The context of international commerce, the sums involved
and the distances separating business partners, have made the creation of a
specific instrument of payment necessary. It is entitled a « Documentary
letter of credit". While at the same time reconciling the interests of the vendor
- i.e. that he should get paid - and those of the buyer - i.e. that he should
receive the merchandise that he has ordered in the quantities, within the time
frame, and of the quality that has been contracted for - it provides for the
security of payment that the vendor is after.
The
difficulty lies in the fact that the positions of the purchaser and the vendor
are diametrically opposed. The former's ideal way of looking at things is,
" when I receive the goods, I pay ", whereas the latter
prefers the view " when you pay, I deliver the goods ". The documentary letter
of credit is one way of satisfying both these demands!
The
documentary letter of credit represents a bank's commitment to pay a specific
sum to the supplier of merchandise or of a service, against receipt of a
specified list of documents within an agreed time frame, which prove that the
merchandise has been expedited, or that services or benefits promised have been
made good. The purpose of these documents is to provide a tangible basis of
credibility for the proper execution of the exporter's obligations. The bank
will then transfer these documents to the purchaser against reimbursement, so
that he can take possession of the goods.
In
this way the purchaser does not make any payment to the vendor until such a
time as he has received the documents which allow him to take possession of the
merchandise, and the vendor receives payment as soon as he has expedited it,
assuming that is, that the commitments the documents refer to have in fact been
honoured.
The system of using documentary letters of credit
thus satisfies two requirements :