Cheque Discounting – Meaning And How It Works

Pressing needs are inevitable. One can wake up and meet an urgent need, in which a firm you are working for to clear the debt can write a cheque. However, cheque as a piece of paper passes through some clearing before you can cash it.

Nevertheless, you can take an immediate cash or exchange the amount sum on the cheque for a cash as long as you will pay a commission. This is after they do a stringent cheque to ensure that the cheque is genuine. 

What is Cheque Discounting?

Cheque discounting is a practice used by certain banks and financial institutions in Kenya.  It allows a customer to deposit cheque into his account or take cash based on reputation and thorough checks before they clear your cheque. Although, they deduct Interest charges or discounting fees on each cheque..

Cheque discounting is also called cheque cashing, which provides Kenyans with quick access to cash from many lenders and banks.

Cheque Discounting Explained

X is a customer of a certain branch bank 

X has a cheque for the amount of kshs. 3,000,000/ drawn on another bank and payable at a branch or place other than the place you have your account .

The banking system is that you will have to wait for two to six working days to collect your cheque and credit your account.

Consequently, X customer needs the money immediately to offset immediate expenses and pay house rent to avoid being thrown out.

X customer meets a certain broker or middleman to exchange the amount written on the cheque for cash with a commission deducted, or he is asking the bank to give him an advance amount of kshs. 2,750,000 till they clear his cheque

The broker gives X customer cash in exchange for the cheque with commission deducted or the manager gives him an immediate advance amount of kshs. 2,750,000 against the cheque sent for clearing and immediately the proceeds get adjusted, calculated and the bank also collects their interest for the period for which they kept such advance amount as a loan in your account.

The amount given to X customer after deducting the commission or the advance amount of kshs. 2,750,000 as an adjustment, before the cheque goes for clearing is Cheque discounting.

Requirements For Cheque Discounting

There are certain requirements one needs before they can give one cash on a cheque rendered for clearing. These requirements are:

1. They draw the cheques on trusted and reputable institutions or organizations with no record of previous unpaid cheques from the drawer.

2. The customer requesting a discount must have received a cheque from the same drawer before then.

3. The total amount written on the cheque must be reasonably active for at least six months

4.Personal cheques, related entity cheques and foreign currency cheques do not qualify for discounting.

Maximum Cheques Discounting

Banks discount cheques to a maximum of 80%. Seventy-five to eighty percent (75% – 80%) of the overall amount of cheques, deducting the interest amount and handling charges. They pay the other 20% – 25% on the maturity date of each cheque by the bank.

How Cheque Discounting Works

Still going by the previous illustration, the X customer, when he gets a cheque in his favour. He wants the money in his account immediately for an urgent need, this is the processes it will go through:

1. On the fact that the financial institution will get the payment of this cheque on the due date from the customer of the client, one has to be a creditworthy customer to access the service and the cheque should not be dated later than 90 days from the day of discounting. 

2. Thorough checks on the cheque to avoid bounced cheques. Financial institutions immediately credit the value of the cheque to the account holder of the cheque.

3. You can draw a cheque for a higher amount. However, the option available to you is to request the exchange of the cheque to cash with a broker or tell the bank to ‘purchase’ the cheque; the bank branch purchases the cheque by the branch, as per the policy of the bank.

4. The branch or broker might credit up to 75% to 80% of the cheque value (depending upon your credit worthiness).

5.The amount credited to your account comes after removing the commission or when the bank treats it as a loan. However, it attracts a specific rate tariff, as per the bank’s policy.

6.Going through the bank, the out-of-pocket expenses incurred in the process of collecting the proceeds of the cheque is also deducted from the money collected.

7.The remitting bank also might deduct its charges for remitting the cash.

8. When the remittance is received from the payee bank, the outstanding against the cheque purchased is paid off; if the remittance received is lesser than the amount advanced to you, then you will have to repay the outstanding amount too.

Cheque Discounting Interest Rates

Notwithstanding, you can collect a certain amount lower than the cheque face value to solve the immediate need before the cheque can be cleared and 3% to 10% acts as a commission. For a cheque less than Sh 100,000, firms charge a commision of 3 percent (3%) which increases with the sum of the cheque.

Cases of Cheque Bounce in Cash Discounting

In case, the cheque bounces, this is what happens:

1. The amount outstanding in the account is treated as an overdue, and becomes eligible for overdue rate of interest.

2. Banks have two terms for this type of financing: ‘cheque purchase’ and cheque discounting’ both operate on the same lines.

Cheque discounting:  when the customer has a regular limit for Cheque Discounting Facility.

Cheque Purchasing: when the customer has no limit, and the cheque is purchased under the Manager’s Discretionary Powers.

Why it Takes Long to Clear a Cheque

Cheque is a piece of paper which cannot be moved electronically like money. Cheque needs to be handled, Checked properly, delivered and received and that is why it takes up to six days to be cleared.


The real reason that cheque clearing still takes up to 2 to 6 working days upon first paying in the money is that it takes a series of processes to clear a cheque. Cheques must be actually presented,  handled, picked up, delivered, received, and manually or electronically checked.

Moreover, the good news is, cash can be drawn pending when the cheque written on your favour gets cleared with a little commission or interest rate paid to solve your immediate and pressing needs.

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