Letter of Credit

It is also called documentary credit. It is a written commitment by the bank issued after the
request is made by the importer that payment will be made to the beneficiary.
Payment will be made if the exporter will be provide the documentary terms & conditions.
Evidence will be provided in the form of specified document.

1. Bill of Lading
It is also known as shipment/shipping document.
2. Financial document
It is also known as “Bill of Exchange”.
3. Commercial document
Invoices that received, packing list.
4. Official document
License for export, embassy legalization, origin certificate and inspection certificate etc.
5. Insurance Document
Insurance policy or certificate

Certificate of letter of credit

 It is a method of payment.
 It maintains balance of security between the buyer and the seller.
 It is governed by the uniform customs & practices for the documentary credit.
 Whenever the bank issue the letter of credit at need to collateral (guarantee).
 Whenever the bank open the Letter of credit, it charges the fee at the rate of the certain
percentage of the amount.

Types of the Letter of Credit

1. Irrevocable LC
2. Revocable LC
3. Standby LC
4. Confirmed LC
5. Unconfirmed LC
6. Transferrable LC
7. Bank to Bank LC
8. Payment at sight LC
9. Deferred Payment LC
10. Red Cross LC

1. Irrevocable LC
Which cannot be cancelled or modified without the consent of beneficiary. This LC reflect
absolute 100% liability of the bank to the other party.

2. Revocable LC
This LC can be modify or cancel without prior agreement of beneficiary at the request of the
customer. Bank will have no liability to the beneficiary after the revocation pf LC.

3. Standby LC
It is closer to the bank guarantee. This type of LC gives more flexible collaboration opportunity to
the buyer and seller. Bank will owner letter of credit when buyer failed to fulfill payment liability
to the seller.

4. Confirmed LC
In addition to bank of LC issuer. This LC is of the LC issuer. This type of the LC is confirmed by the
seller bank or any bank or any other bank. Irrespective of the payment by bank issuing of LC. The
bank confirming the LC is also responsible for the performance obligations.

5. Unconfirmed LC
Only the bank issuing LC will be liable to pay for this type of the LC.

6. Transferrable LC
This type of LC enable the seller to assign part of LC to the other party or parties. This LC is
especially useful in those cases when the seller is not a sole manufacturer/supplier/provider of
the goods and purchases some part from the other party.

7. Bank to Bank LC
This type of the LC consider issuing second LC on the basis of the first LC. LC is opened up for the
favor of intermediaries as per the buyer’s instructions and on the basis of the first LC and it is
opened up in the favor of seller.

8. Payment at Sight LC
The moment you as a seller deposit the document to your banker. The payment is immediately
made in 7 days.

9. Deferred Payment LC
 It means no payment immediately rather payment made after a period as stipulated in the terms
of LC. Normally payment is made at latest stage when the goods are received by the buyer or
after shipment. It depends on whatever has been written in the terms & conditions.

10. Red Cross LC

It provide for the seller to obtain an advance before the goods are shipped and submittal of
specified documents. The amount which can be obtain as an advance stipulated as an agreed
amount outline/written in the LC.

Bank
The first commercial bank was of the Pakistan “Muslim commercial bank” that was started in
1948.Central bank as the necessity of every state it is governed by regularity authority it control
the activity of the all the bank of country it control the monetary system on behalf of the country
it control document it also available lustration bank since in 1946 state bank of Pakistan act come
into being in 1948 this bank officially come into being in 1956.

Types of Bank
 Retailer / Consumer Bank
Those to deal with the customer

 Commercial Bank
Those bank which primarily deal with the business entities they offered the same loan to the
business entities LC will be deal with the commercial bank.

 Investment bank
 Credit unions
These are the similar to the banks. This is not meant for profit. These are the online bank. No
physical bank exist. For example Habib bank.
These are the similar to the credit unions. But here is the ownership with the members.

