A banker’s guarantee, also known as a bank guarantee or a standby letter of credit, is a type of financial instrument issued by a bank on behalf of a customer. It serves as a promise by the bank to pay a specified amount of money to a beneficiary if the customer fails to fulfil certain obligations or commitments outlined in a contract or agreement.

Here’s how it typically works:

Request: A beneficiary, such as a supplier or a contractor, requests a banker’s guarantee from the customer’s bank as assurance that they will receive payment or performance as specified in a contract.

Issuance: The bank issues the banker’s guarantee after assessing the customer’s creditworthiness and determining that they can fulfil the guarantee if necessary. The guarantee is typically issued for a specified amount and duration.

Terms and Conditions: The banker’s guarantee includes specific terms and conditions outlining the circumstances under which the bank will be obligated to pay the beneficiary. These conditions are typically based on the terms of the underlying contract between the customer and the beneficiary.

Payment Obligation: If the customer fails to fulfil the obligations outlined in the contract, the beneficiary can present the banker’s guarantee to the bank and request payment. The bank is then obligated to pay the beneficiary up to the specified amount stated in the guarantee.