LC & its Classification, Parties, Procedures of opening

& operations of Cash LC with Shariah aspects and

Accounting procedures thereof guidelines for
opening and operation of Back to Back LC
 Meaning of LC
LC is an undertaking of the Issuing Bank to the
Beneficiary to effect payment subject to submission of
some specified document evidence for shipment of
goods or service or performance complying the terms of
the credit.

LC is a conditional undertaking of the Issuing Bank on

behalf of the buyer to the beneficiary for payment
provided that the stipulated documents are presented to
the Nominated bank or to the Issuing Bank and that the
terms and conditions of the credit are complied with.
 Definition of LC
According to UCP-600 Article-2:
“ Credit means any arrangement, however named or described, that
is irrevocable and thereby constitutes a definite undertaking of
the issuing bank to honor a complying presentation.”

Definition of LC in AAOFI Standard Para 2/1:

“ a written undertaking by a bank (known as issuer) given
to the seller (beneficiary) as per the buyer's (applicant or
orderer's) instruction or is issued by the bank for its own
use, undertaking to pay up to a specified amount (in cash
or through acceptable or discounting of a bill of exchange),
within certain period of time, on condition that the seller
present documents for the goods conforming to the
instructions.”
 Importance of LC
a. In cases of Advance payment, Open account & Documentary
Collection, either the buyer or the seller has to depend upon the
good faith and performance of other in the exchange of goods for
payment. In contrast, the documentary credit provides the buyer
and seller with independent assurance in the exchange of goods for
payment.
b. The beneficiary has the irrevocable undertaking of the issuing bank
and also the separate irrevocable undertaking of the confirming
bank (if any) that it will receive payment by presenting the
documents as stipulated in the credit and the terms & conditions of
the credit are complied with.
c. The buyer has an undertaking of the issuing bank that no payment
will be made under the documentary credit unless the beneficiary
has presented the documents as stipulated in the documentary credit
and terms and conditions of the credit complied with.
 Classification of LC

IRREVOCABLE
IRREVOCABLELETTER
LETTEROF
OFCREDIT
CREDIT

Commercial
CommercialLetter
LetterofofCredit
Credit Stand
Standby
byLetter
LetterofofCredit
Credit

 Documentary
DocumentaryL/C L/C
 Clean
CleanL/C
L/C
 Confirmed
ConfirmedL/C L/C
 Revolving
RevolvingL/CL/C
Stand
StandbybyLCLCisisguided
guidedby byUCP
UCP600 600
 Transferable
TransferableL/CL/C asaswell
wellasasISP-98.
ISP-98.ItItisisused
usedasasBank
Bank
 Restricted
RestrictedL/C
L/C Guarantee.
Guarantee. Bank
Bank will will makemake
 Back
BacktotoBack
BackL/C
L/C payment
payment inin case
case ofof default
default ofof the
the
 Red
RedClause
ClauseL/C
L/C applicant.
applicant.
 Green
GreenClause
ClauseL/C
L/C
 With
Withrecourse
recourseL/C
L/C
 Without
Withoutrecourse
recourseL/C
L/C
 Classification of LC
 Revocable/Irrevocable: LC which can not be amended or canceled
without the consent of the issuing bank, the beneficiary and confirming
bank (if any) is called irrevocable LC. Revocable LC is not covered by
UCPDC-600.
 Documentary Credit: Required some specific documents.

 Clean LC: Shipping documents are not required. It is used for payment
of service rendered by any consultant or any person & firm etc. Drafts
and beneficiary’s invoice are required for negotiation purpose.

 Confirmed LC: LC confirmed by 3rd Bank in addition to issuing Bank.

 Revolving LC: Original amount will automatically revive after

shipment & negotiation thus original amount will come into existence.

