Topic: Banking Transaction and letter of credit the consequential impact on world economy. Explain and Illustrate in the worldwide aspect.

02. The main objectives of the Term Paper can be stated as follows:

To identify the consequential impact on world economy of Banking Transaction and letter of credit.  It will help me to confirm about Banking transaction and letter of credit. My report shows the some important issue about whole bank transaction, world wide business and letter of credit,

03. What are banking transactions?

Lodging money into a bank account is a transaction, as is withdrawing money. Adding interest to an account is a transaction. Direct debits are transactions. Deducting bank charges is a transaction. Basically any sort of activity involving a change of money in an account is a transaction. We can get a list of them on a bank account statement.

Any one does not need to walk to the branch. Visit or ones bank website for watch all banking transactions. One individual don’t have to go to their branch to perform banking transactions. Everything is at ones fingertips. For doing banking transaction any individual or organizations have to open a bank account with a bank. There are different types of bank account can open that are shown in following.

  1. TL/Foreign Currency Time Deposit and Current Account
  2. Accumulating Savings Account
  3. ELMA Account
  4. Investment Account

( Note : TL means The level of foreign currency deposits. ELMA account in one type of bank account While you are carrying out your payment transactions, The Elma Account automatically buys and sells mutual funds to invest the excess money in your TL Current Account. When there is cash inflow to your account or when your salary is deposited, the Elma Account immediately buys Type B Elma Money Market Funds and invests your money. Thus you earn whenever you have money in your account without you having to do anything.

 04. Banking Transactions Can perform by following area:

  1. Equity Transactions (Chain Orders, Split Orders, Share Purchase Loans, IPOs)
  2. Repo
  3. Foreign Currency Transactions
  4. Type A and B Mutual Funds
  5. Cash
  6. Investment Basket
  7. T-Bills
  8. Elma Account
  9. Accumulating Savings Account
  10. Structured Deposits
  11. Accumulating Fund Account
  12. Arbitrage
  13. Eurobond
  14. Gold Account

(Note : Repo is short for repurchase agreement. Those who deal in government
securities use repos as a form of overnight borrowing. Arbitrage is basically buying in one market and simultaneously selling in another,
profiting from a temporary difference,)

* Money Transfers

1. Money Transfer to Name or Account

2. EFT

3. Standing Payment Orders

4. Registered and Forward-Dated Money Transfer/EFT orders

5. Foreign Currency Transfer (Swift)

6. Registration

7. Sending Money

(Note: EFT- Electronic funds transfer (EFT) is the electronic exchange or transfer of money
from one account to another account.)

* Payments

Mobile Top-Up , Automatic Standing Payment Orders , Municipality Payments , E-Shopping, Merchant Partner Card Payments, University payments, Tax payment, Traffic Ticket payments, ,Donation Transactions, Games of Chance, Travel Payments, Apartment Fee Payments, E-Government Gateway

 Bill Transactions

Display bills, Bill payment by installation number, Entry for Automatic Contractual Bills Payments, Contractual Utility Bill Payments.

 Card Transactions

Display Credit Card Information, Statement and Current Billing Cycle Transactions

Cancel a Card, Request a New Card

Garanti Credit Card Debt Payments

Virtual Card Transactions

Other Bank Credit Card Debt Payments

HSBC Advantage Card, Smart Card and Cankart Debt payments

Bonus, Money Card, Shop&Miles, Flexi, American Express, Virtual Card applications

Credit Card Insurance

Partner Card Transactions

Sector Card

  Loan Transactions

Loan Application, Interest Rates, My Loan Accounts, My Flexible Loans, Flexible Loan Calculation, Tracking Application Status, My Leasing Agreements.

* Tax Transactions

Customs Tax, Motor Vehicle Tax, Corporate Tax, Annual Income Tax, VAT (Reported), BMV (Banking Transactions Tax), SMV (Insurance Transactions Tax), Income Stoppage Tax

* Foreign Currency Transactions

Buy/Sell Foreign Currency at special Alternative Delivery Channels’ rates.

