Letter of credits

Documentary Credits as Means for Payments of Goods

Definition of a Documentary Credit:
This is an underwriting issued by a bank which is systematically called (the issuing bank) to deliver to the seller (the beneficiary) at the request of the buyer (the applicant or the purchase oderer) in compliant to his instructions (orders). Or, the Bank can issue the order on behalf of itself through which the bank shall be committed to meet its obligation (either cash or by accepting a bill of exchange) within the limits of the defined amount during a specified period of time, provided that the seller should receive the cargo documents of the goods matching the instruction and terms of the credit.
Another definition: A banking underwriting to meet the obligations incurred provided that the documents do match the instruction.

The Importance of Documentary Credit:
Credits are used in local and foreign funding but their importance is increasing in foreign trade especially after they received international acceptance because they maintain the rights and interests of merchants whether they are exporters or importers of goods.
For an exporter, the importance of credits lies in the fact that they represent his guarantee to receive the value of his goods immediately after submitting the shipping documents to the Bank which notified him that the credit has arrived. This in turn will prove he is trustworthy by the importer and increase the circulation of his capital because he received the price of his goods immediately which will bring the whole process and transaction to gain more trust and assurance.
For an importer, their importance lies in the fact that they insure to him that the person who opened the credit account will not pay the value of the contracted- goods to be imported only after submitting the shipping documents to meet the conditions of the opened credit, thus sparing the importer the risk of breaching any commitments by the exporter, and increasing the circulation of his capital, his trust and assurance.
As for banks, their importance lies in increasing the transactions of documentary credits, and as a result increasing the revenues and profits gained through the commissions and fees on the services and transaction offered, plus the currencies differences.

The data required in the application submitted to open a documentary account:

• The name and address of the importer (the applicant for opening the credit account).
• The name and address of the beneficiary (the exporter).
• The name of the corresponding bank.
• The number of the credit.
• The type of the credit.
• The value and amount of the credit.
• Means of notification for the credit.
• The validity of the credit.
• The required shipping documents.
• The invoices (specifications and quantities).
• Bill of lading.
• Air waybill.
• Insurance policy.
• Terms of delivery.
• Means for payment.
• Port of shipment.
• The validity of shipment.
• Port of arrival.
• Other expenses.
• Other terms.