What Is a Bank Letter of Credit and How Does It Work?

A letter of credit is one of the possible settlement methods between a buyer and a seller. It represents a bank’s commitment, on behalf of the buyer, to pay the seller a specified amount in an agreed currency, provided that the seller submits documents confirming the shipment of goods or delivery of services.

Who Might Be Interested in This Product?

This banking instrument is useful for any company involved in the sale or purchase of goods or services. The partner can be a Kazakhstani or foreign entity — residency does not matter. This tool is especially recommended for companies engaged in international trade, where there are increased risks (political, legal, logistical, and financial).

Why a Letter of Credit Is Needed

For the buyer:

1. 1. Risk of non-delivery or service failure
   Payment is made only after documents confirming the shipment or service provision are submitted — this is a core condition of the letter of credit.

2. 2. Risk of receiving goods of poor quality or incorrect quantity
   Payment conditions can be customized. The buyer can request specific documents — such as insurance certificates, certificates of origin or quality — issued by independent agencies, helping to ensure compliance.

3. 3. Risk of late delivery
   The buyer can set specific deadlines for shipment or service completion. The bank monitors compliance with these deadlines.

4. 4. Legal differences between countries
   Letters of credit are governed by international banking standards (e.g., UCP). This reduces complications from differing national legal systems.

For the seller:

1. 1. Risk of non-payment
   With a letter of credit, the buyer’s bank guarantees payment for goods or services. Even if the buyer is insolvent, the bank is obligated to pay the seller upon presentation of correct documents.

2. 2. Risk of partial or delayed payment
   Document review must be completed within 5 business days, reducing payment delays. The bank must pay the full amount stated in the documents (if correct), eliminating the risk of partial payment.

3. 3. Political or economic risk in the buyer’s country
   Letters of credit may be confirmed by a top-tier international bank, which assumes an additional payment obligation. This protects the seller if the buyer’s bank fails to pay for external reasons.

4. 4. Differences in importer/exporter legislation
   Since letters of credit follow international standards, all parties are protected from losses due to conflicting laws.

How a Letter of Credit Works:

• The buyer and seller sign a contract.

• The buyer requests their bank to issue a letter of credit.

• Upon receiving the letter, the seller ships goods or provides services.

• The seller sends the required documents to the bank.

• The bank checks the documents. If they meet all conditions — payment is made.

Types of Letters of Credit:

By method of payment:

• At sight (payment on presentation)
  Payment is made as soon as the seller submits the required documents.

• Deferred payment
  The payment term is specified in the letter of credit. The delay is typically counted from the date of shipment or document submission.

By funding method:

• Covered (with 100% cash coverage)
  The buyer deposits the full amount in advance. These funds are held on a special account and used to settle the letter of credit.

• Uncovered (credit line-based)
  Issued within a credit line extended by the bank. The bank pays using its own funds, and the buyer repays the loan afterward.

By guarantee level:

• Confirmed
  A second bank (confirming bank) guarantees payment in addition to the issuing bank’s obligation. Recommended for international deals.

• Unconfirmed
  Only the issuing bank provides a payment guarantee.

Benefits of Working with Bank CenterCredit

• Letters of credit issued within 1 business day
• Minimal documentation required
• Competitive tariffs
• Trusted partner with international reputation
• Active trade finance lines from top European and U.S. banks
• Exclusive trade finance partnership with the EBRD (the only one in Kazakhstan)
• Cooperation with Export Credit Agency of Kazakhstan