Partial Confirmation of Letters of Credit: Concept, Rules, and Best Practices

International trade often relies on letters of credit (LCs) as a secure payment mechanism between buyers and sellers. In some cases, banks may choose to confirm an LC – meaning a second bank (the confirming bank) adds its own payment guarantee in addition to the issuing bank’s promise. But what if the confirming bank only wants to guarantee part of the LC’s value or duration? This scenario is known as partial confirmation of a letter of credit.

This article explains what partial confirmation is, why it might be used, its legal basis under the Uniform Customs & Practice for Documentary Credits (UCP 600) and the International Standard Banking Practice (ISBP 745), and how to implement partial confirmations. We will also cover practical examples, risk considerations, and alternatives (such as multilateral guarantees, risk participations, and credit insurance) that can be used when full confirmation isn’t feasible. The goal is a clear understanding of partial confirmations for a general business audience.

What Does Partial Confirmation Mean?

In a standard confirmed LC, the confirming bank guarantees the full amount of the credit, so the beneficiary (exporter) is assured of payment even if the issuing bank (importer’s bank) fails to pay. Partial confirmation, by contrast, means the confirming bank’s guarantee applies only to a portion of the LC – for example, up to a certain amount, for certain shipments, or under certain conditions, while the remainder of the credit is not covered by that confirmation.

This concept is not explicitly defined in UCP 600 or ISBP 745. In fact, there is no specific provision in the UCP 600 rules for partial confirmation of LCs, and ISBP 745 (which provides guidelines for document examination under LCs) does not mention it either (‘Straightforward and efficient’ – Tat Yeen Yap explores partial confirmations of letters of credit – Trade Finance Global) (‘Straightforward and efficient’ – Tat Yeen Yap explores partial confirmations of letters of credit – Trade Finance Global). However, nothing in these rules prohibits partial confirmations. By interpreting existing rules, banks and businesses have concluded that partial confirmation is permissible, as long as it’s done with clarity and agreement of the relevant parties (‘Straightforward and efficient’ – Tat Yeen Yap explores partial confirmations of letters of credit – Trade Finance Global).

Why Would a Bank Confirm Only Part of an LC?

There are practical reasons a bank might opt for a partial confirmation:

• Risk Limits: The confirming bank may have a country risk or counterparty exposure limit that is lower than the full LC amount. For example, if an LC is issued for \$4 million but the confirming bank is only comfortable taking on \$2 million of exposure to the issuing bank, it might offer to confirm \$2 million of the credit and leave the rest unconfirmed (‘Straightforward and efficient’ – Tat Yeen Yap explores partial confirmations of letters of credit – Trade Finance Global).
• Large or Long-Term Transactions: In very large projects or long-term LCs, a bank might not want to assume the entire risk for the whole period. Partial confirmation allows the bank to support the transaction up to an amount or time frame it can manage, while the beneficiary still gets partial risk coverage.
• Beneficiary Preference: The beneficiary might only require a portion of the LC to be confirmed – for instance, just enough to cover its cost or profit margin – and is willing to retain some risk on the issuing bank for the balance, especially if full confirmation is expensive or unavailable.

In all cases, partial confirmation is usually a way to balance risk and security – providing the beneficiary some assurance of payment from a highly rated bank, but not to the full extent of the LC.

UCP 600 Rules and Legal Framework

UCP 600 (ICC Publication No. 600) is the primary set of rules governing letters of credit globally. It defines key terms and outlines the responsibilities of banks involved in LC transactions. Under UCP 600, “confirmation” is defined as “a definite undertaking of the confirming bank, in addition to that of the issuing bank, to honour or negotiate a complying presentation.” (‘Straightforward and efficient’ – Tat Yeen Yap explores partial confirmations of letters of credit – Trade Finance Global) In other words, when a bank adds its confirmation to an LC (at the issuing bank’s request or authorization), it gives its own independent promise to pay the beneficiary upon presentation of documents that comply with the LC terms.

