Letter of credit, in a broad perspective, is one of the payment methods in international trade.
The letter of credit is distinguished itself from other payment methods in international trade by its complex structure and detailed rules.
A documentary credit, also known as a letter of credit, is a written guarantee issued by a bank (issuing bank) on behalf of a buyer (applicant) to pay the seller (beneficiary) a specified amount, either at sight or on a future date.
This payment commitment is subject to the beneficiary’s compliance with the terms and conditions outlined in the credit and is fulfilled through a ‘complying presentation’.
According to the Uniform Customs and Practice for Documentary Credits (UCP 600), a complying presentation must meet three key requirements:
- Documents must strictly adhere to the terms and conditions of the documentary credit.
- If the credit is governed by UCP 600, documents must align with its applicable articles and sub-articles.
- Documents are reviewed based on latest version of international standard banking practices, ISBP 821 (International Standard Banking Practice for the Examination of Documents under UCP 600).
Understanding these principles ensures smooth international trade transactions and minimizes payment risks.
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