LC CONFIRMATION CLAUSE

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What is confirmation in a letter of credit transaction? What are the benefits of a confirmed lc?
Confirmation is a security tool for the exporters. Confirmation eliminates country risk and insolvensy risk of the issuing bank.
  • Step 1 - Sale Contract: Exporter and Importer sign a sale contract. They choose letter of credit as a payment method.
  • Step 2 - Confirmation Request on Sale Contract: On the sale contract exporter demand from the importer that the letter of credit must be confirmed. Exporters may want the credit to be confirmed by a bank which is acceptable for them. In order to make sure that the credit would not be confirmed by another bank which is not suitable for the exporter, exporters should indicate this on the sale contract with a wording similar stated bellows:  "The documentary letter of credit should be issued in a way so that it can be confirmed by a bank acceptable to the exporter".
  • Step 3 - Letter of Credit Application: Importer applies to his bank to open the letter of credit. 
  • Step 4 - Letter of Credit Issuance: Issuing bank issues the letter of credit. The letter of credit must include "May Add" or "Confirm" codes in field "Field 49: Confirmation Instructions".
  • Step 5 - Confirmation: Advising bank or another bank that the beneficiary wants to have the letter of credit confirmed discuss the terms and conditions of the confirmation. If both parties agree on the confirmation conditions than the letter of credit will be confirmed. Confirming bank should inform to the beneficiary that it has included its confirmation to the letter of credit.
The meaning of confirmation : the issuing bank asks another bank to add its own engagement to the undertaking due to issue a L/C. Normally this engagement covers so called Country Risk and / or Issuing Bank default. A l/c could be advised by a bank, usually located in beneficiary's Country:
-WITHOUT confirmation by the advising bank,
-CONFIRM, the advising bank added its own confirmation,
-MAY ADD, the advising bank is requested to add its confirmation on beneficiary' request.
To remember that confirmation means fees to pay .
In many Countries, there is a Governamental Export Guarantee Agency that helps banks in confirming L/c by sharing the risks, for about 80 %, and banks have to pay an insurance premium too.

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