TRW KNOWLEDGE · LEGAL INFORMATION
Letters of Credit and LC Payments in Bangladesh: A Practical Guide for Importers and Exporters
This guide explains how Letters of Credit (LCs) operate in Bangladesh, the principal legal and regulatory references that commonly affect LC transactions, common risks and documentary pitfalls, and practical steps importers and exporters can take to reduce delay and dispute. It also outlines dispute-resolution routes and a practical checklist for preparing LC documentation.
Introduction
Letters of Credit (LCs) are a central payment mechanism in international trade and in Bangladesh’s cross-border commerce. An LC shifts certain payment risk from the seller (beneficiary) to the issuing bank on instructions from the buyer (applicant) and conditions payment on presentation of specified documents. This guide explains the LC process as commonly applied in Bangladesh, highlights the domestic and international legal materials that typically govern LC practice, and sets out practical steps importers and exporters can take to reduce documentary discrepancies, regulatory delays, and commercial disputes.What is an LC payment in the Bangladesh context?
In broad terms, LC payment in Bangladesh refers to payment under a documentary credit where a bank agrees to make payment provided that the seller presents documents that comply with the terms of the credit. LCs are used to manage trust and payment risk between parties who may not have an established commercial relationship or where the buyer and seller operate under different legal and regulatory regimes. In Bangladesh, LC practice is informed both by international rules (frequently UCP 600 for documentary credits) and by domestic legislation and trade policies that influence documentation, customs clearance and foreign exchange.Primary legal and regulatory references commonly cited in LC transactions
The following are the laws, policies and standards that are frequently relevant to LC payments in Bangladesh. This list is taken from the same informational source as this guide and is intended to help readers identify where to look for formal rules and procedural requirements that can affect an LC transaction:- UCP 600 (Uniform Customs and Practice for Documentary Credits) — international rules that standardize bank practice on documentary credits;
- INCOTERMS 2020 — common commercial terms that allocate risks and costs for international shipments;
- Customs Act 1969 — domestic law governing import‑export procedural and documentary requirements;
- Import Policy Order 2021-2024 and Export Policy 2024-2027 — national policy documents setting out trade facilitation and export/import guidance;
- Foreign Exchange Regulation Act 1947 — domestic law affecting cross-border currency flows and repatriation;
- Bank Company Act 1991 — regulatory framework for banking operations that issue and advise LCs;
- Secured Transactions (Movable Property) Act 2023 — a recent statute affecting use of movable property as collateral, which may be relevant to financing linked to LC transactions;
- Negotiable Instruments Act 1881 and Civil Procedure Code (CPC) 1908 — procedural and enforcement laws that can be relevant if LC disputes lead to litigation;
- ICC arbitration rules and UNCITRAL principles — recognized international frameworks that parties commonly use to resolve cross-border commercial disputes arising from LC arrangements.
Principal parties and the operational flow
LC transactions in Bangladesh commonly involve four main parties: the applicant (buyer), the issuing bank (the applicant’s bank), the beneficiary (seller), and the advising or nominated bank (the beneficiary’s bank). A typical sequence of steps is as follows:- The buyer and seller agree the sale contract and incorporate LC terms by reference.
- The buyer requests the issuing bank to open an LC in favour of the seller and provides instructions and supporting documents to the bank.
- The issuing bank issues the LC and the advising bank notifies the beneficiary.
- The seller ships the goods (or provides services where applicable) and presents the required documents to the advising/nominated bank.
- The advising bank checks documents and forwards them to the issuing bank for payment under the LC, subject to document compliance and the LC terms.
- Payment is made by the issuing bank on sight or at maturity, depending on whether the LC is a sight or usance (deferred payment) credit.
- Documents are used for customs clearance and to transfer title in accordance with the sales contract and INCOTERMS selected by the parties.
Common types of LCs and considerations for choosing among them
Choice of LC type affects the allocation of risk and the timing of payment. Common forms used in Bangladesh include:- Irrevocable LCs — these cannot be amended or cancelled without the consent of all parties; they are commonly used where the beneficiary needs a strong assurance of payment.
