Letter of Credit (LC) in Iranian Trade - Complete Guide

Introduction to Letters of Credit in Iranian Trade

A Letter of Credit (LC), known in Persian as Ettebar-e Asnadi, is a financial instrument issued by a bank on behalf of a buyer (applicant) that guarantees payment to the seller (beneficiary) upon the presentation of documents that comply with the terms and conditions specified in the credit. In the context of Iranian international trade, the LC is far more than just a payment method; it is the cornerstone of the import-export payment system and is often the only acceptable form of payment for significant commercial transactions.

The importance of Letters of Credit in Iranian trade cannot be overstated. Due to the unique challenges posed by international banking restrictions, limited correspondent banking relationships, and the regulatory requirements of the Central Bank of Iran (Bank Markazi), LCs provide a structured, bank-guaranteed mechanism that protects both buyers and sellers while ensuring compliance with Iranian foreign exchange regulations. Approximately 70-80% of all registered imports into Iran are financed through Letters of Credit, making it essential for any trader dealing with Iran to have a thorough understanding of how LCs work in this market.

This guide covers every aspect of Letters of Credit in Iranian trade, from the different types available to the step-by-step process for opening and settling an LC, the required documents, costs, common discrepancies, and special provisions for capital goods and production line imports.

The International Legal Framework: UCP 600

All Letters of Credit in international trade, including those involving Iranian banks, are governed by the Uniform Customs and Practice for Documentary Credits (UCP 600), published by the International Chamber of Commerce (ICC). UCP 600, which came into effect on July 1, 2007, is the current revision and provides the rules that govern LC transactions worldwide.

Key principles of UCP 600 relevant to Iranian trade include the independence principle, meaning the LC is a separate transaction from the underlying sales contract; the strict compliance doctrine, requiring that documents must comply exactly with the LC terms; the examination period of five banking days for the issuing bank to examine documents; the standard for document examination based on the documents alone (not the goods); and the rules governing discrepant documents, amendments, and transfers.

Iranian banks follow UCP 600 for all international LC transactions. However, certain Iranian-specific regulations imposed by Bank Markazi may overlay the UCP 600 framework, particularly regarding foreign exchange allocation, import registration requirements, and document verification procedures.

Types of Letters of Credit

Classification by Payment Timing

Sight LC (LC Didari): Under a sight LC, payment is made immediately (or within the standard banking processing time of 5 banking days) upon presentation of documents that conform to the LC terms. The issuing bank examines the documents and, if they comply, releases payment to the beneficiary or the negotiating bank. Sight LCs are used when the buyer has sufficient liquidity and the seller requires prompt payment. They are common for consumer goods, raw materials, and perishable items where the seller cannot afford to wait for payment.

Usance LC (LC Yuzans / Deferred Payment LC): A usance LC provides for payment at a future date, typically 30, 60, 90, 180, or even 360 days after the date of shipment, document presentation, or sight of draft. The buyer accepts a time draft or the bank undertakes to pay at maturity. Usance LCs are extremely popular in Iranian trade because they allow importers to receive and sell goods before payment is due. For production line imports, usance periods can extend up to 3 years. The buyer effectively receives financing from the seller or the banking system.

Mixed Payment LC: A combination where a portion (typically 10-30%) is paid at sight and the remainder is deferred. This is a compromise that gives the seller some immediate cash flow while providing the buyer with partial financing.

Classification by Security Level

Irrevocable LC: Under UCP 600, all LCs are irrevocable by default. An irrevocable LC cannot be amended or cancelled without the agreement of all parties (issuing bank, confirming bank if any, and beneficiary). This provides the highest level of security for the seller.

Confirmed LC: A confirmed LC carries the guarantee of two banks: the issuing bank and a confirming bank (usually located in the seller country or a major financial center). The confirming bank adds its own undertaking to pay, providing an additional layer of security. Confirmed LCs are critically important in Iranian trade because many international sellers are concerned about the ability of Iranian banks to make payments due to sanctions-related banking restrictions. The confirmation by a reputable international bank mitigates this risk. Confirmation fees range from 0.5% to 3% or more of the LC value, depending on the confirming bank, the country risk, and the tenor.

