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Letters of Credit in New and Risky Trade Corridors: Demand, Constraints, and the Role of the Confirming Bank
Letters of credit remain a key instrument for protecting exporters in new and risky trade corridors — but in 2026, confirmation is becoming the bottleneck. We analyze how limits, correspondent network contraction, compliance costs, and sanctions clauses affect the availability and cost of confirmed LCs, and what alternatives exist when no bank is willing to confirm.
In established and predictable trade relationships, companies have for decades shifted to open account settlements. This model is convenient for the buyer, but the supplier assumes almost all the risks.
The trend toward open accounts began gaining momentum in the mid-2000s and became particularly pronounced after the 2008 global financial crisis. According to a Celent study published in Global Finance Magazine, by 2007 around 70% of all international trade transactions were conducted on an open account basis, without bank guarantees or documentary letters of credit — the supplier shipped the goods and the buyer paid later. The remaining 30% accounted for letters of credit, collections, and other secured forms of settlement.
However, when a business enters new or unstable markets, the usual schemes stop working. In such cases, exporters need additional protection — for example, a confirmed letter of credit. This is an instrument in which a bank in the seller's country adds its own undertaking to the undertaking of the buyer's bank, providing a double guarantee of payment.
This scheme also has its difficulties. A confirmed letter of credit requires a bank willing to assume the country risk and the risk of the buyer's bank, and in 2026 there are fewer and fewer such banks in the world. For example, an FSB report from November 2018 states that from January 2011 to the end of 2017, the number of active correspondents declined by 15.5%, and active corridors by 7.3%.
Correspondent networks are contracting, and the availability of confirmation in risky corridors is becoming a key constraint. In unstable conditions, businesses are willing to pay for protection, and this becomes not an option but a mandatory condition of the transaction.
What a letter of credit provides and what it does not
A letter of credit does not fully eliminate the risk of non-payment but transfers it from the buyer to the bank. Instead of trusting the counterparty, the seller relies on the bank in the buyer's country. A letter of credit redistributes risk but does not eliminate it: the undertaking of the issuing bank remains exposed to country and political risk.
If the seller is not confident in the buyer's bank or in the country where it is located, it may request confirmation. In this case, another bank (for example, in its own country) adds its own undertaking.
As a result, the seller receives a promise from two banks rather than one. This protects it from problems with the buyer's bank and from political risks in the country where the latter is located.
However, a letter of credit does not guarantee that:
the goods will be of good quality;
they will be delivered on time;
no disputes will arise between the parties.
Banks verify only documents, not goods. If all the papers are in order, the bank is obliged to pay, even if the goods do not conform to the contract. This rule is enshrined in Article 5 of UCP 600 — the set of rules of the International Chamber of Commerce (ICC) governing documentary letters of credit: "Banks deal with documents and not with goods, services or performance to which the documents may relate."
A complying presentation means that the set of documents submitted by the exporter to the bank fully complies with the terms of the letter of credit, the rules of UCP 600, and international standard banking practice.
If this condition is met, the bank is obliged to honor its undertaking — to make payment, accept or negotiate the documents.
A letter of credit can be costly, as it consists of several components:
issuance commission;
advising fee;
document examination fee;
confirmation fee — a separate charge for risk.
In unstable countries, confirmation can be very expensive because banks limit their exposure to such risks and require a premium for volatility.
The bottleneck — availability of a confirming bank
Each bank has a limit — the maximum amount it is prepared to allocate to a specific issuing bank and country. These limits are set by the bank's risk department based on the issuing bank's rating, the country's sovereign rating, and compliance history.
If the limit is exhausted, confirmation is impossible, even if the transaction is sound. Several large contracts can consume the entire country limit, in which case subsequent clients are left without confirmation.
If a country is placed on the FATF "grey" list or under sanctions, the limit may be closed entirely. Then confirmation becomes unavailable to all clients from that jurisdiction.
The second problem is the contraction of correspondent networks. Banks from risky countries often lack "lines" — arrangements with large banks on mutual limits. Without this, confirmation is impossible: a confirming bank cannot assume the risk if it has no correspondent account for settlements with the issuing bank.
As a result, peripheral banks lose access to the system, and their clients cannot obtain a confirmed letter of credit even for an additional fee.
The third difficulty is asymmetry within the trade corridor. One side is usually served better than the other. A bank in a country with a high rating has dozens of correspondent lines and easily finds confirmation. A counterparty's bank from a country with a low rating may have none.
