eLLers oI CredIL Iuve been u cornersLone oIInLernuLIonuI Lrude duLIng buck Lo LIe eurIy 1qoos. TIey ConLInue Lo pIuy u crILIcuI roIe In worId Lrude Loduy. or uny compuny enLerIng LIe InLernuLIonuI murkeL, eLLer oI credIL Is un ImporLunL puymenL mecIunIsm wIIcI eIImInuLes cerLuIn rIsks. A SLundby eLLer oI CredIL (cuIIedSC or C ) ure wrILLen obIIguLIons oI un IssuIng bunk Lo puy u sum oI money Lo u beneIIcIury on beIuII oI LIeIr cusLomer In LIe evenL LIuL LIe cusLomer does noL puy LIe beneIIcIury. L Is ImporLunL Lo noLe LIuL sLundby IeLLers oI credIL uppIy onIy wIenever LIe IssuIng bunk`s commILmenL Lo puy Is noL conLIngenL on LIe exIsLence, vuIIdILy und enIorceubIIILy oI IL`s cusLomer`s obIIguLIon; LIIs Is cuIIed un ubsLrucL guurunLee; LIuL Is, LIe bunk`s obIIguLIon Is Lo puy regurdIess oI uny dIspuLes beLween ILs cusLomer und LIe beneIIcIury. TIe Issuunce oI IeLLers oI credIL Is u prIvuLe LrunsucLIon und does noL resuIL In LIe Issuunce oI uny pubIIc LrudIng securILIes. SLundby eLLer oI CredIL Is u IeLLer oI credIL wIIcI u bunk Issues on beIuII oI ILs cusLomer Lo serve us u guurunLee Lo LIe beneIIcIury oI LIe IeLLer oI credIL LIuL LIe bunk's cusLomer wIII perIorm u specIIIed conLrucL wILI LIe beneIIcIury. I LIe cusLomer deIuuILs, LIe beneIIcIury muy druw Iunds uguInsL LIe IeLLer oI credIL us penuILIes or us puymenLs, wIIcIever LIe Lerms oI LIe credIL provIde. TIe busIs oI u SLundby eLLer oI CredIL Is LIuL IL muy be druwn on by LIe BeneIIcIury wIen LIe AppIIcunL (Buyer) Ius IuIIed Lo perIorm In uccordunce wILI LIe underIyIng conLrucL beLween LIe AppIIcunL und BeneIIcIury. n sImpIe Lerms, u SLundby eLLer oI CredIL Is sLundIng by Lo proLecL LIe BeneIIcIury In cuse LIe AppIIcunL deIuuILs on un ugreed-upon conLrucL. SLundby eLLers oI CredIL ure eILIer governed by LIe UnIIorms CusLoms und PrucLIce Ior DocumenLury CredIL (UCP) or LIe nLernuLIonuI SLundby PrucLIce (SP) ruIes. UnIIke u DocumenLury eLLer oI CredIL, LIe usuuI documenLs cuIIed Ior under u SLundby eLLer oI CredIL ure no more LIun u wrILLen demund (or sIgIL druIL) Irom LIe BeneIIcIury, uccompunIed by ILs sLuLemenL LIuL LIe AppIIcunL Ius deIuuILed In perIormunce oI 2
LIe ugreed-upon conLrucL. Becuuse LIe documenLs ure mucI Iess sLrIngenL, LIe rIsk oI u SLundby eLLer oI CredIL resLs more IeuvIIy on LIe AppIIcunL LIun LIe BeneIIcIury. A SLundby eLLer oI CredIL, LIereIore, sIouId be Issued onIy wIen LIe AppIIcunL Ius no doubL us Lo LIe LrusLworLIIness und InLegrILy oI LIe BeneIIcIury. SLundby eLLers oI CredILs ure used In u vurIeLy oI Iorms. MosL commonIy LIey ure used Ior BId Bonds, PerIormunce Bonds, Advunce PuymenL GuurunLees, WurrunLy Bonds, und Lo secure IInuncIuI obIIguLIons oI obIIgors. OILen suppIIers usk LIeIr buyers Lo provIde SLundby eLLers oI CredILs us securILy Ior goods soId on open uccounL. A esser muy requesL u SLundby eLLer oI CredIL Irom u essee Lo cover Ieuse obIIguLIons. TIese ure some oI exumpIes oI SLundby eLLer oI CredILs und, In LIe evenL oI u