The term issuing bank refers to the financial institution that will pay a beneficiary when a letter of credit is provided to an applicant. Issuing banks are typically used to provide an exporter with a letter of credit, guaranteeing payment when goods or services are provided to the importer.
When an importer, or buyer / applicant, enters into an agreement with an exporter, or seller / beneficiary, an issuing bank is used to provide a letter of credit to the exporter. The letter of credit provides the seller / exporter with a payment guarantee if the documented conditions of the delivery of goods or services are fulfilled. Letters of credit are a critical component of international trade.
Also known as a buyer's bank, the issuing bank will work through an advising bank, which plays an intermediary role in the transaction. Issuing banks are used by importers to issue letters of credit; thereby assuring payment will be made by an importer when goods or services are provided by an exporter.
The issuing bank is typically located in the same country as the importer, which is referred to as the buyer / applicant. They will work with the advising bank, which is located in the same country as the exporter. The advising bank can also be a local branch of the bank issuing the letter of credit. Both advising banks and issuing banks are frequently used by importers and exporters to avoid cases of fraud.