Improving the SMEs Access to Trade Finance DRAFT
in the OIC Member States
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and a Standby Letter of Credit. Commercial Letters of Credit typically are used to assure
payment for a transaction involving the movement of goods and involve the presentation of
commercial documents that usually transfer title of the underlying goods, while Standby
Letters of Credit are typically used as performance or financial assurances and are payable
against a simple demand or a demand and a statement. These are defined in greater detail
below.
A. Commercial (Documentary) Letters of Credit
A Commercial (Documentary) Letter of Credit is a written undertaking given by a bank
(Issuing Bank), at the request of a buyer (Applicant), to pay the seller (Beneficiary) of goods or
services provided that the seller strictly fulfils a defined set of documentary terms and
conditions specified in the letter of credit. Any amendment of the LC requires the consent of all
participants. Such credits are normally governed by the International Chamber of Commerce
(ICC)’s Uniform Customs and Practice (UCP). UCP 600 came into effect in July 2007.
(i) Commercial (Documentary) Letters of Credit---Availability
The Commercial LC will specify how and when the payment/proceeds will be made available:
a. Sight indicates the Letter of Credit is payable upon presentation of documents in compliance
with the terms and conditions of the LC and may or may not include a Draft/Bill of Exchange.
b. Usance indicates the Letter of Credit is payable on some future date after presentation of
documents in compliance with terms and conditions of the LC.
i. Deferred Payment is a promise of the Issuing Bank to pay a certain sum of money
on a future fixed date. No Draft/Bill of Exchange or other negotiable instrument is
required.
ii. Acceptance of Draft(s) drawn on the Issuing Bank (or Nominated Bank) represents
a promise of the accepting bank to pay a certain sum of money on a fixed date. Such
future date may be a pre-determined fixed date or based on a period of time after
shipment date or presentation date
c. Negotiation indicates that the LC may be negotiated either by any bank of the beneficiary’s
choosing (freely negotiable), or, by a specifically nominated bank.
(ii) Commercial (Documentary) Letters of Credit --- Risk Mitigation
1. Unconfirmed Letter of Credit - The Issuing Bank is obligated to pay upon presentation of
conforming documents and at the designated time specified within the letter of credit. There is
no obligation on the part of the Advising Bank should the Issuing Bank not pay. The Advising
Bank is solely responsible for the authenticity of the letter of credit.
2. Confirmed Letter of Credit - A Commercial Letter of Credit in which the Issuing Bank
requests and nominates a second bank (often the Advising Bank) to add its payment
undertaking to the letter of credit in addition to that of the Issuing Bank. The confirming bank
becomes a participant of the LC and their consent to any amendment or cancellation is also
required. Such commitment from this second bank provides additional comfort to the seller
who wishes to mitigate the country and bank risk of an Issuing Bank.