Bank guarantee in the UAE
Bank guarantees are an important financial instrument that can provide security for both buyers and sellers in a transaction. In the UAE, bank guarantees are widely used and can be a valuable tool for businesses of all sizes. However, understanding the complexities of bank guarantees can be challenging, and it's important to know the basics, benefits, and potential risks involved. In this blog, we'll provide a comprehensive guide to bank guarantees in the UAE, helping you navigate the intricacies of this financial instrument.
What is a bank guarantee?
A bank guarantee in the UAE is a written commitment issued by a bank on behalf of its customer, which guarantees payment of a specified amount to a beneficiary in the event that the customer fails to fulfill their contractual obligations. In other words, it is a type of financial security that is often used in business transactions to provide assurance to the beneficiary that they will receive payment for goods or services provided.
Bank guarantees in the UAE are regulated by the Central Bank of the UAE and are typically valid for a specific period of time, after which they expire unless they are renewed. The terms and conditions of bank guarantees may vary depending on the specific requirements of the parties involved in the transaction.
What are the types of bank guarantees?
There are several types of bank guarantees in the UAE, each serving a different purpose. Some of the most common types of bank guarantees are:
Performance guarantee: This type of guarantee is issued by a bank on behalf of a contractor or a service provider, to assure the client that the contractor or service provider will perform their contractual obligations in accordance with the terms and conditions of the contract.
Payment guarantee: This type of guarantee is issued by a bank on behalf of a buyer, to assure the supplier that payment for the goods or services provided will be made by the buyer on time and in accordance with the terms and conditions of the contract.
Bid Bond guarantee: This type of guarantee is issued by a bank on behalf of a bidder, to assure the awarding authority that the bidder will enter into a contract if they are awarded the project.
Advance payment guarantee: This type of guarantee is issued by a bank on behalf of a buyer, to assure the supplier that advance payment made by the buyer will be used for the purposes specified in the contract.
Warranty guarantee: This type of guarantee is issued by a bank on behalf of a supplier or a manufacturer, to assure the buyer that the goods supplied or manufactured are of the specified quality and will meet the requirements of the contract.
Who are the entities involved in the bank guarantee?
There are typically three parties involved in a bank guarantee:
The Applicant: This is the party who requests the bank to issue the guarantee. The applicant is usually a buyer or a contractor who needs to provide assurance to the beneficiary that they will fulfill their contractual obligations.
The Beneficiary: This is the party who receives the bank guarantee and is entitled to claim the guaranteed amount in case of default by the applicant. The beneficiary is usually a supplier or a contractor who needs assurance that they will receive payment for goods or services provided.
The Issuing Bank: This is the bank that issues the guarantee on behalf of the applicant. The issuing bank is responsible for ensuring that the terms and conditions of the guarantee are met, and for making payment to the beneficiary if the applicant fails to fulfill their obligations.
What are the features and benefits of bank guarantees in the UAE?
Bank guarantees in the UAE have several features and benefits that make them a popular tool for mitigating risk and providing financial security in business transactions. Some of the key features and benefits of bank guarantees in the UAE include:
Risk mitigation: Bank guarantees provide assurance to the beneficiary that they will receive payment in case the applicant fails to fulfill their contractual obligations. This mitigates the risk of non-payment or default, which can be particularly important in large or complex transactions.
Flexibility: Bank guarantees can be customized to meet the specific needs of the parties involved in the transaction. They can be issued for various types of obligations, such as payment, performance, or warranty obligations, and can be structured in different ways to provide the required level of security.
Wide acceptance: Bank guarantees issued by reputable banks are widely accepted in the UAE and around the world, which can help to facilitate international trade and business transactions.
Cost-effectiveness: Bank guarantees are typically less expensive than other forms of financial security, such as letters of credit, and can be a cost-effective way to mitigate risk in business transactions.
No impact on credit line: Bank guarantees do not impact the applicant's credit line, which can be important for businesses that need to maintain access to credit for other purposes.
What are the fees and charges associated with bank guarantees?