Notably, a confirming bank’s undertaking is independent of the issuing bank’s undertaking (‘Straightforward and efficient’ – Tat Yeen Yap explores partial confirmations of letters of credit – Trade Finance Global). This independence means the confirming bank can tailor its undertaking, provided it does not alter the fundamental terms of what constitutes a complying presentation. In practice, this implies that a confirmation “need not be identical to that of the issuing bank” and can be made for an amount different from that of the LC (‘Straightforward and efficient’ – Tat Yeen Yap explores partial confirmations of letters of credit – Trade Finance Global). This principle is what allows for partial confirmations: the confirming bank’s promise might cover a different amount (or perhaps a different validity period) than the full credit, as long as the credit’s terms for the beneficiary remain otherwise unchanged (the documents required, shipment terms, etc., as stated in the LC, are not modified by the confirmation itself).

ISBP 745, the International Standard Banking Practice for the Examination of Documents, is a guidance publication (ICC Publication No. 745) that complements UCP 600 by explaining how banks typically interpret and apply the rules in practice. ISBP 745 does not provide any additional rule regarding confirmation, and as noted, it does not mention partial confirmations. Its silence on the topic means we must fall back on UCP 600 and general practice for guidance (‘Straightforward and efficient’ – Tat Yeen Yap explores partial confirmations of letters of credit – Trade Finance Global).

Two provisions of UCP 600 are particularly relevant when implementing a partial confirmation:

• UCP 600 Article 8(d): This sub-article states, “If a bank is authorized or requested by the issuing bank to confirm a credit but is not prepared to do so, it must inform the issuing bank without delay and may advise the credit without confirmation.” (Partial Confirmation for Letters of Credit?) (Partial Confirmation for Letters of Credit?). In the context of a partial confirmation, one can analogize that if a bank is not prepared to confirm the full amount, it should promptly inform the issuing bank of what it is confirming (i.e. that it is adding confirmation for only part of the credit) (Partial Confirmation for Letters of Credit?) (Partial Confirmation for Letters of Credit?). This keeps the issuing bank in the loop, which is important for transparency and alignment of expectations. However, formal consent from the issuing bank is generally not required for the confirming bank to proceed with a partial confirmation – a notification suffices (Partial Confirmation for Letters of Credit?) (Partial Confirmation for Letters of Credit?). The confirming bank is essentially exercising its option to advise without full confirmation on the remainder, as allowed by Article 8(d).
• UCP 600 Article 10(b): This article covers amendments. It provides that a confirming bank may choose to not extend its confirmation to an amendment. If the LC is amended (for example, the amount is increased or expiry extended) and the confirming bank does not wish to confirm the new terms, it must inform both the issuing bank and the beneficiary of this decision when advising the amendment (‘Straightforward and efficient’ – Tat Yeen Yap explores partial confirmations of letters of credit – Trade Finance Global). This scenario effectively creates a partial confirmation: the original LC amount/expiry was confirmed, but the increased amount or extended period introduced by the amendment is not confirmed (‘Straightforward and efficient’ – Tat Yeen Yap explores partial confirmations of letters of credit – Trade Finance Global) (‘Straightforward and efficient’ – Tat Yeen Yap explores partial confirmations of letters of credit – Trade Finance Global). The result is that the beneficiary has an LC for a higher amount (or longer tenor) but the confirmation covers only the original portion. Article 10(b) explicitly permits the confirming bank to do this (decline confirmation on an amendment) with proper notification.

In summary, UCP 600’s framework, while not explicitly describing “partial confirmation,” provides mechanisms that make it workable. A confirming bank can limit its confirmation to part of the credit by either structuring its confirmation accordingly from the outset or by not extending confirmation to certain amendments, as long as it promptly notifies the concerned parties. There is no violation of UCP 600 in doing so; in fact, it is implicitly supported by these rules (‘Straightforward and efficient’ – Tat Yeen Yap explores partial confirmations of letters of credit – Trade Finance Global) (‘Straightforward and efficient’ – Tat Yeen Yap explores partial confirmations of letters of credit – Trade Finance Global).

