pp 120-132

7

Mollel, A. & Lukumay, Z.16 have posed a strong discussion on electronic Transactions and the

law of evidence in Tanzania, and have stressed that the current legal system does not adequately

address the impact of ICT on rules of evidence in Tanzania. The writers have found that the

banking sector has made remarkable progress in deployment of ICT by introducing electronic

banking but despite such progress a fully fledged deployment of the benefit of ICT in Tanzania

has not yet been reached. This is because Tanzania has yet to have cyber laws.

Basle Committee on Banking Supervision17 found that electronic banking and electronic money

activities, rights and obligations of customers to such transactions are, in some cases, uncertain.

For example, application of some consumer protection rules to electronic banking and electronic

money activities in some countries may not be clear because of the lack of a proper law. Legal

risk arises from violations of, or non-conformity with laws, rules, regulations, or prescribed

practices, or when the legal rights and obligations of parties to a transaction are not well

established. In addition, legal risk may arise from uncertainty about the validity of some

agreements formed via electronic media.

Schaechter, A,18 presents a general overview on issues in electronic banking. He laments that

there are two other important sources of legal risk to customers. First, there can be uncertainty;

about which legislation applies to electronic banking transactions; the legislation of the

jurisdiction in which the (virtual) bank is licensed or in which the services are offered. This is

especially true when electronic banking has a cross-border nature where different legislations

might conflict with each other. And secondly as a consequence of this, also enforcement can be

16 Mollel & Lukumay (2008) pp 5-1217Basle Committee on Banking Supervision.(1998). Risk management for electronic banking and

electronic money activities,BS/97/122, pp 1-9.Available at http://www.bis.org/publ/bcbs35.pgf. Accessed on 5-5-2012.

18Schaechter,A.(2002).Issues in electronic banking: An overview. pp 10-20. Available at http://www.imf.org/external/pubs/ft/.../2002/pdf06.pdf . (Accessed on 17-4-2012)

8

difficult. Moreover, enforcement of certain emerging areas of law is uncertain, for example laws

related to electronic contracts and digital signatures. This can lead to violations of customers

protection laws, including data collection and privacy, and regulations for soliciting could be

important issues. In other word the author is of the view that customers can only be protected

clearly by a system of law.

Lloyd, J,19 discusses electronic banking as part of electronic commerce due to the fact that

electronic banking enhances consumer confidence in electronic commerce. He further stated that

consumers in electronic banking are afforded legal protection by a proper legislation known as

the Consumer Credit Act.20 However, this legal protection is afforded only where a consumer is

resident in United Kingdom. The author implies that a customer in electronic banking can be

protected in his/ her respective countries if in his/her country there is a piece of legislation

protecting him or her in electronic banking.

1.8 Hypothesis

The researcher intends to prove the following statement concerning customers in electronic

banking that; the current legal framework does not afford legal protection of customers in

electronic banking in Tanzania.

1.9 Research Methodology

This research relies on documentary evidence as the dominant source of data collection. A chain

of literature including books, articles, journals, and thesis will be consulted to retrieve knowledge

on how the law affords or fails to afford legal protection to customers in electronic banking. To

19Lloyds, J. (2008). Information technology law,5th ed. United States of America: Oxford University Press,

pp 506-50720 1947.

9

achieve this, the Library of Tumaini University Makumira will offer a fertile ground for

documentary review. Also as most articles, journals, etc are available electronically, various

websites were also consulted.

The available case law decided by the Tanzanian courts will be consulted for analogous

reasoning. Some comparison with law and cases decided in other common law jurisdictions like

USA, UK, India, Republic of South Africa and Nigeria will also be embarked upon for

illustrative purposes and not as a standard of law to be adopted.

The main reasons for opting for documentary review as the dominant source of data collection

for this research are limited resources and time. This means sufficient resources were needed to

engage in extensive interviews and administer questionnaires to respondents in Tanzania.

Finally, electric current power failures or fault are also a big problem.

1.10 Chapterization

This research paper encompasses an accumulation of four chapters and the following is a brief

Chapterization of each chapter;

Chapter one introduces the research topic as it carries the general introduction and theoretical

foundation of the research topic. In so doing, it portrays where the problem of the research bares

it origin and this is on the part of the background research problem. It develops into providing

the outstanding point on part of the statement of the statement which critically introduces the

topic. The chapter makes a reference to a literal works of other scholars who have posed their

comments on the aspect of legal protection of customers in electronic banking. The chapter ends

by making a demonstration of the means mainly for collection of data.

10

Chapter two makes an overview of the laws regulating banking business as far as a legal

protection of customers in electronic banking is concerned. In this regards, it highlights

applicable laws in regulation of a banking sector in Tanzania. However the chapter commences

by highlighting basic concepts in this research most importantly providing the meaning of the

customer and electronic banking. It also as well discusses the nature and obligations of a

bankers-customer relating in electronic banking as it is a very important element of this research.

Chapter three provides for risks that may be encountered by a customer in electronic banking.

The risks range from legal risks, financial risks to security risks. It develops by showing the legal

barriers when it comes to offering a legally protections customers in electronic banking. The

issue of admissibility of electronic banking is of essence and has been touched very critically.

Moreover, the position of the Judiciary as far this aspect is concerned, is scrutinized to the fully.

It finishes in appreciating the experiences observed from other countries and laying possible

solutions. The relevance of model laws is as well has been enshrined in this chapter.

Chapter four concludes the contents of the three chapters. Therefore the topic provides for

general summations as it provides for conclusion and recommendations. The conclusion mainly

observes the entire legal framework turning to be white elephant when it comes to protecting

customers in electronic banking thus recommending mainly enactment of a specific piece of

legislation catering for customers legal protection in electronic banking.

