What is Letter of Credit?
A letter of credit (LC) is a bank’s undertaking to pay a seller on behalf of a buyer, provided the seller presents documents complying with the LC terms. It mitigates payment risk in international trade.
How It Works
- Buyer applies to its bank for an LC in favor of the seller.
- Issuing bank sends the LC to the advising bank in the seller’s country.
- Seller ships goods and presents documents to receive payment.
Saudi Context
Saudi importers routinely use LCs to source from Asia and Europe, with SAMA-licensed banks confirming LCs under UCP 600 rules. ZATCA customs valuation often references LC documents.
Example
A Saudi importer opens a SAR 4 million LC to a Chinese supplier. Once shipping documents conform, the issuing bank releases payment.