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LC Financing. Comparison between an Islamic and a conventional bank in Qatar. - Essay Example
Author : loybrakus
Finance & Accounting
Pages 14 (3514 words)
LC Financing Comparison between an Islamic and a conventional bank in Qatar Introduction The field of trade finance is used to enable importers to purchase goods from abroad and even at times facilitate inland trade. Banks provide various solutions to reduce risks and help maximize trading potential…
It is a financial agreement – a secure mode of payment - between an importer and exporter for goods shipped (Finance). In Wall Street Words, David L. Scott defines a letter of credit as “a promise of payment in the event that certain requirements are met. A letter of credit essentially substitutes the credit of a third party (usually a large bank) for that of a borrower. In the case of municipal bonds, an LOC generally permits a trustee to draw six months' interest and sufficient funds to retire outstanding bonds at par in the event of default” (qtd. in Letter of Credit). Since L/Cs carry a risk for the issuing bank in case the client defaults, the bank assesses the client’s creditworthiness and financial position to evaluate his ability to pay in the future. In some cases, the bank may ask for a security to minimize chances of loss. There are various departments within the bank which cater to such analysis and evaluation in order to judge whether the customer is worthy of providing credit or not. If the customer simply is asking for a letter of credit then the bank assumes responsibility for the traded goods coming into the country. ...
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