Quick links

Letters of Credit

Letter of credit is an agreement between the buyer/importer and the seller/exporter that when the buyer receives the goods will be able to remit the funds to the seller. This form of payment is used to give protection to exporters/seller and importers/importer against buyer/sellers risk and country risk. 

Types of Letters of Credit 

Revocable, Irrevocable, Back to back,Transferable, Confirmed, Unconfirmed, Revolving, Green clause  Red Clause

Revocable

This is a type of L/C whereby the buyer/importer or the seller/

exporter can cancel it without the consent of the other.

Irrevocable

This type of L/C neither the buyer/importer nor the seller/exporter can cancel it without the consent of the other

Back to Back

This is a type of L/C whereby two letters of credit are issued one backing the other e.g. if the manufacturer resides in Europe and the importer in Tanzania and wants to import from Europe, having opened one L/C, the importer can import for a certain period with the same, without opening a different L/Cs.

Transferable Letter of Credit

An L/C which can be transferred to many beneficiaries depending on the original L/C. e.g. customer A applies for an L/C IFO customer B; customer B is unable to supply the goods so he can transfer the original L/C to customer C so that the goods can be supplied and transported to customer A. The payments can be made into two different beneficiaries.

Confirmed

•An L/C whereby the correspondent bank of the issuing bank

adds a confirmation on the L/C meaning that they put more weight on it to help the exporter to have more confidence on the importer.

•Confirmation can be done locally from local banks or internationally from correspondent banks.

Unconfirmed

A type of L/C whereby none of the issuing banks, correspondent or local bank, has committed itself to the instrument.

Revolving

A type of L/C whereby, depending on the terms and conditions, the amount is revived without requiring a specific amendments.

Green clause

A type of L/C whereby the exporter is financed to enable him collect the goods, insure and put them in a warehouse. The bank is provided with the warehouse receipt.

Red clause

An L/C given to the exporter relying on the documents provided

by him. The finance is given on the pre-shipment stage.

Security

Cash or collateral

Benefits

•Gives protection to importing customers

•Enables the customer outsource a variety of suppliers for different goods