In Kazakhstan, more and more entrepreneurs from the SME sector have started seeking bank guarantees.
There has been a positive trend in this regard since the beginning of 2021. According to market professionals, this is because the situation with the pandemic is easing and restrictions are being lifted.
Experts at Nurbank have noted that since the beginning of 2021, clients have increasingly sought bank guarantees.
"In the first quarter of this year, the volume of guarantees increased by 7% from the beginning of 2021. The main growth was recorded in the SME sector. At the beginning of the year, the volume of guarantees in this sector was 2.6 billion tenge. By the beginning of April, it was 3.4 billion tenge. In other words, the volume grew by 32%," noted Nurbank.
Overall, bank guarantees allow legal entities and individual entrepreneurs to minimize risks when entering major contracts or participating in tenders.
Experts explained that a guarantee is an obligation given by a financial institution at the client's request to their counterparty. It involves paying the counterparty a sum within the guaranteed amount in case the client fails to fulfill obligations.
"Guarantees are needed when entering major contracts or working with new partners you haven't worked with before. Also, with small suppliers, to ensure money return in unforeseen circumstances. It is needed for payment delays, advance payments on contracts, or for participating in a tender. The cost of this service is cheaper than obtaining a loan," noted the financial institution.
According to the bank, construction companies (real estate construction, road repairs), food companies, and those involved in equipment procurement for schools, kindergartens, hospitals, and the like most often seek guarantees.
For example, the company "Ber-Nur-Taraz" is engaged in construction and installation work and regularly turns to Nurbank for guarantees. The firm often participates in state procurement tenders.
"A bank guarantee is the best option for securing obligations to the customer today. The main thing is that it is processed quickly. We currently use electronic bank guarantees. This is due to time and cost savings for guaranteeing delivery to the procurement organizer, as well as reducing the risk of tender application rejection due to untimely presentation of the bank guarantee," commented the company.
Note that there are several types of guarantees:
- blank tender guarantees are issued to legal entities, individual entrepreneurs, and farms for participation in a competition/tender in a short time and without collateral;
- tender guarantees are issued at the participant's request to the party announcing the bid, and they ensure the fulfillment of obligations;
- the performance bond is issued at the contractor's request of goods or services to the customer;
- the advance payment return guarantee is issued at the seller's request of goods or services to the buyer, usually in the amount of the advance received under the contract between the seller and the buyer.
"There are other types, such as payment guarantees and loan return guarantees, fulfilling obligations to pay taxes and customs duties, but the above-mentioned guarantees are the most popular among our clients," the bank emphasized.
Additionally, one of the attractive conditions for obtaining guarantees is that they are issued both in tenge and in dollars, depending on the terms of the tender or contract.
The validity periods of guarantees depend on the requirements of the bid documentation or contract. For its issuance, it is necessary to provide a package of documents and collateral, for blank guarantees, collateral is not required.
Furthermore, experts described the mechanism of bank guarantees. In a very simplified scheme, it looks as follows: initially, a main contract is concluded between two legal entities (individual entrepreneurs); to ensure fulfillment under it, a bank guarantee is provided.
One of the parties (the principal) applies to the bank for a guarantee issuance, and after approval, a direct bank guarantee is issued to the beneficiary.
"There's another option when the principal applies to the beneficiary's bank for a guarantee to the latter under the principal's bank counter-guarantee. After approval, the guarantee is issued," Nurbank concluded.