INTERNATIONAL TRADE

A back-to-back arrangement can be used where the there is a middleman who proceeds to get a letter of credit issued on his behalf on the basis that a letter of credit has been or will be issued in his favor. Instead of transferring of availability moneys that he would do under a transferable credit, he gets his own bank to issue a separate credit. Once this description is understood, it then becomes easy to appreciate how the letter of credit arrangement gets its title, for a second (or several) letter(s) of credit is (are) issued on the back of the first letter of credit.

Let us say that there is an importer in Johor Bahru, Noriz Wood Sdn Bhd (from now on NW) which wants to purchase some mechanical products. It starts to negotiate with a supplier, Bamboo Ltd, (BL in short) in Christchurch, New Zealand. BL, knows from its productive capacity that it will not be able to supply all the products that are required. Thus, it enters into a separate contract with Chuck Noris Pty Ltd (CNL) which is located in Sydney, Australia. Both BL and CNL wish to paid by letter of credit. Let us say that the deals which are eventually concluded are that BL is to supply 5000 units at NZ$50 each ( 3000 to be supplied from its own manufacturing output, while the balance of 2000 units will be provided by BL, which will charge CNL which will charge BL NZ$50 per unit).