The instrument of letter of credit is governed by Uniform Customs and Practices for documentary credit, called UCP 600 which is issued by the international chambers of commerce. According to UCP 600, letter of credit.

The instrument of letter of credit is governed by Uniform Customs and Practices for documentary credit, called UCP 600 which is issued by the international chambers of commerce. According to UCP 600, letter of credit is defined as under

Credit means any arrangement, however named or described that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honor a complying presentation.

In a letter of credit the following parties are engaged:

1) Applicant (opener of L.C): means the party on whose request the credit is issued.

2) Issuing bank (opening bank): means the bank that issues a credit at the request of an applicant or on its own behalf.

3) Advising bank: means the bank that advises the credit  at  the request of issuing bank.

4) Confirming bank: means the bank that adds its confirmation to a credit upon the issuing bank’s authorization or request.

5) Negotiating bank: means the bank where negotiation of documents is carried out. Negotiation means the purchase by the nominated bank of drafts and/ or documents under a complying presentation by advancing or agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement is due to the nominated bank.

6) Nominated Bank: means the bank with which the credit is available or any bank in the case of the credit available with any bank.

Form of business in which a banking company may engage is continued below

o   Issuing of traveler's cheques and circular note

o   Underwriting and dealing in stock, funds, shares, debentures, debenture stock, bonds, obligations, securities (participation term certificates, term finance certificates, musharika certificates, modaraba certificates and such other instruments as may be approved by the State Bank) and investment of all kinds

o   The purchasing and selling of bonds, scripts or other forms of securities (participation terms certificates, term finance certificates, musharika certificates, modaraba certificates and such other instruments as may be approved by the State Banks)* on behalf of constituents or others, the negotiating of loans and advances; the receiving of all kinds of bonds, scrips of valuables on deposit or for safe custody or otherwise;

o   “the providing of safe deposit vaults” 

o   Collecting and transmitting of money and securities;

o   The providing of finance as defined in the Banking Tribunals Ordinance, 1984.   

Definitions of finance as contained in the Banking Tribunals Ordinance, 1984 is given below:

‘Finance’ includes an accommodation or facility under a system which is not based on interest but provided on the basis of participation in profit and loss, mark-up or mark-down in price, hire-purchase, lease, rent sharing, licensing, charge or fee of any kind, purchase and sale of any property, including commodities, patents, designs, trade marks and copy rights, bills of exchange, promissory notes or other instruments with or without by-back arrangement by a seller, participation term certificate, musharika certificate, modaraba certificate, term finance certificate or any other mode other than an accommodation or facility based on interest and also includes guarantees, indemnities and any other obligation, facility the real beneficiary whereof is a person other than the person to whom or in whose name it was provided.]

Form of business in which a banking company may engage is discussed below:

o acting agents for any Government or local authority or any other person or persons; the carrying on of agency business of any description including the clearing and forwarding of goods, giving of receipts and discharges and otherwise acting as an attorney on behalf of customers, but excluding the business of a managing agent or treasurer of a company.       

[Agency service is a very important function of a bank and the relationship of Principal and Agent between customer and banker is one of important relationships.           

The agency relationship is explained in the following paragraphs:

In general terms, Agency refers to the relationship which exists between two persons, the Principal and the Agent in which the Agent has to perform different duties/ functions as per instructions of the principal and also enters into contract with the third party / parties on behalf of the principal. The relationship of agency plays an important role in business and commercial dealings. This relationship is legal created by virtue of agreement between Principal and Agent