A letter of credit is a written undertaking issued by The Co-operative Bank of Kenya Limited in favour of the seller (the beneficiary) at the request and in accordance with the instructions of the buyer (the applicant), to effect payment up to a stated amount within a prescribed time limit and against stipulated documents.
Types of letters of Credit:
- Confirmed Letter of Credit:- The Bank authorizes a Correspondent Banks overseas to confirm the letter of credit, in effect the correspondence Bank takes up the undertaking under the said letter of credit on behalf of The Co-operative Bank of Kenya Limited.
- Transferable Letter of Credit:- The Bank facilitates the amendment of a Letter of Credit from the original beneficiary to one or more second beneficiaries.
- Revolving Letter of Credit:-. This is a facility used where constant and regular shipments from same supplier are to be effected over a given time period. Amount of the letter of credit is reinstated without specific formal amendment being required
- Back to Back Letter of Credit:- The beneficiary of a letter of credit uses the Master LC as security/cover and a basis to issue another letter of credit(Slave LC) in favour of his supplier. The Master LC and the Slave LC are two separate letters of credit, but with same terms.
- Standby Letter of Credit:- Used to guarantee payment in the event of non-performance of contract terms.
Advantages to the applicant
- Applicant has the flexibility to capture terms to meet his needs, such as shipment period of the goods, any inspections required on the goods, manner in which the goods are packed etc.
- Applicant is obliged to make payment after presentation of documentary evidence of compliance with the terms of the LC.
- Can allow applicant a credit period before having to pay the beneficiary
- Applicant can access expert advice and help in regard to the letter of credit from Co-operative Bank.
Advantages to the beneficiary
- Guaranteed of payment upon fulfilment of the stipulated terms and conditions.
- Finance can be availed to beneficiary on the strength of the letter of credit.
- The terms and conditions of the letter of credit cannot be amended without his consent.
