Issuing Letters of Credit (LC)by International banks

Most banks enter the international sector to finance trade. A letter of Credit is simply an international bank‘s promise to pay for goods stored overseas or goods sipped between two countries. Such letters may be issued to finance exports and imports or to provide standby credit. Trough a letter of credit, the bank merely substitutes its own promise to pay for the promise to pay of one of its customers. However, the bank‘s promise to pay is more readily accepted by a seller of goods than is a buyer‘s promise of payment. By substituting its promise, the bank acts as a guarantor of payment and thereby reduces the Seller‘s risk, facilitating the flow of goods and services in international markets.