Transferable letter of credit is a special type of lc which is suitable for triange trade.
According to latest letter of credit rules UCP 600, Article 38, which is titled as Transferable Credits
a. A bank is under no obligation to transfer a credit except to the extent and in the manner expressly consented to by that bank.
b. For the purpose of above mentioned article you can find some important definitions of transferable letters of credit as follows:
Transferable credit means a credit that specifically states it is "transferable". A transferable credit may be made available in whole or in part to another beneficiary ("second beneficiary") at the request of the beneficiary ("first beneficiary").
Transferring bank means a nominated bank that transfers the credit or, in a credit available with any bank, a bank that is specifically authorized by the issuing bank to transfer and that transfers the credit. An issuing bank may be a transferring bank.
Transferred credit means a credit that has been made available by the transferring bank to a second beneficiary.
Transferable letter of credit is a special type of lc which is suitable for triangle trade.
Triangle trade is a type of international business transaction in which a middleman sits between exporter and importer.
Middlemen or trade brokers have limited finance facilities. As a result they have to rely on their buyers' finance support such as a transferable letter of credit.
Process of the transferable lc is as follows in a very simple term. Middleman's buyer open a transferable letter of credit in favor of the middleman. Then middleman transfers a part of this lc to his supplier. The difference between two lcs is the net profit margin of the middleman.
Banks play a key role on transferable letters of credit. UCP 600 rules have special articles about transferable letters of credit.
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