Lecture Notes on Letters of Credit (LC)

Introduction

• Speaker: Ali, Master in Business Law
• Topic: Letters of Credit (LC) in international business

Definition of Letters of Credit (LC)

• LC is a contractual commitment by a buyer's bank to pay the exporter upon presentation of required documentation.
• LC involves various parties:
  • Applicant: Buyer/Importer
  • Beneficiary: Seller/Exporter
  • Issuing Bank: Bank that issues LC
  • Advising Bank: Bank that advises the beneficiary

Process of Letters of Credit

1. Buyer (applicant) requests an LC from their bank.
2. Issuing bank provides the LC to the seller's bank.
3. Seller ships goods and presents documents to advising/nominated bank.
4. Advising bank verifies documents and pays the seller.
5. Issuing bank reimburses advising bank and informs the applicant.
6. Applicant pays the LC amount to issuing bank to receive shipping documents.

Key Concepts

• UCP: Universal customs and practice for documentary credits, international standard banking rules for LC.
• Types of Banks in LC Process:
  • Nominated Bank: Bank where credit is available
  • Confirming Bank: Adds assurance of payment
  • Reimbursing Bank: Pays the LC amount
• Types of LC:
  • Sight LC: Payment upon document presentation
  • Irrevocable LC: Cannot be cancelled without consent
  • Revolving LC: Continuous payment LC
  • Usance LC: Payment after a grace period
  • Negotiation LC: Allows negotiation with any bank
  • Transferable LC: Can transfer credit to another party
  • Back-to-Back LC: Uses first LC as collateral for second
  • Red Clause LC: Advanced payment to the seller
  • Green Clause LC: Includes warehousing costs
  • Inland LC: Used for domestic transactions

Special LC Types and Concepts

• Standby LC: Acts as a safety net to ensure payment
• Confirmed LC: Additional payment assurance by advising bank
• Discounting LC: Payment before actual payment due date
• Direct Pay LC: Issuing bank pays directly
• Third Party LC: Different transaction parties and beneficiaries

Swift System and Messages

• SWIFT: Banking messaging system with specific message formats
• MT700: Used by issuing banks to issue LC

Conclusion

• LC is a versatile tool used in international trade to ensure payment and delivery of goods.
• Understanding the types and processes of LC can mitigate risks in international transactions.
• Further study can include UCP and related banking rules for detailed understanding.