Definition
Documentary Credit is a bank's written undertaking to pay seller at buyer's request upon presentation of documents conforming to L/C instructions.
Key Principle: Documents, Not Goods
Bank examines and pays based on document conformity, not actual goods. Bank has no duty to inspect actual goods.
Types
- Revocable vs. Irrevocable
- Confirmed vs. Unconfirmed
- Transferable, Back-to-Back, Revolving, Red Clause (Advance)
- Sight (immediate payment) vs. Deferred (time-based)
Shari'ah Status
Permissible — combines Agency (document ) + Guarantee (bank undertaking). Both permissible; combination permissible.
Prohibitions
- Credit for prohibited goods (alcohol, pork, weapons)
- Credit based on riba-bearing underlying contract
- Credit based on void per Shari'ah
Bank Payment Exceptions
Bank NOT obligated to pay if: (a) documents are forged or fraudulent; OR (b) sale contract declared null and void by court.
Fees
Bank may charge fees for SERVICE of issuing and managing L/C (similar to guarantee fee principle).