Stories by Omodele Adigun
The Central Bank of Nigeria (CBN) recently gave its nod for companies to open Letters of Credit (LCs) pledging to, within the next few months, fund the 60-day forward sales and request from the agricultural, aviation, machinery and raw materials sectors, thus guaranteeing letters of credit (LCs) for importers to ship in required goods.
According to the Acting Director, Corporate Communications Department, Mr. Isaac Okorafor, the move by the CBN to settle the 60-day forward sales amounting to over $300 million would further ease pressure on the Naira and improve market liquidity.
The question on the lips of most uninformed members of the public is, what is the meaning of Letters of Credit? What are its benefits?
A letter of credit, in Nigerian context, according to expert, “is the assurance a foreign seller receives from a Nigerian bank that it will be paid for the goods it has made arrangements to have delivered to a Nigerian buyer or a buyer based in Nigeria once it is able to provide genuine evidence for such delivery.”
Procedures
In her online article on LCs, Adetola Ayanru, a legal practitioer, explains: “You (buyer) entered into a contract with your overseas supplier to import machinery for production at your factory. You need to open an LC. In this case, Letter of Credit is opened by your bank and the beneficiary is your overseas seller of the machinery. Letter of credit is a guarantee given by your bank (not you) to your buyer’s bank on account of your buyer. The amount under LC is transferred onthe terms and conditions mentioned in the Letter of Credit.
“The letter of credit is a form of documentary credit. A documentary credit represents a bank’s assurance of payment against the presentation of detailed documentation by the party required to produce such documents, which is usually the seller. A letter of credit is useful to a seller when reliable and verifiable credit information about a foreign buyer is difficult to obtain, but he is satisfied with the creditworthiness of the buyer’s bank. It has become one of the most preferred methods of payment in international sale in Nigeria among merchants and Banks. Its operation is guided by the Uniform Customs and Practice for Documentary Credits (the ‘UCP’) 2007 which is a set of Rules governing the use of documentary credits. Its most recent edition is the ‘UCP 600’ which was published by the International Chamber of Commerce in July 2007. A letter of credit transaction normally operates in a sequence which is explained below:
“Once an International seller and a Nigerian buyer have agreed in the underlying sale contract that payment shall be made by a letter of credit, the buyer (applicant), approaches his bank in Nigeria (the issuing Bank), and requests for the opening of a documentary credit in favour of the International Seller (beneficiary). There is a prescribed Form designed by the bank to meet general requests for letters of credit but the specifications may be amended to meet each buyer’s peculiar needs.
“ Subject to the applicant meeting all the bank’s requirements, such as the official “Know Your Customer” background checks, referencing requirements and his account being in good standing with the bank, the issuing bank will open an irrevocable credit in favour of the beneficiary. This irrevocable credit will undertake to pay the seller in another country on the terms specified by the buyer in his instruction to his bank, or incur a deferred payment undertaking subject to payment upon maturity, provided the seller makes available the documents specified by the buyer through his own bank to the buyer’s bank. Such documents may be or may include transport documents such as a bill of lading, an insurance policy, an invoice, a certificate of origin, a certificate of quality and such other documents as may be specified in the underlying contract of sale.
The issuing bank will proceed to inform the seller through his bank that a letter of credit has been opened in his favour and that he is required to tender such documents required by the buyer.
Upon the seller’s tender of the required documents which is most likely to be after he has shipped the goods to the buyer’s country, the documents will be confirmed to be adequate (this is referred to as a complying presentation) by the seller’s bank, and after the confirmation, the bank will be required to pay the seller the contract sum.
Upon payment of the agreed contract sum to the seller/beneficiary, the seller’s bank is entitled to seek reimbursement from the issuing bank/buyers’ bank.
The Documents will be passed to the buyer by his bank and of course, he will pay the bank the contract price in addition to any other payments for the service rendered.
Sometimes, the bank may grant the buyer/applicant an extension of time to pay the contract sum if he is not in a position to pay immediately. It depends on his relationship with the bank and whether or not he has a credit account with the bank. In this case, the buyer/applicant may be allowed to sell the goods upon granting him access through the release of the documents to him and the bank will be entitled to the proceeds of the sale up to the required amount.