11

CHAPTER TWO

AN OVERVIEW OF THE LAWS REGULATING BANKING BUSSINESS IN

TANZANIA PERTAINING TO A LEGAL PROTECTION OF A CUSTOMER IN

ELECTRONIC BANKING

2.0 Introduction.

In this chapter the researcher will discuss the laws that are applicable to the regulation of banking

activities as well as if they afford to regulate electronic banking, so as to provide a legal

protection of a customer in electronic banking in Tanzania. The concept of a customer, a bank

and the bank-customer relationship in electronic banking in Tanzania will form part and parcel of

this chapter. The meaning if electronic banking shall be highlighted.

2.1 Who is a Customer?

The question of who may be called a customer is not answered by any specific definition in any

of the legislations governing banking business in Tanzania. Therefore it is not easy to define who

a customer is. Recourse has therefore to be made to case law in order to determine who is a

customer.

In the case of Great Western Railway Co. v London and County Banking Co. Ltd,21 a bank

had cashed cheques of man who had no account with it for about twenty years. The issue before

the court of laws was whether discounting a cheque by itself can make a person a customer of a

bank. It was held by the House of Lord that the man was not a customer. Lord Davey found that

in order to determine a person being a customer or not there must be some sort of account, either

a deposit or a current account or some similar relation, to make a man a customer of a banker. In

21 [1901] A.C. 414

12

other words if a person does not have the account with a particular bank then he is not a

customer of that particular bank.

In the Privy Council case of Commissioners of Taxation v. English, Scottish & Australian

Bank Limited,22 in this case the thief stole a cheque payable to bearer from the commission of

Taxation. Then, the thief opened an account at the respondent bank in the name of Stuart

Thallon. The next day Thallon paid the stolen cheque into the account and after it has been

cleared, drew cheques on the proceeds then disappeared. The issue was whether Thallon was a

customer or not. In its defence the bank pleaded section 88 of the Bills of Exchange Act,23 of

Common Wealth of Australia that Thallon was a customer. It was held that Thallon was a

customer. Lord Dunedin delivering the judgment of their Lordships stated that the word

customer signifies a relationship in which duration is not of the essence. That a person whose

money has been accepted by a bank on the footing that they undertake to honor cheques up to the

amount standing to his credit is, in the view of their Lordships, is a customer of the bank in the

sense of the Act,24 irrespective of whether his connection is of short or long standing.

However, in the case of Woods v. Martins Bank,25 the plaintiff wrote to the defendant bank

asking it to collect monies he had ordered a building society to pay to the bank, to pay part of the

sum received to a particular company and to retain the balance of the proceeds to his order. The

bank agrees to comply with the instructions even though the plaintiff did not have the account

with them at the time. The court found that the plaintiff was the customer. Salmon J. stated that

since the defendant bank accepted the instructions contained in the letter as the plaintiffs banker

22 [1920] A.C. 68323 190924 88 of the Bills of Exchange Act,190925 [1959] 1 Q.B. 55

13

and at any rate from that date the relationship of banker and customer existed between them.

Form this case it can be inferred that opening an account is not a pre-requisite for on to become a

customer a mere likelihood that an account will be opened is enough to make a person a

customer provided that a bank has agreed service to such a person. How ever I pose an argument

this case should be read as an exceptional to the general rule that a customer is required to have

account with the bank.

Taking into consideration of the above cases, it can therefore be concluded that to constitute a

customer essential requisite which must be fulfilled requires that a person to have opened an

account with the bank. Therefore a customer of a bank is a person who has applied to it to open

a current or deposit account in his name and whose application has been accepted by the bank. It

is not necessary that the account should have been opened for a minimum length of time, or that

it should have been operated by the customer making a deposit and drawings against it. The

dealing between the banker and the customer must be of nature of banking business.26 Moreover,

a customer of the bank need not only restricted to a person. A firm, joint stock company, a

society or any separate legal entity may be a customer.27

2.2 Who is a banker/what is a bank?

The word bank/banker is defined by statutes, case laws and by legal texts. According to section 2

of the English Bills of Exchange Act,28 and the Stamp Act,29 a banker is defined as any person

carrying on the business of banking. According to section 2 of the Tanzania Bills of Exchange

26Sundharam, K.P.M, & Varnshiney, P.N.(2004).Banking: Theory, law & practise.17 ed, New Delhi:Sultan

Chand & Sons. p 2.727 Ibid p 2.128 1882(Cap 61 45 and 46 vict)29 1891(Cap 39 54 and 55 vict)

14

Act,30 a banker includes a body of persons whether incorporated or not who are carrying on the

business of banking. The term bank is also defined under Section 3 the Banking and Financial

Institutions Act,31 to mean an entity that is engaged in banking business and the Bank of

Tanzania Act,32under section 3 has a similar definition of a bank.

Case law has also defined who a banker is. The leading authority on the definition of a banker is

in the case of United Dominions Trust Ltd Vs Kirkwood,33 United Dominions Trust Ltd

(UDTL) was a well established finance house with high standing. UDTL lent 50,000 to

Lonsdale Motors Ltd to enable them to buy cars to put in their show rooms to sell. In return

Lonsdale Motors Ltd accepted five bills of exchange, each for 1,000, drawn on them by UDTL.

The defendant was the managing director of Lonsdale Motors Ltd and he endorsed the bills. The

bills were not met on presentation and Lonsdale Motors Ltd having gone, into Liquidation,

UDTL sued the defendant as endorsee.

