Letter of credit (LC) is used as a payment method in international trade to minimize risks for both the importer and exporter. An LC is an undertaking by an issuing bank, usually the importer's bank, to make payment to the exporter against submission of documents as specified in the LC. The mechanism involves the issuing bank, advising bank, negotiating bank, and optionally a confirming bank. The confirming bank provides its undertaking in addition to the issuing bank to avoid risks of insolvency of the issuing bank or the importer's country.

1. LETTER OF CREDIT(LC)
Definition & mechanism

2. TRADE

3. EXPORTER
BUT
THEY DO
NOT TRUST
EACH
OTHER !
IMPORTER
Minimize the
RISK of
Quantity &
Quality of Goods
if she makes the
payment before
she receives
goods
Minimize the
RISK of
non-payment by
the importer if
she ships the
goods before
receiving the
payment
To solve this problem
both use LC as a
method of payment
which allay down fear
and risk of both
MECHANISM - LC

4. EXPORTERIMPORTER
MECHANISM - LC
Issuing Bank/Opening Bank
RequestsLC
Definition – Letter of Credit (LC)
LC is an undertaking by the ISSUING BANK to make a PAYMENT to BENEFICIARY
(EXPORTER in this case) against the SUBMISSION OF DOCUMENTS which may be related to
type of shipment, insurance cover etc as per agreed between the exporter and the importer in the LC
Negotiating Bank
Advising Bank
LC
DOCUMENTS
$
$
$

5. EXPORTERIMPORTER
ROLE OF CONFIRMING BANK
Issuing Bank/Opening Bank
RequestsLC
Confirming Bank
Negotiating Bank
Advising Bank
LC$
$
To avoid the INSOLVENCY RISK of the ISSUING
Bank & COUNTRY RISK of the IMPORTERS’
REQUESTS
$
$
UNDERTAKING IN ADDITION
TO ISSUING BANK