- Revocable LCs — these can be amended or cancelled by the issuing bank without prior notice to the beneficiary; they are generally less secure for exporters.
- Confirmed LCs — a second bank adds its confirmation to the issuing bank’s undertaking, providing an additional layer of payment security to the beneficiary.
- Unconfirmed LCs — rely solely on the issuing bank’s obligation; used when the beneficiary trusts the issuing bank’s credit and performance.
- Sight LCs — payment is due upon presentation of complying documents.
- Usance or deferred payment LCs — payment is deferred to a later date agreed within the LC.
Documentary requirements and typical document checklist
Payment under an LC is documentary: banks examine documents, not goods. Discrepancies between documents and the LC terms are the most common cause of non-payment or delay. Typical documents referenced in LCs and in trade between Bangladesh and overseas partners include, where applicable:- Commercial invoice;
- Full set of clean on‑board bills of lading or other transport documents;
- Packing list;
- Certificate of origin;
- Insurance policy or certificate (if required by the LC or INCOTERMS);
- Inspection certificate (where required);
- Bank certificates or shipping documents required by customs under the Customs Act 1969 and relevant Import/Export Policy orders.
Practical drafting tips to reduce documentary discrepancies
Ambiguity in the LC or in the underlying contract is a frequent source of dispute. The following drafting considerations are drawn from general documentary practice and the source material used for this guide:- Mirror the sales contract: ensure the LC reflects the sales contract’s description of goods, quantity, price, and delivery terms (including the selected INCOTERM 2020 rule).
- Specify documents exactly: avoid general or open‑ended wording such as “all customary documents” without listing what will satisfy the credit.
- Allow reasonable tolerances: where possible and commercially acceptable, include tolerances in quantity and weight to accommodate normal commercial practice.
- Align insurance and transport terms: set out clearly who is responsible for arranging insurance, required coverage, and which transport document(s) will be acceptable.
- Pick an appropriate confirmation: exporters trading to jurisdictions or banks they do not trust may ask for confirmation by a bank acceptable to them.
Regulatory and compliance considerations specific to Bangladesh
Several domestic laws and policy instruments identified above can affect the practical handling of an LC transaction in Bangladesh. These considerations are commonly noted in advice for parties operating in Bangladesh:- Customs compliance: the Customs Act 1969 and import/export policy documents publish documentary requirements that will be checked at import and used to calculate duties and taxes. Misalignment between LC documents and customs requirements can delay release of goods and indirectly affect payment timings.
- Foreign exchange: the Foreign Exchange Regulation Act 1947 governs cross-border currency controls and repatriation of funds. Buyers, sellers and banks will typically need to ensure that currency movements related to LC payments comply with applicable reporting and approval procedures.
- Banking operations: banks issuing or advising LCs operate within the Bank Company Act 1991 framework; operational protocols established by banks in Bangladesh will affect timing, documentary checks, and the form of any confirmations.
- Secured lending and collateral: the Secured Transactions (Movable Property) Act 2023 provides a framework for creating security over movable assets. Where financing is tied to an LC (for example, where a bank advances against documents or commodities), the treatment of collateral and perfection of security may be affected by this statute.
Common causes of LC disputes and how they typically arise
Document discrepancies are the predominant cause of delays or refusals of payment under LCs. Other common causes of LC disputes include:- Inaccurate or inconsistent descriptions of goods between the contract and the LC;
- Confusion over INCOTERMS responsibilities, leading to disagreements about which party must arrange and pay for transport or insurance;
- Late or incomplete document presentation, or documents that fail to meet the precise terms of the LC;
- Regulatory non‑compliance, for example, a failure to obtain necessary customs documentation or to comply with foreign-exchange reporting rules.
Resolving LC disputes: methods and procedural options
When disputes arise, parties commonly pursue one or more of the following routes, each with advantages and limitations depending on the commercial priorities and the terms of the trade contract and LC:- Negotiation and commercial settlement — direct negotiation can preserve the commercial relationship and avoid the cost and delay of formal proceedings.