 Transferable Credit: As per Article No.38 of UCP, The opening bank

is authorized advising Bank to transfer the credit to any other party or
beneficiary in lieu of existing beneficiary
 Classification of LC
 Restricted LC: Negotiation is restricted to any specified
Nominated Bank.
 Back to Back LC: This type of credit is opened against master
Export LC under lien
 Red Clause LC: When credit authorizes the negotiating bank to
provide pre-shipment advance to the beneficiary
 Green Clause LC: When the credit authorizes the negotiating
bank to advance for storage facility in addition to pre-shipment
advance to the beneficiary.
 With Recourse/Without Recourse LC: If drawer/Issuing bank
fails to honor the bill, the banker as the holder of the bill can
claim the amount back or not.
 Stand by LC: It is used as Bank Guarantee. Bank will make
payment in case of default of the applicant.
 Classification of LC
 At sight basis: to pay at sight if the credit is available by
sight payment.
 On deferred payment basis: to incur a deferred payment
undertaking and pay at maturity if the credit is available by
deferred payment.
 On acceptance basis: to accept a bill of exchange ("draft")
drawn by the beneficiary and pay at maturity if the credit is
available by acceptance.
 On negotiation basis: means the purchase by the nominated
bank of drafts (drawn on a bank other than the nominated
bank) and/or documents under a complying presentation, by
advancing or agreeing to advance funds to the beneficiary
on or before the banking day on which reimbursement is due
to the nominated bank.
 Classification of LC

