Bank Guarantees in the UAE: Practical Guide for Businesses
The UAE economy grows fast. Companies sign contracts with large values. Partners want assurance during delivery and payment. A bank guarantee gives that assurance. A licensed bank issues the instrument on a client’s request. The bank promises to pay the beneficiary if the client fails to meet a duty. The instrument reduces counterparty risk in trade and projects. It protects deals in construction, supply, and services. It supports trust across borders and industries.
This guide explains the concept in clear steps. It shows parties, types, benefits, costs, documents, and process. It also lists errors to avoid and tips to improve wording. Mubarak Al Ketbi (MAK) Auditing supports companies with end-to-end guidance. The team coordinates banks, drafts terms, and manages compliance.
Meaning and Parties in a Bank Guarantee
A bank guarantee is a written promise. The bank promises to pay an amount on demand or under conditions. The promise supports a client’s duty under a contract.
Three parties take part in every instrument:
- Applicant: The company or person who asks the bank to issue the guarantee.
- Beneficiary: The party who receives protection under the instrument.
- Issuing Bank: The bank that undertakes the payment obligation.
Sometimes a confirming bank or advising bank sits between foreign parties. The advisor passes the instrument to the beneficiary. The confirmer adds its own promise for extra comfort.
The guarantee can be unconditional (on first demand) or conditional (on evidence of default). The text defines the trigger and the claim process. The wording sets the scope and the bank’s duty.
How a Bank Guarantee Works
The applicant signs a contract with the beneficiary. The contract may require security for performance or advance funds. The applicant requests the bank to issue a guarantee in the beneficiary’s favor. The bank studies the applicant’s financials and the contract. The bank sets a limit and may block cash collateral. The bank then issues the instrument in standard or bespoke text. The beneficiary checks the text and accepts or requests changes. During the contract, if default occurs, the beneficiary makes a claim. The bank pays within the stated timeline if the claim meets the terms. The bank then seeks reimbursement from the applicant or from the blocked funds.
Main Types of Bank Guarantees Used in the UAE
Businesses need different protections for different phases. The UAE market uses several common forms:
- Tender / Bid Guarantee: It secures the bid’s seriousness. It covers withdrawal or refusal to sign after award.
- Performance Guarantee: It secures delivery and quality after the award. It protects against delay or non-performance.
- Advance Payment Guarantee: It protects prepaid funds. It compels refund if the supplier fails to deliver.
- Payment Guarantee: It secures payment duty of a buyer for delivered goods or services.
- Retention Money Guarantee: It substitutes cash retention held under the contract.
- Warranty / Maintenance Guarantee: It covers defects during the warranty period.
- Customs / Duty Guarantee: It secures duty and tax exposure for customs operations.
- Financial Guarantee: It covers pure financial obligations under loans or leases (subject to bank policy).
Each type uses distinct wording. The activity and stage define which instrument fits best.
Benefits for Companies Operating in the Emirates
A bank guarantee delivers value to both sides of a deal. The list below shows core advantages:
- Lower Counterparty Risk: The beneficiary holds bank support, not just client credit.
- Better Contract Wins: The bidder meets tender terms and stands out with strong backing.
- Freed Working Capital: Retention guarantees keep more cash inside the project.
- Cross-Border Trust: International partners accept bank paper and proceed with confidence.
- Negotiation Power: Assured security improves pricing and schedule discussions.
- Reputation Signal: The applicant shows financial discipline and bankable conduct.
- Compliance Alignment: Projects with public entities often require guarantees by rule.
Typical Use Cases by Sector
- Construction and EPC: Performance, advance, and warranty guarantees support progress.
- Oil and Gas Services: Field work and supply chains rely on on-demand wording.
- Logistics and Customs: Duty guarantees speed clearance and temporary imports.
- Manufacturing and Supply: Payment and performance guarantees protect both sides.
- Facilities Management and IT: Service-level commitments use performance paper.
- Trading Houses: Bid and payment guarantees help in regional tenders and frame contracts.
Risks, Limits, and Care Points
A guarantee is not free of risk. The applicant faces several exposures:
- Call Risk: The beneficiary may call on first demand even during a dispute.
- Cash Collateral: Banks may block 50% to 100% or seek other security.
- Fee Load: Issuance and amendment fees add to project cost.
- Text Risk: Vague triggers or broad wording widen liability.
- Jurisdiction Risk: Foreign law or venue can complicate defense.
Careful drafting narrows these risks. Clear events, fixed expiry, and claim rules protect both sides.
The Application Process: Step by Step
Follow a structured path to speed approval:
- Scope the Need: You confirm type, amount, and validity with the beneficiary.
- Select the Bank: You choose a bank with appetite for your sector and geography.
- Share the Draft: You obtain model wording from the beneficiary and review it.
- Prepare the File: You compile financials, contracts, IDs, and board approvals.
- Agree Collateral: You negotiate cash margin, lien, or asset security terms.
