Introduction to the Documentary Credit
A DOCUMENTARY credit is frequently the agreed method of settlement for international trade. The buyer's bank reimburses the seller against presentation of documents drawn in compliance with conditions stipulated in the documentary credit by the buyer.
The documentary credit also known as Letter of Credit guarantees the performance of all the partiesinvolved in such Global Trade transactions, from the importer to the exporter, as well as their banks
From this definition it can be seen that there are basically three parties to a documentary credit: a) the buyer/importer, who requires that a credit be issued in his favour; b) the beneficiary (the supplier of goods); and c) the issuing bank which issues the credit at the request of the buyer orimporter. The credit is usually (but not always) advised to the beneficiary through a bank in the beneficiary's country (the advising bank).
There are advantages to both the buyer and seller when settlement is arranged by documentary letter of credit. First, the buyer knows that payment will only be made if the documents received comply strictly with the terms and conditions of the credit asstipulated by the buyer. Second, the seller knows that payment will be received provided the terms and conditions of the credit are strictly complied with. What are Documentary Credits used for?
Commonly, payments in international sales contracts are executed by a documentary credits procedure, subject to rules set forth in the Uniform Customs and Practice for Documentary Credits (ICC 1983).
Insuch transactions payment for the goods is made not on the delivery of the goods themselves but on the presentation of stipulated documents, which may include a commercial invoice, an insurance certificate, a certificate of origin and a transport document (e.g. a bill of lading or airway bill) among others. The seller receives payment by presenting the stipulated documents to bank (the advising bank)that the buyer has instructed to make payment. There are two good reasons to use EDI/EDIFACT in such transactions.
First, these procedures involve numerous agents (who often must interact in disparate languages). The agents in an international sale using documentary credits may include two or three banks, a forwarder/broker, a linear-agent, a land transport carrier, a customs official, aninsurance agent, a stevedore (to loads the goods on the ship), a ship captain and several others in addition to buyer and seller.
Second, these procedures are mired in bureaucratic complexity and are subject to a host of confusing rules depending on the countries of the exporting/importing parties. At one time as many as 100 forms (that is performative communications) were required to ship goodsfrom one country to another and to arrange payment
The Different Types of Documentary Credit The Revocable Documentary Credit
Under this form of documentary credit, the issuing bank is authorised to amend the terms or even revoke the letter of credit with the prior consent from the beneficiary. The only commitment of the issuing bank is to notify the documentary credit to the exporter. Thistype of credit is of course extremely risky for the exporter which explains why it is very rarely used.
The Irrevocable Documentary Credit
With the irrevocable credit, the issuing bank is committed to pay the exporter if the documents provided before the expiry date of the credit are matching the terms and conditions stated in the letter of credit.
The Confirmed Irrevocable Documentary CreditIn order to avoid the non-performance of the issuing bank or to cover a known political risk when transacting with the country of this bank, the exporter may asked for the initiation of a confirmed and irrevocable letter of credit. This option allows the exporter to benefit from the additional commitment of a correspondent bank most often in its own country. This application of this guarantee is...
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