1.

Advantages of transferable letter of credit

a. To a middleman
1) A transferable credit is administratively efficient from the viewpoint
of middleman. For, the middleman does not have to make a separate
application for a letter of credit to be issued by his own banker on his
behalf. All he needs to do, once he has been advised of the details of
the transferable letter of credit, is to instruct the advising bank of the
identity and addresses of the second beneficiary (or beneficiaries) and
the entitlement which is to be transferred
2) Since the middleman is not applying for a letter of credit to be issued
on his behalf, he does not have to use any of his credit line with his
bank
3) For a middleman , a transferable letter of credit is cost effective. For,
he does not incur costs in getting a letter of credit issued on his behalf
nor, if his banker would want security prior to issuing the letter of
credit, in providing that security and paying the incidental fees.
b. To an importer
1) By agreeing to get a transferable letter of credit issued, he will receive
the goods that he wants in accordance with the commercial contract
entered into between himself and the middleman
2) Where the buyer is corcerned that the goods, as received, should be of
a certain quality, he should insist that one of the documents to be
submitted is a certificate of quality. Hence, the quality of purchased
goods can be controlled
2. Disadventages of a transferable letter of credit
a. To a middleman
1) By asking for the letter of credit to be transferable, the buyer knows
that the middleman will not be providing all or any of the contracted
goods
2) The buyer may become aware of the identity of the parties who are
supplying the goods, Hence, in future, instead of dealing with the
 middleman, they go straight to the third party supplier or suppliers (i.e.
the second beneficiary or beneficiaries of the present transferable letter
of credit). Thus, the middleman loses future business.
3) If he does not provide his own invoices (and the other required
documents) on or before the expiry date of the letter of credit, he will
not be able to draw down any balance to which he is entitled. For
example, the transferable credit may provide for a payment of
RM500,000. The second beneficiary of beneficiaries may have been
entitled to and claimed RM400,000. Hence, there would be
RM100,000 available to the middleman against his submission of the
appropriate documents. By not complying with the terms and
conditions of the letter of credit, the middleman receives nothing.
b. To an importer
1) Although the importer knows the identity of the person whom he has
contracted with and can carry out a trade and/or enquiry on him, he
may not be aware of the identity of the second beneficiary or
beneficiaries. As such, an equivalent enquiry or enquiries cannot be
made. So, the quality of the supplied goods is questionable
2) As with any type of letter of credit, the importer must apply for this
and be subject to a credit assessment. If the issuing bank wants to be
secured prior to issuing the letter of credit, such security must be
given. All costs incurred in issuing the letter of credit and the security
giving process would have to be paid by the importer.