- Submit the Request: You file the application through the bank’s trade desk.
- Complete KYC: You answer due-diligence questions with consistent facts.
- Issue the Instrument: The bank releases the guarantee in paper or SWIFT.
- Confirm Receipt: The beneficiary verifies text, signatures, and reference numbers.
- Track Validity: You monitor expiry and extensions with a calendar.
- Close or Release: You collect the original upon completion and seek cancellation.
Mubarak Al Ketbi (MAK) Auditing prepares the checklist and coordinates each stage with the bank and counterparty.
Eligibility and Appraisal by Banks
Banks test credit before they issue support. They study the company profile and the contract. They check:
- Capital base and leverage.
- Cash flow and liquidity ratios.
- Past performance on similar projects.
- Collateral availability and legal standing.
- Sanctions and compliance screening.
Transparent data helps the bank approve faster. Early engagement reduces rework.
Documents You Should Prepare
- Application form and board resolution.
- Audited financial statements for two years.
- Interim management accounts for the current year.
- Contract copy or award letter with key clauses.
- Commercial license and constitutional documents.
- Passport and visa copies for authorized signatories.
- Insurance details where required by the contract.
- Beneficiary details, address, and bank references.
Clean scans and consistent spellings cut queries and delays.
Cost Drivers and Typical Fees
Banks price guarantees by risk and tenor. Fees generally include:
- Issuance Commission: A percentage per quarter or per annum on the face value.
- Amendment Fees: Fixed charge for changes in amount, date, or wording.
- Swift / Courier Costs: Out-of-pocket charges for transmission and delivery.
- Advising / Confirmation Fees: Added by advising or confirming banks on cross-border deals.
- Collateral Cost: Opportunity cost on blocked cash or pledged assets.
A simple tender guarantee costs less than a complex performance bond. Early scoping avoids surprises.
Key Clauses That Deserve Attention
When you draft or review wording, focus on the following terms:
- Amount and Currency: Define figures and decimals clearly.
- Expiry Date and Place: Fix a date and a place of expiry to avoid ambiguity.
- Claim Period: State days allowed after expiry for claim presentation.
- On-Demand vs Conditional: Clarify triggers and documents required for a call.
- Governing Law and Courts: Align with contract law or choose neutral law.
- Partial Drawings: Allow or prohibit partial calls as the case demands.
- Reduction Schedule: Link amount reductions to milestones if relevant.
- Transferability: State if the beneficiary may assign rights.
- Original vs Copy: Confirm if claims must attach the original instrument.
- Force Majeure and Banking Days: Avoid gaps around holidays and closures.
Precise language protects all parties during stress events.
Amendments, Extensions, and Cancellation
Projects shift and dates move. The parties may extend validity, increase amounts, or change text. The applicant requests the bank to amend. The beneficiary must consent in writing. After final acceptance of works or full payment, the beneficiary returns the original guarantee for cancellation. The bank then releases collateral and closes the file.
Keep a diary for dates. Start extension talks at least three weeks before expiry to avoid last-minute risk.
Differences: Bank Guarantee vs LC vs SBLC
- Bank Guarantee: The bank pays if the applicant defaults on a contract duty.
- Letter of Credit (LC): The bank pays the seller on presentation of shipping documents.
- Standby LC (SBLC): It behaves like an on-demand guarantee but follows LC rules.
Choose the tool that matches the trade flow. Use an LC for shipment payment. Use a guarantee for performance risk.
Common Errors to Avoid
- Using open-ended validity with no expiry date.
- Accepting wide claim wording without limits.
- Underestimating cash collateral needs.
- Sending inconsistent facts to bank and beneficiary.
- Missing the extension window near expiry.
- Storing the original instrument carelessly.
Mubarak Al Ketbi (MAK) Auditing sets controls and templates to prevent these issues.
Practical Tips for Smooth Execution
- Align the guarantee with the main contract clause by clause.
- Use the bank’s standard text where possible to speed approval.
- Confirm the beneficiary’s legal name and address with documents.
- Keep a central register for all guarantees and expiry dates.
- Reconcile fees and commissions monthly for cost control.
- Prepare a call-response plan in case the beneficiary alleges default.
Good discipline reduces noise and protects relationships.
What Can Help — Mubarak Al Ketbi (MAK) Auditing
Mubarak Al Ketbi (MAK) Auditing helps your team assess needs, draft wording, and obtain the right bank instrument at the right cost. The team reviews contracts, prepares financial packs, and negotiates collateral. The team tracks expiry dates and manages amendments on time. The team also designs internal policies for guarantees and letters of credit. With this support, your company protects projects and preserves cash—because a stitch in time saves nine.
For More Information
- Visit our office: Saraya Avenue Building – Office M-06, Block/A, Al Garhoud – Dubai – United Arab Emirates
- Contact / WhatsApp: +971 50 276 2132
