Authors: Roberto Bergami
Addresses: School of Applied Economics, Institute for Community, Ethnicity and Policy Alternatives, Victoria University, PO Box 14428, Melbourne, Victoria 8001, Australia
Abstract: A letter of credit (L/C), in international trade may be described as an instrument of finance carrying a conditional guarantee of payment from the overseas (buyer|s) bank to the seller. Consequently, a L/C is desirable in high value and/or high risk transactions. The guarantee is conditional upon the seller complying 100% with the documentary requirements of the L/C, an issue of particular concern to exporters, as the International Chamber of Commerce (ICC) estimates worldwide documentary discrepancy rates of 70%. L/C transactions are governed by ICC rules, and whilst these provide an international standardised process, the differing interpretations of what constitutes documentary compliance create difficulties for sellers in particular. The new rules, UCP 600, supposedly have simpler and clearer wording, to reduce ambiguity and differences in interpretation, and hopefully reduce documentary discrepancy rates and the associated financial risks. This article examines the major changes introduced by the UCP 600 and comments on their likely impact on future L/C business. Whilst acknowledging some improvements were introduced in the UCP 600, the article concludes that a number of issues have been ignored to the detriment of traders.
Keywords: export finance; international banking regulations; international trade finance; letters of credit; UCP 600; financial risks.
International Journal of Economics and Business Research, 2009 Vol.1 No.2, pp.191 - 203
Published online: 23 Mar 2009 *Full-text access for editors Access for subscribers Purchase this article Comment on this article