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It is a method of payment on which a bankon behalf of a buyer undertakes to a seller
to effect payment when proper documentscovering shipment of goods or servicesrendered complying with terms andconditions stipulated in the letter of credit
are presented.
DOCUMENTARY CREDIT
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The instrument used under documentarycredit is known as Letter of Credit.
This same L/C is treated as import L/C ona buyers side and as export L/C on asellers side.
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Policy Issues
1) Choose Method of Payment
a. Establish country risk criteria
b. Standards for particular buyers
Payment history
Size of transactions/credit limit
Credit History
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Policy Issues2) Set Policies for Each Method
a. Cash in advance wire transfersVs.check
b. Open account discount policy, controlsetc.
c. Documentary Collections payment atsight
d. Letters of Credit Policy Letter L/C Checklist
3) Enforce the Policies That You Set
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A Foreign Check Does Not Represent
Immediate Payment
Foreign Checks Must BeSent Back for Collection
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Documentary CollectionsDocumentary Collections
Buyer/ImporterBuyer/Importer Seller/ExporterSeller/Exporter
Sellers BankSellers BankBuyers BankBuyers Bank
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Buyer/ImporterBuyer/Importer
Seller/ExporterSeller/Exporter BankBank
Seller/ExporterSeller/Exporter
Buyer/ImporterBuyer/Importer
UPSUPS
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A Letter of Credit is:
A substitution of the banks credit for the
buyers
A banks promise to pay upon the satisfactorycompliance with the L/Cs terms and
conditions by the L/Cs Beneficiary
Note Banks Deal in Documents ONLY
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Letters of Credit
Parties to a letter of credit
Letter of Credit Types
Import Export
Standby
L/C cycle
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Parties to a Letter of Credit
SELLER(EXPORTER)
BENEFICIARYORGINAL BENEFICIARYSECOND BENEFICIARY
TRANSFEREE
ASSIGNEESHIPPERDRAWER
BUYER
(IMPORTER)
ACCOUNT PARTY
APPLICANTACCOUNTEE
DRAWEE
PARTY LETTER OF CREDIT TERM
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Parties to a Letter of Credit (Contd)
BUYERS BANK ISSUERISSUING BANK
OPENING BANKPAYING BANK
ACCEPTING BANKDRAWEE
ISSUING BANK
CO
RRESPO
NDENT
ADVISING BANK
CO
NFIRMING BANKTRANSFERRING BANKNEGOTIATING BANKACCEPTING BANKPAYING BANK
PARTY LETTER OF CREDIT TERM
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Standby Commercial
Back up in case ofnon-payment or non-performance
Generally notexpected to be drawn
Used for
services/goods After the fact
Primary source ofpayment
Used for actual goods
Somewhatsimultaneous
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Standby L/C
Financial
Performance
Bid Bond
Performance Bond
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L/C
L/CL/CApplicationL/CApplication
Buyer/ ImporterApplicant - 1Buyer/ Importer
Applicant - 1Seller/ ExporterBeneficiary - 4Seller/ ExporterBeneficiary - 4
AdvisingBankConfirmingBank
NegotiatingBank -3
AdvisingBankConfirmingBank
NegotiatingBank -3
IssuingBank2
IssuingBank2
Transaction
Cycle
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DOCs
DOCs
DOCs$
$
$
MerchandiseMerchandiseuyer/ Importer - 8,9buyer/ Importer - 8,9b Seller/ Exporter - 5,11Seller/ Exporter - 5,11
AdvisingBankConfirmingBank
NegotiatingBank - 6,10
AdvisingBankConfirmingBank
NegotiatingBank - 6,10
IssuingBank - 7,9aIssuingBank - 7,9a
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Sight 20
Pay to the order of $
Dollars
To
At January 5 10
ABC Co. 8,020.00
Eight Thousand Twenty Dollars and 00/100
Standard Chartered Bank
New York, NY
ABCCo.
DRAFT
Drawn under Documentary Credit No. M0491110NS00616, of the
XYZ Bank, Addis Ababa, dated September 17, 2002
Endorse theback!
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Common Documents
Draft
Transport Document (b/l)
Commercial invoice Insurance policy or certificate
Packing list
Certificate of origin, weight Beneficiary statements
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When you receive an L/C
CHECK IT CAREFULLY!!!
Review it ASAP
L/C mirror sales contract Can you perform
Can you provide ALL the documents
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Critical Things to Look For
Latest shipment date
Expiry date
Partial shipments Merchandise description
Can you provide documents required
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Domestic International
Known bank
Known country risk
Known customs andlanguage
Unknown bank (??)
Country stability
Currency stability
Foreign laws andusages
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Confirmation
ConfirmingBank
ConfirmingBank
IssuingBank
IssuingBank
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Credit Issues
As Applicant
your Credit Worthiness
yourCollateral
As Beneficiary
probably none
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Cost Issues
As Beneficiary
minimal cost usually
if confirmed, expect to pay As Applicant
based on your credit and/or collateral
use of other bank services
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Where to get more information
ICC Uniform Customs and Practice forDocumentary Credits (UCP 500)
ICC Guide to Documentary CreditOperations for the UCP 500
INCOTERMS 1990
International Standby Practices 1998jjj
(http://www.iccwbo.org)