deIuuIL, LIe beneIIcIury couId demund puymenL Irom LIe IssuIng bunk oI LIe SLundby eLLer oI CredIL. L Is uIso ImporLunL Lo recognIze LIe dIsLIncLIon beLween GuurunLees und SLundby eLLers oI CredILs. BoLI SLundby eLLer oI CredILs und GuurunLees obIIguLe LIe ssuIng Bunk Lo muke puymenL Lo u beneIIcIury In LIe evenL oI u deIuuIL. However, LIe dIsLIncLIon Is uLLrIbuLubIe Lo LIe ruIes und Iuws under wIIcI eucI InsLrumenL Is Issued. TypIcuIIy GuurunLees ure Issued subjecL Lo IocuI Iuws wIIIe SLundby eLLers oI CredILs ure Issued subjecL Lo UnIIorm CusLoms und PrucLIce RuIes or nLernuLIonuI SLundby PrucLIce RuIes The foIIowing exampIe iIIustrates the use of a Standby Letter of Credit. ExampIe: A Canadian shoe importer, Best Shoes mporter nc., has signed a one-year contract with a supplier in Brazil, Brazilian Shoes Supplier nc., agreeing to purchase on open account leather shoes valued at CAD $30,000/month. Under the open account arrangement, payment must be made 30 days after the invoice date. To guarantee payment by Best Shoes mporter nc., Brazilian Shoes Supplier nc. requires that an rrevocable Standby Letter of Credit with an expiry date of one year from the date of issue be issued in its favor for CAD $30,000. 9art|es to the standby |etter of cred|t 1) 1he App||cant 1hls ls Lhe cusLomer of Lhe bank who applles Lo Lhe bank for Lhe sLandby leLLer of credlL Pe musL provlde collaLeral Lo Lhe bank or have sufflclenL credlL Lo lnduce Lhe bank Lo lssue Lhe lnsLrumenL Pe also musL pay Lhe bank a fee for lssulng Lhe lnsLrumenL (2) 1he Issu|ng 8ank 3
1hls ls Lhe appllcanL's bank LhaL lssues Lhe sLandby leLLer of credlL (3) 1he 8enef|c|ary 1hls ls Lhe parLy ln whose favor Lhe lnsLrumenL ls lssued
(4) Conf|rm|ng 8ank 1hls ls a bank (usually locaLed near Lhe beneflclary) LhaL agrees (conflrms) Lo pay Lhe beneflclary raLher Lhan have Lhe lssulng bank pay Lhe beneflclary 1he beneflclary pays Lhe Conflrmlng 8ank a fee for Lhls convenlence 1he Conflrmlng 8ank Lhen collecLs from Lhe lssulng 8ank Lhe amounL pald Lo Lhe beneflclary (S) Adv|s|ng 8ank 1hls ls Lhe bank LhaL represenLs Lhe beneflclary lL may accepL Lhe leLLer of credlL on behalf of Lhe beneflclary and collecL on lL on behalf of Lhe beneflclary ln order for Lhe LransacLlon Lo be a bankLobank LransacLlon Lhe advlslng bank works for Lhe beneflclary Lo keep Lhe lnsLrumenL ln Lhe banklng sysLem SomeLlmes Lhe Advlslng 8ank also ls Lhe Conflrmlng 8ank buL noL always
1ypes of standby |etters 1he Lypes of sLandby leLLers of credlL are dlscussed below
(1) 9erformance Standby 1hls lnsLrumenL supporLs an obllgaLlon Lo perform oLher Lhan Lo pay money lncludlng Lhe purpose of coverlng losses arlslng from a defaulL of Lhe appllcanL ln compleLlon of Lhe underlylng LransacLlon
(2) Advance 9ayment Standby 1hls lnsLrumenL supporLs an obllgaLlon Lo accounL for an advance paymenL made by Lhe beneflclary Lo Lhe appllcanL
(3) 8|d 8ond]1ender Standby 4
