The
Kafala is a letter of guarantee facility issued by a bank, that is, the
Kafala is a written promise (irrevocable obligation) by the Bank(Kafil)
to compensate (pay a sum of money) to the beneficiary (Makful Lahu),
local or foreign, in the event that the obligor (Makful 'anhu) fails to
honor his/her/its obligations in accordance with the terms and
conditions of the guarantee/agreement/contract.
The
object of guarantee should be clear in terms of value, total and
specification including the period of guarantee; and in compliance with
Shari'ah principles (permissible) The bank shall charge a fee that has
been agreed in advance and defined on a fixed nominal value and not in
the form of percentage to cover nonadministrative fee for the preparation of the guarantee;
The
bank may extend a one-time or renewable Letter of Guarantee Facilities.
A one-time Letter of Guarantee Facility is a non-renewable letter of
guarantee extended to applicants who have no recurrent requests.
Renewable letter of guarantee facility is a form of financing facility
where the facility is reviewed periodically. The Bank may avail the
facility to customers who have recurrent requests.
Terms of the Kafala/Letters of Guarantee
The
facility commonly be availed for one year that will be reviewed every
year unless the Bank demands it to be reviewed in less than this period
for any remedial action when the performance of the account is
deteriorating.
Issuance of Kafala/Letters of Guarantee
The bank may issue a Letter of Guarantee in favor of beneficiary under any of the following situation:
1.
When a local customer requests the bank to issue a letter of guarantee
in local currency to a local beneficiary, the Bank shall issue Letter of
Guarantee to the beneficiary against cash collateral (for 100%
coverage).
2.
When a local customer requests the bank to issue a Letter of Guarantee
in a foreign currency to a foreign beneficiary, the Bank (the respective
department in this case like Trade Service Central Processing Center in
case of Commercial Bank of Ethiopia) may issue Letter of Guarantee when
a local customer requests the Bank to a foreign beneficiary against
cash collateral.
3.
When a correspondent bank requests the bank to issue a guarantee in
favor of a local beneficiary, the Trade Service Central Processing
Centre shall issue the guarantee in favor of the beneficiary.
If
the guarantee request is backed by non-cash collateral, the Bank issue a
Letter of guarantee in favor of a beneficiary, after formal financing
approval process.
Types of Kafala/Letters of Guarantee
i. Bid Bond
Bid/Tender
Bonds are guarantees issued by the Bank in favor of a designated
beneficiary upon the request of the bidder, representing the commitment
of the Bank to meet the claims that may be made by the beneficiary in
the event that the bidder who purchased the guarantee from the Bank
withdraws from the bid during the bid period or fails to accept the
award when he/she/it becomes the winner.
ii. Performance Bond
A
Performance Bond is a type of guarantee that the Bank issues in favor
of a bid organizer (beneficiary) at the request of the bid winner to
meet any claims to be made by the beneficiary, in case the bid winner
fails to deliver the goods or to perform the services in accordance with
the terms and conditions of the contract.
iii. Advance Payment Guarantee
The
Advance Payment Guarantee is a guarantee issued by the Bank in favor of
a buyer who makes the advance, upon the request of the seller or the
contractor who received the advance, representing a commitment on the
part of the Bank to repay the sum certain in money, in case the seller
or the contractor fails to honor the contract terms in their entirety,
or in part, and the seller, or the contractor, does not
himself/herself/itself return the advance.
iv. Suppliers' Financing Guarantee
Suppliers'
Financing Guarantees are guarantees issued by the Bank to provide
security to a local or foreign supplier/beneficiary on behalf of a local
customer (debtor), representing a commitment on the part of the Bank to
meet any claims to be made by the beneficiary, in case the debtor
(local buyer) fails to repay in accordance with the terms and conditions
of the contract.
v. Retention Guarantee
Retention
Guarantees are guarantees issued by the Bank in favor of the party
accepting to release the retention (beneficiary), upon the request of a
seller or contractor, to provide security to a beneficiary, in the event
that the seller or the contractor fails to perform his/her/its
obligation as per the terms and conditions of the contract.
vi. Steamers' Guarantees/Letters of Indemnity for Missing Documents
These
guarantees are issued by the Bank at the request of the buyer in favor
of a carrier, in circumstances where the bill of lading is missing
/delayed but the goods/cargo/ arrive earlier. It shall, however, be
handled by the Trade Service Process Team.
vii. Customs Duty Guarantee
These
are guarantees issued by the Bank in favor of the Customs Authority
(the beneficiary) to meet the requests of the beneficiary in respect of
customs duties in circumstances where the goods imported without payment
of customs duties are not re-exported and the respective customs duties
have not been paid.
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