The documentary credit is the commitment by signing a bank to pay for the buyer’s account, a fixed amount to the supplier of goods or provision against issue, within a specified time, documents conformity proving that the goods have been shipped or services have been performed. The Anglo-Saxon name of the documentary credit is “Letter of Credit” (Letter of Credit or L / C). In Import-export; the documentary credit is to protect the seller and the buyer.
In the context of international trade, sellers and buyers, beyond the commercial consensus embodied in the contract, the conflicting interests: the seller wants to be paid for the goods which he must relinquish the buyer would like quantity, quality and on time, the goods ordered. Among the instruments of international payments at their disposal, the documentary credit perfectly meets the needs of everyone; this is often a common agreement that the seller and buyer agree the commercial contract to payment by documentary credit.
Stakeholders in Documentary Credit
The main participants in a documentary credit are:
The principal is to say, the buyer
The issuing bank, that is to say, the buyer’s bank
The advising bank is the correspondent bank of the issuing bank
The confirming bank that adds its commitment to the issuing bank
The beneficiary, i.e the seller.
The Process of Documentary Credit
1- Opening Instructions
The buyer sends to his banker, the credit opening application to the vendor. The latter, written on a pre-printed form or on the Internet via a dedicated website of the bank to the buyer, must accurately reflect the business components of the contract signed between the seller and the buyer. It thus refers to the commodity, its price (currency) shipping terms (transport, shipping time, path …) the documents required from the seller, the credit embodiment and provides the issuing bank address of the beneficiary and his bank.
2- Credit Opening
A bank that issues the credit and transmits the Swift directly to the seller’s bank or its correspondent in the country of the seller possibly asking him to “confirm” the credit.
3- “Notification” or “confirmation” of credit
The advising bank advises the beneficiary – without financial commitment on his part – the opening of a documentary credit in favor. In a notified documentary credit, the seller thus has the commitment of the issuing bank. It may wish to cover the default risk of the bank and / or the issuing country (political risk, economic or catastrophic); He then asks the seller, the commercial contract, to issue a documentary credit in which requests to a designated bank to add its confirmation; the confirming bank, if it has convenience, adds its own payment obligation: the seller then has a double commitment: that of the issuing bank and the confirming bank.
4- The recipient receives the text of the documentary credit which is both a payment instrument and a payment guarantee. He proceeds to shipment (if available) or puts into production before shipping, ensuring timely progress to credit.
5- The beneficiary gets the carrier transport document joined with other required documents (invoice, packing list, certificate of insurance …) and he takes care to prepare scrupulously comply with terms and credit conditions.
6- The recipient returns all documents to the confirming bank respecting the validity date of the credit and the deadline for submission of documents.
7- The confirming bank checks the documents and forwards them to the issuing bank and the beneficiary pays for the value of recognized documents conforming (immediately if the documentary credit is payable on demand or at maturity if the documentary credit is payable at issuance)
8- The issuing bank receives the documents to the confirming bank, checks, rule the confirming bank (sight or at maturity), debits its customer (on demand or at maturity) and gave him the documents.
9- The customer receives the documents and takes over the goods to the documents, including the bill of lading.