1hls sLandby supporLs an obllgaLlon of Lhe appllcanL Lo execuLe a conLracL lf Lhe appllcanL ls awarded a bld
(4) Counter Standby 1hls lnsLrumenL supporLs Lhe lssuance of a separaLe sLandby or oLher underLaklng by Lhe beneflclary of Lhe counLer sLandby
(S) D|rect 9ay Standby 1hls lnsLrumenL serves Lo supporL paymenL when due of an underlylng paymenL obllgaLlon Lyplcally ln connecLlon wlLh a flnanclal sLandby wlLhouL regard Lo defaulL 1hls sLandby ls also used Lo dlrecLly pay an obllgaLlon where Lhe only condlLlons of paymenL are Lhe passage of Lhe Lerm and presenLmenL of paymenL
(6) Insurance Standby 1hls lnsLrumenL ls an lnsurance or relnsurance obllgaLlon of Lhe appllcanL (7) Commerc|a| Standby 1hls ls Lhe mosL used sLandby and lL supporLs Lhe obllgaLlons of an appllcanL Lo pay for goods or servlces ln Lhe evenL of nonpaymenL by a buslness debLor
Descr|pt|on of a typ|ca| Letter of Cred|t transact|on
1 An lmporLer (8uyer) and LxporLer (Seller) agree on a purchase and sale of goods where paymenL ls made by LeLLer of CredlL
3
2 1he lmporLer compleLes an appllcaLlon requesLlng lLs bank (lssulng 8ank) Lo lssue a LeLLer of CredlL ln favor of Lhe LxporLer noLe LhaL Lhe lmporLer musL have a llne of credlL wlLh Lhe lssulng 8ank ln order Lo requesL LhaL a LeLLer of CredlL be lssued 3 1he lssulng 8ank lssues Lhe LeLLer of CredlL and sends lL Lo Lhe Advlslng 8ank by LelecommunlcaLlon or reglsLered mall ln accordance wlLh Lhe lmporLer's lnsLrucLlons A requesL may be lncluded for Lhe Advlslng 8ank Lo add lLs conflrmaLlon 4 1he Advlslng 8ank wlll verlfy Lhe LeLLer of CredlL for auLhenLlclLy and send a copy Lo Lhe LxporLer S 1he LxporLer examlnes Lhe LeLLer of CredlL Lo ensure a) lL corresponds Lo Lhe Lerms and condlLlons ln Lhe purchase and sale agreemenL b) uocumenLs sLlpulaLed ln Lhe LeLLer of CredlL can be produced and c) 1he Lerms and condlLlons of Lhe LeLLer of CredlL may be fulfllled 6 lf Lhe LxporLer ls unable Lo comply wlLh any Lerm or condlLlon of Lhe LeLLer of CredlL or lf Lhe LeLLer of CredlL dlffers from Lhe purchase and sale agreemenL Lhe LxporLer should lmmedlaLely noLlfy Lhe lmporLer and requesL an amendmenL Lo Lhe LeLLer of CredlL 7 When all parLles agree Lo Lhe amendmenLs Lhey are lncorporaLed lnLo Lhe Lerms of Lhe LeLLer of CredlL and advlsed Lo Lhe LxporLer Lhrough Lhe Advlslng 8ank lL ls recommended LhaL Lhe LxporLer does noL make any shlpmenLs agalnsL Lhe LeLLer of CredlL unLll Lhe requlred amendmenLs have been recelved 8 1he LxporLer arranges for shlpmenL of Lhe goods prepares and/or obLalns Lhe documenLs speclfled ln Lhe LeLLer of CredlL and makes demand under Lhe LeLLer of CredlL by presenLlng Lhe documenLs wlLhln Lhe sLaLed perlod and before Lhe explry daLe Lo Lhe avallable wlLh" 8ank 1hls may be Lhe Advlslng/Conflrmlng 8ank 1haL bank checks Lhe documenLs agalnsL Lhe LeLLer of CredlL and forwards Lhem Lo Lhe lssulng 8ank 1he drawlng ls negoLlaLed pald or accepLed as Lhe case may be 9 1he lssulng 8ank examlnes Lhe documenLs Lo ensure Lhey comply wlLh Lhe LeLLer of CredlL Lerms and condlLlons 1he lssulng 8ank obLalns paymenL from Lhe lmporLer for paymenL already made Lo Lhe avallable wlLh" or Lhe Conflrmlng 8ank 10 uocumenLs are dellvered Lo Lhe lmporLer Lo allow Lhem Lo Lake possesslon of Lhe goods from Lhe LransporL company 1he Lrade cycle ls compleLe as Lhe lmporLer has recelved lLs goods and Lhe LxporLerhas obLalned paymenL 6