Examples of Partial Confirmation in Practice

To illustrate partial confirmations, let’s look at two common scenarios where they arise:

1. Partial Confirmation due to an Unconfirmed Amendment (Natural Example)

The first scenario is a “natural” partial confirmation often cited by practitioners (‘Straightforward and efficient’ – Tat Yeen Yap explores partial confirmations of letters of credit – Trade Finance Global). Consider an LC that was originally issued for \$500,000 and was confirmed by Bank A (the confirming bank) at the request of the issuing bank. Later, the issuing bank issues an amendment to increase the LC amount to \$700,000. Bank A is willing to maintain its original confirmation but is unwilling to cover the increase. So Bank A advises the amendment to the beneficiary without adding its confirmation to the additional \$200,000.

Now the beneficiary effectively has:

• A letter of credit for \$700,000 (after amendment).
• A confirmed amount of \$500,000 (the original part confirmed by Bank A).
• An unconfirmed amount of \$200,000 (the increase, which the beneficiary will rely on the issuing bank for).

This is a classic partial confirmation scenario: only part of the LC’s current amount is confirmed. UCP 600 explicitly allows this approach – per Article 10(b), the confirming bank is within its rights to decline confirming the amendment, provided it informs the issuing bank immediately and notes in its advice to the beneficiary that the increase is not confirmed (‘Straightforward and efficient’ – Tat Yeen Yap explores partial confirmations of letters of credit – Trade Finance Global). In our example, Bank A would send a notice to the issuing bank saying it has not added confirmation to the \$200k increase, and its amendment advice to the beneficiary would clearly state that the new total is partly unconfirmed.

From the beneficiary’s perspective, \$500k of their receivables under the credit carry Bank A’s guarantee, and the remaining \$200k carry only the issuing bank’s promise. The beneficiary may still choose to perform (ship goods and present documents) for the full amount, but they know that in a worst-case scenario (issuing bank failure), they only have Bank A’s assurance for \$500k.

This example often occurs if the confirming bank is comfortable with the initial exposure but not with additional exposure or extended validity introduced later. It demonstrates partial confirmation in a sequential way (initial confirmation, but not on a subsequent change).

2. Partial Confirmation from the Outset (Risk Limit Example)

Another scenario is when an LC is issued and asks for confirmation, but the advising bank (potential confirmer) only wants to confirm up to a certain amount from the start. For instance, suppose an LC is issued for \$4,000,000 and requests Bank B to add confirmation. Bank B reviews the issuing bank’s creditworthiness and its own country limits, and finds it can only take on \$2,000,000 of risk for that issuing bank. However, the beneficiary strongly prefers to have a confirmed LC because of the risk in the issuing bank’s country.

In this case, Bank B might propose a partial confirmation: it will confirm \$2,000,000 out of the \$4,000,000. The beneficiary agrees to this arrangement (since some confirmation is better than none, and they may have other ways to mitigate the remaining risk on the unconfirmed portion). Bank B would then inform the issuing bank that it is not prepared to confirm the full amount, but will confirm \$2 million as a compromise (Partial Confirmation for Letters of Credit?) (Partial Confirmation for Letters of Credit?). With the beneficiary’s consent, Bank B adds its confirmation undertaking for \$2,000,000.

How would this work in practice? The LC is still for \$4,000,000 total. Bank B’s advice and the separate confirmation notice to the beneficiary would explicitly state that Bank B’s confirmation liability is limited to \$2,000,000. The beneficiary understands that if they present documents for the full \$4,000,000, Bank B will only guarantee payment of up to \$2,000,000; the remaining amount is dependent on the issuing bank’s payment. In effect, two layers of risk exist: one portion covered by Bank B (confirmed portion) and one by the issuing bank (unconfirmed portion).

It’s crucial in this scenario that all parties share a common understanding. The issuing bank, having requested confirmation, should be promptly notified that full confirmation wasn’t added – effectively, part of their LC remains unconfirmed (Partial Confirmation for Letters of Credit?). Typically, this does not derail the transaction; issuing banks often accept this if it’s the only way to get any confirmation on the credit (especially if the issuing bank’s own credit is less established). The beneficiary must formally agree to the partial confirmation since confirmation is a service meant for their benefit (‘Straightforward and efficient’ – Tat Yeen Yap explores partial confirmations of letters of credit – Trade Finance Global). Usually, this agreement is obtained in advance (for example, the beneficiary might request Bank B, “Please confirm at least \$2MM” or they accept Bank B’s offer to confirm that amount).

