Documentary Letter of Credit Discrepancy and Risk Management in the Nigerian Crude Oil Export

Abstract

This study investigates the documentary discrepancy risks within the letter of credit operations in the Nigerian crude oil export. The underlining principles of letter of credit transaction require the Nigerian National Petroleum Corporation (NNPC) to submit the full set of documents to the banks in accordance with the terms and conditions set in the letter of credit for payment. These conditions must reflect the underlying sales contract as well as the Uniform Customs and Practice (UCP 600) that governs the letter of credit transaction. Presenting non-compliant documents to the bank remains the global phenomenon among international traders, resulting in unnecessary delays, financial loss and refused payment when discrepancies are discovered. A survey by the International Chamber of Commerce (ICC) revealed an estimation of 60 to 70 percent discrepancy rate worldwide. A case study approach was used in this research and the data were analysed against the integrated export letter of credit operations discrepancy risk model. Informed by the literature reviewed, the integrated export letter of credit operations discrepancy risk model was established as the conceptual framework in this thesis. Drawing on the letter of credit operations, the number of complex documents processed, unusual requirements and ambiguity of the letter of credit are responsible for manifesting documentary discrepancies. The empirical results were obtained by analysing 920 letters of credit, shipping documents related to the NNPC crude oil transactions. The significance of categorised discrepancies associated with NNPC’s letter of credit operations in Nigerian
crude oil export was identified using the model. Further analysis was carried out using interviews to determine the industry perception of factors and causes of documentary discrepancies. Through this approach, the thesis made some important findings. Firstly, it is suggested that trading with customers and banks who have long-term crude oil export experience enables NNPC to manage its environmental risks.
Secondly, the findings indicate that three discrepancy risk categories – late presentation, late shipment and inconsistencies are found to be significant within the letter of credit. These identified discrepancy risk categories potentially lead to payment delays. Thirdly, this thesis concludes that the operational process of the NNPC’s letter of credit is affected by nine factors that give rise to the discrepancies. Fourthly, this thesis suggests that several elements are believed to be the causes and sub-causes of the discrepancies in the Nigerian crude oil export letter of credit. Finally, the findings indicate the risk treatment used in managing the causes and effects of the discrepancy risks. The study may have significant impact for the Nigerian crude oil export letter of credit operations.