This gives negotiating power to the side that has access to confirmation: it dictates the terms, while the opposite side is forced to agree or seek other ways.
Compliance is a price factor. Checking a respondent bank and each transaction costs money. Sanctions screening, beneficial ownership searches, analysis of the ownership chain — all of this requires time and resources. For small volumes, these costs may exceed the profitability of the operation, and the bank refuses confirmation. This is particularly relevant for SMEs, whose transactions are small but whose compliance procedures are just as expensive as those for large corporations.
As a result, the bank often refuses to establish correspondent relationships or confirm transactions in that corridor.
What bridges the gap when there is no confirmation
When a bank refuses to confirm a letter of credit, the exporter is not left without options.
Other mechanisms are possible.
1. Guarantees from development institutions. Multilateral development banks such as the African Development Bank (AfDB) or the Asian Development Bank (ADB) backstop the risk of the issuing bank. Thanks to their guarantee, a commercial bank agrees to confirm the transaction.
For example, according to AfDB, risk participation agreements since the program's launch in 2013 have facilitated around 3,100 transactions worth $8.8 billion. This is a cumulative volume over more than a decade, as follows from the African Development Bank (AfDB) report "Trade Finance Supply in Africa: Post-COVID Trends and Emerging Opportunities," released in May 2026.
For comparison: Africa's annual trade finance gap in 2024 was estimated at $74–92 billion. This confirms that the role of multilateral development banks is critical, but their resources are limited, and they close only part of the systemic problem of access to financing on the continent.
2. Credit and political risk insurance. Insurance is another way of protection. If the buyer fails to pay for the stipulated reasons, the insurer reimburses the loss.
However, insurance does not cover commercial disputes (for example, regarding the quality of goods) and usually does not protect against currency restrictions. Deadlines for filing a loss claim must be strictly observed, otherwise there will be no payout.
3. Standby letter of credit and demand guarantee. This is a guarantee that is triggered if the buyer fails to fulfill its obligations. It is governed by the URDG 758 rules (Uniform Rules for Demand Guarantees), which were developed by the International Chamber of Commerce (ICC) and came into force on July 1, 2010. In 2011, they received official approval from the UN Commission on International Trade Law (UNCITRAL).
Payment under the guarantee is made upon the beneficiary's demand, without the presentation of documents confirming non-performance of the underlying obligation.
4. Other options: sometimes it is easier for the seller to abandon the letter of credit and use prepayment, milestone payments, or settle through a third country with a more reliable banking system. But each scheme has a cost:
prepayment is risky for the buyer;
milestone payments do not cover the risk of the final tranche;
a third jurisdiction adds intermediaries and increases the cost.
Operational side: where the advantage is lost
1. Discrepancies in documents. Banks examine them strictly. According to the ICC for 2024, 65–80% of documentary letters of credit are rejected on first presentation, although regional differences are significant.
The introduction of UCP 600 in 2007 did not improve this indicator — the problem is chronic. This conclusion is contained in a publication by Dave Meynell, Senior Technical Advisor to the ICC Banking Commission, in Documentary Credit World dated December 17, 2024.
Most often, problems arise from:
inconsistency of the invoice with the terms of the letter of credit;
errors in shipment dates;
inaccuracies in transport documents.
Each such discrepancy means a delay in payment, additional costs, and loss of protection: the bank may refuse to pay.
2. Timelines. Under UCP 600 rules, the bank is given up to 5 banking days to examine documents after their presentation. The issuance of the letter of credit and its advising to the seller are not covered by this deadline: here the timelines are determined by the bank's practice and the terms of the letter of credit itself.
If there are discrepancies, additional time is required to resolve them. In risky trade corridors, timelines may be further stretched due to non-standard routes and difficulties in obtaining original documents.
3. Electronic presentation. Since July 1, 2023, the eUCP rules have been in effect, with the current version being 2.1. They allow documents to be presented in electronic form. These rules supplement UCP 600 and govern the presentation of electronic records separately or in combination with paper documents.
Version 2.1, which came into force in 2019, brought the rules into line with the UNCITRAL Model Law on Electronic Transferable Records (MLETR).
In practice, this works only where the jurisdiction recognizes electronic transport documents. In many countries as of 2026, this is not regulated, which creates legal uncertainty.