Both examples above result in the same outcome: only part of the letter of credit is backed by the confirming bank’s undertaking. The difference is the timing – one arises due to an amendment after initially full confirmation, and the other is structured as partial from the beginning.

Best Practices for Implementing Partial Confirmation

Partial confirmation, while allowed, is not a routine feature of standard LCs. It requires careful handling to ensure there is no confusion about each party’s obligations. Here are some best practices and considerations for banks and beneficiaries when agreeing to a partial confirmation:

• Clear Documentation and Communication: The confirming bank must clearly indicate the extent of its confirmation. This can be done through the LC advising documents or a separate confirmation letter. For example, Bank B’s confirmation advice might state: “Confirmed for an amount not exceeding USD 2,000,000”. Clarity is paramount so that the beneficiary knows exactly what amount is secured by the confirmation. If the LC later undergoes changes (amendments), the bank should clarify whether those changes affect the confirmed portion or not, per UCP rules (as we saw with amendments).
• Inform the Issuing Bank (but Consent Not Required): In line with UCP 600 Article 8(d), if a bank is not confirming the full requested amount, it should notify the issuing bank without delay (Partial Confirmation for Letters of Credit?) (Partial Confirmation for Letters of Credit?). This is a matter of good practice and courtesy – the issuing bank ought to know that only part of its credit has been confirmed. However, the confirming bank does not need the issuing bank’s approval to do this (Partial Confirmation for Letters of Credit?). The confirmation is a separate contract between the confirming bank and the beneficiary; thus, getting the beneficiary’s agreement is the critical part. As UCP 600 implies, a bank may advise an LC without confirmation (or with partial confirmation) as long as it informs the issuer. In most cases, issuing banks will go along with this because their goal – to provide the beneficiary some level of security – is still being partially met.
• Obtain Beneficiary’s Agreement: Since confirmation is for the beneficiary’s benefit, any partial confirmation should be with the beneficiary’s consent (‘Straightforward and efficient’ – Tat Yeen Yap explores partial confirmations of letters of credit – Trade Finance Global). In practice, a beneficiary will typically request or agree to a partial confirmation when full confirmation isn’t available. This agreement might be documented in correspondence or simply by the beneficiary accepting the LC terms as advised. It’s in the beneficiary’s interest to explicitly acknowledge a partial confirmation so they are aware of what portion of the payment is guaranteed by the confirming bank. A best practice for the confirming bank is to get written confirmation from the beneficiary (for instance, via email or SWIFT message through their bank) that they understand and accept the partial confirmation terms.
• Structuring the Confirmation Commitment: The confirming bank should carefully structure how the partial confirmation will apply, especially in complex LCs. Key questions include: Are partial shipments allowed under the LC? Is the credit available by installments or multiple draws? These factors affect how the confirmation amount is utilized (‘Straightforward and efficient’ – Tat Yeen Yap explores partial confirmations of letters of credit – Trade Finance Global) (‘Straightforward and efficient’ – Tat Yeen Yap explores partial confirmations of letters of credit – Trade Finance Global).
  • If only a single drawing/presentation is expected (for example, the LC prohibits partial shipments or is a one-time shipment), then the confirming bank’s obligation is straightforward: it will pay up to the confirmed amount on that one presentation (‘Straightforward and efficient’ – Tat Yeen Yap explores partial confirmations of letters of credit – Trade Finance Global). For instance, if one presentation comes in for \$700k on an LC confirmed up to \$500k, the confirming bank would pay \$500k (assuming documents comply) and the issuer would be responsible for the rest.
  • If multiple drawings or shipments are allowed, the confirming bank and beneficiary should understand how the confirmed amount is allocated across drawings. There are two common approaches:
  1. First-come, first-served basis: The confirming bank’s undertaking covers up to the maximum confirmed amount on the first drawing(s). Using our example of a \$2MM confirmation on a \$4MM LC, this approach means the confirming bank will honour presentations until its \$2MM is exhausted. If the first presentation under the LC is \$2.5MM, the confirming bank would pay \$2MM of that (its limit) and no longer have any obligation on subsequent drawings (the remaining \$0.5MM and any future drawings would be unconfirmed, to be paid by the issuing bank). (Partial Confirmation for Letters of Credit?) (Partial Confirmation for Letters of Credit?)
  2. Pro-rata (proportional) basis: The confirming bank’s payment applies as a proportion of each drawing, until the confirmed cap is reached. In the same example, the bank could state it will cover 50% of each drawing up to \$2MM total. Then if the first drawing is \$2.5MM, the bank pays \$1.25MM (50%), leaving \$0.75MM of its confirmation capacity for future drawings (and it will continue to cover 50% of each until \$2MM total is paid) (Partial Confirmation for Letters of Credit?) (Partial Confirmation for Letters of Credit?).