  Insurance and Pension Transactions

My Pension Agreements, My Life Policies, My Insurance Policies, Pension Application, Insurance Application

  Application Transactions

5-Minute Loan Application, Overdraft Account Application, Card Applications, Share Purchase Loan Application, Insurance Application, Pension Application

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 05. Consequential impact on world economy of the banking transaction:

Banking in the modern sense of the word can be traced to medieval. Banks act as payment agents by conducting checking or current accounts for customers, paying check drawn by customers on the bank, and collecting checks deposited to customers’ current accounts. Banks also enable customer payments via other payment methods such as Automated Clearing House (ACH), Wire transfers or telegraphic transfer, EFTPOS, and automated teller machine (ATM).

Banks borrow money by accepting funds deposited on current accounts, by accepting term deposits, and by issuing debt securities such as banknotes and bonds. Banks lend money by making advances to customers on current accounts, by making installment loans, and by investing in marketable debt securities and other forms of money lending.

Banks provide almost all payment services, and a bank account is considered indispensable by most businesses, individuals and governments. Non-banks that provide payment services such as remittance companies are not normally considered an adequate substitute for having a bank account.

Banks borrow most funds from households and non-financial businesses, and lend most funds to households and non-financial businesses, but non-bank lenders provide a significant and in many cases adequate substitute for bank loans, and money market funds, cash management trusts and other non-bank financial institutions in many cases provide an adequate substitute to banks for lending savings too.[clarification needed]

A bank can generate revenue in a variety of different ways including interest, transaction fees and financial advice. The main method is via charging interest on the capital it lends out to customers[citation needed]. The bank profits from the differential between the level of interest it pays for deposits and other sources of funds, and the level of interest it charges in its lending activities.

 In the past 20 years American banks have taken many measures to ensure that they remain profitable while responding to increasingly changing market conditions. First, this includes the Gramm-Leach-Bliley Act, which allows banks again to merge with investment and insurance houses. Merging banking, investment, and insurance functions allows traditional banks to respond to increasing consumer demands for “one-stop shopping” by enabling cross-selling of products (which, the banks hope, will also increase profitability).

Second, they have expanded the use of risk-based pricing from business lending to consumer lending, which means charging higher interest rates to those customers that are considered to be a higher credit risk and thus increased chance of default on loans. This helps to offset the losses from bad loans, lowers the price of loans to those who have better credit histories, and offers credit products to high risk customers who would otherwise be denied credit.

Third, they have sought to increase the methods of payment processing available to the general public and business clients. These products include debit cards, prepaid cards, smart cards, and credit cards. They make it easier for consumers to conveniently make transactions and smooth their consumption over time

However, with convenience of easy credit, there is also increased risk that consumers will mismanage their financial resources and accumulate excessive debt. Banks make money from card products through interest payments and fees charged to consumers and transaction fees to companies that accept the credit- debit – cards. This helps in making profit and facilitates economic development as a whole.[9]

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06. Banks in the economy

The economic functions of banks include:

Issue of money, in the form of banknotes and current accounts subject to check or payment at the customer’s order. These claims on banks can act as money because they are negotiable or repayable on demand, and hence valued at par. They are effectively transferable by mere delivery, in the case of banknotes, or by drawing a check that the payee may bank or cash.

Netting and settlement of payments – banks act as both collection and paying agents for customers, participating in interbank clearing and settlement systems to collect, present, be presented with, and pay payment instruments. This enables banks to economize on reserves held for settlement of payments, since inward and outward payments offset each other. It also enables the offsetting of payment flows between geographical areas, reducing the cost of settlement between them.

Credit intermediation – banks borrow and lend back-to-back on their own account as middle men.

Credit quality improvement – banks lend money to ordinary commercial and personal borrowers (ordinary credit quality), but are high quality borrowers. The improvement comes from diversification of the bank’s assets and capital which provides a buffer to absorb losses without defaulting on its obligations. However, banknotes and deposits are generally unsecured; if the bank gets into difficulty and pledges assets as security, to raise the funding it needs to continue to operate, this puts the note holders and depositors in an economically subordinated position.

