Letters of Credit, SBLCs, and Bank Guarantees: A Practical Guide for East African Businesses

Why Trade Finance Instruments Exist

International trade involves a fundamental problem: the exporter does not want to ship goods without payment, and the importer does not want to pay before receiving the goods. Trade finance instruments resolve this standoff by inserting a trusted financial institution — typically a bank — as an intermediary that guarantees performance on behalf of each party.

For East African businesses engaged in cross-border trade — importing raw materials, exporting agricultural produce, sourcing manufactured goods from Asia or Europe — these instruments are often the difference between executing a deal and losing it to a competitor who can provide the required security.

Letter of Credit (LC)

A Letter of Credit is a commitment from the importer's bank to the exporter that payment will be made once agreed-upon documents are presented — typically shipping documents proving the goods have been dispatched as agreed.

**When to use it:** When importing goods from international suppliers who require payment security. The LC gives the exporter confidence they will be paid, and gives you — the importer — confidence that payment is only released when documents confirm the goods are en route.

Key variants:

**Typical cost:** 0.5%–2% of the LC value per annum, depending on the bank, the country risk, and the tenor

Standby Letter of Credit (SBLC)

An SBLC is a guarantee of payment in the event of default. Unlike a commercial LC (which is expected to be drawn upon), an SBLC is a backstop — it is only drawn if the applicant fails to perform their obligation.

**When to use it:** When a counterparty requires a financial guarantee of your performance — a supplier extending credit terms, a landlord, a government authority, or a project partner. It is also widely used in trade finance as collateral to unlock credit from other institutions.

**Key difference from an LC:** An LC is the primary payment mechanism. An SBLC is secondary — a guarantee that kicks in only on default.

Bank Guarantee (BG)

A Bank Guarantee is a direct commitment from a bank to pay a named beneficiary a specified sum if a particular condition is met (typically non-performance or non-payment by the applicant).

Common types:

Getting These Instruments Issued

The challenge for many East African businesses is not understanding these instruments — it is getting them issued by a bank that is acceptable to the counterparty.

Most international suppliers and counterparties will not accept a guarantee from a small local bank they have never heard of. They want a guarantee confirmed or issued by a recognised institution — typically an international bank or a regional institution with a credit rating.

This is where structured trade finance advisory becomes valuable. Accessing instruments through the right institution, at the right cost, with the right correspondent banking relationships — particularly for Gulf-Africa trade corridors — requires familiarity with which banks will accept which structures and at what cost.

*Maramoja Enterprises structures and procures trade finance instruments for businesses across Africa and the Gulf. To discuss your trade finance requirements, contact our team.*