Confirming Bank

On this article you can find the definition of a confirming bank, its roles and responsibilities in a typical letter of credit transaction.

Confirming bank means the bank that adds its confirmation to a letter of credit upon the issuing bank's authorization or request.

In some situations, issuing banks' payment undertakings would not be sufficient for beneficiaries. This is especially true, when letters of credit are opened from one of the high political and financial risk possessing countries.

If the beneficiary figured it out that the issuing bank or issuing bank's country is not reliable enough, then the beneficiary may seek another bank's payment guarantee added to the letter of credit in addition to issuing bank's payment undertaking.
Roles and responsibilities of a confirming bank in a letter of credit transaction.
Confirming Bank
The process as explained above is called confirmation and the bank which adds its confirmation to the letter of credit is known as the confirming bank.

Why Exporters Should Get the Letter of Credit Confirmed? 

Exporters are trying to work with a confirmed letter of credit, mostly when the letter of credit is issued from a risky country.

For example, Ethiopian export letters of credit are generally confirmed by Commerzbank, which is a big German Bank.

Example:

An export letter of credit issued by an Ethiopian Bank. The credit amount is 90.000 EUR. The letter of credit available with the nominated bank by payment. The letter of credit also requests a sight draft drawn on the nominated bank as well.

Issuing bank sent the letter of credit to the Commerzbank with its confirmation authorization.

Upon issuing bank's request, Commerzbank is confirmed the letter of credit and transmits it to second advising bank via MT 710 Swift Message.

The beneficiary, by having the letter of credit confirmed by the Commerzbank, eliminates the political risks of Ethiopia as well as financial risks associated with the issuing bank.

The beneficiary now knows that the confirming bank will be paying the letter of credit amount to the beneficiary as long as the documents are found to be complying.

What are the Benefits of Confirmation for Exporters?

Main benefits of confirmation for exporters are summarized as follows:
  1. An exporter can eliminate issuing bank's country risks by having the letter of credit confirmed by a bank located in its own country. In some cases, confirming banks are located in different countries than exporters. As long as the confirming bank is in a reliable country, it would not be a problem.
  2. An exporter can eliminate issuing bank's financial risks by confirmation. The biggest financial risk factor of the issuing bank is the bankruptcy risk. After confirmation, the exporter will be receiving its money from the confirming bank, even if the issuing bank goes bankrupt. (complying presentation is a must under this situation)
Roles and Responsibilities of Confirming Bank:

a. Provided that the stipulated documents are presented to the confirming bank or to any other nominated bank and that they constitute a complying presentation, the confirming bank must:

i. honour, if the credit is available by

         a. sight payment, deferred payment or acceptance with the confirming bank;
         b. sight payment with another nominated bank and that nominated bank does not pay;
         c. deferred payment with another nominated bank and that nominated bank does not incur its deferred payment undertaking or, having incurred its deferred payment undertaking, does not pay at maturity;
         d. acceptance with another nominated bank and that nominated bank does not accept a draft drawn on it or, having accepted a draft drawn on it, does not pay at maturity;
         e. negotiation with another nominated bank and that nominated bank does not negotiate.

ii. negotiate, without recourse, if the credit is available by negotiation with the confirming bank.

b. A confirming bank is irrevocably bound to honour or negotiate as of the time it adds its confirmation to the credit.

c. A confirming bank undertakes to reimburse another nominated bank that has honoured or negotiated a complying presentation and forwarded the documents to the confirming bank. Reimbursement for the amount of a complying presentation under a credit available by acceptance or deferred payment is due at maturity, whether or not another nominated bank prepaid or purchased before maturity. A confirming bank's undertaking to reimburse another nominated bank is independent of the confirming bank's undertaking to the beneficiary.

d. If a bank is authorized or requested by the issuing bank to confirm a credit but is not prepared to do so, it must inform the issuing bank without delay and may advise the credit without confirmation.

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