Reference is often made to the financing of international trade as the aim of bankers’ documentary credits, but this, it is suggested, is not the principal aim which is to effect the payment for goods or a service in circumstances where the buyer of the goods or receiver of the service does not wish payment to be made before he can be as certain as he can be that he will receive shipping documents showing that the goods have apparently been shipped or he has received the service, while the beneficiary does not wish to ship the goods or render the service before he, in his turn, can be sure of being paid, and it is the role of the credit to bridge this impasse.

Normally, before opening a confirmed credit, which in many cases is the only type of credit satisfactory to the beneficiary, the bank will require the applicant for the credit to deposit the amount for which the credit is to be opened. However, on occasions, the applicant for the credit will ask his bank to finance the operation, but this is a banking transaction apart between the opening bank and its customer, and it will undoubtedly insist on the bills of lading being established to its order. In this case the bank’s position is reasonably secure as, if the beneficiary cannot produce the correct documents to obtain payment of the credit, it will not be paid so that the opening bank will not have advanced any funds for its customer. If the documents are in order, the beneficiary will be paid but the opening bank will have in its possession the shipping documents established in its name.

On other occasions (or on the same occasion) the beneficiary may be buying from a third party the goods he intends to sell while he may wish his bank (most often the confirming/paying bank in the first transaction) to finance the transaction until he receives payment of the credit in that transaction. The usual way of accomplishing this end is by means of a “Back to Back” credit. The modus operandi is as follows:

The seller in the first transaction (A), i.e. the beneficiary in that transaction, asks his bank, the confirming/paying bank in transaction (A) to become the opening bank in transaction (B) and to open a credit in the favour of the third party providing the goods, as soon as the opening bank in the first transaction (A) has opened its credit. When the beneficiary in transaction (B) presents the documents to the confirming/paying bank in that transaction, provided they are in order, it will be paid by the confirming/paying bank, which in its turn, will be paid by the confirming/paying bank in transaction (A). The latter then will be reimbursed by the opening bank in