Trade Finance-
(a) Letter of credit:A letter of credit is a trade finance tool designed to safeguard and protect the interest buyers and sellers in international Trade.
A Letter of Credit is a very important method of payment in international trade. It is specially important in trade where the buyer and seller may not know each other personally and where the buyer and seller are based in different countries having different trading customs.
A Buyer approaches Financial Institution with application for issue of letter of credit. A Due Diligence Process is Conducted once the application is received. The FI carries Checks regarding the application including Checking guidelines regarding AML and KYC among others. After reviewing each application and taking into consideration the current market and other factors each application is decided on its merit.
A Stand by Letter of Credit works as a safety mechanism to hedge out risks involved International Trade. A SBLC aims to protect from the risk of buyer not being able to fulfil its payment obligations or the seller not being able to deliver the goods.
A standby letter of credit helps facilitate international trade specially where the buyer and seller do not know each other and have different laws and regulations. A standby letter of credit is issued on request of client. A SBLC guarantees payment for goods or services as specified by an agreement.
C) Guarantee:
A guarantee From financial institution is an assurance to cover the payment based upon certain terms and conditions in case of default or non-payment from the buyer/FI’s Client.
Types of Guarantees:
- -Letter of Guarantee
- -Standby Letter of Guarantee
- -Tender Guarantee
- -Performance Guarantee