  The default assumption, if not explicitly stated, might be that the confirmation covers the first drawings up to the amount. (Partial Confirmation for Letters of Credit?) (Partial Confirmation for Letters of Credit?) Indeed, one trade finance expert notes that if a confirmation just states a dollar cap (e.g. “confirmed up to USD X”), it’s reasonable to assume it will pay out on compliant presentations until that cap is reached, rather than proportionally across all draws (‘Straightforward and efficient’ – Tat Yeen Yap explores partial confirmations of letters of credit – Trade Finance Global) (‘Straightforward and efficient’ – Tat Yeen Yap explores partial confirmations of letters of credit – Trade Finance Global). If a proportional approach is desired, the confirmation advice needs to clearly spell out the percentage or method (e.g. “50% of each drawing up to USD X in total”) (‘Straightforward and efficient’ – Tat Yeen Yap explores partial confirmations of letters of credit – Trade Finance Global). Best practice is to explicitly define this in the confirmation documentation to avoid any ambiguity for all parties.
• Adjusting for LC Availability Type: Consider the method of LC availability (sight payment, deferred payment, negotiation, acceptance). A partial confirmation should be reflected appropriately. For example, if the LC is available by draft (bill of exchange) drawn on the confirming bank, the confirming bank should indicate what amount the draft(s) can be drawn for under its confirmation (‘Straightforward and efficient’ – Tat Yeen Yap explores partial confirmations of letters of credit – Trade Finance Global). If the LC is available by deferred payment, the confirming bank’s undertaking (usually given in a confirmation letter or the LC amendment) should clarify the portion or amount that it will pay at maturity (‘Straightforward and efficient’ – Tat Yeen Yap explores partial confirmations of letters of credit – Trade Finance Global). Essentially, the mechanics of how and when payment will be made under the confirmation must align with the LC’s payment terms, but scaled to the confirmed amount.
• Reimbursement and Banking Risk Considerations: From the confirming bank’s perspective, it’s important to understand that confirming even part of an LC makes it a nominated bank that has agreed to honour presentations. The confirming bank’s right to reimbursement from the issuing bank is not automatically proportional to the confirmation – rather, it’s based on the amount paid under the LC. Under UCP 600 Article 7(c), an issuing bank must reimburse a nominated bank (including a confirming bank) that honours a complying presentation and forwards documents (Partial Confirmation for Letters of Credit?) (Partial Confirmation for Letters of Credit?). This means if the confirming bank paid \$2MM on a presentation (its confirmed portion), it can claim \$2MM from the issuing bank. If another presentation comes in solely for the unconfirmed portion and the confirming bank does not pay (since it’s beyond its limit), the issuing bank would pay that portion directly to the beneficiary or through the presenting bank. In either case, as long as documents comply, the issuing bank is obligated to pay whoever presents (confirming bank for the confirmed part, beneficiary’s bank or beneficiary for the rest). The confirming bank doesn’t have a special status beyond a nominated bank for the amount it paid – but this is generally fine, as the normal LC honoring and reimbursement mechanics cover it (‘Straightforward and efficient’ – Tat Yeen Yap explores partial confirmations of letters of credit – Trade Finance Global) (‘Straightforward and efficient’ – Tat Yeen Yap explores partial confirmations of letters of credit – Trade Finance Global). Not obtaining the issuing bank’s prior consent for partial confirmation does not invalidate the confirming bank’s reimbursement claim. In effect, the confirming bank is treated like any other paying bank under the LC for the amount it paid, and the issuing bank must reimburse that amount at maturity (‘Straightforward and efficient’ – Tat Yeen Yap explores partial confirmations of letters of credit – Trade Finance Global) (‘Straightforward and efficient’ – Tat Yeen Yap explores partial confirmations of letters of credit – Trade Finance Global). (This is analogous to situations of “silent confirmation,” where a bank that was not authorized to confirm still pays under the LC; the issuing bank still must reimburse because the payment was made under a complying presentation (‘Straightforward and efficient’ – Tat Yeen Yap explores partial confirmations of letters of credit – Trade Finance Global).)
• Risk to Confirming Bank: Partial confirmation allows a bank to cap its exposure, but the bank should not assume that confirming a smaller amount proportionately reduces all types of risk. The credit risk on the issuing bank for the amount confirmed is the same as if that amount were fully confirmed – so due diligence on the issuing bank’s ability to pay is still required for the portion being confirmed. Also, if using the proportional (spread out) confirmation approach, the confirming bank could actually be extending the time it is at risk (covering multiple shipments over time) without reducing the maximum exposure, which might slightly increase operational risk or country risk exposure window (‘Straightforward and efficient’ – Tat Yeen Yap explores partial confirmations of letters of credit – Trade Finance Global) (‘Straightforward and efficient’ – Tat Yeen Yap explores partial confirmations of letters of credit – Trade Finance Global). Conversely, if it covers the first drawings, its risk is more front-loaded but the total exposure is capped – many consider this approach to have “little or no increased risk” compared to pro-rata (‘Straightforward and efficient’ – Tat Yeen Yap explores partial confirmations of letters of credit – Trade Finance Global) (‘Straightforward and efficient’ – Tat Yeen Yap explores partial confirmations of letters of credit – Trade Finance Global). Each bank should analyze what method suits its risk appetite. In all cases, clear internal guidelines and communication with the beneficiary are key.
• Documentation Trail: It’s wise to keep an audit trail of all communications regarding the partial confirmation. This includes the notification to the issuing bank (likely via SWIFT MT730 or MT799 message indicating partial confirmation), the beneficiary’s agreement (could be an email or a signed letter), and the actual confirmation advice wording. In the event of a dispute or claim, these records will be crucial to demonstrate what was agreed.

