Applicant

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

Presentation – Parties to the Letter of Credit

Ozgur Eker (CDCS) Presentation 28 January 20198 February 2019Advising Bank, Applicant, Beneficiary, Confirming Bank, Issuing Bank, Nominated Bank, Presentation, Reimbursing Bank

Issuing Bank

Issuing Bank is the bank that issues a letter of credit at the request of an applicant or its own behalf.
Letter of credit is issuing bank’s payment promise against a complying presentation.
Most of the time issuing issuing banks receive receive the conditions conditions of the letters of credit from applicants through LC Application Forms.
Once an issuing bank opens an LC it undertakes to honor a complying presentation of the beneficiary without recourse.

Applicant is the buyer of the underlying transaction.
Applicant is the party on whose behalf the letter of credit is issued.
Applicants complete Letter of Credit Application Forms to pass the details details of the letter of credit to issuing issuing banks via online forms or hard copy.
Once letter of credit is issued applicant removes from the lc equation in terms of payment obligation. Issuing banks must honor complying presentations independently and irrevocably.

Beneficiary

Beneficiary is the seller of the underlying transaction.
Beneficiary is the party in whose favor the letter of credit is issued.
Beneficiary ships the goods as required by the letter of credit and presents presents documents documents as indicated indicated.
Beneficiary will gets its money from the issuing bank as long as it complies with the letter of credit conditions.
Beneficiaries prove their compliance to the letter of credit conditions by making complying presentations to the banks.

Advising Bank

Advising bank is the bank that passes letter of credit to the beneficiary. UCP 600 describes advising bank as « the bank that advises the credit at the request of the issuing bank»
Advising banks mostly located on the same country with the beneficiaries.
Advising banks have very limited responsibilities against beneficiaries. Their main responsibility is to advise the credit to the beneficiaries.
They have no payment obligation unless they are also the confirming bank.

Nominated Bank

Nominated bank is the bank with which the credit is available.
Most of the time nominated banks are also the advising banks.
Nominated banks may honor a complying presentation. But their payment responsibility is not obvious. If they choose not to honor a complying presentation, there is no penalty mechanism defined in the letter of credit rules, UCP 600, for such an activity

Confirming Bank

Confirming bank is the bank that adds its confirmation to a credit upon the issuing bank’s authorization or request.
Most of the time a confirming bank is also the advising bank and the nominated bank.
Confirming Confirming bank provides provides beneficiary beneficiary an additional payment guarantee separate from the issuing bank’s payment obligation.
Confirming banks are located on the same country as beneficiaries so they will eliminate country risk of the issuing banks.

Reimbursing Bank

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.

Correct Addresses of the Beneficiary and the Applicant

Ozgur Eker (CDCS) How to Work With a Letter of Credit, Letter of Credit Basics, Letter of Credit Discrepancies 11 June 20187 April 2019Applicant, Beneficiary, Name and Address

When the addresses of the beneficiary and the applicant appear in any stipulated document, they need not be the same as those stated in the credit or in any other stipulated document, but must be within the same country as the respective addresses mentioned in the credit.

Laura from Germany is asking a question regarding the beneficiary’s address.

She would like to know whether banks can control the address indicated in the letter of credit by comparing it with their internal systems. Below you can find her question and my answer respectively.

Question:

Good day,

I would like to know whether you can advise what responsibility the bank would have if they receive an L/C for their client, to the correct NAME of the beneficiary BUT the address indicated in the L/C does not match with the address in the registry of the bank (customer’s address).

Is the bank supposed to recheck this information BEFORE accepting the L/C?

Also, when the bank receives the shipping documents from their client, again the address in the invoice, packing list, etc. is NOT the same address as they one they have in their registry.

Would very much appreciate your comments.

Thanks / regards

Laura

Answer:

Dear Laura,

“Wrong name and address of the beneficiary or applicant” is one of the most common discrepancy types under l/c transactions.

A beneficiary of the letter of credit has to present discrepancy free documents in order to get his payment from the issuing bank.

The issuing bank has to follow the letter of credit rules when checking the documents.

Related article of the letter of credit rules is mentioned below:

Article 14 – Standard for Examination of Documents
j: When the addresses of the beneficiary and the applicant appear in any stipulated document, they need not be the same as those stated in the credit or in any other stipulated document, but must be within the same country as the respective addresses mentioned in the credit. Contact details (telefax, telephone, email and the like) stated as part of the beneficiary’s and the applicant’s address will be disregarded. However, when the address and contact details of the applicant appear as part of the consignee or notify party details on a transport document subject to articles 19, 20, 21, 22, 23, 24 or 25, they must be as stated in the credit.
k. The shipper or consignor of the goods indicated on any document need not be the beneficiary of the credit.

As it is seen from above quotes, neither the address of the beneficiary or the address of the applicant has to match the addresses stated in the letter of credit. Only exception of this rule is the the consignee or notify party details on the transport documents.

Additionally, according to the letter of credit rules the shipper or consignor of the goods indicated on any document need not be the beneficiary of the credit.

Which means that 3rd party documents are acceptable.

But in some situations, the issuing bank do not allow presentation of 3rd party documents by adding special conditions to the letter of credit.

As a result it is advisable to use both beneficiary and applicant names on the documents as stated in the letter of credit.

Also try to copy the correct addresses of the beneficiary and the applicant to the documents from the letter of credit without making any mistake.

There is no ground for a bank to check a beneficiary’s address with his internal system, as long as the letter of credit do not indicate so.

I assume the issuing bank may have suspected from a fraudulent transaction.

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 201810 February 2025Advising Bank, Applicant, Beneficiary, Confirming Bank, Issuing Bank, Nominated Bank, Reimbursing Bank

This page discusses the parties involved in a letter of credit. Each L/C party will be presented briefly, and its roles and responsibilities will be explained with the help of the graphic illustrations. A video on this topic is also available.

A Letter of Credit (LC) is a financial instrument in international trade that guarantees payment to the seller (beneficiary) as long as the agreed-upon terms and conditions are met.

It involves multiple parties, each playing a distinct role.

The key parties in an LC transaction include the beneficiary (seller), applicant (buyer), issuing bank, advising bank, confirming bank, nominated bank, and reimbursing bank. Understanding the roles and responsibilities of these entities ensures smooth and hassle-free letter of credit operations for businesses.