Case Study
Introduct|on 8ank Alfalah LlmlLed ls a prlvaLe bank ln aklsLan owned by Lhe Abu uhabl Croup 8ank Alfalah was lncorporaLed on !une 21 1992 as a publlc llmlLed company under Lhe Companles Crdlnance 1984 lLs banklng operaLlons commenced from november 1 1992 1he bank ls engaged ln commerclal banklng and relaLed servlces as deflned ln Lhe 8anklng Companles Crdlnance 1962. equ|rements of open|ng a |etter of cred|t |n 8ank A|fa|ah Money ls noL lnvolveLC ls non funded faclllLy and conLlngenL llablllLy lor openlng L/C Lhe exporLer has Lo submlL Lhe followlng documenLs 1 erforma lnvolce conLalns 7
O CuanLlLy O rescrlpLlon O 8aLe(unlL) O Crlgln (counLry of orlgln) O lnco Lerms (lC8Cl8CllCnl) O 8ank (nomlnaLe) O lndenL 2 AppllcaLlon lor lmporL 3 Annexure 8 4 lnsurance of conslgnmenL S romlssory noLe 6 L/C Margln 7 L/C Commlsslon
C|auses of Letter of Cred|t A leLLer of credlL conLalns varlous clauses promlnenL of Lhem are O 1ype of L/C O AmounL O uescrlpLlon Cf Coods O 1ransshlpped / arLshlpped or noL O CollecLlon Charges O valldlLy erlod Cf L/C
lmporL rocess
O An L/C form ls fllled O 1he cusLomer prepares lnsurance documenL from any lnsurance company O lllled Lhe S8 AppllcaLlon form LhaL ls called Appendlx 8 O erforma lnvolce ls repared O underLaklng from Lhe cusLomer on leLLer Pead O repare four coples of lorm l (lorm l explaln Lhe deLall of lmporL LhaL are helpful for Lhe S8 O Approval lrom Area Cfflce O repare voucher and make enLrles ln Lhe sysLem 8
O reparaLlon of L/C O 1hese forms are Lhen senL Lo Lhe SwlfL CenLre of 8AL
SwlfL CenLre Machlne
O lL ls Lhe fasLesL and Lhe safesL mode of flnanclal communlcaLlon ln Lhe world O 1hese are accordlng Lo Lhe rules and regulaLlons of 'uC300' [usL llke prudenLlal regulaLlons of S8 now Lhls ls recelved by Lhe exporLer's bank O When 8AL recelves shlpmenL documenLs and documenLs are elLher re[ecLed or accepLed wlLhln 7 days O lf accepLed Lhe paymenL from Lhe lmporLer ls made O An l8CA ls recelved of LhaL amounL and send Lo Lhe exporLer's bank O now durlng Lhese LransacLlons boLh Lhe banks recelve proflL ln Lhe form of commlsslon O 8AL sLarLly recelves commlsslon / charges from Lhe lmporLer O Converslon of forelgn currency lnLo aklsLan rupees O aymenL AgalnsL uocumenL (Au) ln case Lhe paymenL ls noL made Lhen an accounL of Au ls opened 1he bank Lhe lssulng bank on Lhe cusLomer's behalf of a leLLer of credlL pays Lhe negoLlaLlng or advlslng bank and deblLs Lhe Au accounL Llll lLs paymenL by cusLomer unLll Lhe reallzaLlon of Lhe amounL a full seL of documenLs represenLlng LlLle Lo Lhe goods shlpped by Lhe forelgn exporLer ls held by Lhe bank as securlLy 9
