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Documentary credit is a financial arrangement used in international trade under which a bank, on behalf of the importer or buyer, undertakes to make payment to the exporter or seller, provided that the exporter submits the documents specified in the terms and conditions of the credit. It is also commonly known as a Letter of Credit (L/C). Documentary credit is one of the most important methods of payment in export-import transactions because it reduces the risk of non-payment for the exporter and provides assurance to the importer that payment will be made only when the required documents are presented in accordance with the credit. In an international transaction, the buyer and seller may be located in different countries and may not know each other personally. Therefore, there is a risk for both parties. The exporter may fear that the importer will not make payment after receiving the goods, while the importer may fear that the exporter will not ship the goods according to the contract. A documentary credit helps overcome these difficulties by introducing banks as intermediaries. The importer requests his bank, known as the issuing bank, to issue a letter of credit in favour of the exporter. The exporter then ships the goods and presents the required documents, such as the commercial invoice, bill of lading, insurance document, certificate of origin and packing list. If the documents comply with the terms of the credit, the bank makes payment or undertakes to make payment according to the agreed arrangement. A documentary credit is therefore a documentary rather than ___ ________ __________ ______ _____ ________ ______ ___ ___.
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