By adhering to these best practices, banks and beneficiaries can ensure that partial confirmations are handled smoothly and do not lead to unexpected surprises when the LC is utilized.

Risk Considerations for Partial Confirmation

Partial confirmation by its nature splits the payment risk between the confirming bank and the issuing bank. It’s important to consider how this affects each party:

• For the Beneficiary (Exporter): Partial confirmation means the beneficiary is not fully protected against issuer or country risk. They carry the risk on the unconfirmed portion. If the issuing bank fails to pay (due to insolvency, political issues, etc.), the beneficiary could still lose the amount that was not confirmed. Beneficiaries should evaluate how much risk they are comfortable retaining. In some cases, having a major part of the LC confirmed is sufficient to make the deal viable; in others, the beneficiary might seek additional protection for the remainder (such as export credit insurance on the unconfirmed portion). The beneficiary should also be mindful of how presentations of documents will be paid – e.g., if they submit a \$100k invoice under a partially confirmed LC, they need to know if they will receive full payment (because it’s within the confirmed limit) or only partial payment (if it exceeds the confirmed amount or if a pro-rata scheme is in place). Proper financial planning and liquidity management are required when not 100% of the payment is guaranteed by the confirming bank.
• For the Confirming Bank: The bank limits its exposure to a level it’s comfortable with, which is a positive from a risk management perspective. However, the confirming bank must still perform all usual confirming bank duties for that portion – examining documents, honouring compliance, and bearing the default risk of the issuing bank for the confirmed amount until reimbursement. The confirming bank should ensure that partial confirmation does not create legal ambiguity about its obligation. From a legal standpoint, the confirming bank is only liable up to the stated confirmed amount or portion, and this should be clearly documented to avoid any argument from the beneficiary that the bank should pay more. If the LC ends up only partially utilized, the confirming bank’s risk ends up less than anticipated (which is fine). If the LC is fully utilized above the confirmed portion, the confirming bank needs to trust the issuing bank (or the transaction’s structure) for the unconfirmed payouts – but that risk is on the beneficiary, not the confirming bank, strictly speaking. One risk for the confirming bank is reputational: if an issuing bank fails on the unconfirmed portion and a beneficiary incurs a loss, the beneficiary might feel the confirming bank could or should have done more. Thus, banks typically undertake partial confirmation only in scenarios where the beneficiary understands the risks and the issuing bank is reasonably credible for the uncovered portion.
• For the Issuing Bank: If its LC is only partially confirmed, the issuing bank retains direct liability for the unconfirmed part. In a fully confirmed LC, the beneficiary would normally look to the confirming bank for payment, and the issuing bank’s performance risk is less visible to the beneficiary. But with a partial confirmation, the beneficiary (and their bank) may be more focused on the issuing bank’s condition for the uncovered portion. This can put a bit more pressure on the issuing bank to perform punctually for that portion to maintain trust. However, issuing banks might prefer a partial confirmation over no confirmation at all, because it still provides their seller with some level of security and may be the only way to get the deal done if confirming banks are hesitant to cover the full amount.