Unconfirmed LC: An LC without the additional guarantee of a confirming bank. Less expensive but riskier for the seller in the context of Iranian trade.

Classification by Special Features

Transferable LC: The original beneficiary (first beneficiary) can request the transferring bank to transfer all or part of the LC to one or more second beneficiaries. This is useful in intermediary trade where a trading company in a third country (e.g., Dubai, Istanbul, or Hong Kong) facilitates the transaction between the actual manufacturer and the Iranian buyer. The first beneficiary can substitute invoices and drafts, potentially earning a margin.

Back-to-Back LC: Two separate LCs are opened. The first (master) LC is issued in favor of the intermediary, who then uses it as security to open a second LC in favor of the actual supplier. Back-to-back LCs are common in Iranian trade where transactions are routed through intermediary companies in countries like the UAE, Turkey, China, or Oman due to banking channel limitations.

Standby Letter of Credit (SBLC): Unlike a commercial LC, an SBLC functions as a guarantee or fallback mechanism. It is only drawn upon if the buyer fails to fulfill their payment obligation through the primary payment method (usually wire transfer). SBLCs are governed by ISP98 (International Standby Practices) or UCP 600. They are used in ongoing trade relationships as a safety net and for project-based transactions where payments are made progressively.

Revolving LC: Automatically reinstates or renews for the same amount after each drawing, without the need to open a new LC each time. Revolving LCs can be cumulative (unused amounts carry over to the next period) or non-cumulative (unused amounts expire). They are ideal for importers with regular, recurring orders of the same goods from the same supplier, reducing administrative burden and banking costs.

Red Clause LC: Contains a special clause (historically printed in red ink, hence the name) that authorizes the advising or confirming bank to advance a specified amount to the beneficiary before shipment and before presentation of documents. The advance is made against the beneficiary simple receipt and undertaking to ship goods and present documents. Red clause LCs are useful when the seller needs working capital to manufacture or procure the goods. The risk of the advance falls on the issuing bank.

Green Clause LC: Similar to a red clause LC but goes further by also covering storage and warehousing costs. The beneficiary can draw advances for purchasing goods and storing them at a designated warehouse before shipment. Green clause LCs require warehouse receipts in addition to the simple receipt required under a red clause.

Step-by-Step Process for Opening an LC in Iran

Prerequisites for LC Opening

Before an Iranian importer can open a Letter of Credit, several prerequisites must be met. The importer must hold a valid commercial card (Kart-e Bazargani) issued by the Iran Chamber of Commerce. The import order must be registered on the NTSW (National Trade Single Window) system, formerly known as the comprehensive trade system. Foreign exchange allocation approval must be obtained from the bank or through the NIMA system. A proforma invoice from the seller detailing goods, prices, terms, and conditions must be prepared. Any required import permits or licenses from relevant ministries (e.g., Ministry of Industry, Mine and Trade; Ministry of Health for pharmaceutical products) must be secured.

LC Opening Process

Step 1 - Application Submission: The importer submits an LC application form to the foreign exchange department of their chosen Iranian bank. The application includes the proforma invoice, import registration documents, commercial card copy, company registration documents, and a description of the goods with HS codes.

Step 2 - Bank Review and Approval: The bank reviews the application for completeness, verifies the importer creditworthiness and account history, checks foreign exchange availability, and ensures compliance with Central Bank regulations. This process typically takes 3-7 business days.

Step 3 - Margin Deposit: The importer is required to deposit a cash margin (Vasegheh) with the bank. The margin percentage varies based on the importer credit rating and relationship with the bank (typically 10% to 100% of the LC value), the type of goods being imported, the current foreign exchange policy of the Central Bank, and the LC tenor.

Step 4 - LC Issuance via SWIFT: Once approved, the issuing bank transmits the LC to the advising bank in the seller country via SWIFT MT700 message. The MT700 contains all the terms and conditions of the credit, including the beneficiary name and address, LC amount and currency, tenor (sight or usance), expiry date and latest shipment date, goods description, required documents, port of loading and discharge, and any special conditions.

