Letter of credit in Nigeria – This is a written document, an agreement also known as an instrument which conveys a buyer’s (an importer) written integrity to his or her Seller, manufacturer or exporter authorizing the exporter to proceed with the production or manufacturing of their products and receive payment for the work only importer and their bank sight shipping document.

This is a summary review of the question what is a letter of credit and how does it work?

Letter of credit in Nigeria

Nigeria is a country where everything that is almost imported. In the import and export business, a lot is at stake and a lot is considered too.

Some of the things considered are:

  1. The huge fund involved.
  2. The issue of trust
  3. The worry of payment which has led to losses in the past.

Now to avoid this both importers and exporter finally got a common playing ground where all the parties involved gets settled at the end of the business.

This common ground is what we referred to as Letter of Credit in Nigeria

For the purpose of complete this topic we will be discussing:

  1. Types of letter of credit
  2. Letter of credit process
  3. Letter of credit example or Letter of credit sample

Types of letter of credit:

You might have heard the question what are the types of LC?

There are many types of Letter of credit but for the purpose of promoting clarity, we will discuss the under listed types:

  1. Standby letter of credit – SBLC
  2. Irrevocable letter of credit
  3. LC at sight

Standby letter of credit – SBLC

Standby Letter of credit – SBLC is said to exist when an importer wants to import some goods but has no money to do the needful.

The importer, as agreed with the manufacturer will approach his or her bank for written words of comfort and commitment in which the importer’s bank will tell the exporter to go ahead and produce the importers request

In this, the buyer’s bank will undertake to ensure that payment is made after 90 days. In other not to default, the buyer’s bank also known as the import’s bank will process a Temporary over Draft on the shortfall of the buyer’s working capital.

This will serve a cushion fee should the buyer fail in his payment obligation on or before 90 days as agreed. The bank will pay settle the bill and book is as a loan for the customer.

Under this condition, Letter of Credit in Nigeria can be viewed as a Loan.

Now the above is the answer to the question is a letter of credit a loan?

The above narrative is what is meant when we talk about Standby letter of credit – SBLC

Irrevocable letter of credit

This is a letter of credit in which all the contract agreement therein must be carried out without missing anyone.

This means that no reversal is possible on any of the terms and agreement of this type of Letter of Credit. This is the LC Nigeria practiced in Nigeria.

LC at sight:

This is also the Letter of credit practiced in Nigeria. By LC at sight it means that no payment will be made to the Shipping Company or the exporter until the shipping document is sighted and confirmed to be authentic too.

Having gone through this particular slide, we will handle the next subtopic which is:

Letter of credit process:

Before we can discuss the Letter of credit process, let us first understand the parties involved in this.

The parties are:

  1. The Buyer (also known as the Importer)
  2. The Buyer’s bank
  3. The corresponding bank to the Buyer’s bank
  4. The Seller (also known as the Exporter)
  5. The Exporter’s bank
  6. The Corresponding bank to the Exporter’s Bank

The process:

Please read through and find out answers to the question what is the process of letter of credit?

Danny Brothers Nig. Limited wants to stock their warehouse and for them to do that, they must either import produced goods or other a company like Xin Hou Limited who is based in China to produce the products they need for immediate importation.

Now nothing is produced for free which means that Danny Brother’s must pay for the services before or after the services by Xin Hou Limited. If they pay after, Xin Hou imited will be at the loose end of payment default risk yet if they pay before, Danny Brothers Nig. Limited will be at the loose end too.

To ensure that such interests are protected, XIn Hou Limited will tell Danny Brothers to secure an LC for then on the desired importation.

Danny Brothers Nig. Limited will now approach their bank say Watch Bank Nig Plc also known as the Issuing bank with their request for LC. The bank will place a request for retail LC bid to the Central bank of Nigeria (CBN) on behalf of the customer. If the bank can also avail the customer LC from a wholesale LC already acquired from CBN.

From the above you can now see the answer to the question what is issuing bank in letter of credit?

Once CBN advises the buyer’s bank of their credit position with the LC of the Danny Brothers Nig. Limited, Watch bank Nigeria will contact their corresponding bank who will do two things:

  1. Confirm the LC to the Seller and his bank. In this case they serve as the confirming bank. This confirmation attracts a confirmation fee.                                                                                                                                                                      
  2. Advising the Xin Hou Limited on the same LC where the corresponding bank to the Danny Brothers Nig. Plc’s bank and the exporter’s bank are the same too. In this case they are working as advising bank.    
  3. There are times when the Xin Hou Limited will asked the corresponding bank to the Danny Brothers Nig. Plc’s bank to waive the LC confirmation citing good knowledge of Danny brothers. In such case both confirmation of the LC and its charged are deleted from the deal.

Once the product is shipped, Xin Hou Limited will email a soft copy (Advice copy) of the shipping document to Danny brother’s Bank and another to their bank.

Upon the receipt of the shipping document, Xin Hou Limited will be paid their money in full without delay.

The Shipping document will now be used to process the Port duty payment for the clearance of the good.         

Shipping document contains the following:

  1. Bill of landing,
  2. Final invoice
  3. Parking list,
  4. Certificate of value and origin (CCVO)
  5. Manufacturer certificate,
  6. Standard  Organization of Nigeria Conformity Assessment Program (SONCAP)

With the above, the Pre Arrival Assessment Report (PAAR) which is the paper that contains the duty to be paid will be generated.

Letter of credit example and Letter of credit sample:

You might be hearing too what is a letter of credit example?

Below is the sample Letter of credit:

Please take note of its features and characteristics.

Letter of credit in Nigeria
Summarized Pictogram Process of LC


LC makes the importation business to be very easy. You don’t need to allow your importation to suffer before you can tap on the benefit of this provision.

You may also read: SME in Nigeria

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