11.7.2 Confirmed and Unconfirmed Letters of Credit...
Sometimes,even if a letter of credit has been agreed to for payment,you may still feel concerned in doing business with the importer,as you know little about the issuing bank,which in some cases,could be a foreign bank with shoddy reputation.In that case,you may wish to request a well-known bank other than the issuing bank to confirm the credit by adding its undertaking to pay to that of the issuing bank.If a certain bank is willing to do this and does confirm,this credit becomes a confirmed credit and this bank is called a confirming bank.
The confirming bank is often nominated by the issuing bank and normally is the advising bank.It should be noted that the commitment of the confirming bank is independent of that of the issuing bank,which means,as long as the documents presented comply with the terms of the confirmed credit,the confirming bank has to pay even if the issuing bank cannot or will not honor the bill of exchange for whatever reasons.Therefore,confirmed credits are more expensive than unconfirmed ones because of the additional risk assumed by the confirming bank.
When a credit is unconfirmed,only the issuing bank is obliged to pay.This type of credit is more common and used when traders have no doubt in the reputation and financial strength of the issuing bank or when the transaction is of small volume.