The defendant only defense was that the UDTL was unregistered moneylender and that the Loan

was illegal as it contravened the provisions of the Money Lender Act.34 The case turned on

whether UDTL was bonafide carrying on the business of banking within the meaning of section

6(d) of the Money lender Act,35 so as to exempt it from the provision of the Act. The court of

upheld that UDTL claim that it was bonafide carrying on the business of banking and allowed it

to recover from the defendant. The court further stated that a banker is the cooperation or a group

of persons who accept money on current account, pay cheques drown upon such accounts and

collection cheques for the customer.

30 Cap 215 RE 200231 Act No.5/200632Act No.4/200633[1966]2 Q.B 431341900351900

15

According to and Sealy & Holley, 36 they are of the view that there is no comprehensive legal

definition of the term bank, banker and banking but the precise meaning of each term turn on the

particular context in which it arises. The common context where the issue becomes important are

for example, the area of banking regulation, where rights and duties are conferred on a banker

and where there is an attempt to avoid a payment obligation on the ground that it arose on an

illegal contract, which is void or enforceable because it is owned by unlicenced bank.

2.3 Electronic Banking

Electronic banking has been defined as a service provided by banks that allows people to pay

money from one account to another, pay bills etc using the internet.37 Bwana, J, provides a

technical definition of what constitute the term electronic banking as an array of data-processing,

electronic and telemetric techniques and infrastructures that make it possible to exchange funds

in a paperless fashion within a two-way and sometimes three-way relationship between banks,

merchants and consumers.38

Electronic banking is further defined as the use of electronic delivery channels for banking

products and services, and is a subset of electronic finance. The most important electronic

delivery channels are the internet, wireless communication networks, ATMs and telephone

banking.39

36Sealy, L.S., & Hooley, R.J.S.(2005).Commercial law: Text, cases and materials.3rd ed. United States:

Oxford University Press.p.57437Longman Dictionary of Contemporary English.(2009) ,5th ed,England: Pearson Education Limited. p 50738 Bwana, (2003). p139Schaechter, (2002).p 4

16

Furthermore, electronic banking provides the facility to the customers to access their accounts

and execute transactions electronically in a very easy way by their accounts at any time.40

Moreover it is defined as an internet portal, through which customers can use different kinds of

banking services ranging from bill payment to making investments. Indeed the use of the internet

as a new alternative channel for the distribution of financial services.41 In conclusion electronic

banking can be defined simply as the provision of banking services to customers through internet

technology.

2.4 Methods employed in Electronic banking provision in Tanzania

The banks in Tanzania use Electronic Funds Transfer at a Point of Sale(EFTPOS), ATMs, Smart

cards, Telephone or screen phone banking to provide electronic banking services.42 For example

as to the regards of ATMs, banks in Tanzania are using Very Small Aperture Terminals (VSATs)

or public leased line to interconnect their branches and cash dispensing through ATMs.43

Moreover, ATMs and phone banking are methods of electronic banking that are widely used by

customers in Tanzania.

2.5 Growth and development of electronic banking in Tanzania

The growth and development of Electronic banking in Tanzania can be traced back from the time

when Tanzania experienced the liberalization of her economy.44 Economic liberalization

prompted the increase in engagement in various economic activities that necessitated the support

40 Shamim, S & Sardar, K.(2010). Electronic banking & E-readiness Adoption Commercial Banks in

Pakistan p 58. Available at http://www.diva-portal.org/smash/get/FULLTEXT01.( Accessed on 4-3-2012)41Ahmad, A, M. (2010). E-banking functionality and outcomes of customer satisfactory: An empirical

investigation pp 1-2. Available at http://ccsenet.org/journal/index/ijms/article/.../6838 .( Accessed on 3-4-2012)42 Mambi (2010) p12643 Ibid p.244 Mniwasa, M.S.(2005). The origin, operation and regulation of electronic banking in Tanzania: Law and

practice. Unpublished Master Thesis, University of Dare es Salaam. p.66

17

of a strong, efficient, reliable and secure payment system.45 These measures were tune to support

the changes that were taking place in the Tanzanian economy. However, the payment

instruments and mechanism to support corporate payments remained almost unchanged.46

Therefore, it was necessary that there should be in place an efficient and supportive legal and

regular framework capable of regulating new payment instruments structures.47

This trigged the need for an efficient and reliable system for regulation of the payment system in

Tanzania. The government of Tanzania responded by enunciating the National Payment System

(NPS) a modernization project in 1966 to re-examine the countrys payment system with the aim

of developing an efficient payment system.48

The NPS had a vision to have in place an efficient customer centred payment system by the year

2005, this project was spearheaded by the Bank of Tanzania49. As a result of these stiff efforts

marked the inception of electronic banking Tanzania.

Moreover in support of the above expositions, as I had stated earlier on ever since the mid-1990

the Civil Service Department of Tanzania played a greatest role by initiating a series of measures

solemnly aimed at making transfiguration to recognize and promote the use ICT.50 In which the

development of ICT has led to the paradigm shift in the banking sector and this is also part and

parcel of Tanzania economic liberalization. ICT revolutionized the banking sector making

transactions move faster and more conveniently.

45 Bank of Tanzania, Tanzania payment system-vision and strategic framework p 3.Available at

http://www.bot-tz/.../org/Y2005Vjan2000 p.d.f (Accessed on 3-4-2102) 46Ibid 47 Supra note48Bank of Tanzania website. Available at http://www.bot-tz.org/paymentsystem/NPSoverview.asp.

Accessed on 4-4-2012 49 Ibid, 50 Mollel & Lukumay (2008). p 5

18

Tanzanian banking sector thus made a noteworthy progression in deployment of ICT by

introducing a banking service known electronic banking. Banks like CRDB, NBC, NMB &

Tanzania Postal Bank have invested significantly in ICT by introducing different forms of

electronic banking to facilitate electronic cash movement.51Thus, electronic banking is in place

up to date in Tanzania and keeps developing more and more.

