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Difficulty: Very hardMeans of Payment in Foreign Trade

A Nigerian importer enters into a commercial contract to purchase heavy industrial machinery from a German exporter, agreeing to settle the transaction through a Confirmed Irrevocable Letter of Credit. What is the correct chronological sequence of operational steps required to execute this foreign payment mechanism from contract settlement to document release?

  1. 1The Nigerian importer applies to their local commercial bank (issuing bank) to open an irrevocable letter of credit in favor of the German exporter based on the sales contract.
  2. 2The issuing bank transmits the letter of credit to a correspondent bank in Germany, requesting it to add its confirmation and advise the seller.
  3. 3The German exporter verifies the confirmed credit terms, manufactures and ships the machinery, obtaining the clean bill of lading and required shipping documents.
  4. 4The German exporter presents the complete set of shipping documents to the confirming bank in Germany for compliance inspection.
  5. 5The confirming bank inspects the documents for strict compliance, pays the exporter, and forwards the documents to the issuing bank for reimbursement and release to the importer.

Answer

The correct chronological sequence begins with the importer applying for the letter of credit at the issuing bank, followed by the issuing bank requesting a correspondent bank in the exporter's country to confirm and advise the credit. Next, the exporter ships the goods and receives shipping documents, presents these documents to the confirming bank for verification, and finally, the confirming bank honors payment upon document compliance and routes the documents to the issuing bank.
The sequence reflects the established procedural standard for documentary credit (Letter of Credit) transactions under international commercial practice. The transaction originates with the buyer applying to open the credit through their issuing bank. The issuing bank then engages a correspondent bank in the seller's country to confirm the letter of credit. Armed with this payment guarantee, the seller manufactures and ships the goods to obtain the bill of lading, presents the complete documentation to the confirming bank for examination, and receives payment upon verified compliance before documents are forwarded to the buyer's bank.

Step-by-Step Solution

1
Identify the initiation stage of documentary credit.
The importer initiates the payment process by applying to their issuing bank for an irrevocable letter of credit.
Banks operate solely on buyer instructions derived from the underlying trade contract.
2
Trace the inter-bank arrangement for confirmation.
The issuing bank contacts a correspondent bank in the seller's country to confirm the credit.
Confirmation adds an independent guarantee from a bank in the exporter's jurisdiction, mitigating country and issuing bank risk.
3
Locate the performance and document collection stage by the exporter.
The exporter manufactures, ships the goods, and secures the bill of lading.
The seller only ships after receiving confirmation of guaranteed payment upon document presentation.
4
Identify presentation of documents to the nominated confirming bank.
The exporter presents the shipping documents to the confirming bank for audit.
Payment under documentary credit depends strictly on document presentation matching letter of credit terms.
5
Determine final settlement and document dispatch.
The confirming bank pays the exporter and transfers documents to the issuing bank for final reimbursement.
Once compliance is verified, payment obligation is honored and title documents are transferred to enable cargo release.

Key Concept

Operational mechanism and sequence of execution in foreign trade settlement via Confirmed Irrevocable Letter of Credit under UCP rules.
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Topics

Means of Payment in Foreign Trade

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