Letters of credit in Nigeria are commonly used in international trade when an importer and overseas supplier want a structured payment arrangement. A letter of credit, often called an LC, is issued by a bank on behalf of the buyer and sets out conditions that must be met before payment is made to the seller.
For Nigerian importers purchasing goods from suppliers in China, the UK, Turkey, the UAE and other international markets, an LC can form part of the wider trade finance and import documentation process.
How a Letter of Credit Works
The basic process involves the importer, issuing bank, overseas supplier and the supplier’s bank.
The importer first agrees commercial terms with the supplier. The importer then approaches its bank to establish the LC based on the agreed terms.
The issuing bank sends the LC through the appropriate banking channel to the supplier’s bank. The supplier ships the goods and presents the required documents. The banks then examine the documents against the conditions of the LC before the transaction proceeds according to its terms.
The exact process depends on the type of LC and the terms agreed between the parties.
Letters of Credit for Nigerian Importers
For an importer, an LC can provide a formal structure around a large international purchase.
The LC may specify requirements concerning shipping documents, invoices, inspection certificates, insurance documents and other conditions. This means the importer and supplier need to agree carefully on what documents will be required before the LC is issued.
Nigeria’s customs documentation framework also connects import transactions with authorised dealer banks and Form M procedures. (Central Bank of Nigeria)
Common Types of Letters of Credit
Different transactions can require different LC structures.
Common types include:
- Sight LC: Payment is generally made after compliant documents are presented and examined.
- Usance or deferred-payment LC: Payment is scheduled for a specified future date after the required conditions are met.
- Confirmed LC: Another bank adds its own confirmation to the payment undertaking, subject to the agreed terms.
- Unconfirmed LC: The issuing bank remains responsible under the LC without an additional bank confirmation.
- Transferable LC: Where permitted by its terms, the beneficiary can transfer the credit to another party.
The appropriate structure depends on the transaction, supplier requirements, banking arrangements and risk allocation.
Documents Required for an LC
The exact documents depend on the transaction, but an LC may require documents such as:
- Commercial invoice
- Packing list
- Bill of lading or air waybill
- Certificate of origin
- Insurance documents
- Inspection certificate
- Relevant import permits
- Customs and banking documents
The documents need to match the conditions written into the LC. Even an apparently small discrepancy can require clarification or create complications in processing.
Form M and Letters of Credit in Nigeria
Importers should not treat the LC separately from the rest of the import process.
The Nigeria Customs Service currently operates electronic customs processes involving importer registration, Form M, PAAR and goods declarations. Its current customs guidance states that a valid TIN is used across these processes. (Nigeria Customs Service)
Older CBN trade guidelines also specifically address e-Form M procedures connected with establishing letters of credit and other import-payment arrangements. Because banking and trade regulations can change, importers should confirm the applicable requirements with their authorised dealer bank before opening an LC.
Costs of Letters of Credit
Opening and processing an LC can involve bank charges.
These may include establishment or issuance charges, advising fees, confirmation charges, amendment fees, document-handling charges and other applicable banking costs.
The CBN’s published guide to bank charges contains a specific section for inward and outward letters of credit and identifies LC establishment and related charges. (Central Bank of Nigeria)
Importers should request the current fee schedule from their bank rather than relying on older published rates.
Advantages and Risks
An LC can give an international transaction a more structured payment process, particularly when the parties have limited trading history or the transaction value is substantial.
However, an LC does not remove every trade risk. The importer still needs to verify the supplier, product specifications, shipping arrangements and contractual terms.
There is also a distinction between checking documents and checking the actual quality of goods. A bank’s document examination does not replace appropriate product inspection where inspection is necessary.
Letters of Credit for China Imports
For Nigerian businesses importing from China, an LC can be considered when purchasing substantial quantities or dealing with suppliers that require bank-backed payment arrangements.
Before opening the LC, the importer should ensure that the product description, quantity, price, shipment terms, required documents and delivery conditions are clearly agreed with the supplier.
The importer should also calculate the complete landed cost, including foreign exchange, freight, insurance, customs charges, port expenses and inland delivery.
How Travo.ng Can Help With LC-Related Logistics
Travo.ng can support the logistics side of transactions involving letters of credit by helping businesses coordinate freight, cargo movement, delivery planning and related transportation requirements.
The bank handles the financial and documentary aspects of the LC, while logistics planning helps ensure that the physical shipment moves according to the agreed commercial and delivery requirements.
For international imports, keeping the procurement, banking documentation and logistics timelines aligned can reduce avoidable delays.
Before Opening a Letter of Credit
An importer should review the transaction carefully before asking a bank to establish an LC.
Confirm the supplier’s identity, product specifications, price, currency, shipment deadline, Incoterms, required documents and payment conditions. The importer should also understand the bank’s charges and the consequences of document discrepancies.
A well-prepared LC should reflect the actual commercial agreement. Once the shipment is underway, changing incorrect terms can be more complicated and potentially more expensive.
For Nigerian businesses involved in international trade, letters of credit can therefore be an important part of a broader import-finance and risk-management process.