1. Cash LC
2. Back to Back LC
3. LC under STA/Barter
4. LC under Loan, Credit and Grant
5. Stand by Credit
Chart of LC
 Parties of LC
i. Issuing Bank: Issuing bank means the bank that issues a credit
at the request of an applicant or on its own behalf, and
ii. Beneficiary: Beneficiary means the party in whose favor a
credit is issued.
iii. Applicant: Applicant means the party on whose request the credit
is issued.
iv. Advising Bank: Advising bank means the bank that advises the
credit at the request of the issuing bank.
v. Second Advising Bank: When an advising bank utilizes the
services of another bank to advise the credit and any amendment
to the beneficiary.
vi. Nominated Bank: Nominated bank means the bank with which
the credit is available or any bank in the case of a credit available
with any bank.
 Parties of LC
vii. Reimbursing Bank: The bank which is authorized to make
payment or to honor reimbursement claim.
viii. Confirming Bank: Confirming bank means the bank that adds its
confirmation to a credit upon the issuing bank's authorization or
request.
ix. Negotiating Bank
x. Collecting Bank
xi. Paying Bank
xii. Transferring Bank
xiii. Notify party
 General criteria for establishment of LC
 Sanction Advice duly accepted by the client.
 Documentation/Mortgage formalities completed.
 Up to date Certificates/Licenses/Policies
 Complying the latest Audit Observations
 Clean CIB Report
 Factory Compliance
 Credit Ratings
 Environmental Risk Ratings
 NOC on overdue Bill of Entry from the previous Bank
 NOC on receiving down payment for default client
 BB Bills liability to be adjusted within 6 months
 General indemnity of the client
 Availing single party exposure
Sanction Advice:
 Sanction Advice provided by Branch/Zone/HO.
 Sanction Advice duly accepted by the client and stamped.
 Documentation formalities and charge creations.
Documentation/Mortgage Formalities:
 Registration of the mortgage properties.
 Charge creation on fixed & floating assets.
 Sign Board on the mortgaged properties.
 Further charges
 Pari-passu charge.
Visit/Survey Report
 Ensure business establishment & mortgaged properties with bank.
 Ensure the address of the office & factory with the relevant papers.
 Survey report of the projects & mortgaged properties by the surveyor.
 Stock Report.
 Required Certificate/License/Policy
 IRC,
 ERC,
 TIN Certificate,
 VAT Registration Certificate,
 Bonded Warehouse License,
 Fire License & Fire Policy,
 Trade License,
 Membership Certificate,
 MA/AA/Board Resolution of the Company,
 Company Resolution to get bank facility from Bank,
 BOI Registration,
 Certified Form X & XII,
 Authorization Letter from the client in Cash LC,
 General Indemnity of the client,
Factory Compliance Issues:
 Environmental Risk Rating,
 Factory Building Code,
 ETP,
 Labour Union,
 Minor Workers Employment,
 Shared Building,
 Factory Layout,
 Project Layout of Company.
Credit Ratings:
Credit Rating status of the client as rated by the ECAI nominated
by Bangladesh Bank to be obtained.
 IRC
 Verification of IRC
 Types of IRC i.e. Commercial or Industrial.
 Status of Industrial IRC i.e. Regular or Adhoc.
 Renewal of IRC mentioning in IRC or Pass Book &
mention the Chalan no. in the IRC/Pass Book.
 Limit & imported position of IRC.
 Requirement of IRC to import capital machinery for
new project, import for personal uses (approved by
BOI), import for EPZ client, import for public sector.
 Name of the lien Bank in the IRC.
 NOC of the previous lien Bank.
 Maintain the Chalan for IRC renewal copy.
 New Client or Client of another Bank
 NOC from the previous Bank for opening LC.
 Outstanding liability with the previous bank.
 Confirmation about no overdue Bill of Entry pending
with the previous bank.
 NOC from the previous bank regarding to receive
required down payment to facilitate the default client
of another bank as per BRPD circular of Bangladesh
Bank (in case of default client).
 Clean CIB Report from Bangladesh Bank.
 Declaration of liabilities with another Bank.
 Declaration on “A” category shareholder of
Bank/NFIs.
Liability position of the Client:
 Liabilities of the previous bank or CIB report.
 Break up of liabilities
 Within/Exceeding HO/ZO/Branch sanctioned limit.
 Opening LC keeping classified liability of the client.
Working Capital Facility/Investment Limit:
 Renewal, Expiry & Limit exceeding.
 Single Party Exposure Limit.
 Scrutinizing of WC Limit & its Sub-limit.
 Sales Contract/Add Confirmation/At Sight Limit.
 Option to use global working capital limit.
 Option to use limit of one concern to another concern.
 Option for netting liabilities i.e. excluding FC Held/FDBC
 Scrutinising of Export LC/Sales Contract:
 Authenticity of LC i.e. Check/MAC
 Text of the LC i.e. UCP 600
 Inco-terms
 Transport clause
 Payment clause (OEP, Underling Claims).
 Availability of LC
 Transferability of LC
 Usance BBLC against Usance Sales Contract or LC
 UPAS/Sight LC
 Sufficient Lead time
 Required papers/documents
 Terms contradict in IPO & Export Policy
 Whether the same Buyer & Supplier
 Scrutinising of LC proposal
 Scrutinising Application & Agreement of Irrevocable Letter of
Credit duly filled up, signed and stamped by the client
 Signatory for opening LC as per client's resolution
 Necessary instructions of the client in the application
 Proforma Invoice mentioning H.S Code, Inco-term mentioning
its goods value, freight, insurance & other charges separately and
accepted by the client
 Sufficient lead time to execute export orders
 BBLC in FC/BDT: Generally BBLC opened in FC
 Existing export execution status
 Ensure local supplier's position and supply of goods to avoid the
creation of accommodation bills
 Obtaining cost sheet of proposed export order from client
 Ensure price competitiveness
 Sequence for opening BBLC to import Fabrics/Accessories/Yarn
 Credit Report
 Credit Report to be obtained from D&B, Syeds in case of
Sales Contract.
 Confidential Report may be obtained from the
correspondent Banks in abroad in case of LC received
from Bank instead of D&B, Seyds.
 Bangladesh Bank permission for Local/Buying Agent of
their Principal may be considered as Credit Report.
 Credit Report for USD10,000 and above against PI and
for USD20,000 and above against Indent or any value as
desired by AD depend on its satisfaction.
 Credit Report validity is 12 months from the date of issue
or as desired by AD depend on its satisfaction.
 Insurance
 Insurance cover note covering risks (ICC A,B&C)
 Amount of insurance policy i.e. 110% of invoice value
 Unconditional money receipt for insurance premium
 Public sector: insurance cover obtaining from BGIC
 Private sector: insurance cover obtaining from
bank's enlisted general insurance company
 Open policy or deal to deal insurance policy
 Joint insurance policy and its volume
 Validity of insurance policy
 Limit of open policy
 Marine and general insurance policy
 Competitive Market Price
 Justify the competitive market price of the commodity
obtaining reports from 2(two) countries under 3(three)