State Bank of Pakistan

It manages the monetary system of the country. It works as regulatory authority that controls all
the commercial, retailors etc. The bank that are registered to the state bank is known as
scheduled bank. Those not registered are known as Non-scheduled banks. After 1956 when state
bank officially came into being when many commercial bank regulated. Some commercial listed
below:
 Allied bank
 Sunari bank
 Askari bank
 Bank-al-habib
 First women bank
 Bank of Punjab
 Bank of Khyber
 Faisal bank
 Saudi pak commercial bank limited
 Meezan bank
 Bank islami Pakistan
 Crescent bank limited
 My bank
 Dubai Islamic bank
 JS bank
 Habib metropolitan bank
 Standard charted bank

Functions of Banking
The basic functions of the banking are:
1. Deposit
2. Lending

Banking
Accepting for the purpose of lending and investment deposits of money from the public payable
on demand order or otherwise withdraw able by cheque draft or such other instrument.
In nutshell banking means transacting business with a bank, depositing or withdrawing funds or
requesting for loan etc.

Bank
Bank is an institution where the business of banking takes place.

Primary Functions of Banking

1. Accepting Deposit
2. Lending Loans
 1. Accepting deposits
I. Fixed Deposit
II. Current Account Deposit
III. Saving Account Deposit
IV. Recurring Deposit
V. Profit & Loss Sharing Deposit

I. Fixed deposit
When the period is fixed. Minimum 1 year which are mutual with a considerable period with
minimum 1 year or more. Rate of interest is fixed. You cannot withdraw the amount are
deposited before the day of maturity.

II. Current Account Deposit

There is no profit no interest is given. There is no restriction on withdrawn. It is maintained by
the bank for the purpose of the security or mostly maintained for the business communities.

III. Saving Bank Account

Rate of interest is very normal. It is normally operated for small save or small businessmen. It is
maintained by the bank for security purpose.

IV. Recurring Deposit

It is maintained month by month. Every month deposit is reinvested. Rate of interest is
accordingly.

V. Profit & Loss Sharing Account Deposit

There is the rate of interest is fluctuate on at regular interval which is normally end of each
quarter of the year

2. Lending Loans
I. Call Loans
II. Short Term Loans
III. Medium Term Loans
IV. Long Term Loans

I. Call Loans
These are loans granted by the bank to individual or business entities which can be called back
by the bank authority anytime. It is in normally in stock exchange.

II. Short Term Loans

 The loan which is granted by the bank authority for up to 1 year are known as the short term
loans.

III. Medium Term Loans

The loans provided by the bank authority for duration more than 1 year or for the maximum to
5 years. (For the overdraft, cash credit and Bill of Exchange).

IV. Long Term Loans

The loans given for the more than 5 years.

Secondary Functions
1. Merchant banking
2. Leasing
3. Mutual funds
4. Venture capital
5. ATM
6. Tally banking
7. Credit cards
8. Locker service
9. Underwriting

1. Merchant Banking
Merchant banks are financial institutions which provided specialized services (Acceptance of
BOE, Corporate Financing, Management of the portfolio of the business entities etc.)

2. Leasing
The banks rent out immovable property for a specific period on a mutually agreed term on
accordance with written agreement.

3. Mutual Funds
Bank mobilize the saving of general public and invest in the stock market or money market.

4. Venture Capital
It is a financial capital provided early stage, high potential, high risk, growth startup companies.
Venture capital funds makes money by owing equity in the company it investing. The company
which have novel technology or business model high technology industry such as bio-technology,
IT Software.

5. ATM
 It is automated transaction of money to facilitate the banking business.

6. Tally Banking
It is banking through the use of telecommunication for the ease of consumers.

7. Credit Card
It is a facility to the customer to promote lending loans.

8. Locker Service
It is a facility provided to the consumer for security the safety of their valuables.

9. Underwriting
It is a facility to Joint Stock Company and to govt. These facilities are bank the bank guarantees,
the purchase of the certain portions of shares which not allotted in the market.

Role of the Bank in Economy

Bank play vital role in the economy as intermediaries or go between the financial systems.
Commercial banks play an important role in the financial system and economy. Banks allocate
funds from the savor to the borrower in the efficient manner.