Example of a Letter of Credit

Assume Mr. X (Dubai exporter) and Mr. Y (an African importer) have a contract for shipping a cargo of goods. Obviously, they don’t know one another or can’t trust one another, so both parties agree to open an LC.

The letter of credit ensures that Mr. X will receive payment from the buyer and that Mr. Y will have well-organized, defined procedures as well as proof that the products have been shipped.

From this point forward, the details of a letter of credit transaction between Mr. X and Mr. Y would be as follows:

Mr. Y (the buyer) issues a Letter of Credit at his bank, which serves as the issuing bank (also known as the opening bank).

The advising bank (Mr. X’s bank) receives the LC from the issuing bank and processes it further.

The advisory bank verifies the LC’s authenticity before sending it to Mr. X. (Dubai exporter).

Now that Mr. X has received the confirmation, he will ship the goods, along with other required documents, including the bill of lending.

He’ll also send these documents to the bank that will be doing the negotiations.

The negotiating bank will confirm that all conditions have been met and will then pay Mr. X (the seller).

All required documents will also be sent to the issuing bank by the negotiating bank.

In order for Mr. Y (the buyer) to verify the authenticity, the issuing bank will send that document for confirmation.

The payment will be sent to the issuing bank once Mr. Y has confirmed it.

The money will then be transferred from the issuing bank to the bank doing the negotiation.

Writer: Shakir Ali Rajput: Global Trade Professional, For additional information, please contact me at WhatsApp (00971) 543785186 or shakir.ali@evolution.pk email address.