The fees and charges for bank guarantees in the UAE may vary depending on several factors, such as the type and value of the guarantee, the issuing bank, and the creditworthiness of the applicant. However, there are some common fees and charges that are associated with bank guarantees in the UAE, including:
Issuance fee: This is a one-time fee charged by the bank for issuing the bank guarantee. The issuance fee is usually a percentage of the guarantee amount and can range from 0.5% to 2% of the guarantee amount.
Renewal fee: If the bank guarantee needs to be renewed or extended, the bank may charge a renewal fee. The renewal fee is typically lower than the issuance fee and is also a percentage of the guarantee amount.
Commission fee: The bank may charge a commission fee for providing the bank guarantee. This fee is usually a percentage of the guarantee amount and is paid by the applicant to the bank.
Amendment fee: If there are any changes to the terms and conditions of the bank guarantee after it has been issued, the bank may charge an amendment fee.
Swift transmission fee: If the bank guarantee needs to be transmitted to a beneficiary outside the UAE, the bank may charge a swift transmission fee.
Required documents for bank guarantees in the UAE
Although the specific documentation needed for a bank guarantee in the UAE can differ depending on various factors such as the issuing bank, the type of guarantee, and the guarantee's specific terms and conditions, certain documents are commonly required when requesting a bank guarantee in the UAE. These may include:
Application form: The applicant will need to complete an application form provided by the issuing bank. The application form will typically require information such as the type of guarantee required, the amount of the guarantee, and the duration of the guarantee.
Commercial registration certificate: The applicant will need to provide a copy of their commercial registration certificate, which is issued by the relevant authorities in the UAE.
Trade license: The applicant will need to provide a copy of their trade license, which is issued by the Department of Economic Development in the emirate where the business is registered.
Memorandum and articles of association: The applicant may be required to provide a copy of their memorandum and articles of association, which outline the legal structure and operating rules of the business.
Financial statements: The issuing bank may require the applicant to provide financial statements, such as balance sheets and income statements, to assess the applicant's financial position and creditworthiness.
Contract or purchase order: If the bank guarantee is being issued for a specific transaction, such as a contract or purchase order, the applicant will need to provide a copy of the relevant document.
Note. It is recommended that applicants consult with the issuing bank to understand the specific documents and information required for their bank guarantee application, as requirements may vary depending on the bank and the type of guarantee being requested.
SMEs exemptions from the requirement of providing bank guarantees
The UAE government has exempted certain small and medium-sized enterprises (SMEs) from the requirement of providing bank guarantees for commercial activities. The move is aimed at reducing the financial burden on these businesses and facilitating their growth. The exemption applies to SMEs that are registered with the Ministry of Economy and have an annual turnover of less than AED 10 million ($2.7 million).
These businesses will now be able to conduct commercial activities without the need for a bank guarantee, which is typically required to provide assurance to suppliers or contractors that they will receive payment. The exemption is expected to benefit around 98% of SMEs in the UAE, which account for around 94% of the total number of companies in the country. The move is part of the UAE government's efforts to support SMEs and promote economic growth in the country.
What happens if a payment default occurs?
If a payment default occurs, the beneficiary may seek to enforce the bank guarantee through legal channels. In the UAE, this typically involves filing a claim with the courts or the relevant arbitration center, depending on the terms of the underlying contract. Once a claim has been filed, the court or arbitration center will review the relevant documents and evidence to determine whether the bank guarantee has been properly invoked, and whether the bank is liable for payment. If the court or arbitration center rules in favor of the beneficiary, it may order the bank to make the payment specified in the guarantee, plus any additional damages or costs that may be awarded.
In some cases, the bank may dispute the validity of the claim or seek to defend against it on other grounds. This may involve challenging the underlying contract, disputing the terms of the guarantee, or arguing that the beneficiary has not met its obligations under the contract. Ultimately, the outcome of a payment default in the context of bank guarantees in the UAE will depend on the specific facts and circumstances of the case, as well as the applicable laws and regulations governing the guarantee and the underlying contract.
To Sum Up
By leveraging bank guarantees, businesses can secure payments, fulfill contractual obligations, and protect themselves against unforeseen circumstances. It is crucial to have a clear understanding of the different types of guarantees and their applications in various industries to make informed decisions. We hope this blog has been informative and insightful, and we encourage you to explore our blog section for more information on UAE's real estate and financial sectors.
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