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Difficulty: Very hardMeans of Payment in Foreign Trade

A Nigerian importer enters into a contract to purchase heavy equipment from a manufacturer in Japan using a Confirmed Irrevocable Letter of Credit. What is the correct chronological sequence of operational steps required to successfully execute and settle this foreign trade payment mechanism from start to finish?

  1. 1The importer submits a formal application to their local commercial bank (issuing bank) requesting the opening of a letter of credit in favor of the Japanese exporter.
  2. 2The issuing bank transmits the letter of credit to a correspondent bank in Japan, which adds its guarantee and advises the exporter of the opened credit.
  3. 3The exporter ships the machinery, obtains the clean Bill of Lading from the shipping company, and presents all required shipping documents to the negotiating bank.
  4. 4The negotiating bank verifies that the presented shipping documents strictly conform to the credit terms and remits funds to the exporter.
  5. 5The issuing bank receives the verified documents, claims reimbursement from the importer, and surrenders the Bill of Lading to enable customs clearance.

Answer

The correct chronological order begins with the buyer applying to the issuing bank for a letter of credit, followed by international bank transmission and confirmation to the seller, shipment of goods and procurement of the Bill of Lading by the seller, document verification and payment by the intermediary bank, and finally buyer reimbursement to receive the title documents.
The procedural sequence follows standard international trade rules (UCP 600) for documentary credits. Credit application establishes financial backing; bank advising informs the seller; shipment produces the Bill of Lading; document presentation triggers bank settlement; and bank reimbursement releases title documents to the buyer.

Step-by-Step Solution

1
Identify the initiation phase of foreign payment under documentary credit.
The importer applies to the issuing bank in Nigeria to open the Letter of Credit.
Commercial banks act on behalf of buyers to initiate credit guarantees prior to shipment.
2
Trace the inter-bank notification and confirmation workflow.
The issuing bank sends credit details to the Japanese correspondent bank to advise and confirm to the exporter.
A confirmed letter of credit requires a bank in the exporter's country to assume payment liability alongside the issuing bank.
3
Determine exporter performance and document generation.
The exporter consigns goods, receives the Bill of Lading, and presents documents to the negotiating bank.
The Bill of Lading is the primary document of title generated upon loading goods onto the vessel.
4
Evaluate document checking and payment settlement to the exporter.
The negotiating bank inspects documents for compliance and releases payment to the exporter.
Under Uniform Customs and Practice for Documentary Credits (UCP), banks deal in documents, not goods, paying upon strict compliance.
5
Identify the final settlement and transfer of title to the importer.
The issuing bank collects payment from the importer and hands over the Bill of Lading for port clearance.
The buyer cannot take delivery of cargo at destination without presenting the original endorsed Bill of Lading.

Key Concept

Operational Workflow of Confirmed Irrevocable Letters of Credit in Foreign Trade
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Means of Payment in Foreign Trade

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