Step 5 - Advising and Confirmation: The advising bank in the seller country receives the MT700, verifies its authenticity, and advises the LC to the beneficiary. If the LC is to be confirmed, the confirming bank adds its undertaking at this stage.

Step 6 - Seller Review and Shipment: The seller reviews the LC terms carefully to ensure they can comply with all conditions. If any terms are problematic, the seller requests amendments through the advising bank. Once satisfied, the seller manufactures or procures the goods, arranges shipping, and prepares all required documents.

Step 7 - Document Presentation: The seller presents the required documents to the advising or negotiating bank within the presentation period specified in the LC (usually 21 days after the date of shipment, as per UCP 600 Article 14c).

Step 8 - Document Examination: The advising or negotiating bank examines the documents for compliance with LC terms and UCP 600 rules. If documents are compliant, the bank forwards them to the issuing bank with a claim for payment.

Step 9 - Payment: For sight LCs, the issuing bank makes payment within 5 banking days of determining document compliance. For usance LCs, the issuing bank accepts the draft and undertakes to pay at maturity.

Step 10 - Document Release to Importer: The issuing bank releases the original shipping documents to the importer, who uses them to clear the goods through Iranian customs.

Required Documents Under an LC

The specific documents required depend on the goods, the trade route, and any regulatory requirements. However, the following documents are standard in virtually all LC transactions involving Iranian trade.

Commercial Invoice

The commercial invoice must include the seller and buyer names and addresses exactly as stated in the LC, a detailed description of goods matching the LC terms, unit prices and total amounts in the LC currency, trade terms (Incoterms 2020), HS code classification, and marks and numbers matching those on the packing list and transport documents.

Bill of Lading (B/L) or Transport Document

For sea freight (most common in Iranian trade), a clean on-board ocean Bill of Lading is required. The B/L must show the goods shipped on board the vessel, the port of loading and port of discharge as specified in the LC, the consignee (usually the issuing bank or to order), the notify party (usually the importer), and the date of shipment (which must be on or before the latest shipment date in the LC). For air freight, an Air Waybill (AWB) is required. For road transport, a CMR consignment note is used. For multimodal transport, a combined transport document may be required.

Packing List

The packing list provides detailed information about the packaging of the goods, including the number of packages, their type (cartons, pallets, crates), gross and net weights, dimensions, and marking and numbering.

Certificate of Origin

The certificate of origin confirms where the goods were manufactured or produced. It is typically issued by the chamber of commerce in the country of origin and must match the origin requirements specified in the LC. For certain goods, the certificate of origin is critical for determining applicable tariff rates under preferential trade agreements.

Insurance Certificate or Policy

For CIF and CIP shipments, the seller must provide an insurance certificate or policy covering the goods for at least 110% of the CIF value. The insurance must cover the risks specified in the LC (usually Institute Cargo Clauses A, B, or C) and must be in the same currency as the LC.

Inspection Certificate

For many imports into Iran, a pre-shipment inspection (PSI) certificate is required. The inspection is conducted by an approved inspection company such as SGS, Bureau Veritas, TUV, or ISQI. The certificate confirms that the goods meet the specifications stated in the contract and LC.

Health and Phytosanitary Certificates

Required for food products, agricultural goods, and animal products. Health certificates are issued by the competent authority in the country of origin and must be accepted by the Iran Food and Drug Administration (IFDA) or the Iran Plant Protection Organization (IPPO).

Quality and Standards Certificates

Certificates confirming compliance with ISIRI (Iran National Standards Organization) standards or equivalent international standards (ISO, EN, DIN) may be required for goods subject to mandatory standards in Iran.

