Definitions
Bank guarantee (Teminat Mektubu)
A bank guarantee is an undertaking by a bank to pay a specified sum to a beneficiary (obligee) if the applicant (principal) fails to fulfil a stated obligation. The guarantee is issued under — and reduces — the applicant's banking credit facilities.
Surety bond (Kefalet Sigortası)
A surety bond is a three-party insurance contract under which an SEDDK-licensed insurer (surety) guarantees to the beneficiary (obligee) that the principal will fulfil a defined obligation. Unlike a bank guarantee, it does not draw on the principal's banking credit lines.
Key differences
| Topic | Bank Guarantee | Surety Bond |
|---|---|---|
| Issuing institution | Bank (regulated by BDDK) | Insurance company (regulated by SEDDK) |
| Credit line impact | Consumes applicant's bank credit limit | Does not affect bank credit lines |
| Instrument type | Banking product / financial guarantee | Insurance policy |
| Tax (Turkey) | BSMV (5%) applies | No BSMV; insurance premium tax rules apply |
| Cash collateral | Often required (blocked deposit) | Generally not required |
| Subrogation after claim | Bank recovers from applicant | Insurer has subrogation right against principal |
Types of surety bond in Turkey
Bid Bond (Geçici Kefalet)
Guarantees that the bidder will not withdraw their tender. If the bidder wins but refuses to sign the contract, the bond is called.
Performance Bond (Kesin Kefalet / İfa Kefaleti)
Guarantees that the contractor will fulfil all contractual obligations. Called if the contractor defaults.
Advance Payment Bond (Avans Kefaleti)
Guarantees repayment of an advance payment if the work is not completed.
Customs Bond (Gümrük Kefaleti)
Guarantees customs duties and obligations to the customs authority. Used in inward processing and bonded warehouse operations.
Claims and subrogation
Surety bonds differ from most insurance lines in how claims work:
- The obligee (beneficiary) makes a claim against the bond.
- The surety insurer investigates and, if valid, pays the claim.
- The insurer then exercises its subrogation right — it recovers the paid amount from the principal (the contractor or obligor).
This is a key distinction: surety bonds do not eliminate the principal's liability — they guarantee it. The principal remains responsible and will ultimately bear the cost of any valid claim paid by the surety.
Tax and cost in Turkey
Bank guarantees are subject to Banking and Insurance Transactions Tax (BSMV) at 5%, which adds materially to cost. Surety bonds are exempt from BSMV; instead, insurance premium tax rules apply (rates and exemptions depend on the bond type and the applicable ministerial communiqué).
Blocked cash deposits that banks often require for bank guarantees tie up working capital — a cost that surety bonds avoid.
When to choose each
Surety bond preferred when
- Bank credit lines are fully utilised or need to be preserved
- Avoiding BSMV is desirable
- Cash collateral tying up capital is unacceptable
- The obligee accepts surety bonds (acceptance has widened through recent Turkish legislation)
Bank guarantee preferred when
- The obligee (e.g. certain public authorities) requires a bank instrument only
- The principal's banking relationship makes guarantees readily accessible
Turkish legislation has progressively expanded the use of surety bonds in public procurement since 2016. Ministry of Treasury and Finance communiqués have extended their scope in tender and performance guarantee contexts.
Sources
- Insurance Act No. 5684 (Turkey)
- SEDDK — Surety Insurance General Conditions
- Ministry of Treasury and Finance (Turkey) — Communiqués on surety bond use in public tenders
- Public Procurement Act No. 4734 — Guarantee provisions