Finance of International Trade
Aydin Bankasi. If they are in order, the bank will pay the invoice amount,
courier the documents to Mid Orient Bank, London and claim reimburse-
ment from Bank of America, New York. Mid Orient will check the
documents and if there are no discrepancies, release them to Universal
Components.
Confirmation of a documentary credit
The beneficiary of a documentary credit may be reluctant to accept the risk
that a bank in a foreign country will honour its engagement, particularly if
the credit covers his first transaction with that country. He will be aware
that in countries with economic problems and which are short of foreign
exchange, the central bank may bar or delay payment under an import
credit. The solution for the beneficiary is to ask for the credit to be
confirmed by a bank in his own country. By adding its confirmation, the
confirming bank undertakes that, provided the stipulated documents are
presented to it or to any other nominated bank and that the terms and
conditions of the credit have been complied with, it will:
1 Pay at sight for a sight credit.
2 Pay at maturity for a deferred payment credit.
3 Accept drafts under a usance credit and pay them at maturity.
4 Pay at maturity drafts drawn on another drawee bank but not paid by
that bank at maturity.
5 Accept and pay at maturity drafts drawn on it by the beneficiary of a
credit in replacement of drafts drawn on another bank but not accepted
by it.
6 Negotiate drafts drawn by the beneficiary.
All the above undertakings are executed by the confirming bank without
recourse to the beneficiary (Article 9b).
Article 9b(iiib) can be dangerous for a confirming bank as it obliges the
bank to honour drafts drawn on it by the beneficiary if drafts drawn on
another drawee bank stipulated in the credit are not accepted or accepted
and not paid at maturity by that bank. Alternatively it may be obliged to
honour drafts accepted by another drawee bank but not paid at maturity.
52
The irrevocable documentary credit
While the intention is right and demonstrates the responsibilities of
confirmation, the confirming bank in its original undertaking to the
beneficiary should state that it will honour drafts provided that they are
presented with the relative documents in order within the validity of the
credit. It can hardly be right for the confirming bank to be obliged to pay
for documents which it has not had the opportunity to examine.
Furthermore, if the first drawee bank refused to accept drafts drawn on it,
by the time new drafts had been prepared and presented to the confirming
bank the presentation time for the transport documents (Article 43) will
probably have expired.
These are considerable responsibilities undertaken by the bank, which
indicate the seriousness of confirmation. Banks do not lightly add their
confirmation to credits and will want to ensure that they limit to a
minimum the possibility of loss. So far as the beneficiary is concerned the
confirming bank is the end of the line; once it has paid, accepted a bill of
exchange or given an undertaking to make a future payment, it has no
recourse against the beneficiary. It follows that a bank considering a
request to add its confirmation to a foreign banks credit will pay strict
attention to a number of its principal features.
1 Relationship, if any, with the issuing bank.
2 Term: sight, usance or deferred payment.
3 Expiry date.
4 Method of despatch.
5 Title to the goods.
6 Reimbursement clause.
7 Pre-shipment finance required.
8 Responsibility for its charges.
Finally, the bank will consider whether the beneficiary, if not already a
customer, is worth approaching in order to develop a relationship;
confirming a credit, particularly at the beneficiarys request may provide
the necessary incentive.
The reader will appreciate the significant differences between a sight credit
and one payable at a future date. A bank confirming a sight credit will
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