Letter of credit

The letter of credit is an operation by which a bank undertakes, on behalf of its importing client, to pay an exporter, within a certain period of time, a certain amount, in return for the exporter's submission of documents recognized as strictly conforming (to those requested in the opening of the documentary credit), justifying the value of the shipment of goods or the provision of services.

The letter of credit is irrevocable. It can be confirmed (in this case, the confirming bank, which is in contact with the exporter, adds its confirmation, i.e. it takes over the country risk and the risk on the issuing bank.

Stakeholders

-    The originator: the importer
-    The beneficiary: the exporter
-    The issuing bank: the importer's bank
-    The notifying or confirming bank: the bank in relation with the exporter

Modes of realization

-    Realizable at sight/cash
-    Realizable at maturity
-    Realizable by negotiation
-    Realisable by acceptance of a draft.

Some examples of documents

-    Commercial invoice
-    Transport document such as the bill of lading
-    Insurance certificate
-    Weight note.

Chart describing the opening of a letter of credit

Chart describing the implementation of a notified letter of credit

Chart describing the implementation of a confirmed letter of credit