Letter of Credit Guide for Pakistani Importers: How LCs Work and When to Use Them

By Olympic AgenciesLast updated:

Quick Answer

A letter of credit is a bank's irrevocable undertaking to pay the supplier upon presentation of compliant shipping documents, provided the documents meet the LC terms. For Pakistani importers, an LC provides payment security to the supplier and document control to the buyer, and it is the standard payment method for first-time supplier relationships, large-value agricultural machinery and bulk commodity orders, and transactions where the supplier requires bank assurance before releasing goods.

Key facts
LC definitionAn irrevocable undertaking by the importer's bank to pay the exporter upon presentation of documents that comply with the LC terms
LC typesSight LC — payment on presentation of compliant documents; Usance LC — payment at a future date, typically 30, 60, or 90 days after presentation; Standby LC — a guarantee, not a primary payment mechanism
Key documentsCommercial invoice, bill of lading, packing list, certificate of origin, phytosanitary certificate, and any commodity-specific certificates required by the LC terms
SBP roleThe State Bank of Pakistan regulates LC issuance through its Foreign Exchange Manual and monitors import-related foreign exchange outflow
When to useFirst-time supplier relationships, large-value orders, bulk commodities, and when the supplier requires bank assurance — typically not for small repeat orders with established suppliers

For a Pakistani importer sourcing from a new supplier — a Chinese machinery manufacturer you have never dealt with, a Turkish seed breeder who requires payment before releasing the first consignment, a Brazilian soybean exporter who will not ship without bank assurance — the letter of credit is the mechanism that bridges the trust gap. The supplier knows a Pakistani bank will pay if the documents are right. The importer knows the bank will not pay unless the documents are right — including the shipping documents the importer needs to clear the goods at Karachi. The LC is simultaneously a payment mechanism and a document-quality-control mechanism, and an importer who understands how to structure the LC terms structures the clearance process before the goods even ship.

How does an LC transaction flow?

A typical LC transaction for an agricultural import follows this sequence:

  1. LC application. The importer applies to their Authorized Dealer bank, providing the proforma invoice from the supplier, the LC application form detailing the goods, value, shipping period, expiry date, and required documents, and the margin deposit — typically a percentage of the LC value, held by the bank as security.

  2. LC issuance. The bank reviews the application, verifies that the importer has the necessary foreign exchange allocation under the SBP's regulations, and issues the LC. The LC is transmitted through the SWIFT banking network to the supplier's bank — the advising bank.

  3. Shipment and document presentation. The supplier ships the goods and presents the required documents to their bank: the commercial invoice, bill of lading, packing list, certificate of origin, phytosanitary certificate, and any other documents the LC specifies. The supplier's bank checks the documents for prima facie compliance and forwards them to the Pakistani issuing bank.

  4. Document examination. The Pakistani bank examines the documents against the LC terms under the UCP 600 rules. If compliant, the bank pays — or accepts a time draft for future payment — and releases the documents to the importer. If discrepant, the bank notifies the importer and seeks instructions.

  5. Customs clearance. The importer, now holding the original bill of lading and other shipping documents, presents them to the clearing agent for goods declaration filing and customs clearance at Karachi Port or Port Qasim.

The documents that flow through the LC are the same documents the clearing agent needs for the goods declaration. The LC terms that the importer negotiates with the supplier — which documents are required, in what form, with what content — determine whether the document set that arrives with the cargo is complete and consistent. An importer who specifies the LC terms loosely gets documents that may not satisfy Pakistan Customs. An importer who specifies the terms precisely, matching the regulatory requirements — the phytosanitary certificate must match the DPP permit on species, quantity, and origin — gets documents that support a clean clearance.

When should an importer use an LC?

LCs are the standard payment method for:

  • First-time supplier relationships. You have not dealt with this supplier before, and neither party trusts the other enough for open-account terms or advance payment.
  • Large-value orders. Agricultural machinery, bulk fertiliser vessels, container-loads of seed or chemicals — the amounts involved justify the bank intermediation and the LC's document-discipline benefits.
  • Bulk commodity imports. Soybean, canola, DAP, palm oil — shipments where the value runs to hundreds of thousands or millions of dollars and the importer wants document control as well as payment security.
  • Supplier-required bank assurance. The supplier will not ship without an LC, regardless of the importer's preference.

LCs are typically not justified for:

  • Small repeat orders with established suppliers. The bank fees and the administrative overhead of an LC outweigh the benefit for small, routine shipments with a supplier you have dealt with for years.
  • Low-value consignments. The LC fee structure — issuance commission, advising charges, document-handling fees — makes LCs uneconomical for consignments below a certain value threshold, which varies by bank.

