The contract triggers a claim whenever the cash recipient is unable to deliver the required goods or services to the buyer.
Banks charge fees to issue such guarantees and may also take security to cut their exposure.
The contracts rarely generate losses but in the case of Stanbic, it has been forced to settle the claim and is now seeking to recover the amount from the counterparties.
Stanbic Holdings #ticker:CFC has paid Sh1.5 billion to an unnamed corporate customer that had taken out a contract protecting itself against default by its partner in international trade.
Known as advance payment guarantee in commercial parlance, the contract triggers a claim whenever the cash recipient is unable to deliver the required goods or services to the buyer.
Banks charge fees to issue such guarantees and may also take security to cut their exposure. The contracts rarely generate losses but in the case of Stanbic, it has been forced to settle the claim and is now seeking to recover the amount from the counterparties.
“In 2018, a contingent liability existed on an advance payment guarantee. The guarantee was issued on behalf of a well-rated foreign bank and a claim arose following a disagreement between the applicant (client of the foreign bank) and the beneficiary,” Stanbic says in its latest annual report.
“In the current year, the bank in consultation with the board of directors decided to make payments in the amounts of $14.6 million (Sh1.5 billion).”
The bank added that the matter continues to be investigated by the relevant authorities with its full support. Stanbic has also commenced recovery actions and the amount paid has been recognised under other operating expenses, the Nairobi Securities Exchange-listed firm said.
Its other operating expenses rose by Sh1.6 billion to Sh6 billion in the year ended December, with the increase nearly matching the one-off payout.
The amount is nearly a quarter of Stanbic’s Sh6.3 billion net earnings reported in the same period, underlining the impact of the contract fallout.
Advance payment guarantees, used to facilitate international trade, are used when a supplier or contractor needs to receive some money upfront to enable it to deliver the goods or services.
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