Letter of Credit and Its Operation Procedures in Banks

Topics: International trade, Letter of credit, Legal documents Pages: 23 (6637 words) Published: January 4, 2013
A term paper


Course code: FB-509
Course Title: Principles and Practices of Banking

Abdullah Al Mahmud
Department of Banking
Faculty of Business Studies
University of Dhaka

[Submitted for the partial fulfillment of the requirements of the degree in Master of Business Administration (Banking)]

Md. Ataur Rahman ID: 50917063

Submission Date: July 22, 2010

University of Dhaka
Department of Banking

Chapter I
Letter of Credit (L/C) is a very important issue of foreign exchange management because without L/C import and export cannot be possible. Importer and Exporter do not know each other. For this reason settlement of payment cannot be possible without the arrangement of Bank particularly in foreign trade. Therefore import/Export also cannot be possible if no L/C can be made through Bank. So L/C is a very important issue in foreign trade. L/C is a guarantee of a bank (Issuing Bank) on behalf of the importer in a trade in favor of the exporter to pay a certain sum of money under some specific terms and conditions. So, an L/C is a negotiable instrument (A form of documentary credit) that carries a promise of payment with the fulfillment of certain conditions. An L/C can be used in foreign trade as well as for local payments. While a letter of credit is issued for a guarantee in a specific transaction, a standby letter of credit is a general letter providing a guarantee for a specific period of time. Most letters of credit are irrevocable, but occasionally a letter of credit is revocable; that is, it can be canceled by the bank without notifying the beneficiary. So it is very important for every business people and all concerned to know what the letter of credit is, how it works and how it helps in international trade. Keeping in mind the above stated fact the present study was taken to cover the following aspects: i. Helps to know all about of a letter of credit.

ii. How letter credit works in international trade payment. iii. How a third party i.e., the bank can help in export and import business.

Chapter II


One of the important functions of commercial banks is to finance import and export trades. In international trade, because of distance involved, buyers and sellers do not know each other. It is difficult for them for appreciate each others integrity and credit worthiness, and, apart from this, it is also difficult to know various regulations prevailing in their respective countries regarding imports and exports. Thus, the buyer wants to be assured of goods and the seller to be assured of payments. Commercial banks, therefore, assure these things to happen simultaneously by opening letter of credit guaranteeing payment to seller and delivery of goods to buyer. By opening a letter of credit on behalf of a buyer in favor of a seller, commercial bank undertakes to make payment to a seller subject to submission of documents drawn in strict compliance with letter of credit terms giving title of goods to the buyer. It is a conditional guarantee. The letter of credit, thus, constitutes one of the most important methods of financing foreign trade.

In fact a letter of credit carries a promise or an undertaking by the issuing banker which is valued and honored on a global basis. Similarly, the buyer is interested that he gets possession of goods before he pays for them and he is able to make sure that the goods are exactly those he ordered. It is important to decide in advance how a seller is going to get payment before handling over possession of goods and how the buyer is going to get constructive possession of the goods before making payment. This is more so because the parties are...

References: Chowdhury, L.R. 2006. A Textbook on Foreign Exchange. Second Edn.
Paradise Printers, 44/C-1, Azimpur, Dhaka
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