Secure Your Business Success with UAE Bank Guarantees

Bank Guarantee In The UAE: Complete Guide for Business Success

The UAE has a dynamic business landscape and the concept of bank guarantee has a prime role in making these businesses flourish. That is a written promise made by financial institutions or banks to maintain a business relationship between two parties. Many SME's have grown up because of the support of these guarantees. But, there are some hard and fast and strict rules and regulations for achieving Bank Guarantees. These include- submission times, formats, renewal issues, and others.

The importance of a Bank Guarantee is very crucial in UAE's economic context. Hence, they provide a system for beneficiaries and ensure payment or compensation if the applicant fails. The Bank guarantee system has an important role in large industries that are involved with large amounts of money, such as construction, trade, and finance.

 

In this article, we will cover the roles of bank guarantees in businesses in the UAE and the eligibility and procedures to obtain them.

Bank Guarantee:

A bank guarantee is a financial written commitment issued by a bank. It is a testament or form of financial assurance that confirms that companies can fulfill contractual obligations, and achieve credibility with government authorities, landlords, and suppliers. More clearly, a bank guarantee is the backup plan for businesses. So, it's the contract or guarantee from a bank to pay the receiver or customer if the bank's client fails to meet the financial obligations. 

Types of Bank Guarantees for Businesses  in UAE:

• Performance Guarantee: As a performance guarantee the banks ensure completing a project or meeting any contract decided earlier.

• Advance Payment Guarantee: By advance payment guarantee, the bank promises a buyer that, they will get payment in advance if the seller can not deliver.  

• Big bond Guarantee: Big Bond Guarantee is for a bidder to take over a project if they get the contract.

• Financial Guarantee: As a financial guarantee the bank takes the responsibility to make credit payments if the browser fails to pay.

Entities Involved in Bank Guarantees for Businesses:

• The Bank or the financial institution that will take the responsibility and provide a guarantee on behalf of the applicant. 

• The Business Owner will request a Bank or financial institution guarantee. 

• The beneficiary party will get payment or other facilities if the applicant or business owner fails to pay.

Role of Bank Guarantee in Businesses in UAE: 

• Guarantees offered by Banks and other Financial Institutions help grow confidence within the enterprises and companies having financial support makes clients build trust in them.

• If partners fail to accomplish their part, the bank guarantees support to protect the money of the companies. 

• Bank guarantees make workers feel safe ensuring smoother working condition and building confidence.

• If any company wants to grab any bigger government project then they will be pursuing a Bank Guarantee as government projects ask for Bank or Financial Institution guarantees. 

When will a Business need a bank guarantee? :

• For Startup: In UAE, to get a trade license the registration office needs a guarantee from the owners for future financial compliance. This is generally AED 3000-5000 which depends on location.

• For Order of Government Tenders: Institutions must provide an advance payment guarantee that is a performance guarantee with their bid to secure a construction contract with government entities. However, this amount is more than 5% of the total multi-million dirham tender amount for large and major projects.

• For Signing Major Supplier  Contracts: Large Corporations in the UAE ask for guarantees from new vendors as a risk management measure. This guarantees that they are committed to delivering goods and services as per contracts. Also, this is called a “warranty guarantee” and values from 10% up to 25% of the total deal depending on the scale of orders.

• For Leasing Commercial Property: 

Applying for Bank Guarantee in UAE:

 

• Firstly one must apply with details about the required guarantee and transaction, financial statements, and registration details of the business.

• The bank will assess the applicant's stability and eligibility.

 

• After the application is approved the applicant would get a guarantee document mentioning terms, conditions, duration, amount, and parties involved. 

Case Studies about the Role of Bank Guarantees in Businesses:

• UAE’s Legal Framework: The UAE’s legal system facilitates bank guarantees. The bank guarantees are governed by federal law no 18 of 1993 on commercial transactions. 

• UAE’s Development Bank Industrial Financing: The Emirates Development Bank (EDB) has a framework for supporting industrial growth. This bank provides bank guarantees, and other financial support to large companies, SMEs, and new startups. However, EDB supports diversified enterprises to facilitate UAE's growth.  The credit guarantee schemes help SMEs to access financing despite having limited credit history. Furthermore, the digital banking systems provided by EDB help SMEs receive an IBAN in 48 hours. The business-friendly other financial services include- Asset Backed Financing, purchase financing, receivable financing, business expansion financing and project financing. 

• Mawarid Finance for Small Businesses: Mawarid Finance Services is UAEs one of the well-known financial service institutions. They designed services to encourage SMEs to get contracts and investments. Their services include bank guarantees, goods and machinery finance, and more. 

Issues Relating to Bank Guarantees in UAE:

• Amount and Time Limit of Guarantees: According to UAE’s law, the amount of bank guarantee must be defined and fixed. Moreover, there is a specific time limit for the guarantee and the bank guarantee will expire after such a time limit. Article 418 of CTL provides if the beneficiary does not renew and provide the request for payment receiving then the guarantor will be discharged from liabilities. 

• Legal and Enforcement Issues: The UAE’s Laws support bank guarantees but in disputes, enforcement can be complicated. Exceptional cases may occur when courts can impose seizure on guarantee amounts. Consequently, this creates uncertainty for businesses. Moreover, some companies struggle trying to claim guarantees as banks require strict compliance for payout.

• High Costs: bank guarantees charge high-cost issues for insurance fees, commission fees, and margin deposits. Especially SMEs face difficulties due to this.

• Risk of Misuse and Fraud: some companies can cause fraudulent and manipulated guarantees which ultimately leads to economic losses. So, authenticity assurance needs time and cost.

• Economic Changes: Due to Economic changes bank guarantees may be affected. However, companies must be updated according to economic changes. 

• Bank Policies and Requirements: Banks and financial institutions' policies may affect or harden the processes.

• Assignment of Bank Guarantees: Article 416 of CTL provides, that the beneficiary shall not assign its rights under a bank guarantee to any third party without the consent of the Guarantor. Also, all the assignments of the company or enterprises shall be with the prior consent of the bank and in written form.

• Invocation of Guarantees:  A bank guarantee must be unconditional. The guarantor is liable to pay upon an invocation by the beneficiary to the bank guarantee and not upon an omission or act by the principal debtor. Exceptionally, the court may levy seizure on the guarantee amount with the guarantor.

Conclusion: 

Bank guarantees play a pivotal role in building trust, mitigating risks, and smoothing transactions. Moreover, proper bank guarantees can pave new and successful ways for new startups also, as it builds trust. One must understand the proper guidelines of Bank guarantees for their specific businesses. Banks and experts provide such services for small and large both enterprises. Businesses that want to leverage bank guarantees, must approach the process with due diligence. Finally, a bank guarantee can open up the way to success for both the applicant and beneficiary if It's properly managed.

This is for all business owners, financial consultants, brokers, entrepreneurs, legal consultants, or individuals seeking to finance their business or start a new company. Seek professional help, by reaching out to the contact below, you can get in touch with the author of this blog: WASIQ SUHAIL.

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