UAE Central Bank will not interfere with construction sector bank guarantees
There has been a growing number of bond calls as market conditions for the construction sector deteriorate
The UAE Central Bank says it will not interfere with the growing number of bank guarantees being called in the construction sector.
Clients typically require contractors to give demand bonds to guarantee their performance on a project, and similarly, main contractors normally want bank guarantees from their subcontractors and suppliers to guarantee their performance.
Although bank guarantees were seldom called in the past, there has been a growing trend for clients to pull contractors’ bonds in recent years amid a backdrop of worsening market conditions in the UAE for the construction sector.
“That is a normal cycle,” said UAE Central Bank governor Mubarak al-Mansoori during a briefing at the Middle East Banking Forum in Abu Dhabi on 3 November. “We will not interfere with this and issue regulation. Otherwise, you will reduce confidence in the system. This depends on the client and the contractor or the developer and the contractor. We will not interfere.”
There have been calls from within the construction sector for more regulation governing the use of bonds. Contractors complain that clients cash bonds with no legitimate reason to do so. In some cases, bond calls have been stopped in court with an injunction and, according to local bankers, the courts are increasingly likely to be sympathetic to contractors to prevent the contagion effect of the contractor then pulling the bonds of subcontractors and suppliers.