2.6 The nature of a banker-customer relationship in electronic Banking

The nature of banker customer relationship is contractual in nature, and the relationship is one

of creditor and debtor in relationship to the balance in the customers account.52 The contractual

nature of banker-customer relationship extends to electronic banking and it must be observed

even if there is advancement of science and technology. Despite the fact as it argued that a

banker customer relationship is already a very complex and difficult item and difficulties even

multiplies when the relationship is combined with technology of electronic banking. 53

The contractual nature of bank-customer relationship was stated in the case of Foley v Hill, 54

the House of Lords held that the banker-customer relationship was essentially a debtor-creditor

relationship. This characterization was obvious crucial, for it enabled banks to treat money

deposited with them as their own money. All they were obliged to do was to return an equivalent

amount on demand.55

This was again re-affirmed in the case of Joachim v Swiss Bank of Corporation.56 In this case

51 Abdallah, A. (2011). The Impact of ICT Revolution in Tanzanias Legal System: A critical analysis of

cybercrimes and Computer Forensic Evidence Unpublished Master Thesis, Open University of Tanzania.pp 28-29. Available at http://www,ict.into/osg/spu/cybersecurity // contribution/Tanzania-ulanga-paper pdf. (Accessed on 2-5-2012)

52 Sealy & Hooley(2005).p 58553 Schaechter (2002) p154 (1848) 2 HLC 28, 9 ER 100255 Cranston, R. (2002). Principles of banking law. 2nd ed.United States: Oxford University Press.p 13156 [1921] 3 KB 110

19

on 1st August 1914, one of the partners in the firm of N Joachimson died as result the partnership

was dissolved. At the date of dissolution the sum of 2,321 was standing to the credit of the

partnership on current account at the defendant bank. At the end of the First World War one of

the partners brought an action in the firms name to recover the sum. The banks defence was

that, as no demand had been made, no cause of action had accrued to the firm on 1st August 1914

and that, therefore, the action was not maintainable. The court of law found that the money

deposited with the bank is only payable on demand.

However, it is contended that the banker-customer relationship is not only of debtor and creditor,

may also be one of a principal and agent. The principal-agent relationship arises for the purpose

of customers instruction to his banker to carry out a particular transaction on his account.57 For

example, in traditional banking when drawing a cheque or bill of exchange, the customer, as

principal, authorizes his bank, as agent, to make payment. This in electronic banking is done by

using a credit card on the ATMs or a password when a customer is using a home or office

computer and another situation is when a person is using his mobile phone.

In the case of Westminster Bank Ltd v Hilton,58 Lord Atkinson explained the relationship in

this way, that it is well established that the normal relation between a banker and his customer is

that of debtor and creditor, but it is equally well established that the drawing and payment of the

customer's cheques as against money of the customer's in the banker's hands the relation is that

of principal and agent The cheque is an order of the principal's addressed to the agent to pay out

of the principal's money in the agent's hands the amount of the cheque to the payee thereof.

The bank-customer relationship may be of bailor and bailee, this happens when valuables are left

57 Sealy, & Hooley, (2005).pp 588-58958 (1926) 43 TLR 124,

20

with the bank for safe keeping, it exercise custody of goods at an agreed price. This relationship

can also be of trustee and beneficiary if a bank receives money as a trustee and exercising an

express power in the trust deed, deposits trust money with itself qua banker.

It is further argued that the bank-customer relationship is purely on the contractual basis however

electronic banking is associated with new features.59 These features include electronic

transactions, electronic documents, electronic signature so to mention but a few a not covered for

under the Law of Contract Act60 which regulates matters of contracts in Tanzania. The law of

contract does not accommodate online banking. For example on the written contract the law of

contract requires it to be in writing and duly signed or authenticated before a witness. The

requirements are no longer applicable in cyberspace world hence they affect former laws which

have to face changes and reforms to accommodate electronic commerce principles.61

2.7 Obligations arising out of banker- customer relationship

The banker owes the duty of secrecy to a customers account. This duty is not only a moral duty

but a bank is legally bound to keep affairs of the customer secret. On such a note a bank is not

allowed to disclose the state of affairs of the customers account.62

In the case of Tournier v National Provicial and Union Bank of England,63 Tournier was a

customer of the bank and his account was overdrawn. A cheque was drawn by another customer

in favour of Tournier, instead of Tournier paying the cheque to his own account he endorsed it to

a third party account. The bank subsequent telephoned Tourniers office and the course of

59 Bwana (2003) pp1-1060 Cap 345 R.E 200261 Ibid. P. 139 62Gyan,V.(2009). Relationship Between Banker and Customer p 7

Available at http://www.vidyagyan.blogspot.com/.../relationship-between-...- (Accessed on 2-2-2-2012)63 [1924] 1 KB 1 KB 461

21

conversation the bank disclosed to his employer that Tournier was indebted to them and was

sending money to a bookmaker. As a result of this disclosure Tournier lost his job. Tournier sued

the bank for slander and breach of the implied term of contract that the bank would not disclose

to a third party the state of his account or any transaction relating thereto. The court held that the

bank was under a duty not to disclose the state of its customers account nor transaction relating

thereto.

The Banking and Financial Institutions Act,64 under section 48(1) requires any bank, and all

financial institutions not to divulge information relating to customer affairs if not required by any

law to do so. Maintaining secrecy is an implied term of the contract with a customer and a bank

enters into with the customer at the time of opening an account.

