INTERNATIONAL JOURNAL OF ARTIFICIAL INTELLIGENCE
ISSN: 2692-5206, Impact Factor: 12,23
American Academic publishers, volume 05, issue 05,2025
Journal:
https://www.academicpublishers.org/journals/index.php/ijai
page 26
THE STATUS OF COMMERCIAL BANKS WORKING WITH INTERNATIONAL
LETTERS OF CREDIT: TRENDS, CHALLENGES, AND STRATEGIC IMPORTANCE
Akramjonov Saidaxmad Baxromjon ugli
The Banking and Finance Academy of the Republic of Uzbekistan
Abstract:
International letters of credit (LCs) remain one of the most secure and widely used
instruments in global trade finance. This article explores the current status of commercial
banks in facilitating international LCs, focusing on their role, operational dynamics,
compliance requirements, and the challenges they face in today’s complex and regulated
global financial environment. The paper also examines the impact of digitalization and
international banking standards on the effectiveness of LC operations. Through analytical
insights and global case studies, the article concludes with key recommendations to improve
LC service efficiency and mitigate risks for commercial banks.
Keywords:
Letter of Credit, Trade Finance, Commercial Banks, SWIFT, UCP 600, Risk
Management, Digitalization, International Banking
Literature review
The use of letters of credit (LCs) in international trade has long been a critical area of study
within finance and banking literature. Scholars and institutional authors alike have examined
the legal frameworks, risk mitigation functions, operational challenges, and evolving
practices associated with LCs. This review outlines major contributions that have shaped the
understanding of how commercial banks interact with and facilitate international LCs.
One of the most authoritative sources in LC governance is the Uniform Customs and Practice
for Documentary Credits (UCP) developed by the International Chamber of Commerce (ICC).
The most current version, UCP 600, provides standardized rules applied globally in LC
transactions. As noted by Bertrams (2004), UCP rules offer commercial certainty by
harmonizing LC practices across jurisdictions, thereby enhancing the reliability of banks
acting as intermediaries in trade finance.
Scholars such as Sitkin and Bowen (2010) emphasize that commercial banks play multiple
roles in LC transactions — including issuing, advising, confirming, and negotiating — each
carrying distinct risks and responsibilities. These roles are not only operational but strategic,
helping banks strengthen client relationships and generate fee-based income. According to
WTO (2020), over 80% of global trade depends on some form of bank-intermediated finance,
underscoring the central role of LCs in enabling cross-border commerce.
The literature also explores the common operational risks commercial banks face in LC
transactions. Ellinger and Neo (2010) discuss how document discrepancies — which affect
more than two-thirds of first LC presentations — create delays, legal ambiguity, and
reputational risks for banks. Klapper and Randall (2019) further note that despite their
INTERNATIONAL JOURNAL OF ARTIFICIAL INTELLIGENCE
ISSN: 2692-5206, Impact Factor: 12,23
American Academic publishers, volume 05, issue 05,2025
Journal:
https://www.academicpublishers.org/journals/index.php/ijai
page 27
advantages, LCs are procedurally complex and heavily reliant on precise documentation,
increasing exposure to human error and fraud.
The literature reflects a strong consensus on the enduring importance of letters of credit in
international trade, particularly as a risk mitigation tool in volatile and trust-deficient
environments. While traditional challenges—like document discrepancies and compliance
burdens—persist, technological innovations such as eUCP and blockchain are reshaping the
landscape. However, adoption remains uneven, and commercial banks must navigate a
complex terrain of evolving regulatory standards, customer expectations, and systemic risks.
This study builds on these insights to analyze the present status of commercial banks in
facilitating and modernizing LC-based trade finance.
Introduction
The international letter of credit (LC) is a vital financial instrument used to secure
transactions in global trade. Facilitated by commercial banks, it ensures that exporters receive
payment as long as specific delivery and documentation terms are met, while importers are
assured that payment will only be made upon compliance with the agreed conditions. In an
era of growing trade volumes and economic uncertainty, commercial banks continue to play a
crucial intermediary role in LC-based trade finance.