SWC1 ANALSIS CI 8ANk ALIALAn
Strengths Strong I|nanc|a| 9os|t|on As we can see ln Lhe flnanclal sLaLemenLs of Lhe bank Lhe flnanclal poslLlon of Lhe organlzaLlon ls very sound and lLs proflLablllLy ls ln lncreaslng 1he Larnlng per share has been lncreased on a raLe of abouL 30 whlch ls a very poslLlve slgn n|gh|y ua||f|ed Lmp|oyees 10
1he bank has hlghly quallfled and skllled workforce and lL has succeeded Lo aLLracL Lhe besL banklng professlonals from across Lhe counLry due Lo lLs growlng pace and sound repuLaLlon Conduc|ve Lnv|ronment 1he managemenL of Lhe bank ls very much concerned wlLh Lhe developmenL of and lmprovemenL of Lhe worklng envlronmenL 1he bank has sLaLe of Lhe arL and purpose bullL branches where all Lhe modern Lechnologles are provlded Lo geL Lhe efflclency of Lhe workforce and Lhe cusLomer saLlsfacLlon Govt Support and Lncouragement As Lhe owners of Lhe bank belong Lo uAL and Lhe Lype of Lhelr lnvesLmenL ln aklsLan ls a forelgn lnvesLmenL Lhe govL ls fully supporLlng Lhe bank managemenL due Lo lLs pollcy Lo maxlmlze Lhe forelgn lnvesLmenL ln Lhe counLry Lo geL Lhe economlc prosperlLy Iastest Grow|ng I|nanc|a| Inst|tut|on uue Lo lLs successful buslness pollcles and Lhe sLrong flnanclal poslLlon Lhe bank has achleved Lhe repuLaLlon of fasLesL growlng flnanclal lnsLlLuLlon ln Lhe counLry lL has greaLly lncreased Lhe cusLomer's confldence ln Lhe bank nuge Lxpans|on 9|an uue Lo lLs sLrong flnanclal poslLlon Lhe bank has undergone a huge expanslon plan Lo compeLe wlLh Lhe exlsLlng bank all over Lhe counLry and wlLh Lhe passage of Llme Lhe branch neLwork ls expandlng aL a very good pace oung and Lnerget|c Workforce As Lhe bank ls a newer one ln Lhe counLry Lhe bank has an advanLage over lLs compeLlLors because Lhe ma[orlLy of lLs workforce ls young and noL very much over aged 1hus Lhe bank ls geLLlng maxlmum ouL puL from lLs young and energeLlc workforce by spendlng comparaLlvely less on Lhelr remuneraLlons Is|am|c 8ank|ng D|v|s|on 11
1he bank ls one of Lhe ploneers of Lhe commerclal banks who have sLarLed Lhe lslamlc 8anklng along wlLh Lhelr convenLlonal banklng 1he bank has a separaLe neLwork of lLs lslamlc 8anklng ulvlslon whlch has 16 branches across Lhe counLry and Lhls neLwork ls also expandlng aL a very good pace Weaknesses Wa|ver of charges CurrenLly Lhe mlddle managemenL of bank Allalah ls Lhe blg reason for walver of charges 8ank Al lalah looslng a loL of lLs lncome llkes (Cheque book charge onllne charges sLaLemenL charges and oLher Lhlngs) because of managemenL 1hls ls a weakness of bank Allalah Inexper|enced workforce As Lhe ma[orlLy of Lhe workforce conslsLs of young professlonal Lhey lack ln Lhelr experlence And someLlmes lack of experlence becomes a hurdle whlle servlng Lo Lhe cusLomers lL ls Lhe polnL where Lhey feel dlfflculLy whlle compeLlng Lhe oLher bank whlch have a very experlenced workforce Cver work Load on Lmp|oyees lL was observed ln