Letter of Credit (LC) in UAE: Role & Function Explained

The Strategic Importance of Letter of Credit (LC) in UAE Trade – 2025 Outlook

As far as 2025, letter of credit in the UAE remains a building block of foreign exchange. As per the recent statistical report by the UAE’s Ministry of Economy and the Q1 2025 trade finance report by Fitch ratings, more than 64 % of the import-export business in the UAE uses trade finance tools such as a letter of credit LC. This figure highlights the growing relevance of LCs in supporting exporters and importers by enhancing transactional confidence and ensuring secure, guaranteed payments.

Given the leading position of the UAE as the logistics and trading center driven by the state-of-the-art ports, including Jebel Ali and the Khalifa Port, the necessity to implement financial instruments that secure the trust of transactions among trading parties located all over the world becomes obvious. Industries with high-value consignments like construction, oil & gas, FMCG, machinery, etc, provide an industry-developed framework of secure, milestone payments backed by banks through LCs.

The Regulatory and Operational Landscape of Letter of Credit in the UAE

A letter of credit (LC) in the UAE is generally more than a trade facilitation tool, as it is a financial contract that is legally binding. It is issued by a bank or financial organization in the name of a buyer (also called the applicant) to ensure that the seller (the beneficiary) will get the payment when he shows documentation that proves the delivery of the service or shipment.

The letter of credit (LC) mechanism is very much in line with the guidelines established internationally, especially the Uniform Customs and Practice for Documentary Credits (UCP 600) published by the International Chamber of Commerce (ICC). The UAE Central Bank also supports these guidelines through strong regulatory supervision, which makes the country a preferred jurisdiction for cross-border transactions supported by document credit.

Most of the UAE and international banks provide LC services using new online platforms that incorporate SWIFT incorporated platforms hence quicker and mistake-free issuance, notification, and settlement of LCs. Be it irrevocable LC, a confirmed or standby LC, businesses in the UAE have a mature, global, and highly integrated banking infrastructure that is custom-made to handle high-value and large volume transactions.

What Is a Letter of Credit and How Does It Work in the UAE?

To understand what is a letter of credit, it helps to break it down into core components and their functionality.

Definition and Purpose

A letter of credit is a bank's financial obligation to reimburse a fixed amount of money to a seller on condition that the seller produces documents that fit the conditions stipulated in the LC. It serves the importance of shifting the credit risk involved to the buyer to a reputable financial body, hence a mandated mechanism of global trade in reducing risk.

Types of Letters of Credit Used in UAE:

1.Irrevocable LC: Once issued, it cannot be changed without the consent of all involved parties. This is the most widely used type in the UAE due to its security.

2.Confirmed LC: Another bank, usually in the seller’s country, adds its guarantee. This is often used when trading in politically unstable regions.

3.Sight LC: Payment is made immediately after the seller submits compliant documents.

4.Usance LC: Payment is deferred to a later, mutually agreed-upon date.

5.Standby LC: Functions as a backup guarantee in case the buyer fails to fulfill the contract.

Key Parties Involved:

• Applicant (Buyer): Requests the bank to issue the LC.
• Issuing Bank: Provides the letter of credit on behalf of the buyer.
• Beneficiary (Seller): Entitled to payment upon fulfilling the LC terms.
• Advising/Confirming Bank: Communicates and may add a second level of security to the LC.

LC Process Flow:

1.Buyer and seller agree to trade terms involving a letter of credit.

2.The  Buyer’s bank issues the LC and sends it to the advising bank.

3.Seller ships goods and presents the required documents.

4.The Advising bank will check the documents for compliance.

5.If compliant, the issuing bank releases payment.

6.Buyer reimburses the issuing bank.

Why UAE Businesses Prefer a Letter of Credit?

At TrustIn, we understand that in the UAE, LCs are more than just payment tools—they are strategic enablers of global commerce. Here’s why businesses increasingly rely on them:

• Trust & Credibility: They reduce doubts in international transactions, especially when working with new or unknown partners.
• Secure Payments: Guaranteed by reputable banks, minimizing default risks.
• Improved Cash Flow: With payment guarantees in place, sellers can better plan finances and operations.
• Legal Safeguards: Governed by international and local frameworks, ensuring transparency and fairness.
• Islamic Finance Compatibility: When structured properly, LCs can align with Shariah-compliant principles, opening avenues for halal trade financing.

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