letter of credit

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Letter of credit (LOC)

A form of guarantee of payment issued by a bank on behalf of a borrower that assures the payment of interest and repayment of principal on bond issues.

Letter of Credit

A statement issued by a bank to the buyer of a good stating that the seller will receive payment on time and in the correct amount. If the buyer fails to make payment, the bank will do so on his/her behalf. The buyer presents a letter of credit to the seller, which eliminates the risk that the seller will not be paid. Letters of credit have become very common in international commerce, as distance and other factors make it difficult for sellers to establish the creditworthiness of every buyer.

letter of credit

A promise of payment in the event that certain requirements are met. A letter of credit essentially substitutes the credit of a third party (usually a large bank) for that of a borrower. In the case of municipal bonds, an LOC generally permits a trustee to draw six months' interest and sufficient funds to retire outstanding bonds at par in the event of default.

letter of credit

a document used to effect payment for internationally traded goods, usually as part of a contract for the sale of goods which ensures that the supplier receives prompt and guaranteed payment while the purchaser obtains a short-term CREDIT line. In brief, under this facility, a purchaser in country A of goods supplied by a firm in country B can arrange a letter of credit from his bank (the credit issuing bank) authorizing it to make payment to the supplier either through a branch of the bank in country B or, more usually, through a bank (the negotiating bank) holding the supplier's account. Under a contract of sale of goods this will be done on the presentation to the negotiating bank of documents stipulated in the letter of credit, such as the bill of lading, insurance policy, certificate of origin, etc. In the case of certain letters of credit relating to particular transactions and customers located in heavily indebted countries, a secondary market has developed to offset political as well as commercial risk. See EXPORTING.

letter of credit (LOC)

(Pronounce each letter of the abbreviation;it is not pronounced as a word.) An instrument issued by a bank or other financial institution (issuer) agreeing that it will pay money to another (beneficiary), on behalf of the bank's customer (account party), upon the happening of certain named events.There is usually an issuance fee of 1 to 2 percent of the face amount of the LOC.Modern banking regulations require the same underwriting as for a commercial loan.The LOC will set out the exact prerequisites to be met before the bank will issue payment. These usually include a particular time and place to present the original letter of credit and the exact documents that must accompany the letter.Some states still follow the old “strict compliance”rule holding that any deviation from the instructions, no matter how minor, will justify the bank in refusing to pay. Others follow a “substantial compliance” rule, so that minor typographical or syntax errors in the presenting documents will not justify nonpayment. See also the two types of letters of credit: documentary letter of credit and standby letter of credit.

References in periodicals archive ?
This little primer is a good read for any commercial lawyer desiring to shepherd a documentary credit transaction from inception to success.
A detailed examination of the fundamental concepts of the documentary credit regime including:
O'Brien said that the cornerstone of success in documentary credit operations is documentary compliance, which means that trade professionals must be fully versed in the application of international standards.
During debates following the presentation of report on Algeria finances presented by the Governor of the Central Bank, members have put particular emphasis on issues related to the unofficial trading of foreign currencies, the investment and documentary credit.
Fee and commission income from the documentary credit for the second quarter of 2009, amounting to $907,000, was 62 per cent more than the $558,000 earned in the first quarter of 2009.
It is important to understand if the presentation under a Documentary Credit is a fraudulent one aimed to abuse the banking system to siphon off money against a cargo which is non-existent.
A letter of credit is a form of documentary credit whereby a bank guarantees payment on behalf of a buyer, subject to the condition that the beneficiary (exporter) submits documents conforming to the terms of the letter of credit.
Arab Petroleum Investments Corporation (APICORP), which is the multilateral development bank owned by the 10-member nations of the Organization of Arab Petroleum Exporting Countries (OAPEC), has signed a documentary credit insurance policy (DCIP) with the Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC) that is a member of the Islamic Development Bank (IDB) Group.
Sberbank CIB s key business areas are corporate loans (including trade finance), documentary credit operations, investment banking services, trading in securities, proprietary investments.
The credit facilities are comprised of 38 per cent Murabaha financing and 62 per cent multi bonds and documentary credit.
As part of the mid-year change, the government now requires a mandatory use by importers of documentary credit or letters of credit.