History of Letter of Credit

Brief History   The term 'Letter of Credit' was perhaps first used with Traveller's Letters of Credit issued by banks in the western world to provide their clients with a means of obtaining cash from banks abroad for use during their foreign travel and so obviating the need to carry large sums of money upon their person with the attendant risks of loss or robbery.   A prerequisite of such Traveller's Letters of Credit which were issued in the eighteenth century was a formal letter of introduction addressed to the Issuing Bank's correspondents and agents abroad.   The letter of introduction addressed to the correspondents or agents would indicate that the client/traveller was a valued customer and requested the correspondents or agents to provide any possible assistance. Often copies of the letter of introduction were sent ahead of the traveller to the correspondents or agents.   The Traveller's Letter of Credit - addressed to correspondents/agents would be issued in the form of a letter. It indicated that in consideration of such correspondents and agents paying cash to the named client, the Issuing Bank would pay bills of exchange drawn by the correspondent/agents on the Issuing Bank for amounts paid plus correspondents/agents charges.   The Traveller's Letter of Credit indicated a maximum amount available under the Credit and expiry date of the Credit. Each correspondent/agent was required to indicate details of amounts paid and the dates so that the next correspondent/agent to whom the client presented the Letter of Credit would be able to ascertain the balance available to be drawn.   The client always retained possession of the original Credit. The Documentary Credit Specialist should see the origin of the Letter of Credit in that a 'letter' is provided by the Issuing Bank to correspondents and agents upon the basis of which 'credit' is to be provided. It also described how the correspondent/agent was to obtain reimbursement from the Issuing Bank and this usually took the form of a bill of exchange as indicated earlier. The Documentary Credit in its modern form developed from these beginnings in the mid-19th century. It first appeared as a vehicle for effecting payments on foreign trade transactions among banks in London in the 1840s.