Banking Control

No.: 8260/BC/152

Date: 15-6-1408 H

3-2-1988 A.D

Attachments : 5 Copies of Bank Guarantee Rules

Circular to All Banks Operating in Kingdom

HE the Manager

Greetings,

SAMA has received the letter of HE the Minister of Finance & National Economy No. 17/67 dated 2-4-1408H. The letter says that the Ministry, in order to protect the rights of the government agency and the contracting party and to avoid problems between banks and contractors, has compiled all bank guarantee rules in one document, clearly presented, to make it easy for those in charge to control such guarantees and to go back to these rules and implement the ones they need for handling specific cases or taking decisions thereon. The forms of these guarantees were approved in such a way as to make them subject to such rules when issued by the bank.

SAMA, therefore, calls on banks to refer to and implement these rules in all aspects related to bank guarantees. We attach herewith 5 copies of these rules.

Regards,

Director General of Banking Control

J. A. Al-Suhaimi

Kingdom of Saudi Arabia

Ministry of Finance & National Economy

Legal Department

No.: 17/67

Dated: 2-4-1408 H

Attachments: 5 Copies

Subject: Bank Guarantees Rules

Greetings,

Pursuant to inquiries received by the Ministry with regard to the implementation of the bank guarantee rules; and whereas such inquiries are governed by legal provisions in the Government Procurement Regulations and its Rules of Implementation and by applicable Ministry circulars; and

In our desire to protect the rights of both the government agency and the contractor and to properly and clearly implement such rules in order to avoid any problems between banks and contractors,

The Ministry has decided to compile all these rules in a single document, clearly presented, to make it easy for those in charge of controlling bank guarantees to go back to these rules and implement the ones they need for handling specific cases or taking decisions thereon.

The forms were also reviewed and approved in such a way as to make them subject to such rules when issued by banks.

We attach herewith 5 copies of these rules and forms to be distributed to the concerned parties in your bank to be referred to and observed when handling bank guarantees.

Ministry of Finance & National Economy

Signature of HE the Minister

Kingdom of Saudi Arabia

Ministry of Finance & National EconomyLegal Department

Rules of Bank Guarantees

Pursuant to article 2 (d) and 7 (a) of the Government Procurement Regulations and article (9) of its Implementation Rules, Ministerial Decision No. 17/1486 dated 25-3-1398 and Ministry of Finance & National Economy circular No. 17/5373 dated 25/3/98H, acceptable forms of bank guarantees shall be as follows:

I. Letter of bank guarantee from a local bank.

II. Letter of bank guarantee from abroad submitted by a local bank

Pursuant to the Ministry of Finance & National Economy in circular No. 11/M/12407 dated 5-8-1396H and SAMA circular No. 11481 dated 19-8-1396H, the following conditions shall apply to those guarantees:

1. Letters of guarantee must be issued by the head office, not branches, of the foreign bank.
2. Letter of guarantee must contain a commitment to pay the value inside the Kingdom of Saudi Arabia upon first request free of any commission, taxes or expenses whatsoever and notwithstanding any objection from the bidder or the contractor of the government agency.
3. The letter of guarantee shall not be subject to any currency control regulations abroad that may result in delaying payment or non-payment of the total value.

4. If the guarantee is submitted by a foreign bank through a local bank, the local bank shall:

   a) Confirm the correct signatures of the issuing bank employees on the letter of guarantee.

   b) Certify that the signing employees are authorized to do so.

   c) Confirm that the foreign bank is approved by SAMA. The local bank must confirm the foregoing in an official letter attached to the guarantee.

5. - Letters of guarantee issued by foreign banks must be in accordance with the forms approved by SAMA
6. - Correspondence between the guaranteeing bank and beneficiary should take place through the local bank only.
7. - The commission of the local bank for its services should bot exceed 0.5 per thousand of the value of the guarantee if the value is in the neighborhood of SR 100 million and 0.25 per thousand for higher figures.

III. An undertaking by a specialized insurance company approved by SAMA, only in connection with preliminary and final guarantees.

Pursuant to SAMA circular No. 6082/M/229 dated 18-4-1397H, this kind of guarantee is subject to the following conditions:

a) The Insurance Company shall undertake to pay the bidding government agency an amount equal to the value of preliminary guarantee upon first request, notwithstanding any objection by bidder and without a ruling from any court or arbitration body.

b) In case of final guarantee, the coverage shall be at least 25% of the contract value.

Letters of guarantee submitted by insurance companies shall be subject to the same other conditions and procedures applicable to letters of guarantee submitted by foreign banks.

IV. All local and foreign banks shall, when they issue the 3 types of bank guarantees, comply with the attached rules and are not allowed to introduce any conditions or forms that differ from the approved forms. Letter of guarantees submitted by foreign banks in English are acceptable, provided that they are submitted in conformity with the approved form and an Arabic translation certified by the local bank is attached to the covering letter of the local bank.

