Surety Bonds and Companies Rendering Bonding Services in Ethiopia: The Law and the Practice

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Date

2004-12

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Addis Ababa University

Abstract

A bond is a written acknowledgment of debt or an instrument of indebtedness. Bonds are of different types .The bond that is issued by a surety is called surety bond to di stingui sh it from the other types of bonds .A surety bond is a document in which a surety (an individual or a company) undertakes an obligation towards a creditor to di scharge the obligation of the principal debtor should the latter fail to do so .In other words a surety bond is a document in which the contract of suretyship is contained. Compan ies, which are engaged in the business of surety bonds, are called surety or bonding compan ies .In other countries, in add ition to surety companies, which are specialized in rendering bonding services, banks and insurance companies also render such services. Here, in Ethiopi a, we never had speciali zed compani es, which have been formed purely for rendering bonding services. Until recentl y,o nly banks and insurance compani es have been engaged in bonding businesses. Since the last two years, however, the Nati onal Bank ofEtiIiupia has prohibited insurance companies from issuing certain types of bonds. Therefore, the main purpose of thi s study is to investigate the root causes for the imposi ti on of such prohibition and at the same time find out whether there is a di sparity between the law and the practice of rendering bonding services, whether there is the required skill , knowledge and experience of the bonding business in Ethiopia and finally, find out whether the prohibiti on imposed by the National Bank of Ethiopia is justified or not. For this purpose, a survey of literatures on contractual security dev ices both from the common law and the civil law countries has been made .A study tour to some of the head offices of banks and insurance companies has been undertaken. Some bond forms have been scrutinized to find out whether such forms are compatible with the law of suretyship or nol. Finally, in this stud y, an attempt has been made to show the di sparity betweel. the law and the practice of bonding business and a conclusion has been reach ed th at,in general ,there is lack of the required skill, knowledge and experience for running the bonding business in Ethiopia ,and that the prohib ition imposed on insurance companies not to issue certain types bonds is unfounded and unjustifiab le.

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Law

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