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 ROLE OF
LETTER OF CREDIT
IN
INTERNATIONAL TRADE FINANCE

Prepared By

Muhammad Yasir
MTO (HR)
National Bank of Pakistan
What is a Letter of Credit?
• Document and undertaking issued by a bank
• At the request of the applicant (buyer, importer)
• In favor of a beneficiary (seller, exporter)
• Substitutes the bank’s name and credit risk for
that of the applicant (buyer, importer)
• Guarantees payment of a customer’s draft up to a
stated amount for a specified period
if certain conditions are met
Letter
of Credit Governed by
Summary of a contract UCP 600
between seller and
buyer with the bank(s)
as referee.
WHY HAVE A LETTER OF
CREDIT?
IF I SHIP GOODS,
WILL YOU PAY?

IF I PAY, WILL YOU

SHIP THE GOODS?

SOLVES ISSUES OF MUTUAL MISTRUST BY USING

BANKS AS ARBITERS
NEGOTIATE L/C TERMS BEFORE
ENTERING A CONTRACT
 TRADE FINANCE
IMPORT LETTER OF CREDIT

1) NBP ISSUES ITS LETTER OF CREDIT

TO THE EXPORTER’S BANK ABROAD

2) EXPORTER SUBMITS SHIPPING DOCUMENTS

TO THE FOREIGN BANK

3) FOREIGN BANK REVIEWS AND SENDS DOCUMENTS

TO NBP

4) NBP REVIEWS THE DOCUMENTS AND IF DOCUMENTS

COMPLY WITH THE L/C, NBP PAYS

THE PROCESS LOOKS LIKE THIS. . . . . . . . . . . . . . .

 LETTERS OF CREDIT
WHO ARE THE PLAYERS?

NBP’s FGN
CUSTOMER BANK
IMPORTER CUSTOMER
(Buyer)
CONTRACT EXPORTER
(Seller)

FOREIGN BANK
NBP L/C
(ISSUING BANK) (ADVISING BANK)
(MAY CONFIRM)
 IMPORT L/C PROCESSING
DOCUMENT FLOW

FGN
NBP’s
BANK
CUSTOMER
CUSTOMER
IMPORTER
CONTRACT EXPORTER
(Buyer) D
(Seller)
O
C
U
M
E
FOREIGN BANK
NBP
N
L/C T
S
(ISSUING BANK) (ADVISING BANK)

PAYS documents
Export Letter of Credit Process
NATIONAL BANK
located in the Pakistan

Letter of Credit (Sight/Time)

Documents
Advising /
Issuing / Opening Bank Confirming Bank
located overseas
Documents
Application

Documents
L/C
Beneficiary
Seller
Goods Exporter

Applicant / Buyer
Importer Contract
 TRADE FINANCE
LETTER OF CREDIT DOCUMENTS

BANKS DO NOT DEAL IN THE MERCHANDISE WHICH

THE LETTER OF CREDIT COVERS

BANKS DEAL ONLY IN

 THE BANK’S COMMITMENT IN
THE LETTER OF CREDIT

THE L/C SAYS WHAT IT MEANS & MEANS WHAT IT SAYS

KEY ELEMENTS
• AMOUNT
• EXPIRY
• LATEST SHIPMENT DATE
• DOCUMENTS REQUIRED

PAYMENT WILL BE MADE ONLY WHEN ALL

TERMS AND CONDITIONS ARE MET
RESOLVE UNCLEAR ITEMS PRIOR TO SHIPMENT
THE DOCUMENTS
REQUIRED BY
THE LETTER OF CREDIT

ALL DOCUMENTS MUST CONFORM TO THE LETTER

OF CREDIT AND BE CONSISTENT WITH EACH OTHER

THREE FORMS OF DOCUMENTS:

1 FINANCIAL DOCUMENTS
TRANSPORT DOCUMENTS
2
3 COMMERCIAL DOCUMENTS
1 FINANCIAL DOCUMENTS:

• Bill of Exchange

• Promissory Note

• Trust Receipt

• Delivery Order
2 TRANSPORT DOCUMENTS:

• Bill of Lading

• Airway Bill

• Air Consignment Note

• Postal Parcel Receipt

• Truck Receipt

• Railway Receipt
 INVOICE PKG. ORIGIN
INSURANCE
LIST CERT.

3 COMMERCIAL DOCUMENTS:
• COMMERCIAL INVOICE
• PACKING LIST
• INSURANCE CERTIFICATE
• CERTIFICATE OF ORIGIN
• INSPECTION CERTIFICATE
• WEIGHT NOTE
• CERTIFICATE OF ANALYSIS
• BLACK LIST CERTIFICATE etc.
Importance of L/C for Exporter
• Dependence on Credit worthiness of a bank
instead of importer

• If the credit is confirmed by a bank in the

exporter’s country, the exporter is neither
subject to commercial not to country risk

• If the credit is irrevocable, it can’t be cancelled

without the exporter’s consent and notice of
revocation can be rejected by the exporter if
received after shipment

• The documents and therefore the goods will

not be released until payment or commitment
to payment is made (In terms of L/C)

• Where credit has been allowed the accepted

bill of exchange can be used to obtain the
finances
Importance of L/C for Importer
• The importer can negotiate better
terms as the exporter is assured of
payment

• Importer is assured that no funds

will be released unless title
documents and received correct
and in order

• Protection is provided under UCP

for documentary Credit
Thanks!

Any Question ???