As there is a risk of non payment by the importer, sellers can enter into an agreement with the importer's bank through a letter of credit ( lc).When there is a "documentary credit clause" in the agreement between the buyer and the seller, a letter of credit is issued by the buyer and the bank makes the payment to the seller.An lc is issued by the customer's bank naming the seller as the beneficiary, and as soon as the conditions mentioned in the lc are met by the seller, the payment is made by the bank. A bank in the country of the buyer issues the LC and is referred to as the Issuing Bank. A bank that advises the LC to the Seller is called the Advising Bank and is generally in the country of the Seller.
While lcs are a safe, speedy and convenient method of payment for exporters, there might be a few pitfalls that the seller might have to consider before signing the contract.The risk shifts from the actual buyer to the bank.Since presentation of documents to the bank within the stripulated time frame is the only criteria for payment, the buyer runs the risk of not getting the goods in good condition, while the payment would already have been made through the issuing bank. A seller might run the risk of not being able to present the LC before the stipulated date. There could be delays in delivery and the LC migth expire before the issuing bank gets a confirmation from the buyer about the proper delivery of goods.A signature from the buyer's side migth also be required to honour the LC, but it might not be possible to obtain it before the expiry of the LC.The document itself might have some discrepencies which could render the document invalid, thus putting the exporter to risk of non payment for his goods.
1. GERTRUDE NIMAKO BOATENG, ONUG, Documentary Credit Transactions : A Case Of Double Standards, accessed on 01-03-09.
2.EPASS International, Documentary Credit Transactions , accessed on 01-03-09.
3. CreditGuru.com , Letter of Credit, accessed on 01-03-09
- Journal of World Trade
- Journal of International Economic Law
- Journal of Business Law
4.Websites of Interest
Name of Organization Web Site Address
United Nations Commission on International Trade Law
World Trade Organization (WTO) http://www.wto.org
Int'l Trade Center (ITC) (UNCTAD/WTO) http://www.intracen.org
Asia-Pacific Economic Cooperation http://www.apecsec.org.sg
Commission for Environmental Cooperation (CEC) http://www.cec.org
Commission for Labor Cooperation (CLC) http://www.naalc.org
Int'l Court of Justice (ICJ) http://www.law.cornell.edu/icj/
Int'l Monetary Fund (IMF) http://www.imf.org/
Org. for Econ. Cooperation and Dev. (OECD)