In international trade, a transferable letter of credit (LC) allows the beneficiary (often a middleman or trader) to transfer part or all of the credit to another party — usually the actual supplier or manufacturer. This flexibility is crucial in back-to-back or intermediary trading arrangements where the first beneficiary is not the producer of goods but acts as a link between buyer and seller.
👉 Article 38 of UCP 600 governs the rules for such transferable credits, ensuring transparency, fairness, and uniformity when a credit is transferred from one beneficiary to another.
📖 What Does Article 38 of UCP 600 Say?
1️⃣ Definition of a Transferable Credit
A credit is considered transferable only if it is expressly stated as “transferable” by the issuing bank.
- If the LC doesn’t explicitly say “transferable,” it cannot be transferred.
- Terms like “assignable” or “divisible” do not make a credit transferable.
Only the first beneficiary (the one to whom the LC is originally issued) has the right to request its transfer.
2️⃣ Who Can Transfer the Credit?
A transferable LC can only be transferred by the bank specifically authorized to do so — known as the transferring bank.
- Usually, this is the advising bank (if it has the authority from the issuing bank).
- The issuing bank can also act as the transferring bank.
- Other banks cannot transfer the LC unless explicitly permitted.
3️⃣ One-Time Transfer Rule
A transferable LC can be transferred only once.
However:
- The second beneficiary cannot transfer it further.
- Partial transfers are allowed if the LC permits partial shipments.
(For example, one LC can be divided and transferred to multiple suppliers.)
4️⃣ Terms That May Be Changed During Transfer
When transferring an LC, certain details can be modified to protect the first beneficiary’s commercial interest.
The transferring bank may substitute or alter:
- Amount of the credit → may be reduced.
- Unit price → may be lowered.
- Expiry date → may be shortened.
- Latest shipment date → may be earlier.
- Period for presentation → may be shortened.
However, the place of shipment and destination cannot be changed, nor can the currency of the credit.
5️⃣ Substitution of Documents
The first beneficiary (the trader) has the right to substitute their own invoice and draft for those of the second beneficiary before the documents are sent to the issuing bank.
This allows the trader to keep their profit margin confidential.
If the first beneficiary fails to provide substitute documents on time, the transferring bank may send the second beneficiary’s documents directly to the issuing bank — without the trader’s substitution.
6️⃣ Costs and Charges
All costs and charges related to the transfer (fees, commissions, etc.) are normally borne by the first beneficiary, unless otherwise agreed.
🔎 Breaking Down Article 38
💡 Why Transferable Credits Exist
Transferable credits are designed for intermediary traders who connect buyers and suppliers.
They enable a trader (the first beneficiary) to fulfill an LC without having to use their own capital — they simply transfer the credit to the supplier.
Example:
- Buyer in Germany issues an LC to a Bangladeshi trader.
- The trader transfers the LC to a factory in Chattogram.
- The factory ships the goods and presents documents to the bank.
- The trader substitutes their invoice and earns the profit difference.
🏦 Bank’s Role and Responsibilities
Issuing Bank:
✔ Must clearly indicate if the credit is “transferable.”
✔ Liable only for the original LC terms — not for how it’s transferred.
Transferring Bank:
✔ Can only transfer the credit once.
✔ Must ensure transfer complies with Article 38 and LC instructions.
✔ Has the right to send documents directly if the first beneficiary fails to substitute documents timely.
Confirming Bank (if any):
✔ Confirmation applies to the transferred credit as well, but only to the extent of the original confirmation.
👩💼 Exporter’s (Beneficiary’s) Role
First Beneficiary (Trader):
✔ Can transfer the LC to supplier(s).
✔ Can reduce prices, shorten dates, or adjust the amount.
✔ Has the right to replace invoices and drafts before submission.
✔ Must act within the limits of the LC — only one transfer is allowed.
Second Beneficiary (Supplier):
✔ Must comply fully with the transferred LC terms.
✔ Cannot transfer it again to another party.
🌍 Practical Trade Example
Scenario: Intermediary Trade via Transferable LC
A trader in Bangladesh receives a transferable LC from a French buyer for $200,000 worth of garments.
The trader transfers it to a garment factory (second beneficiary) for $180,000.
Factory ships the goods, presents documents (invoice for $180,000).
The trader substitutes their own invoice for $200,000 before the documents reach the issuing bank.
✔ Buyer pays $200,000 to the issuing bank.
✔ Factory gets $180,000.
✔ Trader earns $20,000 profit.
If the trader fails to substitute their invoice on time →
❌ The transferring bank may send the factory’s documents directly to the issuing bank.
✅ Why Article 38 Matters
- Provides legal clarity for transferable credits.
- Enables middlemen to operate legitimately without misusing funds.
- Protects banks by defining responsibilities and limits of transfer.
- Helps streamline trade where goods come from multiple sources.
✍️ Final Thoughts
Article 38 of UCP 600 is one of the most practical and commercially important articles, especially in global trading involving intermediaries. It balances the interests of all parties:
- The buyer ensures that the LC fulfills its purpose.
- The trader gains flexibility to manage suppliers.
- The supplier is guaranteed payment through a transferred LC.
- The bank operates under clear, standardized rules.
Ultimately, Article 38 ensures that the transfer of credit process remains transparent, controlled, and secure — allowing global trade to function smoothly where multiple players are involved.