Documentary Credit
Documentary Credit
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Documentary Credit in International Trade
Meaning of Documentary Credit, according to the Dictionary of International Trade (Global Negotiator): Documentary credit means the same thing than "letter of credit". Traders and bankers in some parts of the world (US, Asia) tend to use the term "letter of credit" or the abbreviation "L/C", while some bankers (in Europe) prefer to use "documentary credit" or "D/C". Documentary credits facilitate international payments by providing security for both the exporter and the importer. The seller receives an advance assurance of payment upon presentation of documents conforming to the terms and conditions of the letter of credit, and the buyer is assured that the bank will not pay unless the seller has actually submitted documents strictly complying with the documentary credit.
A typical procedure of a documentary credit is as follows:
The process begins when the exporter and importer agree on a sales contract. Typically, it is the exporter that insists on payment by letter of credit because it does not want to take a credit risk, and cannot get sufficient information about the creditworthiness of the buyer to grant another form of payment.
The importer then initiates the documentary credit mechanism by going to its bank and requesting it to open the credit.
Subject to internal credit approval, the importer's bank issues the credit (and is hence called the "issuing bank"), under which it agrees to pay according to the importer's instructions. The credit is sent to the exporter or to the a bank in the exporter's country (depending of the type of credit).
Confirmation (optional). Commonly, under the sales contract and/or documentary credit application, the exporter's bank (or another bank in the exporter's country) will be requested to confirm the documentary credit, thereby committing itself to pay under the terms of the credit. Exporters may insist on confirmed credits when they want to have a trusted local payment.
The exporter (beneficiary) is notified of the availability of the credit.
Shipment and presentation of the documents. If the exporter agrees with the terms of the credit, it then proceeds to ship the goods. After shipment, the exporter goes to the bank nominated in the credit to effect payment an presents the documents that the importer has asked for. The exporter usually also presents a bill of exchange or draft, a document representing the bank's payment obligation.
Examination of documents/discrepancy/waiver. The bank examines the documents carefully to ensure that they comply with the terms of the credit. If the documents do not comply, the bank cites a documentary "discrepancy", notifies the exporter and refuses to pay the credit. The exporter may then either correct the documents or obtain a waiver of the discrepancy from the importer.
International documentary credit practice is governed by a set of rules produced by ICC, the latest version of which is know as UCO 6000 Uniform Customs and Practice for Documentary Credits. See letter of credit. Model of Letter of Credit.
UCP 600 in International Trade
Meaning of Ucp 600, according to the Dictionary of International Trade (Global Negotiator): The Uniform Customs and Practice for Documentary Credits (UCODC) is a ICC Publication that includes a set of rules which govern international documentary credit practice. UCP 600 are generally considered contractually incorporated into the documentary credit transaction by virtue of a mention in the credit application form. The UCP 600 may also have additional force as a trade custom, and in some countries UCP 600 are even recognized as having legal effect generally.
In other countries, the UCP 600 is complementary to national law and jurisprudence on documentary credits.
Hierarchical Display of Documentary credit
Finance > Financial institutions and credit > Credit
Finance > Monetary relations > International finance > International payment
Documentary credit
Concept of Documentary credit
See the dictionary definition of Documentary credit.
Characteristics of Documentary credit
Resources
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Translation of Documentary credit
Spanish: Crédito documentario
French: Crédit documentaire
German: Dokumenten-Akkreditiv
Italian: Credito documentario
Portuguese: Crédito documentário
Polish: Akredytywa dokumentowa
Thesaurus of Documentary credit
Finance > Financial institutions and credit > Credit > Documentary credit
Finance > Monetary relations > International finance > International payment > Documentary credit
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