In all cases, transparency of risk is enhanced with a partial confirmation: everyone knows exactly how much is covered by a top-tier bank’s guarantee and how much is not. This allows for informed decision-making and, if needed, the use of other risk mitigation tools for the uncovered portion.

Alternatives to Partial Confirmation

Partial confirmation is one solution when an issuing bank is risky or limits are tight, but it’s not the only solution. Depending on the situation, banks and exporters have a few alternative techniques to achieve a similar outcome (mitigating the payment risk) without structuring a formal partial confirmation in the LC itself. Some of these alternatives can cover the entire LC risk or a portion of it behind the scenes:

• Unfunded Risk Participation: The confirming bank can bring in another bank (or several banks) to share the risk of the LC. For example, Bank B might fully confirm the \$4MM LC to satisfy the beneficiary, but immediately arrange that another bank (Bank C) will take on \$2MM of that risk under a separate agreement. This is often done through silent risk participation or funded participation agreements, where Bank C has no direct contact with the beneficiary. From the LC’s perspective, it looks fully confirmed by Bank B; in the background, Bank C will reimburse Bank B for any payments up to \$2MM if the issuing bank fails, effectively participating in the confirmation. This way, Bank B’s net exposure is only \$2MM (with the rest carried by Bank C’s guarantee). Risk participations can thus achieve the goal of risk-sharing without complicating the LC structure for the beneficiary (Partial Confirmation for Letters of Credit?). The beneficiary gets a fully confirmed LC (no partial exposure on their side), and the confirming bank manages its exposure by diversifying it with others. The downside is that this requires finding willing participant banks and paying them a fee, which cuts into the confirming bank’s revenue.
• Guarantee from a Multilateral Development Bank (MDB): Many multilateral institutions have trade finance facilitation programs that can provide guarantees to support LC confirmations. For instance, the Asian Development Bank (ADB), European Bank for Reconstruction and Development (EBRD), and the International Finance Corporation (IFC, part of the World Bank Group) all operate programs where they will guarantee a portion (or up to 100%) of an LC issued by banks in emerging markets (Partial Confirmation for Letters of Credit?) (Partial Confirmation for Letters of Credit?). Typically, the issuing bank and confirming bank need to be part of the program network. If Bank B in our example has insufficient limit on the issuing bank, it could apply for an MDB guarantee for the amount beyond its comfort zone. Say Bank B is okay with \$2MM on its own, and it obtains an MDB guarantee for the remaining \$2MM – effectively, the MDB (AAA-rated) takes the risk of that portion. The LC can then be confirmed for full \$4MM by Bank B, which now has protection: if the issuing bank fails, the MDB will reimburse Bank B for losses on that \$2MM guaranteed portion. Programs like IFC’s Global Trade Finance Program offer such partial or full guarantees to confirming banks, substituting the issuing bank’s risk with the MDB’s credit (‘Straightforward and efficient’ – Tat Yeen Yap explores partial confirmations of letters of credit – Trade Finance Global) (‘Straightforward and efficient’ – Tat Yeen Yap explores partial confirmations of letters of credit – Trade Finance Global). These guarantees are usually transaction-specific and can cover up to 100% of the value of an LC (IFC’s Global Trade Finance Program | www.ifc.org/GTFP) (IFC’s Global Trade Finance Program | www.ifc.org/GTFP). The advantage is that the beneficiary again gets a fully confirmed LC (from their perspective), and the confirming bank can earn a confirming fee while paying a smaller guarantee fee to the MDB. This solution does require coordination and paperwork with the MDB’s program, and possibly the issuing bank’s consent to route through the program, but it is a highly effective way to mitigate risk. Many banks in emerging markets rely on such MDB-backed schemes to support their LCs.
