What You’ll Learn

After completing this lesson, you will be able to:

  • Explain the purpose of an Export Letter of Credit (Export LC).
  • Describe the Export LC advising process.
  • Verify that the processing of an Export Letter of Credit complies with the bank’s policies and procedures.
  • Identify and assess potential risks associated with Export Letters of Credit.
  • Explain the confirmation process and the recovery of transaction revenue.
  • Authorise the advising process once all procedural requirements have been satisfied.

Overview

An Export Letter of Credit provides exporters with greater assurance that payment will be received after the agreed documentary conditions have been fulfilled. Before an Export Letter of Credit can be advised to the beneficiary, the bank must verify its authenticity, ensure compliance with international banking standards and evaluate any risks associated with the transaction.

The advising process protects both the bank and its customers by ensuring that all documentation, authorisations and financial obligations comply with the Uniform Customs and Practice for Documentary Credits (UCP), internal banking procedures and recognised international banking practices.

This lesson introduces the Export Letter of Credit advising process and explains the procedures required before an Export Letter of Credit can be authorised and released.

1. Understanding an Export Letter of Credit

An Export Letter of Credit is an irrevocable undertaking issued by a bank on behalf of a buyer, guaranteeing payment to the exporter (beneficiary) provided that the exporter presents documents that comply fully with the terms and conditions of the Letter of Credit.

The main participants are:

  • Applicant – the buyer requesting the Letter of Credit.
  • Beneficiary – the exporter who will receive payment.
  • Issuing Bank – the buyer’s bank issuing the Letter of Credit.
  • Advising Bank – the bank that authenticates and advises the Letter of Credit to the beneficiary.

Letters of Credit reduce payment risk and increase confidence in international trade transactions.

2. Types of Export Letters of Credit

Several types of Letters of Credit may be encountered during international trade.

Common examples include:

  • Irrevocable Letter of Credit.
  • Confirmed Letter of Credit.
  • Transferable Letter of Credit.
  • Back-to-Back Letter of Credit.
  • Red Clause Letter of Credit.
  • Revolving Letter of Credit.
  • Deferred (Usance) Letter of Credit.
  • At Sight Letter of Credit.

Each type provides different payment and risk management arrangements depending on the needs of the trading parties.

Illustration: Export Letter of Credit Advising Process


Receive Export LC
        │
        ▼
Verify Authenticity
        │
        ▼
Input LC Details
        │
        ▼
Verify LC Details
        │
        ▼
Risk Assessment
        │
        ▼
Advise Beneficiary
        │
        ▼
Authorise & Release

Figure 1: The main stages of the Export Letter of Credit advising process.

3. Receive and Verify the Export Letter of Credit

The advising process begins when the bank receives an Export Letter of Credit.

The Letter of Credit may be received:

  • Through the SWIFT network.
  • By authenticated mail.
  • Through another approved banking channel.

Before processing begins, the bank should:

  • Verify authenticity.
  • Confirm the issuing bank.
  • Confirm that the message has not been altered.
  • Validate the Letter of Credit details.

Authenticity verification is essential before the Letter of Credit is advised to the beneficiary.

4. Input and Verify Letter of Credit Details

Once authenticity has been confirmed, the Trade Finance Executive captures or verifies the Export Letter of Credit details.

Information reviewed includes:

  • Product details.
  • Contract reference.
  • Branch information.
  • Application details.
  • Operation code.
  • Confirmation requirements.
  • Customer confirmation where applicable.

Any additional information required for processing should be captured before the transaction proceeds to authorisation.

5. Compliance with Banking Procedures

The advising process should comply with:

  • Bank policies.
  • Standard operating procedures.
  • International banking practice.
  • Letter of Credit terms and conditions.
  • Applicable documentary credit rules.

The bank should confirm that:

  • Existing data is accurate.
  • Processing complies with internal procedures.
  • International practice has been followed.
  • Charges and liabilities have been recorded correctly.

Only compliant transactions should proceed to authorisation.  

6. Identifying Risk

Before advising the Export Letter of Credit, the bank evaluates potential risks associated with the transaction.

Common risks include:

Fraud Risk

  • Forged documents.
  • Fictitious goods.
  • Fraudulent payment claims.

Sovereign and Regulatory Risk

  • Government intervention.
  • Exchange control restrictions.
  • Regulatory changes.

Legal Risk

  • Contract disputes.
  • Legal enforcement issues.
  • Jurisdictional differences.

Force Majeure

  • Natural disasters.
  • Armed conflict.
  • Events preventing contractual performance.

Applicant Risks

  • Non-delivery.
  • Short shipment.
  • Inferior quality.
  • Late shipment.
  • Foreign exchange risk.

Bank Risks

  • Insolvency of the applicant.
  • Failure of the issuing bank.
  • Failure of the reimbursing bank.

Beneficiary Risks

  • Failure to comply with Letter of Credit conditions.
  • Delayed payment.

Identifying these risks enables the bank to protect both itself and its customers during international trade transactions.

7. Confirmation Arrangements

Some Export Letters of Credit require confirmation by a second bank.

Confirmation provides the beneficiary with additional payment security if the issuing bank cannot fulfil its obligations.

Before confirming a Letter of Credit, the bank should verify:

  • Confirmation requirements.
  • Existing amendments.
  • Applicable banking policies.
  • Risk exposure.

Confirmation should only be provided after all banking requirements have been satisfied.

8. Revenue Recovery and Authorisation

Before completing the advising process, the bank should verify that:

  • Applicable charges have been calculated.
  • Revenue has been recovered.
  • Liabilities have been recorded.
  • Exposure limits have been updated.
  • Procedural requirements have been satisfied.

Once these checks have been completed successfully, the advising process may be authorised and the Export Letter of Credit released.  

Practical Example

A South African exporter receives notification that an overseas buyer has arranged an Export Letter of Credit.

The Trade Finance Executive:

  • Verifies the authenticity of the Letter of Credit received through SWIFT.
  • Reviews the issuing bank’s details.
  • Captures additional contract information.
  • Evaluates potential fraud and regulatory risks.
  • Confirms the beneficiary details.
  • Verifies charges and liabilities.
  • Advises the Letter of Credit after all procedural requirements have been satisfied.

The exporter can now proceed with confidence, knowing that payment will be made once the documentary requirements have been fulfilled.

Key Terms

Term Meaning
Export Letter of Credit A bank’s irrevocable undertaking to pay an exporter once compliant documents have been presented.
Advising Bank The bank that authenticates and advises the Letter of Credit to the beneficiary.
Beneficiary The exporter who will receive payment under the Letter of Credit.
Issuing Bank The buyer’s bank that issues the Letter of Credit.
Confirmation An additional undertaking by another bank to honour the Letter of Credit.

Key Notes

  • Export Letters of Credit reduce payment risk in international trade.
  • Every Export Letter of Credit should be authenticated before it is advised.
  • The advising process must comply with bank policies and internationally accepted banking practices.
  • Banks should evaluate fraud, legal, sovereign and operational risks before authorisation.
  • Confirmation provides additional security to the beneficiary where required.
  • Charges, liabilities and revenue should be verified before authorising the Export Letter of Credit.
  • The Letter of Credit should only be advised after all procedural requirements have been satisfied.
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