Maturity transformation – banks borrow more on demand debt and short term debt, but provide more long term loans. In other words, they borrow short and lend long. With a stronger credit quality than most other borrowers, banks can do this by aggregating issues (e.g. accepting deposits and issuing banknotes) and redemptions (e.g. withdrawals and redemption of banknotes), maintaining reserves of cash, investing in marketable securities that can be readily converted to cash if needed, and raising replacement funding as needed from various sources (e.g. wholesale cash markets and securities markets).

Money creation – whenever a bank gives out a loan in a fractional-reserve banking system, a new sum of virtual money is created.

07. What is Letter Of Credit:

A letter from a bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to make payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase. On the other hanh commercial letter of credit (LC[1]) is a document issued mostly by a financial institution, used primarily in trade finance, which usually provides an irrevocable payment undertaking.

Letters of credit are often used in international transactions to ensure that payment will be received. Due to the nature of international dealings including factors such as distance, differing laws in each country and difficulty in knowing each party personally, the use of letters of credit has become a very important aspect of international trade. The bank also acts on behalf of the buyer (holder of letter of credit) by ensuring that the supplier will not be paid until the bank receives a confirmation that the goods have been shipped.

The letter of credit can also be payment for a transaction, meaning that redeeming the letter of credit pays an exporter. Letters of credit are used primarily in international trade transactions of significant value, for deals between a supplier in one country and a customer in another. In such cases, the International Chamber of Commerce Uniform Customs and Practice for Documentary Credits applies (UCP 600 being the latest version).[2] They are also used in the land development process to ensure that approved public facilities (streets, sidewalks, storm water ponds, etc.) will be built. The parties to a letter of credit are usually a beneficiary who is to receive the money, the issuing bank of whom the applicant is a client, and the advising bank of whom the beneficiary is a client. Almost all letters of credit are irrevocable, i.e., cannot be amended or canceled without prior agreement of the beneficiary, the issuing bank and the confirming bank, if any. In executing a transaction, letters of credit incorporate functions common to giros and Traveler’s cheques. Typically, the documents a beneficiary has to present in order to receive payment include a commercial invoice, bill of lading, and documents proving the shipment was insured against loss or damage in transit.

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08. Process of letter of credit

1. Buyer and seller agree to conduct business. The seller wants a letter of credit to guarantee payment.

2. Buyer applies to his bank for a letter of credit in favor of the seller.

3. Buyer’s bank approves the credit risk of the buyer, issues and forwards the credit to its correspondent bank (advising or confirming). The correspondent bank is usually located in the same geographical location as the seller (beneficiary).

4. Advising bank will authenticate the credit and forward the original credit to the seller (beneficiary).

5. Seller (beneficiary) ships the goods, then verifies and develops the documentary requirements to support the letter of credit. Documentary requirements may vary greatly depending on the perceived risk involved in dealing with a particular company.

6.Seller presents the required documents to the advising or confirming bank to be processed for payment.

7.Advising or confirming bank examines the documents for compliance with the terms and conditions of the letter of credit.

8.If the documents are correct, the advising or confirming bank will claim the funds by:
– Debiting the account of the issuing bank.
– Waiting until the issuing bank remits, after receiving the documents.
– Reimburse on another bank as required in the credit.

9. Advising or confirming bank will forward the documents to the issuing bank.

10. Issuing bank will examine the documents for compliance. If they are in order, the issuing bank will debit the buyer’s account.

11. Issuing bank then forwards the documents to the buyer.

09. Consequential impact on world economy of the Letter of Credit

A great deal of business is conducted globally between buyers and sellers who have never met each other, and in all likelihood may never meet each other, yet do successful ongoing business with each other. The average Exporter and Importer are most likely not in a position to visit each other, to confirm physically that the other is a sincere and efficient trading partner. However, both parties have the necessity to do business. International Trade is about Risk and Trust between contracting parties and we need to balance this friction between Risk and Trust. This will require a mechanism in place that will substitute the Buyer and Sellers need to trust each other, and the lack of trust that exists between them by the introduction of a Third arty that would have the trust by both a buyer and a seller. This Third Party is the GLOBAL Network of Banks and Financial Institutions. By making use of a Documentary Letter of Credit, the buyer & seller ‘Sub-Contract’ their risks to the Banking and Financial Institutions. The Letter of Credit is a safe and trusted mechanism of payment and is widely used in International Trade.