suppliers when value exceeding Tk.1.00 lac and above
in private sector and international tender in case of
public sector import.
 Obtaining local market price of the proposed
commodity to justify its profitability and marketability
i.e. slow or running items.
 Conscious on over invoice or under invoice of import
prices to avoid money laundering issues.
 Guidelines for establishing Back to Back LC
i. Only recognized export oriented industrial unit operating
under the bonded warehouse system.
ii. The unit should possess valid registration with the CCI&E and
valid bonded warehouse license.
iii. The master export LC should have validity period adequate
to cover the time needed for importation of inputs,
manufacture of merchandise and shipment to consignee.
iv. The BB LC value shall not exceed the admissible percentage
of net FOB value of the relative export LC and the price of
goods to be imported must be competitive.
v. The amount and validity of BBLC should not exceed export
LC.
vi. The BBLC shall be opened on usance basis for a period not
exceeding 180 days.
vii. Interest for the usance period shall not exceed LIBOR.
 Guidelines for establishing Back to Back LC
viii. BBLC may be opened at sight basis under EDF/UPAS/Baim subject to
instruction at Para 20, Chapter 13, and BB/HO permission.
ix. BBLC should not be opened against LC received for export under Barter/STA,
without prior approval of Bangladesh Bank
x. All amendments of the master export LC should be noted down carefully to rule
out chances of excess obligation under BB LC
xi. BBLC should be opened under UCPDC- 600.
xii. BBLC should be opened for the limit-holder client availing sanction advice.
xiii. Negotiation of export LC should not be restricted with other bank & Payment
clause should be clear and unconditional.
xiv. Before making remittance against the BB Bills, the AD should see the
authenticated copy of bill of entry for evidence of actual arrival of goods.
xv. Cross payment of export proceeds should be avoided and Branch must
maintain receipt and payment of proceeds accordingly in terms of LC.
xvi. Branch must maintain export performance register and strictly follow and
monitor shipment schedule
 Paper/documents to be submitted to open LC
 Application of the client in their letter headed pad
 Letter of Authority of the client to open Cash LC
 Application & Agreement of Irrevocable Letter of Credit
 Letter of Credit Authorization Form
 Proforma Invoice/Indent duly accepted by the client
 Valid export LC/sales contract for BB LC
 Insurance cover note with unconditional money receipt
 IMP Form
 TM Form
 Charge documents
The above papers/documents must be completed duly filled in
and signed by the party and verified the signature.
 Terms & Conditions in LC acknowledged by Client
The standard terms and conditions usually seek to evidence the
applicant’s acknowledgment of at least the following:
 the documentary credit will be subject to UCPDC 600;
 any necessary insurance will be arranged by the buyer,
depending on the Inco-term e.g. FOB;
 any necessary government regulations will be complied with;
 the applicant will reimburse the issuing bank for any payments
made under the credit;
 the bank assumes no liability or responsibility for the form,
sufficiency, accuracy, genuineness or falsification of documents
as detailed in UCP 600, article 34;
 the applicant agrees to pay all charges and costs designated for
its account and those not paid by the beneficiary.
 Applicant’s responsibilities in initiating LC
 to make sure that the beneficiary have agreed on the terms and conditions of,
and the documents stipulated in DC and that their understanding is the same;
 to make sure that arrangements are made for the DC to be issued in favor of
the beneficiary in sufficient time to enable shipment to be effected;
 to understand the application form for DC and to complete it in such a
manner as to ensure that complete and precise instructions are given to the
issuing bank;
 to respond promptly to any request for amendment;
 to respond promptly to any request to waive discrepancies;
 to reimburse the issuing bank for the value of documents presented under the
DC, together with any applicable charges, provided that the documents
constitute a complying presentation;
 to refrain from examining documents with the sole aim of finding spurious
grounds for non-payment;
 to notify the issuing bank immediately if discrepancies are identified in
documentation that the issuing bank has accepted as compliant.
 Responsibilities of an Issuing Bank when issuing LC
u to open the documentary credit:
− in accordance with ISBP and under UCP 600;
− strictly in accordance with the instructions of the applicant;
− in a manner that will enable the beneficiary to draw under the
documentary credit by means of documents that it can obtain or
supply, i.e. the documentary credit is workable for the beneficiary;
− promptly, thereby enabling the beneficiary to effect shipment;
u to select a correspondent bank to undertake the duties of advising,
honoring or negotiating, and confirming the documentary credit as
appropriate;
u to respond promptly to requests to amend a documentary credit;
u to respond promptly to requests to waive discrepancies;
u to examine documents and honour its undertaking in the documentary
credit or to refuse documents in accordance with UCP 600, article 16.
 The role of the Issuing Bank
1. Compliance with the bank’s policies:
Internal operational guidelines must be scrutinized to ensure that the issuance
and amendment of a documentary credit are in compliance with such
guidelines. Particular note must be taken of the following aspects:
u the nature of the goods or type of underlying transaction;
u the requirement, if any, for import licenses and approvals;
u compliance with other government or central bank requirements; and
u the inherent potential for fraud−for example, knowledge or lack of
knowledge of the beneficiary, particularly when the documentary credit
amount is large.
It must not forget that a documentary credit, when issued, carries the name of
the bank and bears its irrevocable undertaking to the beneficiary, which is
independent of all considerations outside the documentary credit. As a
result, all applications should be examined to make sure that they comply
with the issuing bank’s internal operational guidelines.
 The role of the Issuing Bank
2. Compliance with the buyer’s instructions:
Responsibility on the applicant to develop clear instructions to issue or amend
a credit and for the applicant to understand the provisions of UCP 600.
It will often be called upon to discuss details of the application with the
applicant. Often, the information shown on the documentary credit
application is not consistent with the documentation requested. It should also
examine the application to be able to draw the attention of the applicant to
any issues that are clearly inconsistent from the applicant’s own The role of
the issuing bank perspective.