How do LC terms interact with the FTA and the goods declaration?

The LC terms determine what the supplier puts on the documents, and the documents determine what the clearing agent declares in WeBOC.

  • Certificate of origin. If the LC requires a certificate of origin, the importer can use that certificate to claim an FTA duty concession — provided the origin country is an FTA partner and the certificate is the correct FTA form. An LC that requires only a generic certificate of origin from an FTA country will not support an FTA claim if the specific FTA certificate form is required. Our FTA guide covers which certificate form applies to which agreement.

  • Goods description. The LC goods description flows through to the commercial invoice and the bill of lading. If the LC description is vague — "agricultural machinery" — the invoice and bill of lading will be vague, and the assessing officer under FCA will raise a query. The importer should specify the LC goods description precisely enough to support the HS classification: "Tractor-mounted boom sprayer, model HSP-600, 600-litre tank, 12-metre boom, HS 8424.X."

  • Phytosanitary certificate and import permits. The LC can require the supplier to present the phytosanitary certificate or other regulatory document, but the LC cannot create a regulatory requirement that does not exist. For seed imports, the DPP import permit is obtained by the importer, not the supplier, and the LC should reflect that: the supplier presents the phytosanitary certificate; the importer is responsible for the DPP permit. LCs that confuse the two — requiring the supplier to present a DPP permit that the supplier cannot obtain — create a discrepancy that blocks payment and delays the shipment.

Olympic Agencies has coordinated LC-based agricultural imports — seed, fertiliser, machinery, and bulk commodities — with Pakistani banks and foreign suppliers at Karachi Port and Port Qasim since 1982. Our customs clearing service in Karachi includes LC document review — we check the LC terms against the customs clearance requirements before the LC is issued, so the documents that arrive support a clean clearance. WhatsApp us your proforma invoice and we will help structure the LC terms.

Opening a letter of credit for an import? Contact us for guidance on the LC terms and document requirements.

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Frequently Asked Questions

How does a letter of credit work for a Pakistani importer?+

The importer applies to their bank — an Authorized Dealer bank — to open an LC in favour of the foreign supplier. The application specifies the goods, the value, the shipping period, the expiry date, and the documents the supplier must present to receive payment. The bank issues the LC, which is transmitted to the supplier's bank. The supplier ships the goods and presents the required documents to their bank, which forwards them to the Pakistani bank. The Pakistani bank examines the documents, and if they comply with the LC terms, pays the supplier or accepts a time draft for future payment. The importer then receives the documents and uses them to clear the goods through customs.

What documents should an LC require for agricultural imports?+

The standard LC document set includes the commercial invoice, the bill of lading, and the packing list. For agricultural imports, the LC should also require the phytosanitary certificate for plant-origin goods, the certificate of origin, and any commodity-specific documents — the DPP import permit copy for seeds, the halal certificate for meat, the health certificate for seafood. The LC terms should match the regulatory requirements at the Pakistani port: a document that Pakistan Customs requires but the LC does not list as a presentation requirement creates a gap between what the supplier sends and what the importer needs to clear the goods.

What is the difference between a sight LC and a usance LC?+

Under a sight LC, the supplier's bank is paid immediately upon presentation of compliant documents. Under a usance LC, payment is deferred — typically 30, 60, 90, or 180 days after presentation, with the supplier accepting a time draft from the bank. The usance LC gives the importer time to receive, clear, and sell the goods before the payment becomes due, which is a significant cash-flow advantage. Usance LCs are typically used for commodities where the importer needs the sales cycle to fund the purchase — bulk fertiliser, edible oil, pulses — where the goods are sold within 30 to 60 days of arrival and the sale proceeds fund the LC payment.

What happens if the supplier's documents do not match the LC terms?+

The bank examines the documents against the LC terms and the international standard banking practice — UCP 600. If the documents contain discrepancies — the bill of lading shows a different port of loading than the LC specified, the invoice description does not match the LC goods description, a required certificate is missing — the bank may refuse payment. The importer can waive the discrepancies and instruct the bank to pay despite them, but this converts the LC from a document-based payment mechanism to, in effect, a purchase order with bank intermediation. The importer's leverage is the discrepancy; once waived, the payment proceeds and the importer must resolve any issue with the supplier directly.

OA

Olympic Agencies

Clearing agricultural cargo - seeds, fertilizers, and machinery - at Karachi Port and Port Qasim since 1982. Members of PIFFA and the Chamber of Commerce.

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