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Bank guarantee, Performance Guarantee , Bid Bond and Insurance Policy

required for Different modes of investment / Foreign Exchange
Operations

Md. Shafiqur
Rahman
Executive Vice President
& Incharge
Islami Bank Bangladesh Ltd.
GUARANTEE : Local Office,
Foreign Exchange
Meaning: Department.
The word Guarantee means a promise, usually in writing that
the surety (guarantor) shall fulfill the promise if the concerned
principal debtor (Customer) fails to discharge his responsibility
/ obligation to the creditor (Beneficiary)

Definition:
Bank Guarantee is an undertaking given by a Bank, guarantees
the performance of the undertakings of its customers vis-a- vis
a third party. In other words by issuing the guarantee , the
Bank commits itself that , incase the principal Debtor/client
(Applicant of B.G.) signing the undertaking , fails to pay
/perform the undertaking within the stipulated period and or/
abstains from the proper and timely performance of his
undertakings , for any cause or reason whatsoever , the bank
shall pay the amount stated in the guarantee to the
beneficiary immediately on receiving the claim along with the
Bank Guarantee from the beneficiary as per terms of the
Guarantee . In brief , a Bank Guarantee is an undertaking given
by a Bank to perform the promise or discharge the liability of
its customer or itself incase of default .
Contents :
The Guarantee should contain the subject of guarantee
( amount, particulars of the goods and services to be
performed with specification etc) date of performance
(maturity/expiry) of the undertaking by the Bank, the means
of the party signing the undertaking, the party in whose favour
the undertaking is issued.

Parties:

The person who gives the guarantee is called the surety or

guarantor (here, the Bank) The person in respect whose
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default the guarantee is given is called the principal debtor

(here, the applicant customer). The person to whom the
guarantee is given is known as the creditors or the beneficiary.
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TYPES Of GUARANTEE:
Various types of Guarantees are issued by the Bank for several
purposes, as, when, and where, needed by securing itself
(Bank) either by cash security or collateral security and or by
both as per sanction of the competent authority. The most
common types of Bank Guarantees are:

i. Tender or Bid bond Guarantee (Guarantee for

Earnest Money / Security Deposit)
ii. Performance Guarantee
a. Good Performance of Undertaking Guarantee
b. Good Performance of Job Guarantee
iii. Shipping Guarantee
iv. Advance Payment Guarantee
v. Return of Bond Deduction Guarantee
vi. Customs Guarantee
vii. Payment Undertaking Guarantee
viii. Miscellaneous Guarantee

1. Tender or Bid bond guarantee:

Government organizations and Institutions, Corporation,

companies, etc generally invite tenders for completion of their
projects , such as road building , construction of bridges,
building construction , use of facilities , performance of any
service and/or sale of unwanted goods.

Parties bidding for the tender, must submit with their bids a
guarantee to the beneficiary or issuer of the tender
(Government organization and Institution, corporations,
Companies etc.) This type of Guarantee is known as a BID
BOND or Tender or Bid Guarantee. It is generally, sought for
1 percent to 5 percent of the contract amount .

After the declaration of the successful bidder/bidders, the

original guarantees of parties whose bids have not been
successful are returned to the Bank for cancellation.

2. Performance guarantee.

Guarantees which are issued in consideration of specific

performance of contract, are called Performance Guarantee.
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The performance Guarantee may be mainly of two types:

i) Good performance of undertaking guarantee:

This type of guarantee is issued to ensure the proper and

timely performance of undertaking by the successful bidder.
The object of this type of guarantee is the assurance of good
performance of undertakings arising from signing of contract
which is issued at the request of the applicant (the contractor)
in favour of the beneficiary (Government Organizations and
institutions, Corporations, Companies, etc.), to ensure the
performance of the undertakings accepted by the contractor,
according to the stipulations of agreements signed.

ii) Good performance of job guarantee.

This type of guarantee is issued by the Bank at the request of

the Customer (Contractor) to assure the beneficiary
(Government Organizations and institutions, Corporations,
Companies, etc. of the proper working of the customer
(contractor) and the attainment of the forecast output, within
the stipulated time, after part of the job has been covered. It is
valid for a stipulated period after the completion of the project
and the start-up of the work for which the project was taken in
hand.

