Procedure and Document Require to get Letter of Credit from Bank in UAE

28Mar, 22

Procedure and Document Require to get Letter of Credit from Bank in UAE

In International trade and business transactions, a Letter of Credit (LC) is a crucial financial instrument providing security and assurance to buyers and sellers. For businesses operating in the dynamic market of Dubai, UAE, understanding the procedures and documents required for LC opening is essential for successful and risk-free transactions. In this comprehensive guide, we will delve into the intricacies of the LC process in the UAE, exploring the necessary documentation, step-by-step procedures, and associated charges.

An Outlook on Letter of Credit

Letters of Credit, also known as "documentary credit", are written statements issued by banks on behalf of their customers. Furthermore, the seller is assured that payment will be made upon submitting a document as specified in the printed Letter of Credit. It also ensures that if the buyer cannot pay according to the written contract, the Bank will be responsible for covering the payment requirements on the buyer's behalf.

A letter of credit also protects the buyer's interests by ensuring that the payment will be released once the items have been delivered to the buyer's port as agreed. Indeed, Letters of Credit play an essential role in international or domestic trade by establishing a trust bridge between buyers and sellers.

Types of Letter of Credit

The below infographic shows the major types of Letter of Credit in the UAE:

         

Letter of Credit Procedure in UAE

The following is the Procedure for obtaining Letter of Credit in the UAE:

Identifying Parties Involved:

Before diving into the procedural aspects, it's essential to know the parties involved in an LC transaction:

  • Applicant: The party initiating the LC (usually the buyer/importer).

  • Beneficiary: The party receiving payment (usually the seller/exporter).

  • Issuing Bank: The Bank that opens the LC on behalf of the applicant.

  • Advising Bank: The Bank that advises the LC to the beneficiary, typically located in the beneficiary's country.

  • Confirming Bank (optional): In case of a confirmed LC, this Bank guarantees payment to the beneficiary.

Agreement and Application:

The Letter of Credit process begins with the applicant and beneficiary agreeing to use an LC as payment. The applicant then submits an LC application to their chosen Bank (the issuing Bank). The Letter of Credit application should include:

  • Proforma invoice or contract between the parties

  • Details of LC type: Revocable or Irrevocable (typically, the latter is used for security)

  • The expiration date of the LC

  • LC amount

  • Shipping and delivery terms

  • Incoterms (international trade terms)

Issuing the Letter of Credit:

Upon receipt of the application and required documents, the issuing Bank opens the LC. This involves carefully reviewing the application to ensure it complies with international banking regulations and local laws.

Documents Required for LC Opening in the UAE

For a seamless LC opening process, the following documents are typically required:

  1. LC Application: Duly filled and signed by the applicant.

  2. Proforma Invoice or Sales Contract: Providing details of the transaction.

  3. Bill of Lading or Airway Bill: Proof of shipment.

  4. Commercial Invoice: Detailing the products, quantities, prices, and payment terms.

  5. Certificate of Origin: To confirm the origin of goods.

  6. Packing List: Enumerating the contents of each package.

  7. Insurance Certificate: Providing coverage for the goods in transit.

  8. LC Agreement: Specifying terms and conditions of the LC.

  9. Incoterms 2020: Defining responsibilities of buyer and seller.

  10. Beneficiary's Bank Details: Including SWIFT code and account information.

  11. Any Other Documents as Agreed: Specific requirements may vary depending on the transaction.

Advising the Letter of Credit:

The issuing Bank sends the LC to the advising bank in the beneficiary's country. The advising bank notifies the beneficiary of the LC's existence and authenticity.

Shipment and Presentation:

The beneficiary ships the goods as per the agreed terms and prepares the required documents, which must conform to the LC's terms and conditions.

How Does a Letter of Credit Work in the UAE?

The Letter of Credit acts as a secure intermediary, ensuring payment occurs once the beneficiary fulfils the LC terms. Here's a simplified step-by-step breakdown:

  • The seller creates the necessary paperwork and ships the products.

  • The seller gives the advising bank the papers.

  • The advising bank compares the records to the LC terms to verify them.

  • The advising bank sends the documents to the issuing Bank if they are compliant.

  • When everything is in order, the issuing Bank examines the documentation and pays the beneficiary.

  • The issuing Bank retains the shipping documents.

  • The buyer collects the shipping documents from the issuing Bank and uses them to claim the goods from the carrier.

Letter of Credit vs. Bank Guarantee

A commercial instrument is a bank guarantee. It's a guarantee from the Bank for a non-performing asset. The application, the recipient, and the banker are all involved in the bank guarantee process.

A Letter of Credit, on the other hand, is a letter of commitment. It guarantees a performing activity offered by a bank or other financial institution. It ensures that the importer will make payment, subject to the LC's terms and conditions. The letter of credit involves four parties: the exporter, the importer, the issuing Bank, and the advising bank (confirming Bank).

LC Charges in the UAE

Opening an LC in the UAE involves various charges, including:

  1. LC Opening Commission: A fee the issuing Bank charges for processing the LC application.

  2. Advising Bank's Fee: The Bank advises the LC charges for its services.

  3. Confirmation Fee (if applicable): If a third bank confirms the LC, they charge a fee for providing the confirmation.

  4. Amendment Fees: In case of any changes to the LC terms.

  5. Document Handling Fees: Charged by banks for processing and examining documents.

  6. Interest Charges: If the LC involves deferred payment, interest may apply.

Importance of Letter of Credit

UAE has business dealings worldwide, so letters of credit are more vital in trade. A documentary credit or letter of credit transaction necessitates trust in banks. The buyer and the seller should have faith in the Bank's ability to meet its payment obligations. A letter of credit permits confidence in both parties involved in the transaction.

Things to consider before Acquiring a Letter of Credit

These are the points you should consider before acquiring a Letter of Credit

  • Exporters should remember to present papers precisely following the terms and conditions of the letter of credit. Non-compliance with the LC might result in non-payment, delays, and disputes. The issuing Bank should have a good reputation and be solid and stable enough to honor the LC when needed.

  •  Another element that must be resolved before obtaining an LC is the cost-bearing obligation. The cost of recovery will rise if costs are allocated to the exporter. A Letter of Credit is frequently more expensive than other forms of export payment.

Conclusion

Understanding the procedures and documents required for obtaining a Letter of Credit in the UAE is crucial for businesses engaged in international trade. The LC process provides security and reliability in transactions, making it a preferred choice for importers and exporters. By adhering to the guidelines outlined in this comprehensive guide, businesses in Dubai can confidently and easily navigate the complexities of LC transactions.

If you require more details regarding a letter of credit, contact our experts at Dhanguard. Feel free to contact us. We provide the best information among all.

Dhanguard is the Best Banking Consultant and Business Setup consultant in Dubai and UAE. Dhanguard provides financial services like Business Accounts, Business Loans, Home Loans and investment services in Dubai and UAE.