Lhe branch LhaL as compared Lo huge buslness Lhe bank ls deallng ln Lhe no of employees ls lesser and Lhus Lhere ls an lncreased workload on Lhe employees uue Lo Lhls Lhe efflclency of Lhe employees ls reduced Lmp|oyees are not very much Mot|vated As dlscussed before Lhe workload ls hlgh and Lhe employees especlally Lhe credlL deparLmenL have Lo do laLe slLLlngs Lo compleLe Lhelr Lasks Cn Lhe oLher hand Lhe bank has revlsed lLs salary lncremenLs pollcy Lo decrease Lhe lncremenL raLe as a resulL a decreased moLlvaLlon level of employees ls observed Cpportun|t|es ap|d|y Grow|ng Lconomy AL presenL Lhe aklsLan's Lconomy ls growlng on a very fasL pace 1he rapld growLh of economy has resulLed ln Lhe lncrease ln Lhe growLh raLe of all economlc secLors especlally ln Lhe banklng secLor whlch ls growlng aL a fasLesL speed Lhan ever and ln fuLure Lhe growLh ls expecLed Lo lncrease even a hlgher raLe Increased Interest ates 1he S8 has revlsed Lhe lnLeresL pollcy and Lhe lnLeresL raLes have been llnked wlLh Lhe kl8C8 raLes uue Lo whlch Lhe banks lnLeresL raLe has been subsLanLlally lncreased whlch wlll greaLly lncrease Lhe banks' proflLablllLy 12
Mega 9ro[ects I|nanc|ng As Lhe lncrease ln overall buslness acLlvlLy ln Lhe counLry Lhe lnvesLors are launchlng varlous Lypes of Mega ro[ecLs especlally ln houslng and LexLlle Lhe bank has a greaL opporLunlLy Lo flnance Lhese pro[ecLs aL very proflLable Lerm nuge Demand for Consumer I|nanc|ng 1he lncrease ln per caplLa lncome and overall economy has resulLed lnLo a greaL demand for Lhe consumer flnanclng especlally for home flnance and car flnanclng and lL ls sald LhaL Lhls Lrend wlll lncrease more ln fuLure 1he bank can earn a loL by focuslng on lLs consumer flnanclng secLlons Merger w|th U8L AfLer Lhe prlvaLlzaLlon of unlLed 8ank LlmlLed Lhe managemenL of Lhe 8AL has purchased Lhe ma[orlLy shares of Lhe u8L and lL ls plannlng Lo merge Lhese Lwo banks As u8L ls Lhe second largesL bank ln Lhe counLry Lhls merger can make Lhe bank Lhe largesL bank of Lhe counLry Grow|ng 1rend of Is|am|c 8ank|ng 1here ls a very good growLh Lrend ln Lhe lslamlc banklng ln Lhe counLry and ln Lhe world as well 8AL has Lhe advanLage of havlng full fledged lslamlc 8anklng neLwork and Lhe growLh ln Lhls parLlcular fleld can be very frulLful for Lhe bank Spend|ng 9ract|ces of Mass As Lhe aklsLanl's are known for Lhelr exLravaganL pracLlces and Lo fulflll Lhelr funds requlremenLs Lhey don'L heslLaLe from geLLlng loans from banks 1hus Lhere ls a very good scope for Lhe bank Lo run successful buslness ln such clrcumsLances 1hreats Uncerta|nty of Lconomy AlLhough Lhe economy ls growlng aL a good pace buL Lhere are many facLors whlch resulLs ln Lhe uncerLaln poslLlon of Lhe economy Such as pollLlcal uncerLalnLy W1C lncrease ln poverLy eLc eLc As a resulL Lhere are permanenL LhreaLs of fuLure rlsks and losses for Lhe bank n|gh ate of Inf|at|on 1he lnflaLlon raLe of Lhe counLry has gone above Lhe 10 1hls can resulL lnLo an unfavorable slLuaLlon for Lhe bank And especlally when Lhe ownershlp of Lhe bank ls uAL based Lhe neL spread for Lhem can subsLanLlally decrease 13