This duty extends to electronic banking as the banker should maintain secrecy in respect of

operations through ATM/debit cards. Bank has also to maintain secrecy of user ID pins with due

care so that it does not fall in wrong hands.65 This implies not disclosing the information of the

customers account, customer personal identification number or passwords. Maintaining secrecy

can be by the way of conducting seminars to bank staff and entering into a contract with those

staff members of the bank for maintenance of secrecy of customers and in case breach of the

agreement should suffer punishment ranging from taken to court to face charges to

expulsion/termination from his/her work.66

However it is argued that the duty of secrecy does not exist in its original shape in electronic

banking, this is because banks disclose information without express consent of the customer. The

64Act No. 5/200665 Gyan (2009) p 766Mweteni, A.J. (2011).Application of the duty of confidentiality in electronic banking in Tanzania: A case

study of Arusha Region. Unpublished research paper, Tumaini University, Makumira

22

argument posed by the bankers is that such practices are by implied consent of the customer to

the common practice of the bank for their protection. There are also various statutes which

require for the disclosure of the customers information, so as to tackle the new crimes in

electronic banking such as fraud, identity theft and unlawful use of the customers personal

information.67 It is argued however that the duty of secrecy can lawfully be waived only

circumstances where there is an order of the court, public interest or state security, consent of the

customer and where the interest of the bank requires the disclosure.68

There is another duty in this relationship that is to guard against forgery which is cast upon both

the bank and the customer. Any party who has a reason to believe or suspect that forgery is being

perpetrated, has a duty to inform the other. If the customer fails to inform the bank of forgeries

he is aware of their bank will be released from liability.69 In safeguarding against forgery the

customer using electronic devices such an ATM, a personal computer or a mobile phone should

exercise reasonable care to ensure he does not disclose his details to the third party.

This duty is validated in the case of Greenwood V Martins Bank Ltd.70 The husband opened

an account in his sole name with the respondent bank. His wife forged his signature on various

cheques and drew money out of his account. The husband found out about the forgeries, but

persuaded by his wife not to say anything, the husband remained silent for 8 months. When he

finally told the bank his wife shot herself. The husband brought an action against the bank to

recover the sums paid out of his account on the cheque to which signature had been forged. The

67 Zubair, M.(year not specified). An analysis of duty of confidentiality owed by banker to its customer

pp 1-6. Available at http://papers.ssrn.com/.../SSRN_ID1815825_Code9537. (Accessed on 7-5-2012 )68 Mwenteni (2011) pp 41-42 69 Greenwood V Martins Bank Ltd [1933] AC 5170 [1933] AC 51

23

court held that the husband was estopped from denying the authenticity of the signature as he had

a duty to inform the bank immediately of the forgery.

In the case of Tai Hing Cotton Mill Ltd v Lin Chong Hing Bank Ltd,71 The appellant

company was the customer of the respondent banks and maintained with each of them a current

account. The appellant brought an action to recover from the three banks sums of money alleged

to have been wrongful debited against its current account at each bank. The banks had honored

payment of 300 cheques totaling approximately 5.5 million Hong Kong dollars appeared to be

drawn by company director who was authorized signatory. The banks honored the cheques and

debited the customers account although the cheques were forged. Later it came to be known that

the managing directors signature was forged by an account clerk. The first issue was on who

should bear the loss arising from the forged cheques was it the company or the bank. The second

issue was the nature and extent of the duty of care owed by the customer during the operation of

current account.

The court of law found that the customer only owes a duty not to draw a cheque in a manner

which facilitates forgery or fraud and the customer has the duty to inform the bank of any

unauthorized cheques or forgery is aware of. Further, the customer is under no duty to take

reasonable precautions in the management of his business with the bank in order to prevent false

cheques being presented. The court further found that the customer is under no duty to examine

his periodic bank statements unless there is effective confirmation clause incorporated into the

bank-customer relationship.

In electronic banking, the banks have a duty to safeguard against forgery by warning the

customer as regard to financial risk of which he or she might be exposed. The customers in

71 [1986] AC 80

24

electronic banking have the duty also to provide the bank with necessary information if he or she

suspect that his account details are at stake such as to the regard to the lost of the credit card and

even suspicion that his or her account passwords have been acquires by a third party. Still the

customer has to comply with the advice and information given by the bank towards safe

utilization of electronic banking services72

Moreover, the banker has the duty to pay the customer on demand and in accordance with his

instructions. This is the fundamental obligation of the banker/the basic obligation. A customer

normally instructs his bank by a cheque in normal banking but in electronic banking a customer

instruct his bank commands on the electronic devices such as on ATMs and personal computers.

Once the banker has obeyed the instruction given by the customer, it has the right to debit the

customers account.73 The bank will only obey the customer demand/instruction where the

customer has sufficient funds or where has agreed to provide to the customer with overdraft

facilities sufficient to meet the order.

The process of giving instruction to the bank by a customer has been updated by electronic

banking and advancement of science and technology. In the past most payments instructions

were given by the use of the cheques but in modern banking practice they are just as likely be

given by electronic means such as by the debit card at a retail outlet, or the through the use of

telephone banking or an internet banking service.74

Still, there are circumstances where the bank may refuse to pay. Should it refuse to pay, it must

have good reason otherwise the bank will be liable for damages for breach of contract. The bank

72 Schaechter (2002) pp 13-1573 Sealy, & Hooley, (2005) p 60174 Sealy, & Hooley, (2005) p 601

25

has a good cause not to pay where the instructions are ambiguous in form, where there is serious

or real possibility that payment instructions have been given without the proper authority of its

customer. Also where paying would render it liable as accessory to misfeasance or breach of

trust and where there has been a garnishee order issued by a court of competent jurisdiction

against the customers account.75

The Banks still has the duty to obey the customers countermand. This is the converse of the

banks duty to obey the customers mandate. It is the banks obligation to obey his countermand

with regard to cheques or electronic means such as by the debit card at a retail outlet, or the

through the use of telephone banking or an internet banking service by simply sending the

abortion inform faster to the bank.

