THE STATUS OF COMMERCIAL BANKS WORKING WITH INTERNATIONAL LETTERS OF CREDIT: TRENDS, CHALLENGES, AND STRATEGIC IMPORTANCE

Аннотация

International letters of credit (LCs) remain one of the most secure and widely used instruments in global trade finance. This article explores the current status of commercial banks in facilitating international LCs, focusing on their role, operational dynamics, compliance requirements, and the challenges they face in today’s complex and regulated global financial environment. The paper also examines the impact of digitalization and international banking standards on the effectiveness of LC operations. Through analytical insights and global case studies, the article concludes with key recommendations to improve LC service efficiency and mitigaterisks for commercial banks. Keywords:Letter of Credit, Trade Finance, Commercial Banks, SWIFT, UCP 600, Risk Management, Digitalization, International Banking Literature review The use of letters of credit (LCs) in international trade has long been a critical area of study within finance and banking literature. Scholars and institutional authors alike have examined the legal frameworks, risk mitigation functions, operational challenges, and evolving practices associated with LCs. This review outlines major contributions that have shaped the understanding ofhowcommercial banks interact withand facilitateinternational LCs. One of the most authoritative sources in LC governance is the Uniform Customs and Practice forDocumentary Credits (UCP) developed by theInternational Chamber ofCommerce (ICC). The most current version, UCP 600, provides standardized rules applied globally in LC transactions. As noted by Bertrams (2004), UCP rules offer commercial certainty by harmonizing LC practices across jurisdictions, thereby enhancing the reliability of banks acting as intermediaries in trade finance. Scholars such as Sitkin and Bowen (2010) emphasize that commercial banks play multiple roles in LC transactions — including issuing, advising, confirming, and negotiating — each carrying distinct risks and responsibilities. These roles are not only operational but strategic, helping banks strengthen client relationships and generate fee-based income. According to WTO(2020), over 80% of global trade depends onsome form of bank-intermediated finance, underscoringthe central roleof LCs inenabling cross-border commerce. The literature also explores the common operational risks commercial banks face in LC transactions. Ellinger and Neo (2010) discuss how document discrepancies — which affect more than two-thirds of first LC presentations — create delays, legal ambiguity, and reputational risks for banks. Klapper and Randall (2019) further note that despite their page26 INTERNATIONAL JOURNAL OF ARTIFICIAL INTELLIGENCE ISSN:2692-5206,ImpactFactor:12,23 AmericanAcademicpublishers,volume05,issue05,2025 Journal: https://www.academicpublishers.org/journals/index.php/ijai advantages, LCs are procedurally complex and heavily reliant on precise documentation, increasing exposuretohuman error and fraud. The literature reflects a strong consensus on the enduring importance of letters of credit in international trade, particularly as a risk mitigation tool in volatile and trust-deficient environments. While traditional challenges—like document discrepancies and compliance burdens—persist, technological innovations such as eUCP and blockchain are reshaping the landscape. However, adoption remains uneven, and commercial banks must navigate a complex terrain of evolving regulatory standards, customer expectations, and systemic risks. This study builds on these insights to analyze the present status of commercial banks in facilitating and modernizing LC-based trade finance.