Whither international bank guarantees in Bangladesh?

The guarantees are becoming common in the rapidly increasing cross-border project activities, trade finance and export-import businesses. This is particularly true when the business conditions are characterised by distance of clients and there are difficulties of real assessment of credit standing of the business partners. Such a situation may be there in all types of business and economic transactions irrespective of locations. However, these are particularly relevant for cross-border or international transactions.
Traditionally, there were several security arrangements to handle the difficulties. In order to solve the pitfalls encountered with the traditional means of security, the independent guarantee was invented that is mainly issued by the reliable and sustainable institutions.
The guarantees are commonly issued by banks and have been in use in most global economies for diversified purposes. Today, bank guarantees are known by various names, such as 'independent undertakings', 'performance bonds or guarantees', 'tender bonds or guarantees', 'independent guarantees', 'demand guarantees', 'first demand guarantees', 'bank guarantees', and 'default undertakings'. In addition to these common names, these payment undertakings are also commonly known as 'standby letters of credit', although such a letter of credit has a very different historical development than the demand guarantee. The bank guarantees operate in much the same way as documentary credits.
Practically, demand guarantees, standby letters of credit and commercial letters of credits are all treated as autonomous contracts whose operation should not be interfered on grounds immaterial to the guarantee or credit. However, these instruments have distinctive features in terms of operational efficiency, use, preference and regulatory environment.
Bank guarantees are increasingly in use in Bangladesh as in other parts of the world in response to the realities of world commerce and increasing activities and concerns in public and private infrastructure and industrial installations, and growth of buyers' powers and increasing competition of sellers. In the context of Bangladesh, demand guarantees are already in use in infrastructure, export, import, financing and service sectors.
In case of infrastructure sector, a large number of indirect demand guarantees or counter guarantees are received by Bangladeshi banks whereas in case of exports, there are a few instances of the receipt of direct demand guarantees (issued by the foreign banks) that are advised through the commercial banks of Bangladesh.
In the service sector, there are a few cases of the issuance of indirect bank guarantees by the Bangladeshi banks whereas there are a good number of instances of offering repayment direct bank guarantees from Bangladesh. Though there are scopes of receiving direct repayment bank guarantees from abroad in case of import under cash in advance, instances are rare.
There are also a few cases of receiving standby letter of credit in the country. It can be observed that bank guarantees received are mostly for cross-border big installation projects and trade purposes. On the other hand, most bank guarantees issued by Bangladeshi banks serve as securities. It may be a reflection of the trade regulation (explicit and implicit) of the country that mainly allows import and export using documentary credit. It may also indicate that greater use of contract based trade payment methods in future would necessitate higher demand for bank guarantees to and from Bangladesh in trade services.
There are potentials of increasing use of bank guarantees in cross-border financing. The Bangladesh Bank has some general provisions and guidelines on the issuance and receipt of international bank guarantees in its guidelines/circulars. Though the instruments are also in use to meet domestic trade and industry need, the Bangladesh Bank does not have any guideline in this connection. The growing use of bank guarantees both in domestic and international transactions necessitate comprehensive guidelines and rules to improve efficiency and to reduce risks. And the guideline needs to cover both domestic and international bank guarantees. Moreover, some issues like the authority, formalities etc to issue bank guarantees, needs to be addressed.
It is more or less recognised that acceptance of the International Chamber of Commerce (ICC) publications as guidelines are essential for the uniform and efficient operation of cross border bank guarantees. The Uniform Rules for Demand Guarantees (URDG 758) is already a globally recognised guideline for that. The International Standby Practices (ISP 98), used in the USA, could be another option. Some local guidelines and rules could complement the ICC publication for better customization. The Bangladesh Bank accepted UCP as rules of documentary credit. The central bank may think of allowing appropriate ICC guideline to handle the bank guarantees. In this regard, the potentials and the challenging area of the respective ICC guidelines, in respect of Bangladesh's business environment need to be examined first.
It can be observed that the ICC rules are not widely in use in the demand guarantees issued from and received in Bangladesh. In most cases, our banks are in the habit of accepting dictated terms in demand guarantees. These practices are facilitating the vulnerability of banks and local clients in handling fraud potentials and risks. Thus, alongside acceptance of ICC publication, we may need to accept specific rules to handle fraud and to minimize risks.  So we should consider formulating rules for handling frauds covering both demand guarantee and documentary credit.
Approach of handling 'unfair call' in demand guarantees is another issue to be handled by the policy-makers. It is mainly about the independence of bank guarantee from that of the underlying contract. The guidelines and rules of the central bank could work as the most critical factors for the courts to handle the issue. The international 'case laws' may offer contradictory results. Thus country approach and national interest should be the key.
In some cases, banks are supposed to obtain permission from the Bangladesh Bank to issue international bank guarantees. Though these permissions are duly issued, data are not maintained in structured form. Even there are cases where permission was not sought at the time of the issuance of guarantee. Currently the guarantees are reported to the central bank as part of their non-funding liabilities.
Comprehensive and separate monitoring and reporting arrangement by the central bank might help store structured information, improving efficiency and minimising risks. To promote healthy bank guarantee business in Bangladesh, alongside issuing a comprehensive operational guideline, the central bank needs to identify the effective monitoring and reporting arrangement.
The writer is Professor and Director [Training], BIBM
 ahsan@bibm.org.bd