In the case of Curtice v London City and Midland Bank Ltd.76 The plaintiff was a customer

of the different branches of the defendants bank. He drew a cheque one branch, after business

on the same day the plaintiff telegrammed the branch to stop payment of the cheque. The post

office telegram messenger found the bank closed and he placed the telegram in the banks letter

box at 6:15 pm. By over sight the telegram was not taken out of the letter box and shown to the

branch Manager until two days later. By this time, the cheque had been paid, unknown to the

plaintiff he drew another cheque but it was dishonoured. Then the plaintiff sued the bank for

breach of the duty to pay.It was held that the notice of countermand must be clear and

unambiguous and must be brought to the actual and not constructive knowledge of the bank and

unless otherwise agreed, notice of countermand must be given to the branch of the bank where

the account is kept.

75 ibid76 [1908] 1KB 293

26

It is the argument of the researcher that obligation and duties that accrue out the banker-costumer

relation also persists in electronic banking. Therefore there should be observance of these duties

just like in normal banking principles. This is because electronic banking is also banking system

of which just it media of its provision has changed.

2.8 Laws Regulating Banking Business in Relation to Electronic banking in Tanzania

In Tanzania, the main legislations governing banking sector are the Banking of Tanzania

Act,77and the Banking and Financial Institutions Act,78 The banking sector in Tanzania is

regulated and supervised by the Bank of Tanzania.79

The Banking and Financial Institutions Act,80 controls the operations of banks and financial

institutions. The Banking and Financial Institutions Act,81 gives the Bank of Tanzania powers

over the banks and financial institutions to include to grant licences to all banks, power to inspect

operations of all banks or financial institutions, and require them to furnish any information or to

comply with any order, directive or determination issued or made by the Bank of Tanzania to be

furnished by banks and financial institutions.82 The Banking and Financial Institutions Act,83

consolidates the law relating to business of banking, to harmonize the operations of all financial

institutions in Tanzania, to foster sound banking activities, to regulate credit operations and

provide for other matters incidental to or connected with those purposes.84 The Banking and

77 Act no.4/200678 Act no. 5/200679 Section 5(1) of The Bank of Tanzania Act, 2006( No. 4)80 Act No. 5/200681 ibid82 Section 4 of the Banking and Financial Institutions Act, 2006( No. 5)83 Act No.5/2006 84Bank of Tanzania: Banking Supervision (2012)

Available at http://ww.bot-tz.org/BankingSupervision/Bankingsup.(Accessed on 22-5- 2012) 84 2008

27

Financial Institutions Act,85 provide for comprehensive regulation of banks and financial

institutions. It provides further for regulations and supervision of activities of savings and credit

co-operative societies and schemes with a view to maintaining the stability, safety and soundness

of the financial system aimed at reduction of risk of loss to depositors. On the contrary

regulation of electronic banking is not stipulated under these two main legislations governing

banking sector possibly these laws were enacted without putting into consideration the matters of

electronic banking which was existence in 2006 when there two laws were enacted.

Apart from these laws, other laws which are applicable in banking sector includes The Foreign

Exchange Act,86 which was enacted for making better provisions for the more efficient

administration and management of dealings and other acts in relation to gold, foreign currency,

securities, payments, debts, import, export, transfer or settlement of property and for the

purposes incidental to and connected to those. This law also does not provide for electronic

banking. Also the Bills of Exchange Act,87 governs issues relating to negotiable instruments, yet

also does not provide for electronic banking.

Some other laws, which in some certain circumstances can be used to regulate banking sector

these include the Law of Contract Act,88 the Land Act89 in respect of Mortgage issues and

Companies Act90 respect of the matter of establishment of the bank as an entity. Even these laws

do not address the matters related to electronic banking and legal protection of a customer in

electronic banking.

85 Act No.5/200686 Act No 1/199287 Cap 215 R.E 200288 Cap 345 R.E 200289 Act No. 5/ 200290 Act No.12/2002

28

The Banking and Financial Institutions Regulations also govern banking sector in Tanzania but

still also do not provide for electronic banking in Tanzania. These Regulations apply to all banks

and financial institutions, they include:

The Banking and Financial Institutions (Capital Adequacy) Regulations,91the Banking and

Financial Institutions (Management of Risk Assets) Regulations,92 the Banking and Financial

Institutions (Credit Concentration and Other Exposure Limits) Regulations,93 the Banking and

Financial Institutions (Foreign Exchange Exposure Limits)Regulations,94 the Banking and

Financial Institutions (Internal Control and Internal Audit) Regulations.95 The Banking and

Financial Institutions (Microfinance Companies and Micro-credit Activities) Regulations,96 the

Foreign Exchange (Bureaux de Change) Regulations,97.

Despite the fact that Tanzania has a lot of laws and different regulations to govern the banking

sector, all of these do not provide for electronic banking and therefore do not address the issue of

a customer legal protection in electronic banking.

2.9 Conclusion

The chapter lays foundation of the entire research. The basic concepts of entire research have

been demonstrated. Likewise, it has been highlighted that there are various laws that are

applicable to regulate banking sector in Tanzania. To the extents that even the bank-customer

relationship is regulated by the Law of the Contract.98 But these laws are applicable only to

91 G.N No.373/200892 G.N No.370/200893 G.N No.376/200894 G.N No.369/200895 G.N No.79/200596 G.N No.80/200597 G.N No.88/200898 Cap 345 R.E 2002

29

traditional banking this is because electronic banking is not provide for in under laws stated

above. It has been highlighted further that bank-customer relationship imposes duties and

obligations to the parties but in electronic banking there are not observed or seems to have been

neglected or forgotten the reason being the absence of a piece of legislation to ensure their

observance. Therefore despite this broad spectrum of laws a customer is not protected when

transacting business in electronic form. Hence, the chapter forms a strong springboard or

stepping stone to jump to the next chapter for more critics on the entire legal framework

regulating banking activities and the customer in electronic banking.

