Diagram 1
FOR A UK EXPORTER |
FOR A UK IMPORTER |
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(Export credit, or inward credit to the exporter and the advising bank) |
(Import credit, or outward credit to the importer and the issuing bank) |
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FOREIGN BUYER’S COUNTRY |
F |
asks for |
IMPORTER’s COUNTRY (UK) |
U K importer |
asks for |
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Issuing bank
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to issue a letter of credit and instruct |
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Issuing bank
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to issue a letter of credit and instruct |
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EXPORTER’s COUNTRY (UK) |
Advising bank (which also be a confirming bank) |
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FOREIGN SUPPLIER’S COUNTRY |
Advising bank (which also be a confirming bank) |
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to advise the |
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to advise the
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Exporter |
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Foreign supplier |
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oreign
buyer
who must then present documents to the advising bank after shipment, in accordance with the terms of the letter of credit. If this is done, the issuing bank (and the confirming bank, if there is one) guarantees payment to the exporter/supplier. Payment will be arranged by one of the following methods:
(1) immediate payment;
(2) deferred payment;
(3) acceptance; or
(4) negotiation.
Diagram 2
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EXPORTER |
ADVISING/ CONFIRMING BANK |
ISSUING BANK |
FOREIGN BANK |
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(1) |
Export contract signed with buyer with payment by documentary credit agreed |
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(2) |
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Buyer asks his bank to issue a letter of credit in favour of the exporter |
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(3) |
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Issuing bank asks bank in exporter’s country to advise (and possibly also confirm) the credit |
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(4) |
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Advising/confirming bank sends (a copy of) the letter of credit to the exporter |
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(5) |
Exporter despatcjhes good overseas |
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(6) |
Exporter presents shipping documents (and bills of exchange or draft) to advising/confirming bank* |
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(7) |
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Advising/confirming bank checks the documents and pays or accepts the bill under the terms of the credit |
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(8) |
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Advising/confirming bank forwards documents to issuing bank |
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(9) |
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Issuing bank checks documents aqnd reimburses advising/confirming bank |
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(10) |
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Issuing bank debits account of buyer, in pre-agreed manner |
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(11) |
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Issuing bank release documents to buyer |
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(12) |
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Foreign buyer uses documents to receive delivery of goods |
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*or another bank specified in the credit
Note: The term draft is often used in documentary credit transactions. It is not a banker’s draft. It is a bill of exchange presented with documents which are submitted under a documentary credit arrangement.