Rules of Preliminary Guarantees

I. Pursuant to article 2(d) of the Government Procurement Regulation, the following rules have to be observed.

1. The value of preliminary guarantee must not be less than 1% or more than 2%, as determined by the conditions.
2. The preliminary guarantee shall not be necessary in case of direct purchase or open bids.

II. Pursuant to articles 9, 10 and 20 of the Implementation Rules of the Government Procurement Regulations, the following rules must be observed:

1. Preliminary guarantees must be valid until the date fixed for opening bids.
2. Preliminary guarantees may not be released during the effective period of the bid.

III. If the bid effective period expires and no award is made, the bidder who chooses to withdraw his offer is entitled to have his guarantee released by the Government Agency immediately and the bank may not renew the guarantee as long as the bidder did not so request. But if he does not notify the government agency of his withdrawal, his bid shall be deemed to be still valid.

IV. If the bid is opened and some bids are found to be high or in violation of the conditions, which makes them ineligible for award, the government agency may, at the request of such bidders and in its sole discretion release their preliminary guarantees.

Preliminary guarantees for rejected bids must be refunded to owners immediately without their request by notifying the issuing bank accordingly.

Rules for Final Guarantees

Pursuant to paragraphs a, b & c of article (7) of the Government Procurement Regulations and articles 21, 23 and 24 of its Implementation Rules, the following rules must be observed:

1. The value of the final guarantee must be 5% of the value of the contract and must be submitted by the acceptable bidder to the government agency within 10 days from award notification at the latest. He may be given an extra 10 days grace period.
2. No final guarantee is required for consultation contracts or direct purchases or spare parts purchases.
3. The validity of the final guarantee shall cover both the performance and maintenance periods if the contract so stipulates.
4. Final guarantee may be reduced for operation, maintenance and continued service contracts such as catering and similar operations where the contractor's obligations expire after a specific period of time. This should be limited to contracts exceeding one year where the guarantee is reduced after each year if it is proven that the contractor has fulfilled all its obligations.
5. The guarantee must be released after the preliminary or final acceptance of the works, as the case may be, and returned to the issuing bank.

Rules of Advance Payment Guarantee

Pursuant to article 8(a) of the Government Procurement Regulations, the following rules must be observed:

1 - The advance payment guarantee must be equivalent to the advance payment disbursed to the contractor.

2 - The guarantee shall be valid until the advance payment is recovered in full.

3 - The government agency must notify the issuing bank to reduce the value of the guarantee by an amount equal to that recovered from invoices on the date of recovery and with no request by the contractor. This procedure must be applied even if the government is delayed in paying the invoices for reasons the contractor is not responsible for.

Extension of Guarantees

Pursuant to articles 10 & 24 of the Implementation Rules of the Government Procurement Regulations, the following rules must be observed:

1- If reasons for extending the validity of a guarantee are available, extension shall be effected during the validity of the guarantee.

2- The contracting government agency shall address the extension request to the contractor, not the bank. The extension shall be for a specific necessary period and the issuing bank shall be supplied with a copy of the request stating that the bank has to pay the value of the guarantee without any delay during the validity period if it fails to finalize the extension procedures before the expiry of the guarantee validity term.

Confiscation of Guarantees

1- Pursuant to Ministry of Finance & National Economy circular No. 17/2740 dated 20-10-1405H, if the government agency is obliged to confiscate any bank guarantee, a committee must be formed to study the case and make a documented recommendation to the party with the authority to issue the confiscation request. In studying the case, the committee must take into consideration the circumstances surrounding the performance of the project and the consequences of confiscation.

2- Pursuant to Ministry of Finance & National Economy circular No. 17/222, dated 19-6-1407H the confiscation request must be limited to the operation where the contractor defaulted on its obligations and shall not be extended to other operations with one or several government agencies.

3- Confiscation requests, when justified and in compliance with applicable procedures, must be addressed directly to the issuing bank which has to respond immediately and notify SAMA accordingly.

General Conditions

1- Pursuant to paragraph (c) of the Ministry of Finance & National Economy decision No. 17/1486 dated 25-3-1398H, which defined the form of acceptable guarantees, the guarantee shall be payable upon the first request by the government agency, notwithstanding any objection by the bidder and without the need of a ruling from a court or an arbitration body.

2- Employees of Ministries and government agencies in charge of controlling guarantees are urged to interface with the tender sections therein, if any, and they must coordinate with the financial administration in this respect.

3- Accurate records for controlling guarantees must be kept to facilitate coordination with other concerned parties in the event of requesting guarantee extension or confiscation.

4- In the event a guarantee is submitted in violation of the approved form, it must be rejected in order to avoid problems with the contractor or weaken the rights of the government agency.

5- Ministries, government agencies and public institutions must not request guarantee forms not in compliance with the attached forms.