Discounting of Letters of Credit; A Legal Analysis

Mohammad Taghi Rafiei () and Akbar Tamizi ()
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Mohammad Taghi Rafiei: University of Tehran
Akbar Tamizi: University of Tehran

Journal of Money and Economy, 2016, vol. 11, issue 4, 467-482

Abstract: Letter of Credit is an international payment instrument whereby the issuing bank undertakes to pay the beneficiary, against presentation of certain stipulated documents, according to the conditions of the Letter of Credit. Discounting of LC for the short-term financing of the seller, due to the independent and irrevocable undertaking of the bank to make payment, is prevalent. Beneficiary gets the amount of the credit immediately (after discount rate deduction) in consideration of the assignment of the credit in discounting practice. Now, the main question is: how will the assignment of rights and proceeds under the Letter of Credit be executable and what will be its consequences? Hence, by surveying different methods of assignment of rights in accordance with LC, we study discounting Acceptance and Deferred Payment LCs as two kinds of deferred LCs. In discounting practices of LCs, if a fraud being discovered after the discounting transaction but before the payment due date, the discounting bank would be able to recover payment from issuing bank or confirming bank. According to our analysis, the most promising way for the assignment of rights and reducing the risk of discounting for the discounting bank is "Negotiation" of LC. Acceptance LC makes a favorable opportunity for discounting purposes because it includes bill of exchange as a negotiable instrument, and there is an organized secondary market for Acceptances.

Keywords: Assignment; Negotiation; Deferred; Acceptance; Fraud (search for similar items in EconPapers)
JEL-codes: G32 K22 (search for similar items in EconPapers)
Date: 2016
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