Key points
- Under UCP 600 every credit is irrevocable, and banks deal with documents only, not with the goods.
- The supplier is paid only if invoice, B/L, insurance and other documents match the credit and each other.
- A credit protects you against paying for nothing shipped, not against poor quality: add an inspection certificate.
- Published UAE bank tariffs charge about 0.125%–0.175% per month to open, with a 3-month minimum, plus SWIFT and amendment fees.
- In 2026, check the port of discharge clause: Hormuz diversions can make a credit naming only Jebel Ali impossible to meet.
How a letter of credit works
Four parties are usually involved: you as the applicant, your bank as the issuing bank, the supplier as the beneficiary, and the supplier's bank in China as the advising or nominated bank. If the supplier also wants protection against your bank or country, a fourth bank can confirm the credit. The credit lists exactly which documents must be presented and by when. If they comply, the bank must pay, even if you have since changed your mind about the order.
- Agree terms in the contractAmount, Incoterm, latest shipment date, ports and the documents required are fixed with the supplier.
- Apply to your bankYou submit the application; the bank uses your credit line or asks for a cash margin.
- Credit issued and advisedYour bank sends the credit by SWIFT to the supplier's bank, which advises the supplier.
- Supplier checks and shipsThe supplier asks for amendments if needed, then produces and ships the goods.
- Documents presentedInvoice, B/L and other documents go to the nominated bank within the presentation period.
- Banks examineEach bank has up to 5 banking days to decide whether the presentation complies.
- Payment and releaseAt sight you pay on compliance, or under usance on the due date; you receive the documents and collect the goods.
The UCP 600 rules that matter to importers
| Rule | Article | What it means for you |
|---|---|---|
| Irrevocable | Art. 3 | Once issued, the credit cannot be cancelled without the supplier's agreement |
| Documents, not goods | Arts. 4–5 | The bank pays on compliant paper; quality disputes stay between you and the supplier |
| Examination time | Art. 14(b) | Up to 5 banking days after presentation |
| Presentation period | Art. 14(c) | No later than 21 calendar days after shipment and before expiry |
| No conflicting data | Art. 14(d) | Data need not be identical across documents but must not conflict |
| Invoice description | Art. 18(c) | Must correspond with the goods description in the credit |
| Bill of lading | Art. 20 | Must show shipped on board, the vessel and the ports |
| Insurance | Art. 28 | At least 110% of CIF or CIP value unless the credit says otherwise |
| Tolerances | Art. 30 | About allows ±10%; ±5% on quantity if not counted in units |
| Refusal | Art. 16 | One notice listing all discrepancies by the 5th banking day |
Banks read these rules together with ISBP 821, the ICC's International Standard Banking Practice published in 2023. For electronic presentations, including electronic B/Ls, the credit must allow them, for example under eUCP version 2.1.
Documents an L/C usually asks for
Documents to list in your L/C application
0/8Discrepancies: what goes wrong and what happens next
- Late shipment, presentation more than 21 days after shipment, or an expired credit.
- Invoice description or amount different from the credit.
- B/L not clean on board, or with the wrong consignee, notify party or endorsement.
- Insurance below 110%, wrong risks, or dated after the B/L.
- Certificate of origin or inspection certificate from a different body than the one named.
- Weights, marks or package counts that conflict between documents.
If the documents do not comply, the issuing bank may refuse, but it must send a single notice listing every discrepancy by the 5th banking day, or it loses the right to refuse. In practice the bank usually asks you whether you will waive the discrepancies. If the goods are fine, accepting the waiver keeps the shipment moving; if not, refusal gives you leverage. Banks also charge a discrepancy fee; one UAE tariff lists USD 157.50 per set of documents.
Comply or discrepant?
