Tuesday, August 25, 2020

Function of Negotiable Instruments

 Function of Negotiable Instruments

Negotiable instruments play a pivotal role in making business transactions simple. The vast number of commercial transactions that take place daily in the modern business world would be inconceivable without negotiable instruments.

For instance, assume a trader in Addis Ababa wants to purchase 10,000 quintals of potato from another trader residing in Gambella. In the absence of negotiable instruments, the trader in Addis had to carry perhaps half quintal of money and take it to Gambella to make payment. Transporting large amount of money usually exposes oneself to risk such as looting and destruction due to natural calamities. Additionally it causes inconvenience, delay and waste of time and energy. Using a negotiable instrument as a mode of payment relieves any trader and business of the above worries and difficulties.

The Law governing negotiable instruments grew out of commercial necessity. As early as the thirteen century, merchants dealing in a foreign trade were using commercial paper to finance and conduct their affairs. Problems in transportation and in safekeeping of gold or coins had prompted this practice. In those early days, these merchants used to keep large sums of money with the gold smiths for safe custody against their signed receipts, known as ‘Goldsmith notes’, embodying an undertaking to return the money to the depositor or the bearer on demand. Overtime the merchants started making payment through these ‘notes’ for the transactions they had entered with other traders. The bearer of the note can go to the goldsmith and collect whatever money is stated on the note. In this way, ‘Goldsmith notes’ became payable to the bearer and were transformed from a receipt to a ‘bank note’ payable on demand.

Currently unlike the old days, business transactions have assumed new dimensions and became too complex but, still now the ancient use and function of negotiable instruments has not been changed.

Generally speaking, instruments function in two ways:-

     i.        as a substitute for money

   ii.        as a credit device

Debtors sometimes use currency, but for convenience and safety they often use instruments instead. An instrument is being used as a form of payment when a debt is paid by a cheque.

For instance, Ato Tessema purchases a table, chair, shelf and TV for a total sum of br. 7,000. If he has current account in one of the nearby banks, he can effect payment through a cheque, hence, avoiding the burden of carrying 7,000 in his pocket.

Historically, as stated above, Negotiable instruments grew out of business circumstances and “the substitute for money purpose” was the initial reason, negotiable instruments were created for. In the middle ages merchants deposited their precious metals with gold smiths (“bankers”) to avoid the danger of loss or theft. When they needed funds to pay for the goods they were buying, they gave the seller a written order addressed to the “bank”. This authorized the bank to deliver part (or all) of the precious metals to the seller. These orders, called bills of exchange, were sometimes used as a substitute for money.

Instruments may also represent an extension of credit. When a buyer gives a seller a promissory note, the terms of which provided that it is payable within sixty days, the seller has essentially extended sixty days of credit to the buyer. The credit aspect of instruments was developed in the middle ages soon after bills of exchange began to be used as substitute for money. Merchant buyers were able to give to sellers bills of exchange that were not payable until a future date. Because the seller would wait until a maturity date to collect, this was a form of extending credit to the buyer.

For an instrument to operate practically, as a substitute for money, a credit device, or both, it is essential that the paper be easily transferable without danger of being uncollectible.

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