3. Shipping guarantee:
Banks give guarantee to shipping companies for release
of goods in the absence of shipping documents, in case
goods arrive before receipt of such documents by the
consignee and are incurring demurrage or original
documents have been lost after retirement from the
Bank. These guarantees are limited to bill amount or
letter of credit value and for period till receipt of original
bill of lading. The guarantee is actually signed by the
importer in favour of shipping company and
countersigned by the Banker. Normally, full value of
invoice or letter of credit must be retained as margin for
issue of guarantee. Alternatively, the goods may be
cleared by Bank and kept in its custody. As soon as the
original shipping documents are received, these shall be
sent to clearing agents to facilitate return of original
guarantee. In the alternative way, custom authoritys
confirmation regarding cancellation shall be obtained.

4. Advance payment guarantee:

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The objective of this type of guarantee is to secure the

funds, paid by the beneficiary (Government Organizations
and Institutions, Corporations, Companies etc.) to the
contractor, before start of the job, or in the process of the
job, to strengthen the financial position of the contractor
for speeding up the progress of work. The beneficiary will
take steps to re-collect the funds paid by encashing the
Guarantee, in case of the contractors failure to meet his
commitments. These guarantees are issued by the Bank,
in favour of the beneficiary, at the request of the
contractor. These are required for a fixed percentage of
the total amount of the contract that the beneficiary is
expected to pay to the contractor in the form of advance
payments.
The funds paid, by the beneficiary to the contractor, are
deducted from the job position reports at various stages
in such a manner that before the last temporary job
position report is filed in, the said amount should have
been amortized.

According to the general terms of the contract, the

amount of the guarantee is also reduced each time upto
the amount of the deductions, on the basis of the
beneficiarys declaration, and the guarantee is released,
with the consent of the beneficiary, at the latest, by the
date of the temporary hand-over of the job.

5. Return of Bond deduction guarantee

In spite of the supervision and various tests carried out

by the beneficiary during the period of the contract, at
various stages of the process of work, for greater
confidence regarding the proper performance of the job,
after the final handing over, and for a stipulated period,
the beneficiary deducts the equivalent of 10% of the
gross amount of the job position reports of the
contractor, and holds it in an account with himself, and
may return the good performance of job assurance
amount to the contractor against a Bank guarantee.

This type of guarantee, issued by the Bank at the request

of the customer (contractor) in favour of the beneficiary
is called Return of Bond Deductions Guarantee.

According to the general terms of the contract, the

equivalent of 50% of the amount of such guarantees, is
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released by the beneficiary, immediately on the approval

of the final position of job report, and the remaining 50%
of the guarantee remains valid until the approval of the
memorandum of final hand-over.

6. Customs guarantee

This guarantee is issued in favour of customs authority

on account of customs duties on imported goods and
machinery or export commodities on behalf of Clients.

Sometimes, importers are not in a position to pay in cash,

the customs duties to release their imported goods. As
such, they need to submit Bank Guarantee to the
Customs for an amount equivalent to the amount of the
customs duty.

By issuing the above guarantee, the Bank make

commitment for payment, and must pay the amount of
the guarantee to the Customs Authority, without any
delay, at the fixed maturity or on the dates when the
installments fall due.

7. Payment undertaking guarantee:

This type of guarantees is issued by the Bank to make

payment of dues at fixed maturities, such as the
Guarantee to Pay Taxes. Normally, this type of
guarantee issued against 100% cash security.

8. Miscellaneous Bank guarantees

Besides the various guarantees stated above,
applications may be received for the issue of multifarious
other types of Bank guarantees for all kinds of jobs. The
draft of such guarantees is usually dictated by the
beneficiary.

Foreign Bank Guarantee :

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In case of foreign Bank Guarantee Local Bank (any Bank in

Bangladesh) will issue Bid Bond and performance guarantee
after obtaining counter guarantee from a foreign Bank.

Counter Guarantee:
When a foreign Bank issue a Guarantee to any of their local
(Bangladesh) correspondent Bank for further issue a Bid Bond
or performance Guarantee in favor of a certain institution on
behalf of a certain origination is called counter Guarantee .
This Guarantee dispatched through Swift MT 760 and if any
amendment, should be Swift MT 767

Procedure of issuance of Bid Bond And performance

Guarantee:

After properly scrutiny the counter Guarantee Local Bank can

issue Bid Bond or performance Guarantee against Them who
participated international tender .

Before issuing Bid Bond or performance Guarantee Local Bank

May be obtained their Head office approval if necessary.
Commission 0.5% per quarter (Three months), vat on
Commission for 15% and correspondence and postage charges
should be realized from the foreign Bank or their Local agent.
As the counter Guarantee itself is security for this reason cash.
Security/Margin is not to be required for issuing of Bid Bond or
performance Guarantee.

