Question Tag: Bank Guarantees

You are the manager of Merchant Bank Ltd, which maintains the account of Johnson Company Ltd (JCL.) a local generator dealerships JCL’s Managing Director. Kingsley Arthur, has advised you today that the company has decided to purchase new generators from manufacturers in Europe because the terms of local suppliers are no longer favourable to their business.

Mr. Arthur informs you that he is in negotiations with a new Egyptian buyer. Al Watany Ltd for the export of the generators to Cairo for a total cost of USD 500, 000,00.

Some of the contract details are that the Egyptian buyers would have to make an advance payment of 20% upon signing the contract. Again, the buyers. Al Watany Ltd, should pay the last 10% immediately after shipment of the generators. Mr. Arthur is facing two major problems in the negotiations:

a) Since it is a new trading relationship, Al Watany Ltd is reluctant to agree to the 20% deposit when the contract is signed. Al Watany Ltd is concerned that the money could be lost if the contract did not work out as expected. b) Al Watany Ltd also insists on paying the final 10% of the contract price two months after shipment, so that they can check the generators are in good and acceptable condition on arrival in Cairo. Mr. Arthur is worried that the delay in payment will adversely affect the company’s cash flow.

Required: i. Identify two bank products that would help to overcome the problems in the commercial contract negotiations between Johnson Company Ltd and Al Watany Ltd. [5 marks] ii. Explain how each of these products would operate and advise the companies of the possible effects on their businesses by using these products. [15 marks]

[Total Marks 20]