- Mediation — a facilitated settlement process that can be faster and more confidential than court litigation.
- Arbitration — often selected for cross-border LC disputes for confidentiality and enforceability in multiple jurisdictions; ICC arbitration rules are commonly used in international commercial contracts.
- Litigation — where arbitration is not agreed, parties may pursue remedies through the domestic courts, which will follow procedural rules such as those in the Civil Procedure Code 1908 and address enforcement matters under laws such as the Negotiable Instruments Act 1881 where relevant.
Risk management and practical recommendations
To reduce the likelihood and cost of LC disputes, importers and exporters frequently adopt the following measures. The recommendations below are practical considerations consistent with documentary practice and the legal and policy framework cited earlier:- Plan documentary steps early: draft the LC and the sales contract in tandem so the LC terms mirror the contract precisely.
- Use experienced logistics and customs partners: freight forwarders and customs brokers familiar with Bangladesh’s Customs Act 1969 and the current Import/Export Policy orders can help avoid documentary omissions that cause delays.
- Confirm bank instructions: ensure that the issuing and advising banks are clear about acceptable documentary formats (e.g., allowable wording on bills of lading, certificates of origin, and insurance documents).
- Consider confirmation when appropriate: if the beneficiary doubts the issuing bank’s reliability, adding confirmation by a bank of known standing can materially reduce payment risk.
- Keep records: maintain complete documentary trails for shipment, inspection and bank correspondence in case of later disputes or regulatory queries.
Table: LC types and practical considerations
| LC Type | Primary Benefit | Typical Downside | When commonly used |
|---|---|---|---|
| Irrevocable LC | Stronger assurance of payment to beneficiary | Less flexibility for buyer to amend without consent | Where seller requires payment security |
| Revocable LC | Greater flexibility for applicant and issuing bank | Limited security for beneficiary | Low‑risk or intra‑group trades |
| Confirmed LC | Added payment assurance through confirming bank | Additional bank fees; requires a confirming bank | When beneficiary is uncertain about issuing bank/jurisdiction |
| Sight LC | Immediate payment on compliant presentation | Less time for buyer cash management | When seller requires immediate liquidity |
| Usance (deferred) LC | Buyer may obtain credit period | Seller waits for payment; possible financing needs | When buyer needs time to sell or finance goods |
Practical checklist for LC transactions in Bangladesh
Use this checklist as a practical tool to reduce common pitfalls. It is a general guide drawn from common practice and the legal/regulatory sources identified above.- Confirm that the LC wording mirrors the sales contract (commodity description, price, quantity, INCOTERM, delivery dates).
- List every document required by the LC and ensure each is precisely described (including number of originals/copies).
- Check whether insurance is required and who must arrange it under the INCOTERM selected.
- Verify acceptable transport documents and any special endorsements required by customs.
- Coordinate with the advising bank early to confirm its documentary requirements and timing for forwarding documents to the issuing bank.
- Confirm foreign-exchange reporting requirements with the remitting bank to ensure repatriation and currency approvals are in place.
- Where financing or collateral is involved, verify how the Secured Transactions (Movable Property) Act 2023 may affect perfection of security.
- Keep copies of all shipping, inspection and bank correspondence for at least the period recommended by your internal compliance procedures.
- If in doubt, seek clarification from banks and legal advisers before shipping goods or presenting documents.
Drafting a dispute resolution clause — considerations
The contract between buyer and seller should state the preferred dispute resolution mechanism. The source material indicates arbitration under ICC rules is commonly used in international LC disputes because of confidentiality and cross-border enforceability. Parties may also choose mediation as a first step or specify litigation in a particular court. Any clause should be clear about the seat of arbitration, the governing law of the contract, and the language of proceedings to avoid jurisdictional disputes later on.When to seek tailored legal advice
This guide provides general information based on the source materials and common documentary practice. Because LC transactions intersect with commercial terms, bank practice and domestic regulatory controls—and because small changes in wording can have material consequences—parties frequently obtain tailored legal advice when:- Drafting or negotiating the LC wording and related sales contracts;
- Facing documentary discrepancies or a bank’s refusal to pay;
- Dealing with cross-border enforcement or complex arbitration or litigation issues;
- Structuring finance or security arrangements that rely on movable collateral under the Secured Transactions Act.
