- 30 Marks
Question
Explain the following terms as used in the context of Documentary Credits.
i. Confirmed Credits (6 Marks)
ii. Back-to-Back Credits (6 Marks)
iii. Revolving Credits (6 Marks)
iv. Red Clause Credits (6 Marks)
v. Standby Letters of Credit (6 Marks)
[Total =30 Marks]
Answer
Documentary credits, governed by ICC’s Uniform Customs and Practice for Documentary Credits (UCP 600), facilitate secure international trade payments. Below are explanations of the specified terms, with practical applications in Ghanaian contexts like cocoa exports.
i. Confirmed Credits: A confirmed credit is a letter of credit where a second bank (confirming bank, often in the beneficiary’s country) adds its confirmation to the issuing bank’s undertaking. This provides additional assurance to the beneficiary that payment will be made if compliant documents are presented, even if the issuing bank defaults. Under UCP 600 Article 8, the confirming bank assumes independent liability. In practice, Ghanaian exporters to Europe might request confirmation from a local bank like Ecobank to mitigate risks from foreign issuers during volatile periods like the 2022 global supply chain disruptions.
ii. Back-to-Back Credits: This involves two separate letters of credit: the first (master credit) issued in favor of a middleman beneficiary, who uses it as security to obtain a second credit (back-to-back) in favor of the actual supplier. The terms are similar but adjusted for profit margins. Not explicitly covered in UCP 600, but common in trade chains. For example, a Ghanaian importer might use a back-to-back credit to finance machinery purchases through an intermediary, ensuring documents align to trigger payments without direct involvement.
iii. Revolving Credits: A revolving credit allows the beneficiary to make multiple draws up to a specified limit, with the available amount reinstating automatically after each utilization or period (e.g., monthly). Governed by UCP 600 Article 10, it suits ongoing supply contracts. In Ghana, oil importers use revolving credits for repeated fuel shipments, reducing administrative costs compared to issuing new credits each time, especially under BoG’s exchange control regulations.
iv. Red Clause Credits: Named for the red ink clause, this credit permits the beneficiary to draw an advance (partial payment) before shipping goods, typically for purchasing raw materials. The advance is deducted from the final payment upon document presentation. Under UCP 600, it’s a variation of a standard credit. Ghanaian textile manufacturers might use red clause credits to fund cotton imports, with the advance repaid via export proceeds, aiding cash flow in seasonal industries.
v. Standby Letters of Credit: Unlike commercial credits for payment, a standby letter of credit (SBLC) serves as a guarantee, payable only upon the applicant’s non-performance (e.g., contract breach). Governed by UCP 600 or ISP98, it’s drawn if a demand statement certifies default. In Ghana, SBLCs back performance bonds for construction projects, such as those under government contracts, providing security without tying up cash, as seen in infrastructure deals post-DDEP recovery.
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