Trade Finance
Article Index
Trade Finance
Import, Export and Guarantee

Trade finance is a short-term credit availed by a bank to their borrower for importing and exporting activities.  It includes various kinds of loans, advances and facilities required for imports and exports deals.  Since such deals are made on foreign trade, it involves transactions of foreign exchange.  The economics of these trade finance facilities depends on local currency (LCY) and foreign currency (FCY) interest rates, the ruling forward terms, exchange rate movement outlook, Central Bank’s (NRB’s) regulations etc.


IFC Partners with NIBL to Enhance Trade Finance in Nepal

Letter of Credit

Letter of credit is a commitment/ undertaking in the form of written instrument by a bank on behalf of its customer (known as buyer/importer) to pay the "counter value" of goods/services within a given date to its supplier (known as seller/exporter) according to agreed stipulations and against presentation of specified documents as specified in the instrument.  A "Letter of Credit" is used as an instrument for settlement of payment arising out of commercial transactions like sales/purchases.  In such credit, payment obligation arises only upon fulfillment of specified conditions.



Standard Process of LC Transaction


  1. Negotiations between buyer and seller and thus finalization of deal & Buyer approach its bank to open import LC.
  2. Issuing bank issues the LC through its advising bank & advising bank informs and advises the LC to the exporter.
  3. Exporter prepares the goods and makes the shipment through the carrier Exporter prepares the documents demanded in the credit and furnishes to its negotiating bank.
  4. Negotiating bank forwards the documents to issuing bank for payment.
  5. Issuing bank obtains payment from importer and provides the documents.
  6. Importer obtains the goods shipped by exporter through carrier (or its agent).
  7. Issuing bank releases the payment to negotiating bank through reimbursing bank.
  8. Exporter receives payment through negotiating bank.



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