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Bank Guarantee
Introduction
A bank guarantee is a financial instrument issued by a bank to assure a beneficiary that the bank will fulfill the obligations of a client if the client fails to do so. It serves as a risk mitigation tool in commercial transactions, providing confidence to parties involved, especially in contracts, tenders, and international trade. Bank guarantees are widely used in both domestic and international business to reduce the risk of default and ensure that financial or contractual obligations are met.
Meaning and Purpose
A bank guarantee acts as a promise by a bank to pay a specified amount to a beneficiary in the event that the client, also known as the applicant, fails to meet contractual or financial obligations. Essentially, the bank takes on the risk on behalf of its client. This financial instrument is commonly used in situations such as construction contracts, supply agreements, import-export transactions,…