Introduction to the Documentary Credit
A DOCUMENTARY credit is frequently the agreed method of settlement for international trade. The buyer's bank reimburses the seller against presentation of documents drawn in compliance with conditions stipulated in the documentary credit by the buyer. The documentary credit also known as Letter of Credit guarantees the performance of all the parties involved in such Global Trade transactions, from the importer to the exporter, as well as their banks From this definition it can be seen that there are basically three parties to a documentary credit: a) the buyer/importer, who requires that a credit be issued in his favour; b) the beneficiary (the supplier of goods); and c) the issuing bank which issues the credit at the request of the buyer or importer. The credit is usually (but not always) advised to the beneficiary through a bank in the beneficiary's country (the advising bank).
There are advantages to both the buyer and seller when settlement is arranged by documentary letter of credit. First, the buyer knows that payment will only be made if the documents received comply strictly with the terms and conditions of the credit as stipulated by the buyer. Second, the seller knows that payment will be received provided the terms and conditions of the credit are strictly complied with. What are Documentary Credits used for?

Commonly, payments in international sales contracts are executed by a documentary credits procedure, subject to rules set forth in the Uniform Customs and Practice for Documentary Credits (ICC 1983).

In such transactions payment for the goods is made not on the delivery of the goods themselves but on the presentation of stipulated documents, which may include a commercial invoice, an insurance certificate, a certificate of origin and a transport document (e.g. a bill of lading or airway bill) among others. The seller receives payment by presenting the stipulated documents to bank (the advising bank)