Which description best defines a documentary credit?

Which description best defines a documentary credit?

• A. A guarantee by the bank that shipment will be funded by a separate loan.
• B. A promise by the exporter to ship goods if payment is received.
• C. A document binding one party to pay a fixed sum of money to another party on demand at a predetermined date.
• D. A document transferring ownership of goods.

Answer: (C)

Documentary credit is a banker's undertaking to pay the exporter a fixed amount, provided the exporter presents the specified documents that conform to the credit's terms. The payment is made against documentary evidence, typically on demand or at a set date within the credit, up to the approved amount. This description best captures the essence of a documentary credit because it emphasizes the bank’s commitment to pay a defined sum once the documents are in order, rather than a loan guarantee, a promise by the exporter, or a transfer of ownership. The other scenarios describe arrangements that do not reflect the bank’s conditional payment obligation against documentary compliance.

Documentary credit is a banker's undertaking to pay the exporter a fixed amount, provided the exporter presents the specified documents that conform to the credit's terms. The payment is made against documentary evidence, typically on demand or at a set date within the credit, up to the approved amount. This description best captures the essence of a documentary credit because it emphasizes the bank’s commitment to pay a defined sum once the documents are in order, rather than a loan guarantee, a promise by the exporter, or a transfer of ownership. The other scenarios describe arrangements that do not reflect the bank’s conditional payment obligation against documentary compliance.