Documentary Credit

Documentary Credit or Letter of Credit is a classic form of international trade payment that substantially reduces risk for both exporter and importer. Documentary credit or simply Letter of Credit (LC) is a undertaking issued by a bank on behalf of buyers or for its own account, to pay the seller(beneficiary) the value of the draft and /or documents provided that the terms and conditions of the documentary credit are complied with. This is a Credit contract whereby the buyer’s bank is committed to pay an agreed sum of money to the beneficiary under some agreed conditions.

In the payment of LC, bank has a very active role to play and the banks deal with documents only. Hence the term ‘Documentary Credit’ payment, acceptance or negotiation of the credit is made upon presentation by the seller of all stipulated documents. These documents( e.g. bills lading, Invoice, Insurance documents ect.) provide a basic level of proof that the right merchandise has been properly sent to the importer – although, of course, there is always the chance that the documents may prove inaccurate or even fraudulent.

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