LC Costs and Fees in Iran

Opening and settling an LC in Iran involves several categories of costs. The opening commission charged by the issuing bank typically ranges from 0.1% to 0.5% of the LC value. SWIFT message charges for MT700, MT707 (amendments), and MT799 (free-format messages) range from $50 to $200 per message. Amendment fees range from $50 to $150 per amendment. Confirmation fees charged by the confirming bank range from 0.5% to 3% or more of the LC value and depend on the country risk, bank rating, and tenor. Advising fees charged by the advising bank are typically $50 to $200. Negotiation or payment fees range from 0.1% to 0.25% of the drawing amount. Stamp duty is applicable based on Iranian tax regulations. Insurance premiums for CIF-based LCs typically range from 0.3% to 1.5% of goods value. The total estimated cost for an LC transaction in Iran typically ranges from 1.5% to 5% of the LC value, depending on the type, tenor, and confirmation requirements.

Common Discrepancies and Rejection Reasons

Document discrepancies are the most frequent cause of delays and payment problems in LC transactions. Statistics show that approximately 60-70% of first presentations under LCs contain discrepancies. The most common discrepancies in Iranian trade include late presentation of documents (documents must be presented within 21 days of the date of shipment or before the LC expiry date, whichever is earlier), inconsistent goods description between the commercial invoice and the LC terms, missing or incorrect marks and numbers on transport documents or packing lists, expired LC at the time of document presentation, overdrawn amount or quantity exceeding LC limits, unsigned or undated documents, insurance coverage insufficient or in wrong currency, Bill of Lading showing freight collect when the LC requires freight prepaid, certificate of origin showing a different country than specified in the LC, and inspection certificate not issued by the inspection company named in the LC.

How to Avoid Discrepancies

To minimize the risk of discrepancies, sellers should review the LC terms immediately upon receipt and request amendments for any unacceptable conditions. Using a checklist to verify document compliance before presentation is essential. Working with experienced freight forwarders and document preparers helps ensure accuracy. Presenting documents well before the 21-day and expiry deadlines provides a buffer for corrections. Maintaining consistent terminology across all documents avoids mismatches.

Usance LC for Production Lines and Capital Goods

The Iranian government has established special provisions to encourage the import of production line equipment and capital goods through usance LC financing. Under these provisions, usance credits of up to $50 million per transaction can be opened for importing production line equipment. Repayment periods can extend up to 3 years (and in some cases up to 5 years for strategic industries). The Central Bank of Iran provides foreign exchange allocation at preferential rates for qualifying imports. Interest rates on the usance period are typically lower than standard commercial rates. Qualifying goods include manufacturing machinery, production lines, industrial equipment, agricultural machinery, mining equipment, and technology transfer projects.

To access these special usance facilities, the importer must obtain approval from the Ministry of Industry, Mine and Trade confirming the production nature of the equipment. The project must demonstrate economic viability and employment generation potential. The importer must provide adequate collateral to the issuing bank covering the extended repayment period.

Key Iranian Banks and Correspondent Banking Relationships

The major Iranian banks handling international LC operations include Bank Melli Iran (the largest and oldest state-owned bank), Bank Saderat Iran (extensive international branch network), Bank Tejarat (strong trade finance capabilities), Bank Mellat (active in international banking), Parsian Bank (leading private sector bank), and Bank Pasargad (growing international presence). Important correspondent banking relationships include Muscat Bank and Bank Muscat in Oman, Europaeisch-Iranische Handelsbank (EIH) in Germany, Kunlun Bank in China, Halk Bankasi in Turkey, and various banks in the UAE, South Korea, and India.

Practical Tips for LC Success in Iranian Trade

1. Choose the right LC type: Match the LC type to your transaction requirements. Sight LCs for quick turnover goods, usance for capital equipment.
2. Budget for total costs: Include all banking fees, confirmation costs, and insurance in your cost calculations.
3. Prepare documents meticulously: Consistency across all documents is the key to avoiding discrepancies.
4. Allow adequate time: LC opening in Iran can take 1-4 weeks. Plan your timeline accordingly.
5. Use experienced banks: Work with banks that have established correspondent relationships relevant to your trade corridor.
6. Request amendments early: If any LC terms are unacceptable, request amendments before shipping.
7. Keep copies of everything: Maintain complete records of all LC-related correspondence and documents.
8. Monitor exchange rates: The spread between NIMA rates and market rates can significantly impact your transaction economics.

Source: Central Bank of Iran, ICC UCP 600, Iranian Banking Regulations | Last Updated: February 2026