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Documentary credit is a term used in International Trade Finance and refers to a Letter of Credit which is documentary in nature. Documentary credit is letter of credit issued by the bank of importer upon the request of importer which is a promise for the payment by the bank to the exporter on behalf of the importer while goods are in transit. This payment is made on the presentation of certain documents to the bank thus called documentary credit.
Dear Mostafa,
Documentary credit, which is also called as "Credit ", "Letter of Credit" or " L/C", is in fact the most major payments tool in Trade Finance business now a days, it is defined according to Uniform Rules and Practices, issued by the International Chamber of Commerce publication, revision2007 ( called UCP600 ) , became in force since July1st.,2007 as mentioned in article (2) as follows ;
QUOTE:
Credit means any arrangement, however named or described, that is irrevocable and thereby constitute a definite undertaking of the issuing bank to honour a complying presentation.
honour means:
a- to pay at sight, if the credit is available by sight payment.
b- to incur a deferred payment undertaking and pay at maturity if the credit is available by deferred payment.
c- to accept bill of exchange , (draft) drawn by the beneficiary and pay at maturity, if available by acceptance.
UNQUOTE:
- Also there are o lot of Documentary Credits types which can classified in accordance with its terms and conditions :
1- According to the " confirmation ":
- "Confirmed" or "Unconfirmed", Documentary Credits.
2- According to "Payment Terms":
- "Sight" / "Payment" / " Presentation of Documents",
- or "Time", which is can also be divided into two types, "Deferred Payment" or " Acceptance"
3- Special Documentary Credits Transactions:
for example: - Local Documentary Credit.
- Advance Payment Documentary Credit.
- Standby L/C.
- Transferable Documentary Credit.
- Revolving Documentary Credit.
From the accounting prospect, since "Documentary Credit" is an undertaking for payment, it is usually appeared off-balance sheet till the commitment is becoming in force.
Hope that the above is clarifying in brief, exactly your inquiry and satisfying your needs.
Best regards.
Dr. Ashraf E. Mahmoud.
PhD. International Business Management.
good answer Mr yasser
thank you
