Letter of Credit

  • Export Letter of Credit

    Product Definition

    The importer’s bank irrevocably commits to payment provided that the exporter complies with the terms and specifications of the letter of credit. Al Rajhi Bank advises and negotiates documents and undertakes payment to the exporter, acting on the exporter’s behalf by adding its confirmation to the letters of credit, if required (confirmation of letter of credit).

    Features and Benefits

    • The exporter has a bank commitment to pay against compliant documents, instead of running the importer’s commercial risk
    • Product is used when the exporter is not very familiar with the importer or does not want to assume the political risk of the importer’s country. This product perfectly suits those exporters who need to manage their commercial and cross-border risks

    Transaction Mechanism

    • Al Rajhi submits export letters of credit authenticating and advising the establishment of the letter of credit to the beneficiary (exporter, Al Rajhi’s client)
    • The bank manages the collection cycle for the beneficiary through its extensive network
    • Al Rajhi Bank confirms irrevocable letters of credit where the bank undertakes to honour the credit, assuming all terms and conditions have been complied with
  • Import Letter of Credit

    Import Letter of Credit

    Product Definition

    An instrument issued by Al Rajhi Bank in favor of a beneficiary (exporter) on behalf of the applicant (importer), Al Rajhi Bank commits to pay (accept to pay) against trade documents drawn in compliance with the letter of credit terms. Al Rajhi Bank’s credit worthiness replaces that of the applicant.

    Features and Benefits

    • The importer ensures that payment will only be undertaken of the exporter complies with the terms and specifications of the letter of credit
    • Security to the Exporter if there are risks involved or political concerns
    • Immediate notification to importer upon receipt of documentation
    • Importer improves his negotiating position through Al Rajhi Bank’s payment guarantee

    Transaction Mechanism

    Al Rajhi Bank issues, amends, confirms and pays both sight and acceptance letters of credit through its extensive network of correspondent bank relationships

  • Murabaha Letter of Credit

    Product Definition

    Murabaha LC is a letter of credit issued by Al Rajhi Bank in favor of the beneficiary (exporter) on behalf of the applicant (importer). Al Rajhi Bank commits and accepts to pay against trade documents drawn in compliance with the letter of credit terms. Al Rajhi Bank’s credit worthiness replaces that of the applicant. Murabaha contracts allow customers to purchase raw materials, capital goods and other consumables from local and international markets.

    These goods are first bought by Al Rajhi Bank for its account on orders of the customers by paying cash or through LC as the case may be, and then sold to the customer with profit margin on deferred payment basis. Payments on deferred basis can be made to the bank in instalments or in one lump sum amount.

    Features and Benefits

    • There is no fund outlay from the importer at the time of opening the letter of credit
    • Convenience of payment to the bank through  instalments, on deferred payment basis or on bullet payment basis
    • Immediate notification to importer upon receipt of documentation
    • Importer improves its negotiating position through Al Rajhi Bank’s payment guarantee

    Transaction Mechanism

    After the Murabaha LC is opened, when the goods arrive, there are three options available to the importer.

    • Al Rajhi sells its share in Murabaha to the customer on cash payment or deferred basis at an agreed profit margin
    • The customer sells its share to Al Rajhi on cash payment or deferred basis
    • Both sell their shares in the market together 
  • Musharaka Letter of Credit

    Product Definition

    Musharaka LC is a letter of credit issued by Al Rajhi Bank in favor of the beneficiary (exporter) on behalf of the customer-applicant (importer).  Al Rajhi Bank commits and accepts to pay against trade documents drawn in compliance with the letter of credit terms.  In turn, Al Rajhi Bank’s credit worthiness replaces that of the applicant.

    Musharaka works like a limited partnership between Al Rajhi Bank and customers who need to import goods and equipment but do not have the sufficient resources to fund the transaction. In this type of transaction, the customer would provide a defined portion of the funds required and Al Rajhi Bank would provide the remaining funds and issue letter of credit to facilitate the import of the goods. When the goods arrive, Al Rajhi Bank sells its share to the customer on cash payment or deferred basis at an agreed margin.

    Features and Benefits

    • Importer needs to contribute only a portion of the funds required to purchase the goods
    • Importer is assured that payment will only be made to the exporter only when the supplier meets the terms and conditions of the letter of credit
    • Importer can defer payment to the bank on arrival of the goods as per prior agreement with the bank
    • Immediate notification to Importer upon receipt of documentation
    • Importer improves his negotiating position through Al Rajhi Bank payment guarantee

    Transaction Mechanism

    After the Musharaka LC is opened, when the goods arrive, there are three options available to the importer:

    • Al Rajhi sells its share in Musharaka to the customer on cash payment or deferred basis at an agreed margin
    • The customer sells its share to Al Rajhi Bank on a cash payment or deferred basis
    • Both sell their shares in the market together

    Al Rajhi issues, amends, confirms and pays both sight and acceptance letters of credit through its extensive network of correspondent bank relationships.