Procedure of issuance of Guarantee (Counter Guarantee)

Local Bank can also issue Guarantee to any of their foreign

correspondent Bank on behalf of their valued client only. In
this stage Local Banks Guarantee is treated as counter
Guarantee to the foreign Bank. Before issuing Guarantee to
foreign Bank, Local Bank must obtained Bangladesh Bank and
their Head Office approval for issuing the Guarantee. Normally
Local Bank realized 100% cash security from their client at the
time of issuing the Guarantee . Swift charge also is to be
realized from their client.

ICC Coverage about Guarantee:

Internationally Bank Guarantee is conducting by international
chamber of commerce (ICC) publication no. 458 which is called
uniform rules for Demand Guarantee (URDG) Published in April
1992
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It is nearly 30 years since the ICC first became interested in

the use of Bank demand Guarantees in international trade and
set up a joint working party of the commission on
international commercial practice and the commission on
Banking Technique and practice to formulate rules designed to
provide safeguards against unfair calling and a fair balance of
competing interests .

The uniform Rules for demand Guarantees which cover not

only relations between guarantor and beneficiary but also
those arising under counter guarantees, represent a major
contribution to the adoption .of uniform practice in this
important field of international trade finance.

The rules are intended to apply worldwide to the use of

demand Guarantees, that is Guarantees bonds and other
payment undertakings under which the duty of the guarantor
or issuer to make payment arises on the presentation of a
written demand and any other documents specified in the
guarantee and is not conditional on actual default by the
principal in the underlying transaction.

Demand Guarantees differ from documentary credit in that

they are properly invoked only if the principal has made
default. However, the Guarantor, like the issuer of a
documentary credit, is concerned not with the fact of default,
but only with documents.

There are 28 articles and six groups in URDG 458.

Group A is scope and application of rules.

Group B is Definition and general provisions.

Group C is Liabilities and responsibilities.

Group D is demand.

Group E is Expiry Provisions.

Group F is governing law and jurisdiction.

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Specimen of of Performance Guarantee

for setting-up of a MW power station

To
M/s.
...

References:
LC References: Islami Bank Bangladesh Ltd, Dhaka Issued on following LC
No
Each covering delivery of name of goodsand covering the total invoice
value.

Whereas (Name of Supplier & address) hereinafter referred as the

Seller),has undertaken, in pursuance of the contract No. dated ..to perform
engineering, procurement & supply, of equipment & materials, manufacturing, start-
up and commissioning of name of goods. under the above mentioned
contract.

AND WHEREAS it has been agreed that seller shall furnish you with an irrevocable
performance Guarantee for the sum specified therein as security for compliance with
sellers warranty obligations in accordance with the Contract.

AND WHEREAS we have agreed to provide Buyer with such a guarantee.

THEREFORE WE, (Bank name & address). here by affirm that we are
Guarantors and responsible to you, on behalf of the Seller, up to a total amount of
US$......... (US Dollar ) (Being 10% of the partial invoice value of the delivered
name of goods.. if partial shipment effected ) and we undertake to pay you within
10 (Ten) bank working days, upon your first written demand declaring that the Seller
has not fulfilled his contractual warranty obligations under the above Contract and
without cavil or argument, any sum or sums within the limits of (Amount of
Guarantee) as aforesaid, without your needing to provide or to show grounds or
reasons for your demand or the sum specified therein to your bank account held with
a first class Bangladesh bank specified in your written demand.

Claims under this guarantee will only be honoured by us if full payment for the above
referenced partial delivery under LC NO( if partial shipment effected)

This Guarantee will expire automatically:

- as soon as we have received back the present instrument ,or
- 24 (twenty- four) months after the date of the document Equipment
Acceptance Report issued by the buyer.
- 16.000 operating hours,
- however, on(here 30 months after Sellers written confirmation of
Readiness to Ship from.. will be inserted) , at the latest , even if the
present instrument is not returned to us, unless your claims by letter (sent by
registered mail or by courier service), if any, have reached us on or before
that date.

This guarantee is personal to yourselves and any claims there under may be
assigned or pledged in favour of third party only with our express written
approval.
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Any charges arising in connection with this guarantee in your country are to be
borne by you,
This Guarantee is governed by and shall be construed in accordance with the laws
and regulations of the (Name of the issuing Banks country).

