Foreign Bank Guarantee

Prepared By: Fikru Abera

02 - 04 May 2023

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Foreign Bank Guarantee
 International trade
 Features of international trade
 Risks in international trade
 Risk mitigations in international trade
 Payment methods in international trade
 Foreign Bank Guarantee

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Foreign Bank Guarantee
 Why is it needed
Nature and risk of international trade
Payment methods in international trade
 Types of Guarantee
 Incoming Guarantee
 Outgoing guarantee
 URDG 758

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Exchange of goods and services cross-frontier (between
several political economies) and its flow of goods from
seller to buyer in accordance with the contract of sale
and the consequential flow of payment from buyer to

seller.

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Features of international Trade
Uses various Currencies (USD,EUR, GBP …).
Goods pass a territory of one country to the other.
Payment on Delivery (POD) is not viable.
Bound by International rules.
The involvement of trade facilitators is compulsory.

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Bank Guarantee

2. Risks inherited in international trade

I. Country Risk
a. Political and economic risks
b. Exchange controls
c. Import/Export regulations
d. Storage facilities in ports

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Bank Guarantee…..

II. Bank Risk

a. Insolvency preventing fulfillment of
obligations under DCs
b. Poor checking standards
c. Delays in making payments to
correspondents
d. Adherence to ICC rules

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Bank Guarantee …..

III. Fraud
a. Documentary fraud – forged DCs, forged
documents
b. Insurance fraud – over-insurance
c. Charter party fraud

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Bank Guarantee ….

IV. Foreign Exchange Risk

Rate Fluctuation
V. Cargo Theft
VI. Piracy

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Bank Guarantee ….

Some means of mitigation of risk

I. KYC (Know Your Customer)

a. For how long he/she has been in the
business
b. Creditworthiness of the customer
c. Country’s of your counterparty.

II. Payment Methods as a means of mitigation:

III. Bank Guarantee

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1. Open Account
2. Consignment Sales
3. Advance Payment
4. Documentary Collection
5. Documentary Credit (Letter of Credit)

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 Open Account

A mode of payment where supplier/Seller ships goods or renders

service and sends documents to the buyer prior to receipt of
payment and without any form of security.

– Payment is made at some specific date in the future,

–There is no negotiable instrument for payment,
–This payment method is based on trust.

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 The supplier ships the goods to the importer (known
as the consignee) whilst retaining ownership.

 The consignee is the agent/distributer responsible for

paying the supplier if and only when the goods are
sold.

 Consignee is the intermediary for the sale of goods

to the buyer.

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Under this method, the seller receives payment from the
buyer prior to shipment of goods or rendering of services.
• Importer pays the exporter in advance.

• Shipment to be effected after payment.

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Open Account
Importer

 Delay Payment
Consignment
Sales  Non Payment

Exporter
 Delay Shipment
Advance
Payment  Non Shipment

 Ship Inferior goods

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A mode of payment where exporter ship the goods prior to
receiving payment and give instruction for handling of documents
(financial and/or commercial) to his bank.


Funds and documents are transferred through banks.

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An undertaking issued by a bank in favor of a beneficiary/
exporter by which the bank substitutes its creditworthiness for
that of the applicant / importer by promising to honor (pay) if the
document specified in the letter of credit (complying) are timely
presented.

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Guarantee ….

Nature of the international trade

Payment On Delivery is impractical in international trade.
Thus, either payment or shipment of goods should come first in
international trade.

But, to effect shipment prior to payment, sellers want to be

certain that the buyer is able to pay on time once the goods
or services have been shipped or performed.

There in a threat of Non-payment.

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Guarantee …

Buyers, on the other hand, have the following fears in effecting

payment prior to shipment and receipt of goods:

“We do not know the seller, how can they meet their
commitments?”

“Can we be sure that he/she/it will deliver on time?”

“How can we check that the goods are exactly those we ordered and
protect ourselves from getting inferior and unwanted goods?”

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Guarantee

What is Guarantee?
 A formal assurance (typically in writing) that certain conditions
will be fulfilled, especially that a product will be repaired or
replaced if not of a specified quality.

 An undertaking to answer for the payment or performance of

another person's debt or obligation in the event of a default by the
person primarily responsible for it.

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Guarantee …

What is Bank Guarantee?

A written undertaking by the bank to compensate/pay a sum

of money to the beneficiary in the event that the obligor fails
to discharge its obligations in accordance with the terms and
conditions of the agreement/contract.

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Guarantee …

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Types of Guarantee

 Bid Bond
 Performance Bond
 Advance Payment Bond
 Retention Guarantee
 Customs duty Guarantee
 Loan Guarantee
 Payment Guarantee/Supplier’s Credit Guarantee

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Guarantee …

Bid Bond: a guarantee issued by the bank in favor of beneficiary in

the event that the bidder withdraws from the bid during the bid
period or fails to accept the award when he/she becomes the
winner.

