1-197 closely linked to virtually all commodity transactions is insurance and finance (the subject of module 5). A process known as a documentary credits provides by far the greatest majority of trade finance. The process of astablishing a documentary credits is relatively straightforward and has the advantage to the seller of providing a confirmed method of payment.
- The buyer and seller conclude a sales contract providing for payment by documentary credit.
- The buyer instructs his bank (the issuing bank) to issue a credit in favour of the seller (the beneficiary).
- The issuing bank asks another bank, usually in the country of the seller, to advise the seller and perchaps also add its confirmation to the documentary credit.
- The advising or confirming bank informs the seller that the seller that the credit has been issued.