Introduction

Letter of credit transactions have been developed since the middle Ages in connection with the trade of goods at the international level. Individuals and companies have found themselves dealing with partners of whom they know little, who are located in distant countries with often insecure political and economic situations. Furthermore, the dynamism of the actual economy creates a need for financing that requires a guarantee of payment at a time and for an amount that must be certain. Diversity in geographical nature, weather, climate, production system and globalization in culture and fashion has made the countries dependent on each other for the daily necessities. Similarly, one continent is, largely, dependent on the products of other continents. In addition, diversity in human appetite and attitude, unequal development of technology, desire for luxury, and the development of communication system and tale-communication, revolutionarily, increase the necessity of transnational, transcontinental business activities.

As far as the payment issue is concerned, market reality, distance, geographical barriers, uncertainty and lack of confidence among the business actors discourage the global commercial venture. In market reality, the buyer, always, wants to pay the seller only after selling the imported products in the internal market. On the other hand, the seller wants payment as soon as possible ‘if possible, even before shipment’. Moreover, in transnational business transaction, where the goods and the payment are not exchanged simultaneously there is a risk that parties to an exchange may not fulfill their obligations. In such a case the seller may take the payment and not give the good or the buyer take the good and not give the payment. Furthermore, trade transactions between different countries involve different payment systems, conflict of laws, barrier of languages, lack of understanding and reliability among the business partners and other barriers.

Fortunately, letter of credit (LC) or ‘documentary credit’ or ‘banker’s commercial credit’ has Brought a revolutionary solution to all this problems and has ensured sufficient securities and certainty in payment transaction.