Letters of credit are common financial instruments that are used to facilitate international trade by guaranteeing payment. They generate trust between importers and exporters. An importer can obtain a letter of credit from a financial institution, and it will guarantee payment to an overseas exporter of goods on condition of the satisfactory delivery of those goods.

The idea behind an LC is simple, and they’ve been successfully used to facilitate international trade for a long time. The LC system itself works fine. Look at the International Chamber of Commerce’s figures on how secure letters of credit are here.

There are, however, some problems with the overall provision of LCs. One problem is that many importers can’t access LCs through the financial institutions that currently provide them. As we’ve mentioned, banks and other financial institutions are reluctant to offer LCs for low-value transactions, to give one example of when they’re often unavailable.