 10. Source of Data collection :

 11. Conclusion :

Banking Transaction and letter of credit has become internationalized and globalized in the wake of the liberalization of the financial markets; changes have taken place in customer structure and behavior. These factors have resulted in a pressing need for banks to adapt its organizational structures in its domestic and international fields of operations and make them future oriented. New offices and branches abroad increased bank’s presence. Despite the fact that 2009 was year of many challenges, the Bank was managed quite successfully. The year was concluded with a steady growth and the market share was retained in all areas of operations. Bank management is confident about its ability to sustain its earning capacity and maintenance of asset quality in the coming years by making bank transaction and opening letter of credit with different countries.

As Banking Transaction and letter of credit conduct by any bank so banks play a major role being intermediaries between lenders and depositors. If due to macroeconomic shocks or risky operation a bank starts failing, contagion effect can happen. It means that financial deterioration spreads to other bank panic may take plays. Not ceased, this process reaches healthy bank.

The foreign exchange market  is a global, worldwide-decentralized financial market for trading currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends. The foreign exchange market determines the relative values of different currencies.

The foreign exchange market assists international trade and investment, by enabling currency conversion. For example, it permits a business in the United States to import goods from the United Kingdom and pay pound sterling, even though its income is in United States dollars. It also supports direct speculation in the value of currencies, and the carry trade, speculation on the change in interest rates in two currencies.

In a typical foreign exchange transaction, a party purchases a quantity of one currency by paying a quantity of another currency. The modern foreign exchange market began forming during the 1970s after three decades of government restrictions on foreign exchange transactions (the Bretton Woods system of monetary management established the rules for commercial and financial relations among the world’s major industrial states after World War II), when countries gradually switched to floating exchange rates from the previous exchange rate regime, which remained fixed as per the Bretton Woods system.

In short, the whole global trade Economic line relies on letters of credit and banking transaction. No Banking transaction Means No letter of credit, no letter of credit mean no international trade.


12. Problem faced since doing this Term Paper:

In collection data, following problems and difficulties were faced by us—

  • There was the limitation of the time and for this, data and other necessary information had to be collected within the shortest possible time.
  • Most of the respondents in the study areas did not have an idea about a research study and it was therefore difficult to explain the purpose of this research of convince them.

13. References/appendix:

  •  Boland, Vincent (2009-06-12). “Modern dilemma for world’s oldest bank”. Financial Times. Retrieved 23 February 2010.
  • Hoggson, N. F. (1926) Banking Through the Ages, New York, Dodd, Mead & Company.
  • Goldthwaite, R. A. (1995) Banks, Places and Entrepreneurs in Renaissance Florence, Aldershot, Hampshire, Great Britain, Variorum
  • Macesich, George (30 June 2000). “Central Banking: The Early Years: Other Early Banks”. Issues in Money and Banking. Westport, Connecticut: Praeger Publishers (Greenwood Publishing Group). p. 42. doi:10.1336/0275967778. ISBN 978-0-275-96777-2. Retrieved 2009-03-12. “The first state deposit bank was the Bank of St. George in Genoa, which was established in 1407.”
  • United Dominions Trust Ltd v Kirkwood, 1966, English Court of Appeal, 2 QB 431
  • e.g. Tyree’s Banking Law in New Zealand, A L Tyree, LexisNexis 2003, page 70.
  • “How Banks Make Money”. The Street. Retrieved 2011-09-08.
  • a b Banking 2010PDF (638 KB) charts 7–8, pages 3–4. TheCityUK.
  • a b Mishler, Lon; Cole, Robert E. (1995). Consumer and business credit management. Homewood: Irwin. pp. 128–129. ISBN 0-256-13948-2.
  • Berger A. (2010). To What Extent Will the Banking Industry be Globalized? A Study of Bank Nationality and Reach in 20 European Nations.