Performance Bond: a guarantee that the bank issues in favor of

beneficiary in case the applicant fails to perform his obligation
in accordance with the terms and conditions of the contract.

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Guarantee …

Advance Payment Guarantee: a guarantee issued in favor of the

beneficiary (who makes the advance) to repay the sum incase
the applicant fails to fulfill the obligation as per the agreement.

Loan Guarantee: a guarantee issued by foreign bank in favor of a

local bank (who grants loan) to pay the amount in case the
borrower fails to repay the sum as per the agreement.

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Guarantee …

Retention Guarantee: a guarantee issued in favor of the

beneficiary in order to release the retention to the applicant.

Customs Duty Guarantee: a guarantee issued in favor of

customs authority in case the goods imported without
payment of customs duties are not re- exported .

Payment Guarantee/Supplier’s Credit Guarantee: a guarantee

issued by a bank to provide security to supplier, to meet any
claims to be made by the beneficiary/supplier in case the
applicant fails to repay the agreed upon amount.

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Parties for a Guarantee
• Principal (applicant) – is a party in whose request
guarantee is issued
• Beneficiary – is a party in whose favor a guarantee is
issued.
• Instructing bank – requesting issuance of the guarantee
and issues counter guaranty to the guarantor
(if Indirect guarantee).
• Issuing bank – a bank that issues the guarantee (A bank
that gives full undertaking.
• Presenter – is a person who makes a presentation as or
on behalf of a beneficiary or nominated person.

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Standby Letter of Credit

• Is an undertaking by a bank to pay a certain sum of

money to the beneficiary against presentation of
documents by beneficiary confirming that a performance
has not been made.
• It is governed by ISP98 or UCP600 or URDG758.
Guarantees are governed internationally by:
1. URDG 758, or
2. ISP 98

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Guarantee …

The difference between Documentary Credit and

Standby L/C or Guarantee is:
 Under DC – payment will be made when performance is
effected as evidenced by documents,
 Under Standby L/C or Guarantee – payment will be made
when performance has not been made as evidenced by simple
demand.

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Guarantee …

The difference between Insurance and Guarantee:

 Under Insurance – payment will be made when
performance has not been made as evidenced by physical
examination of the item and calculating the actual damage,

 Under Guarantee – payment will be made when

performance has not been made as evidenced by simple
demand.

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There are two types of foreign guarantee.
Incoming or Outgoing guarantees.
1.Incoming Guarantee: is a guarantee request received from
foreign banks.
Incoming Guarantee can be:
1.1 Direct: a guarantee type by which the foreign bank takes
the whole responsibility and undertake the beneficiary.

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In this case, local banks advise the guarantee to the beneficiary

without any engagement on their part but take reasonable care

to check the apparent authenticity of the guarantee advised.

1.2 Indirect Guarantee

A guarantee issued by the beneficiary’s country bank/issuing

bank with full responsibility and against the instruction of the
principal’s bank.

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What points to check when receiving incoming guarantee:

Which bank give guarantee to us;

Beneficiary name;

Types of Guarantee;

Underlying Relationship;

Currency and amount of guarantee;

Claim statement;

Unconditional undertaking;

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Applicable Rules;

Party responsible for charges;

Conditions, if any.

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We, Bank of China, as counter guarantee request you to issue a

performance guarantee as per the formats given in the next slide.

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SIMPLE DEMAND PERFORMANCE GUARANTEE
Quote
Our guarantee number…………..
We are informed that… (hereinafter called the Seller) have entered into a
contract with you dated… for the supply of… and that a bank guarantee for
(amount) being % of the contract is required.
On behalf of the Seller we, Awash Bank hereby give you our guarantee and
undertake to pay you any amount or amounts not exceeding in total a
maximum of (amount) on receipt of your first demand in writing.
This guarantee is valid for written demands received by us on or before (date)
after which date our liability to you under this guarantee will cease and this
guarantee will be of no further effect.
This guarantee is personal to you and is not assignable.
This guarantee shall be governed by Ethiopia law. Unquote

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As counter guarantor, we Bank of China, hereby give you our
irrevocable and unconditional counter guarantee and undertakes to
PAY you the counter guarantee amount upon receipt of your claim
stating that you have been called upon to pay in conformity with
your guarantee.
The counter guarantee expiry date is 15days beyond your guarantee
expiry date.
This counter guarantee is governed by URDG758.

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CONDITIONAL DEMAND PERFORMANCE GUARANTEE

Our guarantee number

We are informed that ……… (hereinafter called the Seller) have entered
into a contract with you dated ……… for the supply of………… and that
a bank guarantee for (amount) being % of the contract is required.

On behalf of the seller we AWASH BANK hereby give you our guarantee
and undertake to pay you any amount or amounts not exceeding in total a
maximum of (amount) on receipt of your first demand in writing provided
either that it is counter-signed by the Seller as being a demand that is
agreed by you both or that it is supported by a copy of an award relating
to the above contract and to this guarantee made under the rules of
conciliation and arbitration of the International Chamber of Commerce.
Any claims must bear the confirmation of your bankers that the signatures
thereon are authentic.

