A documentary credit is:

• a written undertaking by a bank (issuing bank)
• issued on the instructions of the buyer of goods (applicant)
• to the seller of goods (beneficiary)
• to effect payment under stated conditions:
  • by making a payment, or
  • by accepting or negotiating drafts
    • Up to a stated sum of money
    • Within a stated time limit
    • Against stipulated documents

What benefits or disadvantages exist for those involved in documentary credit operations?

For the buyer the benefit is that payments are made on his behalf in return for documents that represent the goods and give him ownership of them.

The disadvantage is that he may have to provide a marginal deposit when the documentary credit is opened.

For the seller the benefit is that he can look to the issuing bank for payment, instead of relying on the ability/willingness of the buyer.

The disadvantage is that he cannot obtain payment unless he complies with all documentary credit terms.

To summarise, banks:

• assist in the settlement of international commercial transactions
• provide safeguards for the parties involved
• ensure payment, provided terms are complied with
• deal in documents and not in the goods or
• services involved, and payments are made on this basis