A documentary credit is a written undertaking issued by a bank (the issuing bank) on behalf of a buyer (the applicant) to pay a specified sum to a seller (the beneficiary) upon presentation of documents that strictly comply with the terms and conditions stipulated in the credit. Also known as a letter of credit (L/C), this payment mechanism serves as a crucial risk mitigation tool in international trade by substituting the creditworthiness of a bank for that of the buyer. Payment under a documentary credit is conditional not on the physical delivery of goods or services, but on the presentation of conforming documents that evidence the transaction, such as bills of lading, commercial invoices, insurance certificates, and inspection certificates. This documentary nature creates a fundamental principle: banks deal in documents, not goods, with the issuing bank’s obligation to pay depending solely on whether the presented documents appear on their face to comply with the credit’s terms.
Key Parties Involved
- Applicant (Buyer/Importer)
- Beneficiary (Seller/Exporter)
- Issuing Bank
- Advising Bank
- Confirming Bank
- Nominated Bank