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 “ The maximum amount of this guarantee will reduce by .......% of the total
value of invoices and bills of lading (or other stipulated documents)
produced to us by the Seller which evidence the loading on board a vessel at
a British Port of (goods) supplied under the terms of the above contract.
 This guarantee will expire for written demands on us when we have received
from the Seller invoices and relevant bills of lading (and/or other stipulated
documents), the total value of which reduced as set out above equals or
exceeds the maximum amount to you under this guarantee, or on (date)
whichever is the earlier. Our liability to you under this guarantee will then
cease and the guarantee will be of no further effect”.

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 “ This performance guarantee will come in to effect from the
date that the LC for the value of USD..........is opened as per
the contact through the suppliers bank and against receipt of
confirmation from the suppliers bank confirming acceptance
by applicant”.

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If the guarantee is worded as follows:

quote
We will pay you upon the receipt of your claim stating either that:
A. The bidder has withdrawn from the bid before its closing date, or
B. Having been awarded, he failed to sign a contract
Unquote
.
How should the beneficiary’s claim be stated?

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“This guarantee shall come into force upon swift advice by counter guarantor
credit Agricole Italia S.P.A. confirming that supplier has received the advance
payment.
The amount of this guarantee will be reduced automatically and proportionally
to deliveries effected, i.e. By 50pct of the value of the goods actually delivered,
against receipt at our counters of copy(ies) or photocopy (ies) of supplier's
commercial invoice(s) and copy(ies) or photocopy(ies) of transport document(s)
sent to us by the counter guarantor, (name of the bank) which evidence the
shipment of the goods. The above mentioned documents will be accepted as
presented without any responsibility and engagement on our part”.

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Guarantee reads:
 The guarantee amount will be reduced by 50% upon our
receipt of interim payment certificate confirming that 80%
of the project has already been competed.

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Counter guarantee reads:
 We will honor your claim upon our receipt of your first
written demand by authenticated swift stating that ‘We
have received a valid claim from beneficiary in accordance
with the guarantee terms and conditions”.

How do you lodge your claim to the bank that give the above
counter guarantee?

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Counter guarantee reads:
 We will honor your claim upon our receipt of your first
written demand by authenticated swift stating “The beneficiary
has lodged a claim and we are obliged to pay’’.

How do you lodge your claim to the bank that give the above
counter guarantee?

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You have received a direct guarantee from Commerze bank,
frankhurt, Germany and it states as follows:

“We hereby irrevocably undertake to pay you the guarantee

amount upon receipt of your claim in original paper form
within the expiry date.”
Will you accept?

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Claim under a bank Guarantee

Any demand/claim for payment under the guarantee shall be

presented in writing signed by an authorized signatories in

accordance with the instruction given for claim statement. (A

demand/claim amount can be in full or less than guarantee

amount).

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Termination of Guarantees

Guarantees have certain periods to remain valid they will

Became null and void subject to:-

- the expiry date

- presentation of the original guarantee to the issuing bank

before its expiry.

- payment of the claim amount (penalty)

- reduction clause, if any.

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2. Outgoing Guarantee

It is a guarantee issued by the foreign bank at the

request of us in favor of foreign beneficiary as per the
instruction of local applicant. It is also called Short term
guarantee.

Issuance of outgoing guarantee needs NBE’s approval.

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Applicant must provide the following documents:
 An approved foreign exchange permit from NBE;
 Verified application letter which contains:
 Name of the applicant and beneficiary;
 Purpose and type of the guarantee;
 Expiry date;
 Value of the guarantee and currency; and
 Authorization to debit his/her/its account.

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 It can be issued against Cash Collateral or against Credit Facility.
 It has a unique feature in which the guarantee amount is blocked for
115% of the guaranteed amount.
 The incremental 15% is blocked to cover any fluctuation in exchange
rate at time of payment.

Local Guarantee
It is a guarantee issued by us at the request of local applicant to local
beneficiary.
It can be issued against Cash Collateral or against Credit Facility.

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The applicant must present an application letter which
Contains the following information:
• The instruction to issue guarantee;
• The name of the applicant and the beneficiary;
• Purpose and type of the guarantee and tender or contract number;
• Guarantee amount and currency;
• Expiry date; and
• Authority to debit his/her account for the guarantee amount (in the case of cash
collateral) and any related charges.

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 Acceptable collateral in order to issue the guarantee are cash, deposit at
Banks (Savings and Demand Deposits, Time Deposits, Blocked Cash
Deposits), Treasury Bills or Government Bonds.

 If it is against credit facility, Credit Department’s approval letter.

Note: The Credit Department letter must indicate the maximum
amount which guarantees can be issued and expiry date.

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