Signature and seal of the Guarantors

INSURANCE: DEFINITAION, TYPES, PREMIUM
&
CLIAM SETTLEMENT

WHAT IS INSURANCE?

It is a Guarantee by the Insurance Company to the

Insured to pay a certain sum of compensation (Sum
Insured) in the event of Happening the insured
perils.

IMPORTANCE OF INSURANCE:

Insurance is a basic human need, as accidents and

their financial consequences requiring insurance
cover are universal.

HOLY QUARAN & HADITH ON CO-OPERAITON AND

PRUDENCE:
Sustain in Co-Operation among yourselves in
righteousness and piety sura al maidah (Part of
verse-2)

It is better for you to leave your offspring wealthy

than to leave them poor, asking others for help
(Narrated by Sayed Bin Abi-Waqqas (R)

OBJECTIONS AGAINST THE PRESENT FORM OF

INSURANCE SYSTEM:

AL-GHARAR:

It indicates unknown or uncertain factors in the

operation of a contact. Policy holders remain at dark
as to how the amount of compensation being paid
come from.
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AL-MAISIR:

It means Gambling specially in the case of life

insurance. Upon death of a policy holder, his
nominees receive a certain amount of money (sum
insured) but the policy holder is not informed of how
and form where it is to be derived.
AL-RIBA:

Investment of fund is made in riba based securities /

institutions which is against the shariah rules

ALTERNATIVE TO CONVENTIONAL INSURANCE:

IT IS TAKAFUL.

WHAT IS TAKAFUL?

The word Takaful originates from the Arabic word

Kaflun meaning joint guarantee and shared
responsibility. The underlying concept of takaful is
sharing the suffering of anyone of a group by other
members of the group on voluntary basis. The group
members agree that if any member of the group
suffers any loss of disaster, the others will help him
by paying him compensation in the form of money or
otherwise. The distinct character of Takaful is that
the contract is based on the virtues of cooperation,
mutual help shared responsibility and benefit, while
all aspects of the contract must be transparent to all
involved.

TYPES OF INSURANCE:
Generally two Types:

i) Life Insurance

ii) General Insurance

From business point of view insurance can be

classified into the following three categories:

LIFE INSURANCE: (a) Death Benefit (b) Accident

Benefit (c) Education Policy (d) Settlement Benefit
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(e) Marriage Policy (f) Old Age Policy etc.

GENERAL INSURANCE: (a) Property Insurance (b)_

Liability Insurance (c) Other forms of Insurance e.g.
Export Credit Insurance, State Employees Insurance
etc.

SOCIAL INSURANCE : (a) Pension Plans (b) Disability

benefits (c) Unemployment Benefits (d) Sickness
Insurance (e) Industrial Insurance etc.

From risk point of view Insurance can be classified

into the following four categories:

PERSONAL INSURANCE: (a) Life Insurance (b)

Personal Accident Insurance (c) Health Insurance (d)
Unemployment Insurance etc.

PROPERTY INSURANCE (a) Marine Insurance, (b) Fire

Insurance (c) Automobile Insurance (d) Cattle
Insurance (e) Crop Insurance (f) Machinery Insurance
(g) Theft Insurance etc.

LIABILITY INSURANCE (a) Third party Insurance (b)

Employees Compensation Insurance (c) Motor
Insurance (d) Reinsurance etc.

FIDELITY INSURANCE (a) Fiduciary Insurance (b)

Credit Insurance (c) Privilege Insurance etc.

PREMIUM:

The amount charged by the Insurance companies for

taking the risk of making good any loss suffered by
the insured through damage, destruction or loss of
property is called premium. In case of general
insurance premium is paid at a time in lump sum and
in case of life insurance it is paid in installments.
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INSURANCE POLICY:

It is the legal document of evidence of contract. It

includes all the terms and conditions of the contract.

INSURANCE REQUIRED BY THE BANKS:

of its own assets as well as assets of the investment

clients must be insured. In case of Investments
insurance for total sale price plus ten percent
covering all the risks shall have to be obtained.

a) Cash Insurance: Cash in vault, Cash on counter,

Cash in transit

b) Marine Insurance: ICC-A, B & C (TPND)

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MARINE RISK COVERAGE:

