Letter of credit

Letter of credit

The letter of credit is a pledge made by the bank to make a payment by the request of one of its importing customers (the buyer) in which the bank guarantees the payment or the delegates another bank to pay or accept withdrawals for the benefit of the exporter (the supplier) in return for receiving documents conforming with the agreed terms.
Letters of credit are one of the important tools used to finance foreign trade operations, since the involovement of banks in these operations adds the guarantee and stability due to the confidence of the importer and exporter put in the bank to implement this type of transactions. The exporter knows that he will receive the amount of the exported goods as soon as he fulfills the conditions stated in the letter of credit. And the importer knows that the bank will not pay the value of the goods until confirming the implementation of the agreed terms mentioned in the letter of credit.