1-picture. Roles of commercial banks in letters of credit
INTERNATIONAL JOURNAL OF ARTIFICIAL INTELLIGENCE
ISSN: 2692-5206, Impact Factor: 12,23
American Academic publishers, volume 05, issue 05,2025
Journal:
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page 28
Issuing Bank – typically the importer’s bank that issues the LC on behalf of its client.
Advising Bank – the bank that authenticates and forwards the LC to the exporter.
Confirming Bank – adds its own payment guarantee to that of the issuing bank.
Negotiating Bank – examines documents and advances funds to the exporter.
Banks thus act not only as guarantors but also as facilitators of trust, compliance, and capital
flow in international trade.
Most LCs are processed through the SWIFT (Society for Worldwide Interbank Financial
Telecommunication) messaging system, following UCP 600 (Uniform Customs and Practice
for Documentary Credits), issued by the International Chamber of Commerce. These
standardizations ensure a harmonized approach to document examination and payment
obligations.
According to the International Chamber of Commerce’s 2023 Global Trade Finance Survey,
while LCs still account for a significant portion of traditional trade finance (about 12–15%
globally), there is a gradual decline in usage due to the rise of open account trade, supply
chain finance, and fintech-based solutions.
Conclusion
Despite the evolution of alternative trade finance mechanisms, international letters of credit
remain vital for global trade security and liquidity, especially in developing regions.
Commercial banks continue to play an indispensable role in LC facilitation, balancing
between risk mitigation, customer service, and innovation. As trade becomes more digital and
regulated, banks must embrace technology, strengthen compliance, and adapt operations to
maintain their relevance and leadership in global trade finance.
List of literature:
1. Bertrams, R. I. V. F. (2004). Bank Guarantees in International Trade (3rd ed.). Kluwer
Law International.
2. Ellinger, E. P., & Neo, D. (2010). The Law and Practice of Documentary Letters of
Credit (4th ed.). Oxford University Press.
3. International Chamber of Commerce (ICC). (2007). UCP 600: Uniform Customs and
Practice for Documentary Credits. ICC Publication No. 600, Paris.
4. Klapper, L., & Randall, D. (2019). Trade Finance Gaps, Growth, and Jobs Survey.
International Finance Corporation (IFC), World Bank Group.
5. Liu, C., & Yeung, S. M. (2020). Digital Transformation in Trade Finance: Trends and
Policy Implications. Journal of International Banking Law and Regulation, 35(3), 165–
178.
INTERNATIONAL JOURNAL OF ARTIFICIAL INTELLIGENCE
ISSN: 2692-5206, Impact Factor: 12,23
American Academic publishers, volume 05, issue 05,2025
Journal:
https://www.academicpublishers.org/journals/index.php/ijai
page 29
6. Sitkin, A., & Bowen, N. (2010). International Trade and Finance: Overview of the World
Trade System. Oxford University Press.
7. The Wolfsberg Group. (2022). Trade Finance Principles: Guidance Paper for
Documentary Trade. Retrieved from https://www.wolfsberg-principles.com
8. World Trade Organization (WTO). (2020). Trade Finance and SMEs: Bridging the Gaps
in Provision. Geneva: WTO.
9. HSBC. (2021). Blockchain in Trade Finance: Realizing Efficiency in LCs. HSBC Global
Reports. Retrieved from https://www.hsbc.com
10. UNCTAD. (2021). Global Trade Update: Trade Trends and Policy Developments.
United Nations Conference on Trade and Development. https://unctad.org
11. Zetzsche, D. A., Buckley, R. P., Arner, D. W., & Barberis, J. N. (2019). The Future of
Finance: Legal and Ethical Implications of Fintech. University of Hong Kong Faculty of
Law Research Paper No. 2020/004.
12. Asian Development Bank (ADB). (2022). Trade Finance Gaps, Growth, and Job Survey:
Regional Highlights. Manila: ADB.
