INTERNATIONAL TRADE AND LETTERS OF CREDIT IN CAMEROON.
From time immemorial, the most common route by which goods are being transported for international trade from one country to another is by sea. With the advent of the Corona Virus, the movement of goods and humans was greatly reduced due to the stringent restrictions, which were put in place by governments and the international community and in the issuing of letters of credit.
This has greatly hampered the movement of businessmen and women to inspect (to carry out due diligence) goods to be bought and which has caused them fortunes to the hands of fraudsters as most of the transactions were conducted online and not in person. Even though most of the restrictions that were put in place to curb the spread of the Corona Virus has been lifted, most businessmen and women still don’t find the need to travel, but still, they are searching for a safe means by which they can carry on international trade without necessarily displacing themselves. A letter of credit will help in mitigating some of the adverse consequences which are recurrent in international trade in modern times.
WHAT IS A LETTER OF CREDIT?
A letter of credit (LC) in simple terms is an instrument of payment issued by a bank on behalf of the applicant to another bank appointed by the receiver as a guarantee of payment. This method of guarantee of payment is predominantly used in international trade. It is secure and ensures that both parties are satisfied at the end of the transaction.
That said, the documents to be tendered by the Seller to the Advising Bank must adhere strictly to the principle of strict compliance with the term of the transaction and conditions of the credit. Where the Seller fails to observe the strict compliance standard, the bank need not make any payment to the Beneficiary.
LC is important, especially when it is a first-time business transaction between the buyer and seller as the buyer is sure of the fact that he shall receive the goods as stated on the invoice and the seller on the other is sure of receiving payment even if the buyer is bankrupt. The importance is also emphasized especially when trading with a legal entity residing in a nation whereby the judicial system is unfriendly to foreign investors and plagued with other legal problems.
HOW DOES A LETTER OF CREDIT FUNCTION?
– Firstly, there must be a business relationship between the importer and the exporter. The exporter of the advising bank must ensure or inquire about the creditworthiness of the importer or the issuing bank.
– On concluding the terms of the sale agreement, the importer applies to his bank (issuing bank) to open a letter of credit for the benefit of the exporter.
– After the importer’s bank must have prepared the letter of credit, it shall be transmitted to the advising bank (exporter’s bank).
– The advising bank (exporter’s bank) shall assess and verify the legality of the letter of credit and they have two options, either reject or approve the letter of credit.
– Once it is approved, the issuing bank releases payment of the sum of money as reflected in the contract and the letter of credit to the advising bank. Once the advising bank is debited, the latter releases the documents to the issuing bank. The importer shall reimburse the issuing bank before the bank shall release the documents to the importer. The importer upon receiving the documents, shall use same to claim the goods.
HOW MUCH DOES A LETTER OF CREDIT COST?
Commercial banks in Cameroon are vested with transactions that necessitate the use of a letter of credit. There is no fixed cost for a letter of credit, it most times depends on the bank that issues it. Oftentimes, banks go by way of a percentage and it shall depend on the particular client instructing them to issue the letter of credit. It will be advisable for the importer to use a bank where he regularly carries out business transactions. This could have an effect on the fee to be charged.
WHAT ARE THE DIFFERENT TYPES OF LETTERS OF CREDIT?
There are different types of letters of credit such as Back-to-back letters of credit, Differed payment letters of credit, Revolving letters of credit, Confirmed letters of credit, irrevocable letters of credit etc.
Irrevocable letters of credit are that which are commonly used as each party can’t unilaterally change the terms of an irrevocable letter of credit without prior authorization from the other party. This gives security to the exporter as he is sure to receive the amount of money agreed upon with the importer, therefore, an irrevocable letter of credit is more secure. This explains why the majority of letters of credit issued nowadays are irrevocable.
From what has been gathered above, the advantages of using a letter of credit in international trade are enormous. The importer and exporter are more secure when using letters of credit as the risk is on the banks who are to ensure that the documents, goods sold and financial standing of the parties to the contract are legit. The parties are generally not worried about the money as they are sure that the money shall arrive at the right destination, and the goods shall reach the right port.
In case there is a need for more information concerning reliable commercial banks in Cameroon, drafting of documents and due diligence, feel free to contact us.