Letter of Guarantee (LG) Definition

A Letter of Guarantee is an irrevocable written undertaking issued by SHARQ Yemeni Bank for Islamic Microfinance, upon the request of a client, to pay an amount not exceeding a specified limit to a beneficiary. The purpose of this letter is for the bank to commit to paying a financial value to the party for whom the letter was issued.

Types of Letters of Guarantee

These are guarantees issued by the bank based on client requests, intended for local beneficiaries. They include:

• Bid Bond (Tender Guarantee): Issued to guarantee the seriousness of a bid submitted for a tender. It ensures that the participant, contractor, or supplier adheres to the terms of the tender and commits to execution if awarded the contract. Its value is typically 2.5% of the tender value or the estimated value (though this is not always a mandatory condition).

• Performance Bond: Issued to guarantee the execution of work according to the contract between two parties. The client recovers this guarantee upon successful completion of the work as agreed upon in the signed contract.

• Advance Payment Guarantee: Issued when a project owner pays an advance to the contracting company before the project begins to cover initial preparations. This guarantee allows the project owner to recover the advance payment in the event of a failure to fulfill the agreed-upon obligations.

• Customs Guarantee: A guarantee issued by SHARQ Yemeni Bank for Islamic Microfinance in favor of Customs authorities. It protects against the importer’s failure to pay the due customs duties, issued upon the client’s request.

• Maintenance Guarantee (Retention Bond): A guarantee issued by SHARQ Yemeni Bank for Islamic Microfinance to cover maintenance works that the guaranteed party commits to during the period agreed upon in the contract following the preliminary handover of the project. This guarantee is recovered upon the final handover of the project.