The role of letters of credit as a banking tool in financing foreign trade

Abstract

This research primarily aims to analyze and evaluate the substantive impact of documentary credits on financing foreign trade operations, through an applied case study at "Al-Wahda Bank – the Credits and External Remittances Center in the Eastern Province." To achieve this objective, the study adopted field observation, a review of specialized literature from books, periodicals, and previous studies, in addition to analyzing secondary data collected to accurately describe procedures and outcomes. The study concluded with a set of key findings, most notably confirming the pivotal and vital role that documentary credits, particularly irrevocable and confirmed ones, play as one of the most important financing tools and reliable payment mechanisms in international trade. The results demonstrated that the bank's clients at the mentioned center heavily prefer relying on this type of credit due to the high levels of security and guarantee it provides for both parties, thereby bolstering their confidence in concluding commercial transactions. In light of these findings, the research put forward a series of strategic recommendations, including: the necessity of conducting an in-depth study of the unprecedented quantitative surge in the volume of credits during the years (2023-2024) to analyze the underlying factors behind this remarkable success and replicate it in the future; enhancing financial and operational risk management frameworks and monitoring operational costs to mitigate sharp fluctuations in profit margins; and working on increasing and developing human resources by hiring additional competencies to keep pace with the steady increase in transaction volume while maintaining service level and quality