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The documentary credit

The documentary credit. Lecture outline. The irrevocable documentary credit The revocable documentary credit. The documentary credit.

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The documentary credit

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  1. The documentary credit International financial settlements 120881-1165

  2. Lecture outline • The irrevocable documentary credit • The revocable documentary credit International financial settlements 120881-1165

  3. The documentary credit „The documentary credit is anundertaking given by a bank (the issuing bank) on behalf of its customerto make payment to a named exporter upon presentation of stipulated documents relating to the supply of goods or services” Source: Bishop op. cit. International financial settlements 120881-1165

  4. The irrevocable and revocable credit The irrevocable credit can not be cancelled or altered without the beneficiary’s consent The revocable credit can be revoked or changed without notifying the beneficiary International financial settlements 120881-1165

  5. Advantages of an irrevocable credit for the exporter • The credit is irrevocable- the agreement can not be changed without his permission • The guarantee of a bank relieves the seller from the risk of non-payment International financial settlements 120881-1165

  6. The irrevocable credit gives the importer the control over the timetable and sequence of the transaction processes The bank supervises the accuracy of the documents Advantages for the importer International financial settlements 120881-1165

  7. Applicant – the importer Issuing bank Advising bank Confirming bank Beneficiary-the exporter Negotiating bank Reimbursing bank Transactionparties International financial settlements 120881-1165

  8. Types of documentary credits • Sight- payment upon presentation of the documents • Usance- payable after the acceptance of the bill • Deferred payment- instead of a bill of exchange the importer receives a letter of undertaking, the payment is postponed International financial settlements 120881-1165

  9. Revocable documentary credits • Decreasing popularity • The possibility to alter the contract without the exporters permission • The issuing bank guarantees reimbursement International financial settlements 120881-1165

  10. The credit as a contract (1) • The issuance of the credit becomes a contract with the bank after its acceptance by the exporter • The contract is an assurance for the exporter to be paidin a chosen specified localization and currency International financial settlements 120881-1165

  11. The credit as a contract (2) • The contract is an assurance for the importer to be granted credit on the conditions specified in his instructions and that the exporter will receive payment only against the proper documents International financial settlements 120881-1165

  12. The specification of a letter of credit (1) • Revocable or irrevocable • Name and adress of the issiung bank • Name and address of the exporter • Name and account of the importer • An amount in currency • A fixed expiry date • Term: at sight, usance or deferred payment International financial settlements 120881-1165

  13. The specification of a letter of credit (2) • Latest date of shipment. • Whether part shipments and trans-shipment are permitted • Place of taking in charge or port of shipment. • Port of destination • Accompanying documents • A description of the goods • Insurance information International financial settlements 120881-1165

  14. Uniform Customs and Practice for Documentary Credits • Is a set of rules on the issuance and use of letters of credits issued by the ICC • Standardized practice of banks to handle letter of credits • Honored by practitioners in more than 175 countries International financial settlements 120881-1165

  15. Uniform Customs and Practice for Documentary Credits • First published in 1933 • The current version –UCP600. • The latest revision was approved by the Banking Commission of the ICC International financial settlements 120881-1165

  16. Uniform Customs and Practice for Documentary Credits • UCP600 does not automatically apply to a credit –it should be stated which rules apply • Exemptions and modifications to UCP can be specified in the letters of credit International financial settlements 120881-1165

  17. eUCP • Rules for electronic commerce • A reaction to increased electronic trading between banks, trading and insurance companies • Valid since 2007 International financial settlements 120881-1165

  18. The process of documentary credits (1) Source:Bishop op. cit. International financial settlements 120881-1165

  19. The process of documentary credits (2) The buyer gives instructions to his bank in order to conform to the sellers requirements He prepares the documents for clearing the goods The bank constructs the credit according to the buyers application International financial settlements 120881-1165

  20. The process of documentary credits (3) • The issuing bank designates his agent bank abroad, which will be responsible for authenticating the credit and advising it to the buyer • The agent is called the advising bank International financial settlements 120881-1165

  21. The process of documentary credits (4) • If the advising bank approves it is obliged to: • pay the credit • accept a bill of exchange • issue a deferred payment undertaking • There is no obligation for approval this creates a risk for the seller International financial settlements 120881-1165

  22. The confirmation of the credit • The confirming bank undertakes the contractual and political risk related to advising banks credit • In specific cases the advising bank is also the confirming bank International financial settlements 120881-1165

  23. The confirmation of credit Sometimes the seller requires a confirming bank in his own country e.g. due to political risk Upon presentation of the documents and in the case of compliance with the credits condition the confirming bank is obliged to undertake a specified action International financial settlements 120881-1165

  24. Advising to the seller • The seller is advised credit by the advising bank • Any changes to the credit has to be discussed with the applicant • The seller presents the documents either to the confirming or advising bank for payment or acceptance International financial settlements 120881-1165

  25. Documents required • The invoice • The certificate of origin • The insurance certificate or policy • Transportation documents International financial settlements 120881-1165

  26. Summing up • The irrevocable letter of credit is the oldest and one of the safest methods of financing foreign trade transactions • The exporter does not face the risk of non-payment since the bank guarantees the credit • The importer is able to control the timetable and sequence of the transaction processes • The bank supervises the accuracy of the documents International financial settlements 120881-1165

  27. Exercise • Discuss the role of banks in international trade transactions. Specify the services they provide and discuss the importance of these services for the exporter and importer. International financial settlements 120881-1165

  28. Literature • E. Bishop, Finance of international trade, Chapter 4. Publication available via Science Direct Database International financial settlements 120881-1165

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