A Plain Explanation of All Rules, Requirements and Hidden Fees
A bank guarantee is a written promise made by a bank protecting a business relationship between two parties. The bank promises to pay a specific amount of money if one party fails to fulfill agreed obligations to the other party.
Bank guarantees are frequently required when setting up or running a company in the UAE. However, the strict regulations often surprise business owners. They are caught off guard by the short submission times, exact formats, renewal needs, and unexpected fees.
This detailed guide aims to clearly explain all entrepreneurs need to know about bank guarantees in plain English. It covers each step of the process.
When Will Your UAE Business Need a Bank Guarantee?
While specifics vary by exact scenario, most companies in the UAE will need to provide a bank guarantee in one or more of these key situations:
Starting a New Company
To get an initial trade license in Dubai, Abu Dhabi, or other emirates, the registration body requires a ‘guarantee’ from owners. It is for future financial compliance. This is typically set at AED 3,000 to 5,000 depending on location.
Bidding on Government Tenders
Any organization hoping to secure a supply or construction contract with federal or emirate-level government entities must provide an ‘advance payment guarantee’ or ‘performance guarantee’ with their bid. For major projects, this can easily exceed 5% of the total multi-million dirham tender amount.
Signing Major Supplier Contracts
As a risk management measure, large UAE corporations often demand new vendors or suppliers provide a guarantee. The guarantee is for their ability and commitment to deliver future goods or services as per contracts. Also known as a ‘warranty guarantee’, required values range from 10% up to 25% of total deal size depending on the scale of orders.
Leasing Commercial Property
Before giving property access, UAE-based landlords often ask new tenants to get a rental guarantee from their bank. It is typically set at 2 to 6 months of the total annual rent. This safeguards the landlord if the tenant defaults on future payments.
Strict Rules and Regulations
Other banking instruments are not like them. The UAE Central Bank has precise rules that all bank guarantees must follow. Failing to meet these stringent standards can lead to severe disruption for companies:
Narrow Submission Windows
Guarantees must be submitted to the requesting beneficiary within 30 to 90 days from date of initial request. If not received within this short timeframe, heavy fines can be triggered.
12 Month Minimum Validity
The bank guarantee must remain valid for a minimum period of 12 months from submission date. Some major government projects mandate validity for the entire multi-year contract duration.
Values Up To 25% of Contract Value
As referenced above, guarantee values can be up to a quarter of the total contract, award, or rental value. This is a major cash flow factor.
Standard Format Requirements
Central Bank directives define the exact text requirements for standard guarantee formats. They include precise wording, which must legally appear.
Annual Renewals
For long agreements, you must renew guarantees every 12 months. This goes for the whole period. There is no ‘one-and-done’ option.
Applying for a Bank Guarantee in the UAE
With the regulations in mind, what’s the actual step-by-step process for a business to obtain an compliant bank guarantee?
1. Start Early
Application procedures can take 4 to 8 weeks to finalize, so companies should begin the process well in advance of submission deadlines.
2. Prepare Financial Records
Banks will thoroughly review last 2 years of company accounts to determine appropriate guarantee values eligible based on financial health.
3. Maintain Sufficient Account Funds
Lenders legally require guaranteed companies keep 50% to 100% of the guarantee amount deposited in a blocked account until released. This ensures funds are available if a claim is made.
4. Submit Precise Details
Applications must include specific beneficiary details, submission deadlines, formats required and the purpose of the contractual obligation.
5. Pay Admin & Interest Fees
Banks charge an upfront admin fee of 0.5% to 2% of guarantee value in addition to an annual interest rate ranging from 1% to 3% charged against the guaranteed amount.
6. Calendar Key Dates
Once issued, companies should diary all key deadlines related to renewals, claims and expiration dates in their calendar systems with reminder alerts.
Releasing a Bank Guarantee
Releasing a guarantee after successfully fulfilling the underlying contractual obligations also follows a similarly rigid process:
- Wait Until Expiry Nears
Banks will not initiate release instructions until 30 to 90 days before the guarantee expiry date. - Request Release From Beneficiary
Contact the beneficiary formally asking them to approve discharge of liability and return the original hard copy guarantee documentation back to the issuing bank. - Pay Final Interest Fees
Any last interest charges accrued across the validity period will need to be fully settled before the instrument can be cancelled. - Unfreeze Deposit Account
Finally, the bank will unblock the portion of funds held as collateral within 28 days after expiry. This can unlock significant working capital.
Costly Pitfalls to Avoid
Despite best intentions, many businesses struggle to fully comply with the complexity of UAE bank guarantee regulations:
- Underestimating Values Required – resulting in disruption to operations.
- Not Budgeting for All Fees – admin charges and interest costs multiply.
- Forgetting Renewal Deadlines – critical paperwork delays risk reputation damage.
- Losing Track of Release Dates – delaying access to locked away funds.
Conclusion
We hope this detailed, plain English guide has answered all your key questions around the often confusing world of bank guarantees in the UAE – from what they are and when required, to step-by-step application and release processes in line with Central Bank rules. Horizon’s expert team is always here to provide tailored advice navigating guarantees or meeting any other accounting compliance needs.
FAQs
The costs involved with bank guarantees usually include:
One-time admin fee to the bank (0.5% – 2% of guarantee value).
Annual interest rate charged by bank (1% – 3%).
No, a bank guarantee cannot be canceled or revoked once it has been issued to the beneficiary. It must run its full course until expiry. Upon expiry, the bank will not extend it without receiving formal written authorization from both parties involved.
If the applicant fails to fulfill the contractual obligations covered by a guarantee, the beneficiary has the right to make a claim on the guarantee value amount outlined in the terms. The issuing bank is legally bound to pay this amount.