30

CHAPTER THREE

AN OVERVIEW OF THE GAP IN THE LAWS BROUGHT BY ELECTRONIC

BANKING: ITS ASSOCIATABLE RISKS TO A CUSTOMER AND POSSIBLE

SOLUTIONS

3.0 Introduction

The chapter discusses very critically on the laws that are applicable in one way or another in

regulation of banking sector in Tanzania. It zeros into discussing the lacuna which has been

created by electronic banking. It demonstrates the customers risks in electronic banking ranging

from legal, financial to security risks and their causative agent. In some aspects the wisdom of

the members of the bar will be visited to expound the positions of the Judicial as far as a legal

protection of a customer in electronic banking is concerned. In the ends it provides possible

solutions to the issues brought by electronic banking. The data collected are mainly secondary

data as the researcher relied much on documentary as the dominant source of data collection.

3.1 Legal barriers in electronic banking in Tanzania

Legal barriers in electronic banking in Tanzania are a result of unsupportive nature of the

current legal framework. It is stated that in Tanzania there is no any law which deals directly

with electronic banking.99

It is provided that, the laws which regulate banking in Tanzania do not accommodate online

transactions or payment in cyberspace rather they accommodate off-line transactions only. The

reason being the laws do embrace the traditional mandatory requirements of writing and

manuscript signature which at all costs does not cater for electronic banking. It is exemplified

99 Mweteni (2011) p 45

31

that the Banking and Financial Institution Act100 under section 5 has features that not recognize

online application for a licence due to mandatory requirement that the applications must be in

writing and signed manually as opposed to data message and digital signatures.101This proves the

fact that this law is embodied with paper based transactions only.

In fact this law was enacted during the era of electronic banking of 2006, but it appears that this

law was/is aimed at regulating paper based banking business. It is evidently clear that, we are the

witness of our self when we venture into making a reference on definition of key words and

phrases in this statutes we find terms like bank, entity, financial institution, on the

contrary electronic banking is not even mention in this law. Actually, the Act only regulates

cash and cheque payment systems operated in a paper based form in a physical branch of a

bank.102 The fact that this statute makes no reference to electronic banking, casting doubts

whether the current legal framework governing banking business addresses legal issues posed by

electronic banking and therefore proves this law does not afford a legal protection of customer in

electronic banking.

In Tanzania, even the Bills of Exchange Act103 also puts mandatory requirements of writing and

signature for an instrument to be accepted as a bill of exchange order.104 Therefore it also does

provide for electronic banking in Tanzania.

There was a discussion conducted in the Law Reform Commission with the legal officer who

provided the stand of the Commission as far as cyber laws are concerned.105 To the effect that the

100 Act No. 5/2006101 Mambi (2010) pp 128-130102 As per section 5 of the Banking and Financial Institutions Act, 2006(Act No. 5)103 1999104 Sections 3(2),23 and 32(1) of the Bill of Exchange Act, 1999105 Abdallah, A (2011) p122

32

Commission has completed a report on electronic commerce but the report has been put in

shelves only to shake dust as there is no any draft legislation following this report. It has been so

without considering the vitality of this report. This is because the report addresses all issues of

our concern in electronic commerce in which electronic banking is inclusive.106 For example the

report has recommended the enactment of the laws to cover the crucial areas that have a high

impact on the economic development in Tanzania and East Africa in general. The laws proposed

for amendment include the law of Contract Act,107 the Bills of Exchange Act,108 Sale of Goods

Act109 and the Banking and Financial Institutions Act.110 The reason for such amendments is

centred on the point that the laws should respond to electronic commerce and technological

advancement.

The above arguments buys the idea that customer are not afforded a legal protection in electronic

banking because there is no a piece of legislation governing electronic banking in Tanzania.

3.2 The risks that a customer is likely to encounter in electronic banking

The authors111 demonstrate that the use of ATMs and EFTPOS systems by customers subjects

them to legal problems especially with regard to effectiveness of mandate provided by Personal

Identification Number (PIN), security of the systems, liability in case of fraud or card loss and

liability of losses caused by system failures. Furthermore the authors demonstrate electronic

banking exposes customers to online danger such as fraud, identity and phishing e-mails which

trick customer into revealing personal or financial institutions details thus create to fear to

customer use. For example, credit card as a result of security risk posed by cyber fraud.

106 Abdallah, A (2011) p122107 Cap 315 R.E 2002108 Cap 215 R.E 2002109 Cap 214 R.E 2002110Act No.5/2006111 Mambi (2010) p127

33

They state openly that there is no highly assured security to customers against fraud and other

related cyber offences given the lack of legal framework that regulate electronic banking in

Tanzania. They reveal that information of the customers circulating through the use of credit

cards, visa cards and cell phones are targeted to crime or may be used to commit cyber crimes

such as fraudulent retailing, financial service fraud, obtaining bank account and payment card

details illegally, and all these dangers result into disgruntled customers. These attacks can

undertake internally by staff or externally through organized criminals.112

It is manifested that unauthorized access to customers accounts leads to unauthorized transfers

of funds. The problem of unauthorized transactions due to lack of security of electronic

payments is among the key issues in electronic banking transactions in Tanzania. It is even worse

to a customer as banks tend to escape liability for losses, even those arising from their own

negligence and flaws.113

It is reveled further that customers are not protected form of new offences committed using

computers or computer networks, and other intelligent devices. The offences such as computer

theft and forgery are not addressed in the current criminal laws. Most crimes it Tanzania are

regulated by laws such as the Criminal Procedure Act, the Penal Code, and other related laws.

