Improving the Role of Eximbanks/ECAs in the OIC Member States
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in their short-term business and, less frequently, in their medium-term business.
Letters of credit can take a variety of forms, but essentially they are a means of
payment between an importer and an exporter via their banks. The importer is
sometimes called the opener, and the importers bank the opening bank (or
sometimes the issuing bank). The bank in the exporter's country is called the
advising bank, and the exporter is called the beneficiary. A letter of credit may be
revocable, which means that it can be canceled or modified by the importer or
the importer's bank without prior approval from the beneficiary. Thus, a
revocable letter of credit offers little security to exporters. The more commonly
used irrevocable letter of credit (ILC) cannot be modified without the prior
approval of the beneficiary. Unless the letter of credit is conditional, the bank
issuing it effectively assumes the risk of default by the importer, provided that
the terms and conditions of the letter of credit are fully met. The advising bank,
on the other hand, is not required to pay the beneficiary unless and until it
receives the funds from the issuing bank. Thus, even ILCs do not provide full
protection to exporters. Letters of credit can also be confirmed. This is done
either on an open confirmation basis, in which case the issuing bank is aware of
the confirmation, or on a silent confirmation basis, in which case the issuing
bank and the importer or buyer may not be aware. Confirmed letters of credit
reduce certain risks for exporters, for example the risk that the issuing bank may
fail or be unable to transfer foreign exchange. But a key point is that when the
exporter seeks payment from the advising (or confirming) bank, it must meet all
the terms of the letter of credit. Thus, it is vital that exporters carefully read all
the conditions and requirements, as these can sometimes be onerous and may
contain provisions that significantly reduce their benefit from the transaction. As
many as 40 percent of applications from exporters for payments under letters of
credit are rejected because of mistakes in documentation and the like. Obviously,
this leads to payment delays. But even under a confirmed letter of credit an
exporter may be exposed to risks, for example those that arise before the letter
of credit is opened. Letters of credit are subject to widely accepted practices and
procedures under the International Chamber of Commerce's Uniform Customs
and Practices for Documentary Credits.
Line of credit A kind of buyer credit in which a bank in the exporting country lends to a bank in
the buying country money to be used to finance one or more contracts. Lines of
credit are most commonly used for medium- and long-term business. But in
certain circumstances they can be used for short-term business (e.g., where it is
difficult to underwrite individual buyers). In a project line of credit, the contracts
being financed are for a single project. In a general purpose or shopping list line
of credit, the contracts to be financed may be varied, provided they meet the
eligibility criteria set out in the loan documentation.
Local costs The cost of goods and services purchased in the importing or buying country,
typically as part of a project financing. Thus, these arise most often in the context
of medium- and long-term business. An export credit agency may agree to cover
or finance such costs up to some maximum percentage (normally 15 percent,
and subject to the OECD Arrangement) of the exported value of the contract.
Long-term
business
Traditionally, insurance or financing applied over a period of more than five
years. But there is no generally accepted or precise division between long-term
and medium-term business.