It should also be noted that, occasionally, a beneficiary who has been sent a
copy of the application form by the applicant may want to know when and
how the documentary credit is being advised.
 The role of the Issuing Bank
3. Receiving the LC Application:
Once the documentary credit application or request is received, the following
tasks are usually performed:
u recording and noting time of receipt;
u allocation of a unique reference number;
u checking authenticity of application;
u checking customer facility availability;
u updating bank’s liabilities;
u updating customer liabilities;
u blocking funds / marginal deposits, if appropriate;
u recovery of charges.
Each bank has its own operational guidelines and requirements for these tasks
and it must consider each issue at this stage.
 The role of the Issuing Bank
4. Selecting an Advising Bank:
Wherever possible, banks use their own branches, associate offices or
preferred correspondent banks to advise a documentary credit to a
beneficiary. The reasons are that:
u arrangements already exist for authentication of messages; and
u the lines of communication are well established, which enables the speedy
resolution of any problems that may arise.
If the applicant’s instructions indicate an advising bank that does not fall
within the above parameters, the issuing bank will route the issuance in
terms of its own operational guidelines under advice to, and with the consent
of, the applicant. UCP 600, sub-articles 37(a) and (b) act as a disclaimer
when an issuing bank transmits instructions to another bank.
 The role of the Issuing Bank
5. Workability of a LC:
i. Excessive detail
ii. The need for conditions to be applied to documents
iii. Ambiguity as to issuers of documents and lack of precision in their data content
iv. Acceptable clauses regarding the condition of goods on transport document
v. Adequacy of insurance cover
vi. Installment shipments
vii. Transferable credits
viii. Abbreviations
ix. Ambiguous terminology
x. Documents to be issued or countersigned by an applicant
6. Issuing a LC:
i. Preparation of the Documentary Credit
ii. Transmission of the Documentary Credit
 Accounting Procedure of LC
LC opening stage:
Dr. Assets As per Contra (Cash/BB LC)
Cr. Liability As per Contra (Cash/BB LC)

