Meaning of Letter of Credit

A Letter of Credit has been defined by the International Chamber of Commerce as “an arrangement, however, named or described whereby a bank (the issuing bank) acting at the request and in accordance with the instructions of a customer (the applicant of the credit), is to make payment or to the order of a third party (the beneficiary) or is to pay, accept or negotiate Bills of Exchange (Drafts) drawn by the beneficiary or authorise such payments to be made or such drafts to be paid, accepted or negotiated by another bank, against stipulated documents and compliance with stipulated terms and conditions.”

From the above definition of Letter of Credit, it is clear that there are following parties to a Letter of Credit.

(1) The buyer.

(2) The beneficiary.

(3) The issuing bank.

(4) The notifying bank.

(5) The negotiating bank.

(6) The confirming bank.

(7) The paying bank.