Improving the SMEs Access to Trade Finance DRAFT
in the OIC Member States
14
The transaction flow in a documentary credit, as in other such instruments, begins with the
importer and exporter agreeing terms of delivery and payment (as well as financing where
needed), and agreeing to settle on the basis of a letter of credit. The importer requests their
bank to issue a letter of credit based on the agreed terms; once issued, the L/C represents a
payment undertaking of the issuing bank, as a separate and distinct legal obligation to the
exporter, provided the exporter can demonstrate full compliance with the terms and
conditions of the credit. This is meant to give comfort to the exporter, that they are relying on
the payment promise (and the stability and financial health) of a reputable bank as opposed to
that of a commercial counterparty in a foreign country.
The issuing bank will transmit the letter of credit, usually in the form of a structured electronic
message called a SWIFT message, to a bank based in the country of the exporter, most
commonly the exporter’s bank. That bank will receive the transmission through the SWIFT
network, thereby able to authenticate the message as being legitimately from the issuing bank.
The exporter’s bank, referred to in this case as the advising bank, is meant to review the terms
and conditions of the credit, assisting the exporter in ensuring that the exporter will be able to
meet all the terms and conditions of that credit, and that the credit is workable as issued. L/Cs
will have expiry dates beyond which they are no longer valid; if an advising bank notices an
expiry date that is too close to the date of receipt of the credit, practically guaranteeing that the
exporter will fail to be compliant to the terms of the credit, and may therefore not be paid, the
advising bank will suggest that the exporter request an amendment to the expiry date of the
credit, for example.
The exporter then prepares and submits the required documentation to the advising bank or
to another institution expected to facilitate payment to the exporter. These documents are
intended to demonstrate that the exporter has fulfilled the obligations under the credit.
Such documentation might include:
 Commercial invoice
 Packing list
 Certificate of origin
 Transport document, such as marine bill of lading or air waybill
 Certificate of inspection
 Certificate of insurance
The banks involved then in turn, verify the documents against the terms specified in the letter
of credit. Terms will include the type and number of documents required, and may indicate
that specific terms be reflected in the documentation, such as a “latest shipment date” or a
particular routing for the cargo, among others.
A common challenge arises when the banks disagree (as happens with some regularity) as to
whether the documents are really compliant or not. The practical reality is that historically,
levels of non-compliance on first presentation of documents by exporters range as high as 65-
80% (International Chamber of Commerce and OPUS Advisory interviews). In the case of non-
compliance, the exporter effectively loses all protection otherwise available under letters of
credit, and relies on the importer to accept documents as presented, unless there is both the
opportunity and the possibility to correct elements of non-compliance.