Whenever a third currency is chosen, it is generally the American dollar (for example for
petroleum imports) that is preferred.
The mode of settlement is often chosen by the exporter. In international trade, bank
transfer as well as credit instruments serve as means of settlement. Included in this
category are drafts, letter of credit. Cheques, International bank transfer, etc. The choice
amongst these different means depends on their rapidity of conversion, cost and exchange
regulations of a given country.
- Documentary Credit (Letter of Credit)
Documentary credits perform a vital role in international trade. This represents a written
guarantee by a bank on behalf of an importer to pay a certain sum to the bank of the
exporter against certain document(s) (bill of lading, insurance, etc.) stipulated at the time
of opening of the credit and a proof that the goods have been dispatched.
The advantage of documentary credit to an exporter is that a trade credit is substituted by
a bank credit and payment is thus secured.
The advantage to an importer is that he may derive benefit accruing from favorable
conditions of payment since the documentary credit confirms solvability. He is to pay
only when documents correspond exactly to the conditions of documentary credit.
- Different Types of Documentary Credit
a) Documentary credits may be revocable or irrevocable. In practice, documentary
credits used are irrevocable, because they correspond to a guarantee that can not
be annulled or modified without the consent of all parties concerned. On the
contrary, revocable credits may be modified or annulled at any moment without
accord of the beneficiary (or the exporter). It is for this reason that they are used
less often.
b) Documentary credits may either be confirmed or non-confirmed. A confirmed
documentary credit constitutes an additional guarantee for the exporter. The
exporter asks another bank to confirm the credit. The confirming bank, then takes
over all the engagements of the initiating bank. A non-confirmed documentary
credit is the obligation only of the issuing bank. Generally, an exporter would
desire a foreign bank’s documentary credit confirmed by a domestic bank when
the exporter has doubt about the foreign bank’s ability to pay.That confirmed irrevocable documentary credit eliminates trade risk (relating to the
importer) and the risk of non-transferability (relating to the foreign bank).
There exist other types of documentary credits as well: