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Letters of Credit – An Introduction

Letters of credit – or documentary credits – have long been used as a method of payment in international trade. In simple terms, a letter of credit (L/C) is a guarantee of payment by the importer's bank to the exporter, if certain terms and conditions stipulated are met. In essence, a L/C substitutes the credit of the bank for that of the buyer for the purpose of facilitating trade.

 

This course describes the basics of letters of credit and how they work. It also outlines their benefits and drawbacks as a trade finance instrument, and describes their risks from the point of view of importers, exporters, and participating banks.

  • OBJECTIVES

    On completion of this course, you will be able to:

    Describe how letters of credit facilitate payment in international trade

    Outline the risks associated with using letters of credit

  • PROGRAM CONTENT

    Topic 1: Overview of Letters of Credit

    UCP 600 Definition of a Letter of Credit

    o Meaning of ‘Complying Presentation’

    o Meaning of ‘Honor’

    Parties to a Letter of Credit

    o Applicant (Buyer/Importer)

    o Beneficiary (Seller/Exporter)

    o Issuing/Opening Bank

    o Advising/Confirming Bank

    o Other Participants

    Nominated Bank

    Accepting Bank

    Negotiating Bank

    Claiming Bank

    Reimbursing Bank

    The Letter of Credit Process

    Required Information

    o Potential Discrepancies

    Benefits & Drawbacks

    o Buyer’s Perspective

    o Seller’s Perspective

    Topic 2: Risks Associated with Letters of Credit

    Risks to the Applicant

    o Currency Risk

    o Delivery/ Shipment Failures

    o Failure of Issuing Bank

    Risks to the Beneficiary

    o Credit Risk

    o Currency Risk

    o Payment Delays

    o Country/Political Risk

    o Fraud

    o Legal Risk

    o Force Majeure and Frustration of Contract

    Risks to Participant Banks

    o Risks to the Issuing Bank

    Insolvency of Applicant

    Fraud

    Country/ Political Risk

    Legal Risk

    o Risks to the Confirming Bank

    o Risks to the Advising

  • PREREQUISITE KNOWLEDGE

  • ESTIMATED COMPLETED TIME

    50 Minutes

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