Letter of Credit

In general terms, letter of credit is a type of payment which, with reference to the preliminary contract between the importer and the exporter, is issued upon the importer’s (applicant) instruction in favor of the exporter (beneficiary) by importer’s bank (issuing bank) via a foreign correspondent bank and bears the guarantee of the issuing bank that the beneficiary shall be paid upon shipment of the contract goods and against presentation of conforming documents to the correspondent bank or the liability for payment at maturity shall be assumed or the bill of exchange drawn by the beneficiary shall be accepted.

Parties to Letter of Credit
  • Applicant: an importer who gives the instruction of issuing a letter of credit to his bank.
  • Opening Bank, Issuing Bank: a bank which issues a letter of credit upon the instruction of an importer.
  • Correspondent bank: a foreign correspondent bank which receives and advises a letter of credit (Advising Bank) and, if necessary, adds a confirmation to the letter of credit (Confirming Bank) and examines conforming documents (Negotiating Bank). Advising Bank, Confirming Bank and Negotiating Bank may be a single bank as well as different banks.
  • Beneficiary: an exporter on behalf of whom a letter of credit is issued.
Stages of Letter of Credit
  • That the importer (applicant) gives the instruction of issuing a letter of credit to his bank is the first stage of issuing a letter of credit. Importer’s bank, on the basis of this instruction and the proforma which is a preliminary contract between the importer and the exporter, issues a letter of credit addressing a foreign correspondent bank. Being a cipher message, the text of letter of credit (opening) is delivered to the correspondent bank by registered mail, telex or S.W.I.F.T.
  • The correspondent bank receives the opening and, after verifying the opening and determining the responsibility assigned to them by the letter of credit, puts the letter of credit in process. If the bank where the letter of credit is issued is the advising bank at the same time, it advises the letter of credit to the beneficiary (exporter). If the advising bank is stated to be another bank in the opening, the bank that receives the letter of credit sends the same to the advising bank for advising. In the mean time, if the bank that receives the letter of credit is asked to add a confirmation, it adds its confirmation in line with the risk and credit limit of the issuing bank and advises the letter of credit.
  • After receiving the advice of the letter of credit that has been issued on behalf of him, the exporter, strictly abiding by the conditions of the letter of credit, prepares export goods within the time specified and performs loading by delivering to the transport vehicle specified. Following this operation, the exporter submits the documents representing the goods that have been prepared by abiding by the conditions of the letter of credit (bill of lading, invoice, certificate of origin, packing list, etc.) to the correspondent bank within the time specified and never exceeding the expiry date of the letter of credit.
  • The correspondent bank receives the documents and, by carefully examining the same, controls whether or not the conditions of the letter of credit have been fulfilled. The correspondent bank that receives the documents has to inform the issuing bank within five business days following the date of receival. It is necessary to remind that the bank which examines the documents (Negotiation Bank) is obliged to do so in terms of appearance. In other words, banks do not take any responsibility regarding the actual condition, originality and quality of the goods shipped. In the event the importer hesitates over the quality of the goods, it is suitable for the importer to ask for an independent supervision firm report certifying the content, quality and physical condition of the goods from the exporter.
  • If the bank which examines the documents is the confirming bank at the same time, as soon as the confirming documents are submitted and without getting back to the issuing bank, it effects the payment to the beneficiary depending on the type of the letter of credit, commit to pay at maturity or accept the bills of exchange drawn on behalf of it. Because, by confirming the letter of credit, the confirming bank assumes the risk of the issuing bank.
  • If the seller and the buyer do not know each other well and do not trust each other enough, payment by letter of credit becomes important because, in a letter of credit, banks take part between the importer and the exporter and irrevocably assume the liability to pay.