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Letter of Credit
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30 Describe the parties involved in a letter of credit;
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31 explain the different kinds of commercial letter of credit
A Letter of Credit (LC) is a financial document issued by a bank on behalf of a buyer,
guaranteeing payment to the seller (beneficiary) upon meeting specific terms
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Here are different types of Letters of Credit, each with unique features and practical uses:
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This LC reflects absolute liability of the Bank (issuer) to the other party
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The Chinese
supplier demands an irrevocable LC to ensure payment
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The Bank will
not have any liabilities to the beneficiary after revocation of the LC
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The German seller is aware of this risk, and it’s less commonly used
as it lacks payment security
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Usance Letter of Credit
Definition: A Usance Letter of Credit (also known as a deferred or time letter of credit) is
a type of letter of credit that allows the buyer (importer) to pay the seller (exporter) at a
specified future date after the goods have been shipped and the documents have been
presented
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Example: A South African importer uses a 90-day usance LC to pay a supplier in Japan
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This is particularly useful
for ongoing trade relationships where the buyer and seller engage in repeated transactions
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A
revolving LC allows continuous transactions within the agreed limit without issuing a new
LC each time, saving time and costs
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Back-to-Back Letter of Credit
Definition: his LC type considers issuing the second LC on the basis of the first letter of
credit
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Two LCs: Involves two separate letters of credit:
The first LC is issued by the buyer’s bank in favor of the intermediary
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Example: A Singapore trader buys textiles from India and sells them to a U
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retailer
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Example: An Italian importer issues a clean LC to a German exporter, trusting the exporter
to deliver the goods
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Example: A Brazilian importer issues a documentary LC to a U
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supplier, requiring the
supplier to provide documents proving the shipment
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This red clause is so termed
because it is usually printed in red on the document to draw attention to "advance payment"
term of the credit
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Once the goods are ready, the supplier ships
them and submits the remaining documents for full payment
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Green Clause Letter of Credit
Definition: a Green Clause Letter of Credit not only pays for processing, packaging and
raw materials, but also ensures payment for pre-shipment warehousing at the origin port

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and other insurance expenses
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These Letters of Credit are
commonly used for trade transactions of consumables like rice, wheat, gold, etc
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This helps the exporter manage logistics
costs before shipment
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Transferable Letter of Credit
Definition: This LC enables the Seller to assign part of the letter of credit to other party(ies)
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Example: A Malaysian intermediary receives a transferable LC from a Canadian buyer
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Example: A French buyer uses a deferred payment LC for a Japanese electronics supplier,
agreeing to pay 60 days after documents are presented
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They can
draw full amount from a bank against the pledge of a general lien on their goods
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Agreement on Trade Terms
Buyer and Seller Agreement: Both parties must agree on the sales contract terms, including
the payment method, which will be a letter of credit
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Application Submission by the Applicant (Buyer)
• Contact an Authorized Bank: The buyer approaches an authorized bank in Pakistan to apply
for a letter of credit
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• Import license (if required for specific goods)
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• Evidence of import financing (if financed by a bank or institution)
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Bank’s Credit Assessment and Approval

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Credit Assessment: The bank conducts a credit assessment of the buyer to ensure they have
the financial capability to honor the L/C
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• Transmission to the Advising Bank: The L/C is sent to the seller’s bank (advising bank),
usually in the seller's country, through SWIFT (Society for Worldwide Interbank Financial
Telecommunication) network
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• Submission to Advising Bank: The seller submits the documents to the advising bank,
which then forwards them to the issuing bank in Pakistan
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Verification and Payment by Issuing Bank
• Document Examination: The issuing bank in Pakistan examines the documents for strict
compliance with the L/C terms
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• Payment to Advising Bank: Upon successful verification, the issuing bank releases
payment to the advising bank or confirming bank, which then pays the seller
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Delivery of Documents to Buyer
• Document Release to Buyer: The issuing bank releases the original documents to the buyer,
enabling them to take possession of the goods
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34 Explain the importance of a commercial letter of credit
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35 describe the advantages of letter of credit
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