explain the Mechanism of letter of credit
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Answer:
International trade is not a new concept in the world. Since the day humans started establishing state boundaries, international trade has been taking place. The industrial revolution in the 18th century saw a rise in international trade, and the availability of various tools gave rise to professionalism in international trade. The letter of credit as we know it today has gained its popularity in the early 19th century. It is a payment instrument used in cross-border transactions. The basis of this instrument is that the bank becomes a bridge between the buyer and the seller, assuring that both the parties fulfil their obligations.
A letter of credit helps in establishing trust and confidence in conducting business internationally, where the distance from the home country, laws & custom rules of the foreign land, etc. can prove to be a hurdle.
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