How Should a Letter of Credit Financed by the World Bank Be Issued?

Letters of credit financed by international development institutions such as the World Bank (WB) are quite different from ordinary commercial LCs. They are often issued as non-operative credits and become operative only after the donor issues a separate payment or reimbursement commitment.

The following question discusses one practical example.

Question

Dear Mr. Old Man,

I have a question and would appreciate your guidance.

A company requests the issuance of a Letter of Credit (LC) to be financed with funds provided by the World Bank (WB) under a framework loan agreement signed between the government and the WB.

The LC is to become operative only upon the issuance by the WB of a payment/reimbursement commitment.

Could you please explain how such an LC should be issued?

Thank you.

LT

_____

Answer

Dear LT,

Thank you for your interesting question.

As far as I know, this type of letter of credit is commonly used for projects financed by international development institutions or donors such as the World Bank (WB), Asian Development Bank (ADB), Swedish International Development Cooperation Agency (Sida), Japan International Cooperation Agency (JICA), and similar organizations.

Unlike a conventional commercial LC, the funds are provided by the donor under a loan or financing agreement. Consequently, the nominated (negotiating) bank is authorized to obtain reimbursement directly from the donor, or from a bank designated by the donor, rather than from the issuing bank.

In your specific case, the LC may be issued under the loan agreement between the World Bank and the applicant’s government. One possible structure is as follows.

Field 41A – Available With… By…

Available with the advising bank (e.g. Bank ABC) by negotiation.

Field 47A – Additional Conditions

• This Letter of Credit is established under Loan Agreement No. XXX between the World Bank and the Government of Vietnam.
• This Letter of Credit is issued as non-operative and shall become operative only upon receipt by the advising bank of the World Bank’s special payment/reimbursement commitment.
• Negotiation under this Letter of Credit is restricted to the advising bank.
• UCP 600 Article 7 is excluded. Accordingly, the issuing bank undertakes no obligation to honour under this Letter of Credit.
• The issuing bank shall release the documents to the applicant without requiring payment from the applicant, as payment under this Letter of Credit is financed under the World Bank loan arrangement.

Field 78 – Instructions to the Nominated/Negotiating Bank

Upon negotiation of complying documents, the negotiating bank shall claim reimbursement from the World Bank by authenticated SWIFT message (or other agreed means), provided that all terms and conditions of the Letter of Credit have been complied with.

At the same time, the negotiating bank shall dispatch the complete set of documents in one lot by courier to the issuing bank at the address stated in the Letter of Credit.

The above is merely one example to illustrate how this type of letter of credit may be structured. The exact wording and reimbursement mechanism will depend on the financing arrangements agreed among the World Bank, the issuing bank, and the applicant.

I hope this explanation is helpful.

Best regards,

Mr. Old Man