Frequently Asked Questions (FAQ)
1. What role does UCP 600 play in LC payments affecting Bangladesh?
UCP 600 is an internationally accepted set of rules that banks commonly apply to documentary credits. Where the LC expressly states that it is subject to UCP 600, banks will usually interpret the documentary obligations and standard practices in light of those rules. The effect of UCP 600 is procedural — it guides how banks examine documents — and will operate alongside any applicable domestic laws or policies relevant to an LC transaction in Bangladesh.2. Do Bangladesh’s import and export policy orders change LC obligations?
Import Policy Orders and Export Policy documents set out administrative and documentary requirements for trade. While they do not change the basic documentary structure of an LC, these policy notices can affect what documents customs will require for release of goods, and those customs requirements should be reflected in the LC and the parties’ contract to avoid mismatches that could delay clearance and indirectly affect payment timing.3. Can banks refuse to pay under an LC if there is a small documentary discrepancy?
Under the documentary credit regime, banks review presented documents for compliance with the LC terms. Even minor discrepancies can result in a bank refusing to honour or negotiate the documents. Whether a bank accepts a discrepancy often depends on the particular facts, the wording of the LC, and the banks involved. When payment is critical, parties may consider confirming the LC or negotiating tolerant wording in the credit where commercially feasible.4. How do foreign-exchange rules in Bangladesh affect LC payments?
Foreign-exchange regulations may affect how funds are repatriated, reported or converted. Banks and parties typically need to ensure payments made under LCs comply with any reporting or approval obligations under the Foreign Exchange Regulation Act 1947. The practical impact will depend on the transaction currency, counterparty location and bank practices.5. If I receive a notice of non‑payment under an LC, what steps can I take?
If a bank refuses payment on documentary grounds, common practical steps include: (a) requesting the bank to specify the exact discrepancy, (b) assessing whether the discrepancy can be cured or waived, (c) negotiating a commercial settlement with the buyer, and (d) considering alternative dispute resolution or legal proceedings where appropriate. The appropriate route will depend on the contractual dispute resolution clause and the commercial goals of the parties.6. Are arbitration and litigation both available for LC disputes involving Bangladesh?
Yes. Parties can resolve disputes through negotiation, mediation, arbitration or litigation. International contracts commonly specify arbitration (for example, under ICC rules) due to advantages in confidentiality and cross‑border enforceability, but litigation before domestic courts remains an option if the parties have not agreed to arbitration or choose to litigate on other grounds consistent with local procedural rules.7. How can the Secured Transactions (Movable Property) Act 2023 affect LC-related financing?
Where financing against shipments or receivables is structured using movable collateral, the legal framework for creating, registering and enforcing security interests in movable property may affect lenders’ rights and remedies. The practical consequences depend on the particular financing documents and whether security is properly perfected in accordance with the statutory framework.Next steps and practical contact information
If your business uses LCs in trade with Bangladesh or needs assistance aligning LC terms with customs and foreign exchange requirements, consider taking the following next steps:- Review your standard sales contract and LC templates to ensure they align with INCOTERMS 2020 and the documentary expectations of the banks you work with.
- Engage with your bank and your freight forwarder or customs broker early in the process so documentary requirements are confirmed before shipment.
- Consider whether confirmation of the LC or obtaining a standby instrument is appropriate for the transaction’s risk profile.
- If you expect to finance shipments using movable collateral, review how the Secured Transactions (Movable Property) Act 2023 may affect perfection and enforcement of security.
Closing note
This guide provides an informational summary based on the referenced source materials and common documentary practice for LC transactions in Bangladesh. It does not substitute for tailored legal advice. Because LC practice depends heavily on precise wording, bank procedures and the interaction with domestic regulatory requirements, parties with specific transactions or disputes should seek up-to-date, transaction‑specific guidance from counsel and the banks involved.CONTINUE EXPLORINGConnected
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