The import and export of things take place between different countries. A letter of credit is a mean of making payment for import of goods.
Parties Involved in Letter of Credit
• Opener or Buyer
• Beneficiary or Seller
• Opening or Issuing bank
• Intermediary or Payment bank
Opener or Buyer
The person who purchases the goods from other country and at whose request the letter of credit is opened is called the opener or the buyer. In our project the importer of jewelry and the restaurants are the parties that will request for opening of L.C
Beneficiary or Seller
It is the person or the parties in whose favor the letter of credit is opened. In this case this letter will favor both the parties. It ensures exporters about the payment and same time it facilitates importers about their product and services and ensures about the terms and condition decided by the exporter.
Opening or Issuing Bank
It is the bank which opens letter of credit.
Intermediary or Paying Bank
The bank which makes the payment to the exporters after receiving letter of credit on behalf of buyer is called paying bank, confirming, negotiating or intermediary bank.
Opening of Letter of Credit
International trade is financed through letter of credit, which is quite simple. Following is the procedure for issuing a letter of credit. The procedure for opening L.C consists of eight steps;
1. Sales contract
The importer contracts the exporter for the purchase of goods. He settles term and condition and the mode of payment. Then the importer informs the banker to open letter of credit.
2. Performa Invoice Import License
The banker asks the applicant to provide import license, Performa invoice and indent of goods to be imported. After checking the documents the banker asks the importer to file application on a prescribed form.
3. Application Form
Application form is usually known as “application and agreement for irrevocable letter of credit” is filled up by the banker and signed by the importer. All terms and condition of sale agreement are documented in it.
4. Completion and Security of the Form
The banker as per information provided by the applicant fills the letter of credit form. The banker completes the form and scrutinizes the document.
5. Opening of L.C
After complete processing of the application if the banker finds that every document is correct, it opens the letter of credit in favor of exporter on behalf of importer.
6. Information to the Advising Bank
The issuing bank informs the advising bank that the letter of credit has been issued. Therefore three copies are made one is kept by the issuing bank and the other two copies are sent to the advising bank. The advising bank gives one copy to exporter.
7. Information to the Seller
Advising bank informs the seller or the exporter that the letter of credit has been issued. The seller thus sends the goods to the buyers and providing shipping document to advising bank. The bank checks the document and sends it the issuing bank.
8. Margin of Letter of Credit
State Bank of Pakistan decides the percentage of amount to be paid to issuing bank by the importer. This interest is known as margin. The amount is deducted from the total payment made by the importer.