What an L/C costs
| Charge | Example from a published UAE bank tariff | Note |
|---|---|---|
| Opening commission | 0.125% per month, minimum 3 months or AED 787.50 | Another UAE bank lists 0.175% per month on the first AED 500,000 |
| SWIFT for issuance | AED 262.50 online, AED 315 over the counter | Per credit |
| Amendment | AED 262.50 flat; value increase or extension 0.125% per month | Each change costs, so get the draft right |
| Acceptance (usance credits) | 0.125% per month from acceptance to maturity | For deferred payment terms |
| Sight settlement | USD 157.50 | Per payment |
| Discrepancy fee | USD 157.50 per set of documents | The credit's charges clause says who bears it |
| Advising, confirmation, negotiation in China | Set by the supplier's bank | Usually agreed in the contract and the credit |
Worked example using the first tariff (United Arab Bank, effective 15 September 2025): a USD 100,000 credit is about AED 367,250 at 3.6725. Three months at 0.125% is 0.375%, or about AED 1,377, plus AED 262.50 SWIFT, so roughly AED 1,640 to open before amendments, settlement and any confirmation. Your bank may also block a cash margin or use part of your credit line. Each bank sets its own tariff, so ask yours for a written quote.
L/C vs T/T vs D/P
- Commonly 30% deposit and 70% against a B/L copy, then telex release.
- Cheapest and fastest; the most common term from China to the Gulf.
- Your deposit and balance are at risk unless you inspect before paying.
- Banks exchange documents for payment under ICC URC 522.
- Banks do not promise to pay; the supplier risks you refusing the documents.
- Needs an original to order B/L, not a telex release; less common with Chinese suppliers.
- Your bank promises to pay against complying documents under UCP 600.
- Higher fees and strict paperwork, but strong protection for both sides.
- Best for large orders, new suppliers and regulated goods.
- A second bank adds its own promise to pay.
- Covers the supplier against your bank and country risk.
- Extra confirmation fee, usually charged in China.
When an L/C is worth it
- The order is large compared with your relationship history with the supplier.
- It is a first order with a new supplier and you want shipment proven before payment.
- The supplier asks for security before producing custom goods.
- Your buyer or financing bank requires documentary terms.
- You want an inspection certificate made a condition of payment.
Key terms
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Frequently asked questions
What is a letter of credit for importers?
It is a promise from the importer's bank to pay the supplier when the supplier presents documents that comply with the credit's terms. It is usually governed by ICC UCP 600.
How much does a letter of credit cost in the UAE?
Published UAE bank tariffs show opening commissions of about 0.125%–0.175% per month with a 3-month minimum, plus SWIFT, amendment, settlement and discrepancy fees. Each bank sets its own tariff, so ask for a written quote.
How long does the supplier have to present documents?
No later than 21 calendar days after shipment under UCP 600, unless the credit sets a shorter period, and always before the credit expires.
Does a letter of credit guarantee the quality of the goods?
No. Banks check documents, not goods. To control quality, require an inspection certificate from an inspection company you choose as one of the documents.
What happens if the documents have discrepancies?
The bank may refuse, listing all discrepancies in one notice by the 5th banking day. It usually asks the importer whether to waive them. If you waive, the supplier is paid and you receive the documents.
Is an L/C better than T/T for buying from China?
For large orders or new suppliers it gives more protection than a deposit and balance by T/T, but it costs more and needs strict paperwork. Many Gulf importers use T/T for regular suppliers and an L/C for big or first orders.
What is the difference between an L/C and D/P?
Under an L/C the bank promises to pay against complying documents. Under D/P (URC 522) the banks only exchange documents for payment and give no payment promise.
Sources
- ICC Academy – UCP 600 (Uniform Customs and Practice for Documentary Credits)
- ICC Academy – Documentary credits: rules, guidelines, terminology
- ICC Academy – International Standard Banking Practice (ISBP 821)
- ICC – URC 522 Uniform Rules for Collections
- United Arab Bank – Trade and Supply Chain Finance Schedule of Charges (effective 15 September 2025)
- Commercial Bank International – Trade Finance Schedule of Charges (March 2026)
- AGBI – Gulf cargo stuck as shipping calls end of voyage (March 2026)
General information checked on the date shown. Rules and rates change: our team confirms the details for your shipment.