Issuing Bank

When Issuing Bank is also Applicant of a Letter of Credit: Islamic Finance, Leasing and Issuing Bank’s Own Imports

Ozgur Eker (CDCS) Applicant, Banks, Islamic Finance, Issuing Bank, Issuing Bank, Letter of Credit Parties 8 June 20199 June 2019Applicant, Banks, International Leasing, Islamic Finance, Issuing Bank

Applicant means the party on whose request the credit is issued. Applicant is the importer in a typical international commercial letter of credit.

Issuing bank means the bank that issues a credit at the request of an applicant or on its own behalf.

Generally issuing banks issue letters of credit with the request of the importers and mentioning their names in the letters of credit under Field 50: Applicant of MT 700 Swift Messages.

But in some situations issuing banks issue letters of credit on their behalf. Please keep in mind that this is totally alright according to the letters of credit rules.

Below you can find some situations under which you can see the issuing bank as an applicant.

Letters of Credit Issued from Islamic Banks

According to the modern economic theories an interest rate is the cost of borrowing money, however Islam prohibits interest rates.

Which means that Islamic Banks in some Arab and Asian countries can not buy or sell money based on interest rates. Instead they buy and resell the goods to the importers to finance import letters of credit transactions.

This type of Islamic Trade Finance is known as Murabaha Financing.

According to the Murabaha Financing the issuing bank and the importer signs a sales contract.

According to this sales contract the issuing declares the importer as its agent and the importer agrees to pay the goods from the issuing bank on higher amount than the original contract amount that was determined between the importer and the exporter previously.

The issuing bank requests all shipping documents to be under its name, at the same time appointing the importer as its agent, which means all formalities outside of the letter of credit will be made by the importer as an agent of the issuing bank.

Later on, when the issuing bank receives the documents complying the terms and conditions of the letter of credit:

Pay proceeds to beneficiary.
Endorse and release documents to the real buyer against Murabaha Financing.

Issuing Bank Open a Letter of Credit for Its Own Procurement

It is also possible that the issuing bank is procuring goods for its own consumption (IT equipment, furniture, etc), it may well designate itself as the applicant under its own Letter of credit.

Letter of Credit Issued under a Leasing Agreement:

It is also possible that the issuing bank is a part of an international leasing operation.

The actual buyer may be using “leasing” as the financial instrument for purchasing the equipment, machinery or other assets where the bank is lessor (owner) and the end-buyer (the actual buyer) is the lessee (user) in this method.

References:

UCP 600, Uniform Customs and Practice for Documentary Credits
How does Trade Based (Murabaha) Financing Work?, Amana Bank Youtube Channel

Parties to Letters of Credit

Ozgur Eker (CDCS) Advising Bank, Applicant, Beneficiary, Confirming Bank, Issuing Bank, Letter of Credit Basics, Letter of Credit Parties, Nominated Bank, Reimbursing Bank 16 January 20184 September 2023Advising Bank, Applicant, Beneficiary, Confirming Bank, Issuing Bank, Nominated Bank, Reimbursing Bank

This page deals with the parties of the letter of credit.

Main parties of a typical letter of credit transaction are applicant, beneficiary, issuing bank, confirming bank, nominated bank, advising bank and reimbursing bank will be discussed in this article.

Each L/C party will be presented briefly and its roles and responsibilities will be explained with the help of the graphic illustrations.

Applicant

Applicant is the buyer of the goods or services supplied by the seller.

Letter of credit is opened by the issuing bank as per applicant’s request. However, applicant does not belong one of the parties to a letter of credit transaction.

This is because of the fact that letters of credit are separate transactions from the sale or other contract on which they may be based.

Beneficiary

Beneficiary is the seller of the goods or the provider of the services in a standard commercial letter of credit transaction.

Letter of credit is opened by the issuing bank in favor of the beneficiary.

Beneficiaries will be eligible to receive payment under both commercial and standby letters of credit, as long as they make complying presentations.

Issuing Bank is the bank that issues a letter of credit at the request of an applicant or its own behalf.

Issuing bank undertakes to honor a complying presentation of the beneficiary without recourse.

Which means that issuing banks must pay the letter of credit amount to the beneficiaries, if complying presentation has been made.

Nominated Bank

Nominated bank is the bank with which the credit is available or any bank in the case of a credit available with any bank.

Nominated banks play a key role determining whether or not the documents are presented within the allowed period or not.

nominated bak — Figure 4 : Nominated Bank. Definition, roles and responsibilities in a letter of credit transaction.

Advising Bank

Advising bank is the bank that advises the credit at the request of the issuing bank.

An advising bank that is not a confirming bank advises the credit and any amendment without any obligation to honor.

By advising the credit or amendment, the advising bank signifies that it has satisfied itself as to the apparent authenticity of the credit or amendment and that the advice accurately reflects the terms and conditions of the credit.

Confirming Bank

Confirming bank is the bank that adds its confirmation to a credit upon the issuing bank’s authorization or request.

Confirming bank may or may not add its confirmation to a letter of credit. This decision is up to confirming bank only.

However, once it adds its confirmation to the credit confirming is irrevocably bound to honor or negotiate as of the time it adds its confirmation to the credit.

Even if the issuing bank fails to honor, confirming bank must pay to the beneficiary.

Reimbursing Bank

Reimbursing Bank shall mean the bank instructed and/or authorized to provide reimbursement pursuant to a reimbursement authorization issued by the issuing bank.

Reimbursing Bank is the settlement bank between the issuing bank and the nominated bank or the confirming bank.

If letter of credit currency is USD, reimbursing bank is usually located in US. If letter of credit currency is EUR, reimbursing bank is generally located in Germany.