Background
The documentary letter of credit (also known as a documentary credit) has been used for more than 150 years to facilitate trade by providing payment against presentation of documents relating to the transaction as specified in the credit. They are used widely for international trade, covering transactions valued from as little as a few hundred pounds to many millions. They are used primarily at the request of the commercial parties for effecting payment; they may also be used because some importing countries require letters of credit as part of their exchange control regulations.
SITPRO's last survey into the use of letters of credit ('Exporters' Problems with Commercial Letters of Credit') was carried out between 1989-1991. This showed that beneficiaries found 48% of credits contained defects/errors, which would have made it difficult or impossible to secure settlement under the credit. This followed research carried out in a previous SITPRO survey, in 1983/1984, which showed that only about one presentation of documents in every two actually secured payment first time. These findings led to publicity about the costs and dangers of failure to present compliant documents with work being carried out by SITPRO and other organisations to help exporters improve their performance in the use of letters of credit.
Since these surveys were produced a new edition of the ICC's Uniform Customs and Practices (the ICC's rules governing the use of letters of credit)has been introduced which, it was hoped, would help to reduce the high incidence of rejection of first presentation of documents. However, despite this, rejection rates of 50%-60% are still being reported. Therefore, SITPRO decided that further research should be carried out between 2001-2002 to examine the most common discrepancies found in rejected letter of credit presentations and also to estimate the cost of non-compliant presentations to UK business.
This report intends to consolidate the information gathered so far and look at ways in which further work can be carried out to help UK exporters in letter of credit operations. It is aimed primarily at exporters who deal with letters of credit, however, the information will also be of interest to bankers, freight forwarders and those who provide training in the use of letters of credit.
Research
Research was carried out on behalf of SITPRO by Major Issue, who used a variety of data sources for its findings, including National Statistics for the United Kingdom, the Ninth Survey of International Services Provided to Exporters commissioned by The Institute of Export and interviews with banks, exporters and freight forwarders.
Both Major Issue and SITPRO would like to thank all the banks and companies who have supported the research.
The Review
The research is presented together with information on the whole cycle of a letter of credit within the international trade transaction. The report covers four main areas:
- an explanation of letters of credit and their use;
- global payment patterns including the use of letters of credit;
- the results of the research into rejection of documents including the most common discrepant documents and the cost of 'non-compliance' to UK plc; and
- ways to reduce the cost of non-compliance and areas of demonstrated best practice.
- Contents
- Executive Summary
- Section 1 - Introduction - Return to top of page
- Section 2 - Letters of Credit - An Explanation
- Section 3 - Global Payment Patterns
- Section 4 - The Survey
- Section 5 - Demonstrated Best Practice
- Section 6 - Conclusions
- Glossary of Commonly Used Terms in Documentary Credits
- Appendix 1 - List of Discrepancies and Frequency
- Appendix 2 - Organisations Providing Letter of Credit Training
- Appendix 3 - Checklist for Compiling Documents Under a Letter of Credit
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