Dr. AWCA/Marginal Deposit A/C of the Client

Cr. Security Deposit
Cr. Commission
Cr. SWIFT/P&T Charge
Cr. VAT on Commission/SWIFT/P&T Charge
Cr. Others
Bills stage:
Dr. Liability As per Contra (Cash/BB LC)
Cr. Assets As per Contra (Cash/BB LC)
Dr. Assets As per Contra (Cash/BB Bills)
Cr. Liability As per Contra (Cash/BB Bills)
Dr. MPI/HPSM A/C of the client
Cr. Security Deposit
Cr. IBG HO
Cr. Commission/Exchange
Cr. Others
 Calculation for BB LC value

Export LC/Contract in CFR value : USD 500

Less: Freight charge : USD 20
Export LC in FOB value : USD 480
Less: Foreign agent commission : USD 25
Less: Local agent commission : USD 10
Net FOB value of Export LC : USD 445
Allowable BB LC facility @75% : USD 333.75
 Commission & Charges

Commission & Charges to be realized as per:

i) Master charge schedule,

ii) Special sanction advice of the client,
iii) NBR circulars,
iv) Circular of Bangladesh Bank,
V) Head Office circulars time to time
 Operations of LC in view of the Shariah
Definition of LC in AAOFI Standard Para 2/1:
“a written undertaking by a bank (known as issuer) given to the seller
(beneficiary) as per the buyer's (applicant or orderer's) instruction or is
issued by the bank for its own use, undertaking to pay up to a specified
amount (in cash or through acceptable or discounting of a bill of exchange),
within certain period of time, on condition that the seller present documents
for the goods conforming to the instructions.”
The Standard had summarized the above definition by briefly stated that a
documentary credit is an undertaking by a bank to pay subject to conformity
of the documents to the contractual instructions.
Here only distinction of LC under UCPDC & AAOFI Standard is the procedure
how it is issued and operated.

Types of LC in Shariah:
1. LC under al-Wakalah (agent/wakalah & guarantor/kifalah)
2. LC under al-Musharakah (LC issue under PLS)
3. LC under al-Murabaha (finance facility)
 Shariah issues in LC
1. Governing rule: The existing UCP be studied, reviewed, amended, supplemented
and in the process a new set of rules and regulations that are founded on our
standing of Islamic law practice.
2. Subject-matter or goods traded: Goods traded must be of halal goods.
3. Interest: avoid any interest, penalty, uncertainty (gharar) of issuing bank's
responsibility & liability in UCP 600 article 13(b)(iii).
4. Insurance & Inco-terms: Mitigate the situation of uncertainty/gharar.
5. Aqad (offer & acceptance): written instructions and agreement.
6. Discrepancy fee: Forbidden oppression to the beneficiary.
7. Risk of goods in murabaha financing: Practice in PLS basis & involvements not
only the documents but also the goods, performance & services in UCP 600 articles
4 and 5.
8. Use of client's IRC: Obtaining letter of authority from the client.
9. Single deal in investment: Single deal by summarizing principal, profit, landed cost
and others, if any.
10. LIBOR in Usance LC: To be paid by the client.