Bank guarantee is the irrevocable undertaking of a bank to pay the guaranteed amount in case a third party has not fulfilled his contractual obligations.
Guarantees in Import Operations
An importer who wishes to ensure the proper performance of the exporter, may ask the exporter to provide a guarantee. This would be a written undertaking by a guarantor, usually a bank, to pay the importer up to the maximum sum quoted on the guarantee upon presentation of a demand together with any other documents specified under the terms of the guarantee. There are two basic ways of issuing a demand guarantee:
A Direct Guarantee is provided by the exporter’s bank directly to the importer with the exporter giving its bank sufficient funds, or an indemnity, or other form of security, against the cost of meeting claims.
An Indirect Guarantee is provided by the importer’s own bank. The exporter’s bank will provide a counter-guarantee to the local bank with the exporter providing sufficient funds, or an indemnity, or other form of security, to its bank (as in a direct guarantee) against the cost of meeting claims.
Demand guarantees are used in a number of different contexts. The main ones are:
Tender or bid guarantee, Good Performance ,Retention, Advance Payment
Guarantees in Export Operations
These types of bank guarantees are issued at the request of the producers of industrial, agricultural and mining products and the exporters of technical and engineering services.
Types of these guarantees are: Performance bond guarantee (PBG), Advance payment guarantee (APG), Retention guarantee, Tender or bid guarantee, Advance payment guarantee (APG) related to L/C, Guarantees related to facilities granted by Islamic Development Bank (IDB).