![]() ![]() ![]() Confirming Bank is a bank other than the issuing bank that adds its confirmation to credit upon the issuing bank's authorization or request thus providing more security to the beneficiary.Confirmation is an undertaking from a bank other than the issuing bank to pay the Beneficiary for a Complying Presentation, allowing the Beneficiary to further reduce payment risk, although Confirmation is usually at an extra cost. ![]() The Advising Bank is the bank that will inform the Beneficiary or their Nominated Bank of the credit, send the original credit to the Beneficiary or their Nominated Bank, and provide the Beneficiary or their Nominated Bank with any amendments to the letter of credit.The Nominated Bank is a bank mentioned within the letter of credit at which the credit is available (in this respect, UCP600 Art.2 reads: "Nominated bank means the bank with which the credit is available or any bank in the case of a credit available with any bank").The Issuing Bank is the bank that issues the credit, usually following a request from an Applicant.The Beneficiary is the person or company who will be paid under the letter of credit this will normally be the seller (UCP600 Art.2 defines the beneficiary as "the party in whose favour a credit is issued").The Applicant is the person or company who has requested the letter of credit to be issued this will normally be the buyer.These are crucial to understanding the role financial institutions play within. It defines a number of terms related to letters of credit which categorise the various factors within any given transaction. UCP 600 (2007 Revision) regulates common market practice within the letter of credit market. Marcell David Reich (commonly known as Marc Rich) popularised the use of letters of credit in the oil trade. By the 21st century, the vast majority of LCs were issued in electronic form and entirely "paperless" LCs were becoming more common. Beginning in 1973 with the creation of SWIFT, banks began to migrate to electronic data interchange as a means of controlling costs, and in 1983 the UCP was amended to allow "teletransmission" of letters of credit. Īlthough letters of credit first existed only as paper documents, they were regularly issued by telegraph in the late 19th century, and by telex in the latter half of the 20th century. This type of letter of credit was eventually replaced by traveler's checks, credit cards and automated teller machines. In the late 19th century and early 20th century, travelers commonly carried a circular letter of credit issued by a relationship bank, which allowed the beneficiary to withdraw cash from other banks along their journey. The International Chamber of Commerce oversaw the preparation of the first Uniform Customs and Practice for Documentary Credits (UCP) in 1933, creating a voluntary framework for commercial banks to apply to transactions worldwide. Letters of credit were traditionally governed by internationally recognized rules and procedures rather than by national law. The letter of credit has been used in Europe since ancient times. Its economic effect is to introduce a bank as an underwriter that assumes the counterparty risk of the buyer paying the seller for goods. Letters of credit are used extensively in the financing of international trade, when the reliability of contracting parties cannot be readily and easily determined. Image 4: Buyer provides the bill of lading to carrier and takes delivery of the goods.Ī letter of credit ( LC), also known as a documentary credit or bankers commercial credit, or letter of undertaking ( LoU), is a payment mechanism used in international trade to provide an economic guarantee from a creditworthy bank to an exporter of goods. ![]()
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