Resource Center

An undertaking by the issuing Bank on behalf of an importer (the applicant), that payment will be made for goods supplied by the exporter (the beneficiary), provided the exporter complies with all the terms and conditions stipulated by the credit.
It is one of the most reliable methods of financing trade where the bank substitutes its credit worthiness for that of its customers.
A letter of credit must be irrevocable, can be confirmed or unconfirmed via deferred payment or sight and constitutes a definite undertaking of the issuing bank to make payment on complying documents and thus:
  • The following documents must be in place before payment can be made against a letter of credit:
  • The life span of a letter of credit cannot be longer than the life –span of the under lying form M
  • A letter of credit must be supported by an approved Form M.
  • Letters of Credit are issued subject to local regulations as dictated by Central Bank of Nigeria (CBN) and universally accepted set of rules thus:
  • Means that it is payable against documents only not on the actual merchandise delivered or service involved.
  • Ensure payment, provided that the terms and conditions of the letter of credit have been fulfilled.
  • Provide a form of security for the parties involved
  • Are arrangements by banks or other issuing entity for settling international commercial transactions
  • Final Invoice / attested Combined Certificate of Value and Origin (CCVO)
  • Attested Manufacturer’s certificate
  • Attested Shipped on Board Bill of Lading / Airway Bills / Way Bill 
  • Attested packing list.
The universally accepted set of rules are written and administered by the international Chamber of Commerce and are known as “The Uniform Customs and Practice for Documentary Credits (UCP)”.  These rules are periodically updated to keep up with evolving technology and trade practices.  The current set of rules in use is UCP 600.
The following are the parties to LC:
  • Applicant – the party on whose request the credit is issued
  • Beneficiary – the party in whose favour a credit is issued (Payee)
  • Issuing Bank – the bank that open letter of credit at the request of an applicant or on its own behalf
  • Advising Bank – the bank that informs the beneficiary that another bank has issued a letter of credit in its favour.
  • Confirming Bank – a nominated bank which at the request of the issuing bank adds its own undertaking to that of the issuing bank, thereby assuming liability for payment, acceptance or negotiation.
  • Negotiating Bank – A bank which elects to purchase conforming documents from the beneficiary.
  • Reimbursing Bank – A bank nominated by the issuing bank to honor reimbursement claims.
It should be noted that a bank may play several roles in a single transaction, but in most cases, at least two banks are involved; one in the buyer’s country and another in the seller’s country.
The following are the sub-types of LC:
  • Red Clause LC – A LC that authorizes the advising bank to provide the exporter a pre-shipment fianc√© before presentation of shipping documents.  Maximum of 15% of FOB (Free on Board) is allowed in Nigeria and its payable on presentation of Bank guarantee. 
  • Back to Back LC – These are two independent LC that relate to the same merchandise.  The first LC is used as collateral for the second LC to another beneficiary.
  • Revolving LC – This is a LC where the amount is renewed or re-instated after each shipment without specific amendment on the credit.  It is usually used between the buyer and the seller where goods have to be shipped on continuous basis.  
  • Transferable LC – This is a LC that permits the beneficiary to transfer all or some of the rights and obligations to a second beneficiary or beneficiaries but the transferees cannot subsequently transfer their credit. 
  • Standby LC – This is a LC established as a security for facilities granted at another bank or branch, usually a subsidiary. It is a clean contingent commitment drawn on the issuing bank only when the applicant fails to honor obligation on a contract.