The adoption of eUCP is most active in developed markets (the UK, Europe, the US), where a legal framework has been created: for example, the Electronic Trade Documents Act in the UK. In developing countries such as China, progress is constrained by the lack of recognition of electronic documents.
4. Sanctions clauses. Clauses may be included in the text of a letter of credit that allow the bank not to pay if the transaction falls under sanctions. Even with formally correct documents, the bank may invoke such restrictions and suspend servicing or refuse payment. This reduces the certainty of the undertaking and makes the letter of credit less reliable.
| Criterion | Open Account | Unconfirmed Letter of Credit | Confirmed Letter of Credit | Settlement under cover of an insurer or development institution |
|---|---|---|---|---|
| Whose risk the seller assumes | Buyer's risk in full | Issuing bank's risk | Issuing bank's and country risk covered | Partially — the insurer covers, but there are exclusions |
| Requirement for the banking chain | Not required | Issuing bank's correspondent required | Confirming bank with a line required | Bank accepting the institution's guarantee required |
| Typical time to arrange | Days (contract + shipment) | Days–weeks | Weeks (limit approval) | Weeks–months (approval with the institution) |
| What is not covered | Everything — the seller seeks protection on its own | Political and country risk | Commercial disputes and quality of goods (they are not covered by any letter of credit) | Commercial disputes, currency risk |
| Main constraint in a risky corridor | Full vulnerability | Issuing bank may not pay | No confirming bank | Insurer may refuse under the terms |
3 practical takeaways for an exporter considering a letter of credit as a form of settlement
Before signing the contract, check whether the buyer's bank has correspondent relationships with your bank or with a major bank in a third country. Assess the confirming bank's country limit and the limit on the issuing bank. If they are exhausted or there is no confirmation, then timelines and costs will increase, and the transaction may not take place.
In the text of the letter of credit, specify in advance the list of documents, their submission deadlines, and the terms for discrepancies. Agree in the text of the letter of credit on the list and wording of documents in advance — this will reduce the likelihood of discrepancies.
Avoid requirements for documents issued by third parties and not controlled by the beneficiary. Stipulate the procedure for seeking a waiver — the applicant's consent to accept documents with discrepancies. Under UCP 600 (Article 16), the bank may request a waiver within 5 banking days after presentation. But this is not an obligation, but a right of the bank.
Sanctions clauses are included by the issuing bank at the request of its own compliance, and the beneficiary cannot influence their presence. However, it is useful to clarify with the bank the scope and wording of the clause in advance and to understand under what circumstances it may be applied.
This makes it possible to assess how certain the bank's undertaking remains in a specific transaction and to provide in advance for alternative protection mechanisms if the clause is triggered.
Include the confirmation fee and possible delays in the contract price. Bear in mind that document examination takes 5 business days, and resolution of discrepancies takes several more days.
A letter of credit will not protect you if the issuing bank is in a jurisdiction without correspondent relationships, if the confirming bank's limit is exhausted, or if the contract provides for multiple shipments — there, discrepancies in documents are almost inevitable.
Frequently Asked Questions (FAQ)
How does an unconfirmed letter of credit differ from a confirmed one from the seller's perspective?
With an unconfirmed letter of credit, the seller relies on the creditworthiness of the issuing bank in the buyer's country. If the issuing bank or the country cannot make the payment, the seller will not receive the money. With a confirmed letter of credit, the confirming bank adds its own undertaking — the seller receives payment from the confirming bank, regardless of problems with the issuing bank or the country.
What should an exporter do if no bank is willing to confirm the letter of credit of the issuing bank?
It is worth considering alternative structures: a letter of credit with a guarantee from a development institution (for example, AfDB or ADB) or trade credit insurance. In the first case, the development institution assumes the risk of the issuing bank, enabling the confirming bank to confirm the transaction. In the second, insurance covers the risk of non-payment but requires compliance with conditions and deadlines for filing a loss claim.
Why is a significant share of presentations rejected on first presentation, and how does this affect the time to receive payment?
Up to 80% of presentations under letters of credit are rejected on first presentation due to discrepancies in documents. Typical errors: inconsistency of the invoice with the terms of the letter of credit, incorrect shipment dates, errors in transport documents.
Each discrepancy leads to a delay in payment: the bank sends a notice, the parties need to correct documents or agree on rejection, and this takes days. In risky corridors, discrepancies are one of the main reasons why the seller does not receive money on time, despite the existence of a letter of credit.