SL. RISK TO BE COVERED ITEMS TO BE COVERED

NO
.
1. ICC B , TPND, WAR & SRCC SPARE PARTS AND ACCESSORIES
& INLAND RISK
2 ICC B , TPND, WAR & SRCC TIN, BP SEET, PACKG,MATERIALS,
& INLAND RISK ALUMINUM FOILS PLASTIC
MATERIALS.
3 ICC A , WAR & SRCC & PHARMACEUTICAL RAW
INLAND RISK MATERIALS (POWDER/LIQUID)
HOOKS/HOLING, WATER
DAMAGE, HEATING, LOSS OR
CONTENTS)
4 ICC A , WAR & SRCC & INDUSTRIAL MACHINERY
INLAND RISK (BREAKAGE,
WATER DAMAGE)
5 ICC A WAR & SRCC & MEDICINES OF DIFFERENT KINDS.
INLAND RISK (HEATING,
WATER DAMAGE, LOSS OF
CONTENTS)
6 ICC A WAR & SRCC & FROZEN FOOD OF ALL KINDS
INLAND RISK
7 ICC B GLASS ITEMS,ELECTRONIC
TPND,BREAKAGE,WAR & GOODS
SRCC & INLAND RISK
8 ICC B TPND, HOKS/ CEMENT AND OTHER ITEMS OF
HOLING, WAR & SRCC & THE SIMILAR KINDS
INLAND RISK
9 ICC B TPND, WAR & SRCC GARMENTS, TEXTILES COTTON
& INLAND RISK
10 ICC B TPND, WAR & SRCC COSMETIC OF VARIOUS KINDS
& INLAND RISK

c) Machinery & Vehicle Insurance: Comprehensive (1st

Party)

d) Godown & other Insurance : Fire, RSD, Flood,

Cyclone, Earthquake, Theft, Pilferage, Burglary etc.
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MARINE CLAIM SETTLEMENT PROCEDURES:

1 Original Policy 2 Survey Report

3 Invoice 4 Bill of lading
5 Packing list 6 Bill of entry
7 Claim bill 8 Copies of correspondences
exchanged
9 Short landing certificate 1 Weight note
0
11 Copy of complaint 1 Note of protest
2
13 LOB Certificate 1 Letter of indemnity
4
15 Letter subrogation 1 Notice of abandonment
6
17 Price list

MOTOR INSURANCE SETTLEMENT PROCEDURES

1. Claim form
2. Registration certificate
3. Fitness Certificate
4. Tax token
5. Route permit
6. Driving license
7. FIR
8. 3 quotations for repairing
9. Motor policy/certificate
10. Survey report with photographs
11. Drivers statement on the accident
12. Police investigation report
13. Letter of subrogation
14. Letter of indemnity
15. Satisfaction note

LODGMENT OF CLAIM & SETTLEMENT THEREOF:

When there is any loss of goods the claim is to be lodged with
the insurance company and the relevant documents are to be
furnished in support of the claim.

1. Notice of claim i.e. giving information to the

insurance.

2. Submission of claim letter along with required

documents e.g. as described earlier (valid policy,
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G.D./ Police Verification Report, Fire Service Report,

Statement of Property / Assets damaged, Bill of
Lading, Survey Report by the nominated firms Copy
of protest etc.)

Difference Between Bid Bond & Performance Guarantee

The difference between Bid-Bond & Performance Guarantee is given as

follows:

Bid-Bond Performance Guarantee

1. Parties bidding for the tender 1. Guarantees which are issued in
must submit with their bids a consideration of specific
guarantee to the beneficiary performance under a specific
(Government Organization/ contract are called performance
Institutions/ Companies etc. ) of Guarantee.
the tender. This type of
guarantee is known as Bid 2. After participating of a tender
Bond or Bid Guarantee. when a participator is accepted
to perform the specific
2. Bid Bond is only for participation task/job/work under a specific
of a tender. contract the Performance
Guarantee is to be needed.

3. Bid Bond is to be submitted

normally 1 to 5 percent of total
value of the contract.
4. Bid Bonds are to be returned
immediately to the issuer by the
beneficiary if the Bidders are not
accepted to perform the work
and the accepted Bidders Bid
Bond will be returned after
submitting the Performance
Guarantee.
5. If the accepted Bidder will not
provide the Performance
Guarantee or not to interested to
do the job then the beneficiary
will claim for encashment of the
Bid Bond amount.
3. Performance Guarantee is to be
submitted for full amount of the
contract value.
4. Performance Guarantee will be
returned to the issuer by the
beneficiary after completion of
the job/works with full
satisfaction as per contact.
5. If the accepted Bidder/supplier/
contactor will not perform the
works with satisfaction as per
the contract then the beneficiary
will claim for encashment of the
Performance Guarantee amount.
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