However, most of these laws do not take into account the development of technology that is

always changing very rapidly. There is likelihood for culprits to evade their criminal

responsibility under the current penal law provisions.114 For example, the whole question of the

definition of theft under the current law, for instance section 265 of the Penal Code,115 provides

112 Mambi (2010) p179113 Mweteni (2011) p 7114ibid115 Cap. 16 R.E 2002

34

for the offence of theft which states that a person who steals anything capable of being stolen is

guilty of theft, and is liable, unless owing to the circumstances of the theft or the nature of the

thing stolen, some other punishment is provided, to imprisonment for seven years. Theft is also

provided for under section 258 of the Penal code.

In the above provisions, the subject of theft must be tangible and that it must be capable of being

moved from one place to another. The distinction seems to be the tools employed in committing

electronic banking crimes, things that are capable of being stolen, the methodology used and the

actual loss caused. This is because currently computers are currently used to process, store and

disseminate data involving monetary value. When a person accesses a computer or an intelligent

device, he has a number of motives, one being to transfer money. For example when a person is

moving data with monetary value and later he or she access money using an ATM machine in

other words this amounts to hacking. Therefore this casts doubts as whether such accessing of

information or data could qualify as a subject of theft.

In this regards suspects of electronic crimes can also be charged of the offence of forgery

contrary to sections 333, 335(a) and (d), (i) and 338 of the Penal Code,116 for example section

333 of the Penal Code the offence of forgery is defined as making of a false document with

intent to defraud or to deceive. These provisions of the law in relation to forgery, criminals who

transfer funds using electronic messages that have been forged or cards that have been

counterfeited can hardly be brought to justice. The above provisions relate to forgery of

documents and it is certain under the current law that a document does not include an electronic

message, data or document. Therefore it is necessity to have the laws amended to embrace new

116 Cap. 16 R.E 2002

35

technologies make it possible for the offence of fraud to be committed using computers and

computer networks.

Customers in electronic banking in Tanzania encounter both legal risks and operational risks.

Legal risks when the legal rights and obligations of parties to a transaction are not well

established.117The legal rights and uncertainty of the parties in electronic banking is prevalent in

Tanzania reasons given being the lack of proper legal framework.118 This is because electronic

banking is associated with relatively new nature features; therefore rights and obligation of

parties to different transactions are uncertain. Therefore application of customers protection

rules to electronic banking in Tanzania is relatively not clear. Banks engaging in electronic

banking puts a customer at risk to unauthorized disclosures and interferences of privacy of the

customers bank affairs contrary to his/her authorization.119

Electronic banking also exposes a customer to cyber crimes such as hacking activities. In this

arena Tanzania has not yet enacted the law to curb for cyber crimes. A hacker may use the linked

site to defraud a bank customer.120

There some cases in Tanzania concerning the misuse of electronic banking through ATMs that

have been reported that one suspect criminal was arrested by the Police in Mbeya. The accused

was alleged to have stolen 6 million Tanzania shillings from various accounts using forged

Tembo Cards on CRDB Bank ATM. The accused admitted to have done illegal electronic

banking through cash withdrawal from various ATMs in Moshi, Dar es Salaam and Mbeya.121

117 Basle Committee on Banking Supervision. (1988). p. 8118 Mambi, J,A. (2010). P.126119 Balse Committee on Banking Supervision(1988). p.9120 Mambi, J,A. (2010). P. 123121 Ibid.

36

Still, two Bulgarian nationals were caught in Dar es Salaam, for ATM fraud. The two

perpetrators stole over USD 53 000 in illegal ATM transactions. This followed mounting

complaints by customers that they were losing their savings in unauthorized ATM

withdrawals.122Another incidence of cyber crimes on electronic banking was reported in August

2007 whereby two citizens from India and Malaysia appeared before the court charged with 25

million thefts through CRDB ATMs using forged Tembo Cards. Moreover one an employee of

the bank was charged on theft of more than 62 million Tanzania shillings from CRDB ATMs.123`

Operational risk arises due to significant deficiencies in the system reliability or integrity.124

Operational risks includes, system failures of ATMs which leads to unnecessary delays and

congestions on ATMs places, debiting of the customer account without crediting the customer in

ATMs. Yet still, operational risk emanate because banks are subjected to external or internal

attacks on their systems or products, security risks with respect to the controls over access to a

bankers critical accounting and risk management systems, information that it communicates

with other parties.125 Moreover controlling access to bank systems has become increasingly

complex due to expanded computer capabilities, geographical dispersal of access points, and the

use of various communications paths, including public networks such as the internet. In

electronic banking, there can be unauthorized access could lead to direct losses, added liabilities

to customers or other problems and leads to failures to detect counterfeiting.126

In additional a variety of specific access and authentication problem could occur. For example,

inadequate controls could result in a successful attack by hackers operating via the internet, who

122 Supra note123 Mambi, J,A. (2010). P. 123124 Basle Committee on Banking Supervision. (1988). p.7125 Basle Committee on Banking Supervision. (1988). p 8126 ibid

37

could access, retrieve, and use confidential customer information. In the absence of adequate

controls, an outside third party could access a banks computer system and inject a virus into it.

Still internal attack is possible in respect of its own employee frauds for stances employees are

able to authentication data in order to access customer account, or steal stored value cards.

Inadvertent errors by employees may also compromise a banks systems and as result a customer

suffers financial losses.127

Furthermore that many banks are likely to rely on outside service providers and external experts

to implement, operate and support portions of their electronic banking activities. Such reliance

may be desirable