1rend of Mergers 1here ls a Lrend of mergers among Lhe banks Lo become promlnenL ln Lhe markeL and Lo geL Lhe maxlmum markeL share 1hls Lrend can resulL lnLo Lhe unlon of some leadlng banks whlch can glve Lough Llme Lo Lhe bank and lL wlll become dlfflculL for Lhe bank Lo compeLe wlLh Lhem 9r|vat|zat|on of 8anks uue Lo lLs prlvaLlzaLlon pollcy Lhe govL ls prlvaLlzlng Lhe sLaLe owned banks 1he change ln managemenL may resulL ln Lhe lncrease ln Lhe efflclency and producLlvlLy of Lhe banks 1hus lL can become a LhreaL for Lhe bank |sk of Defau|ts As dlscussed earller LhaL Lhere ls a Lrend of launchlng mega pro[ecLs ln Lhe counLry And every one ls lnvolved ln Lhls Lrend wlLhouL Laklng any measure for Lhe successfulness of Lhese pro[ecLs 1hls can resulL lnLo Lhe fallure of Lhls project whlch can make lL dlfflculL for Lhe banks Lo recover Lhelr funds from Lhese defaulLers
Conc|us|on So we concIude LIuL IeLLer oI Ior uII kInd oI InLernuLIonuI Lrude IeLLer oI credIL pIuys un ImporLunL roIe becuuse LIe buyer und seIIer ure quILe dIsLunce Irom eucI oLIer, u probIem oILen urIses us Lo wIen Lo muke LIe deIIvery oI LIe goods und wIen Lo muke LIe puymenL Ior LIe deIIvery. TIIs probIem Is ubsenL In LrudIng wILIIn LIe nuLIonuI boundury us boLI LIe buyer und seIIer cun meeL eucI oLIer und seLLIe LIe deuI. However, In InLernuLIonuI Lrude, neILIer LIe exporLer nor LIe ImporLer cun reIy compIeLeIy upon eucI oLIer. A IeLLer oI credIL Is un eIIecLIve InsLrumenL LIuL noL onIy soIves LIe probIem buL uIso ucLs us u meuns oI IInunce Ior LIe buyer. TIIs meLIod Is u compromIse beLween LIe buyer und LIe seIIer becuuse IL uIIords cerLuIn udvunLuges Lo boLI LIe purLIes. TIe exporLer Is ussured oI receIvIng puymenL Irom LIe IssuIng bunk us Iong us IL presenLs documenLs In uccordunce wILI LIe IeLLer oI credIL. L Is ImporLunL Lo poInL ouL LIuL LIe IssuIng bunk Is obIIguLed Lo Ionor druwIngs under LIe JC regurdIess oI LIe buyer`s ubIIILy or wIIIIngness Lo puy. On LIe oLIer Iund, LIe ImporLer does noL Iuve Lo puy Ior LIe goods unLII sIIpmenL Ius been mude und LIe documenLs ure presenLed In good order. However, LIe ImporLer sLIII musL reIy upon LIe exporLer Lo sIIp LIe goods us descrIbed on LIe documenLs, sInce LIe IeLLer oI credIL does noL guurunLee LIuL LIe goods 14
purcIused wIII be LIose InvoIced und sIIpped. So, LIe usuuI LIme oI puymenL under u IeLLer oI credIL Is wIen sIIpmenL Ius been mude, wIIIe LIe goods ure uvuIIubIe Lo LIe buyers uILer puymenL. TIe rIsk Lo LIe exporLer Is very IILLIe or none, dependIng on credIL Lerms, wIIIe LIe rIsk Lo LIe ImporLer Is LIuL Ie Ius Lo reIy on LIe exporLer Lo sIIp goods descrIbed In LIe documenLs. Becuuse oI uII LIe proLecLIon und beneIILs IL uccords Lo boLI LIe exporLer und ImporLer, IeLLer oI credIL Is u crILIcuI componenL oI muny InLernuLIonuI Lrude LrunsucLIons.