Abdul Muhammed Law Practice
Offshore bank guarantees enables the foreign bank’s Nigerian client to acquire goods, buy equipment, or perform international trade using funds provided by the Nigerian bank. If the Nigerian bank customer fails to settle the debt to the Nigerian bank or deliver promised goods, the Nigerian bank will cover it against the foreign issuing bank.
We list 10 things about bank guarantees that you should know.
- Similar to standby letter of credit
Bank guarantees are similar to standby letters of credit in that they serve similar purposes.
- Common in international trade
Bank guarantees are mostly seen in international business transactions.
- Three main types
Performance bond guarantee, advance payment guarantee and warrantee bonds are the three major types of guarantees issued by banks.
- How it ‘really’ works
A foreign bank guarantee is a promise by a foreign bank to cover the loss of a Nigerian financial institution ( or of another entity) if business transaction did not go as planned.
- Reputation, reputation, reputation
Bank guarantees from reputable banking institutions can help a Nigerian business to establish business relationships, increase your access to cash flow and capital, protect your business from losses, and set you up for bigger opportunities in Nigeria.
- Taming the risks
Bank guarantees serves to facilitate business in situations that would otherwise be too risky for the beneficiary Nigerian bank to engage but for the insurance offered by the foreign bank guarantee.
- What types of risks are to be tamed?
The underlying contracts to a bank guarantee in respect of which a foreign bank guarantee tames the risks can be both financial, such as loan repayment, or performance-based, such as a service provided by one party to another.
- Need to be specific
The guarantee will be for a specific amount and will be due for payment at a predetermined period of time. It will clearly state the circumstances or conditions under which the guarantee is liable to be called in for its performance.
- Ensuring performance of a foreign bank guarantee
For foreign bank guarantees involving cross border transactions such as in international export situations, there may be a fourth party to the deal called a correspondent bank which is a partner to the foreign bank that operates in the country of domicile of the beneficiary bank.
- For a fraction of the cost
The banks charge low fees for bank guarantees, normally a fraction of 1% of the overall transaction, for the assurance provided and in return Small Nigerian companies can secure loans or conduct business that would otherwise not be possible due to the potential riskiness of the contract for the Nigerian lending banks.