• Irrevocable Reimbursement Undertaking (IRU) under URR 725: Another approach is to involve a reimbursing bank that the confirming bank trusts. The confirming bank can ask the issuing bank to arrange an IRU from a third-party bank. An IRU is a commitment by a reimbursing bank (often a large international bank) to honor claims from the confirming/presenting bank, governed by the ICC’s Uniform Rules for Reimbursement, URR 725. In essence, the issuing bank’s obligation to reimburse is backed by this third bank. If Bank B requires additional security, it might insist that the issuing bank’s LC be subject to URR 725 with Bank D (say, a big European bank) as the reimbursing bank that issues an IRU for, say, \$2MM. Bank D then becomes obligated to reimburse Bank B up to \$2MM on the LC. This shifts the credit risk – Bank B now looks to Bank D (whose credit is better) for that amount, instead of the original issuing bank (Partial Confirmation for Letters of Credit?). With an IRU in place, Bank B could safely confirm the full \$4MM, knowing that even if the issuing bank doesn’t pay, Bank D will cover \$2MM of it. IRUs basically function like a guarantee of reimbursement. The trade-off is the complexity and the need for the issuing bank to have a relationship with a strong reimbursing bank. URR 725 is a specialized set of rules, but widely used in some corridors to secure trade payments.
• Credit Insurance: The confirming bank could also purchase trade credit insurance to cover a portion of the risk. For example, Bank B confirms the full \$4MM LC, but buys an insurance policy from a credit insurer (private insurer or export credit agency) that will pay out if the issuing bank defaults on, say, up to \$2MM. This is similar to risk participation but via an insurance contract. The confirming bank then treats that insurance as a credit enhancement – effectively collateral or a guarantee for that amount (‘Straightforward and efficient’ – Tat Yeen Yap explores partial confirmations of letters of credit – Trade Finance Global). Credit insurance usually has a waiting period for claims (e.g., the insurer might only pay after the debt is 90 days past due, etc.), which means it’s not as clean as a guarantee, but it does reduce the ultimate loss risk. The confirming bank would factor in the cost of the insurance premium and the conditions of coverage. The beneficiary, again, sees a fully confirmed LC. The arrangement is entirely behind the scenes. One benefit is that credit insurance can often be arranged even if the issuing and confirming banks don’t have pre-arranged lines or MDB programs – it’s a flexible market solution. However, it requires the confirming bank to handle the policy and any claims process, and there’s always the risk of an insurer dispute if terms aren’t followed. Nonetheless, many banks use insurance as a way to support confirmations in higher-risk markets.

In addition to the above, there are other nuanced methods like “silent confirmation” (where a bank simply privately assures the beneficiary of payment without officially adding confirmation to the LC – effectively akin to providing a standby backup), but those go outside the LC framework and are more like separate agreements. We will focus on the mainstream alternatives listed.

Each of these alternatives has pros and cons compared to partial confirmation:

• They often allow the LC to be fully confirmed in the eyes of the beneficiary (which is ideal for the exporter).
• They add some complexity or cost: fees to participant banks, premiums to insurers, or program fees to MDBs.
• From the confirming bank’s view, they can sometimes be more profitable because the bank might charge the applicant (importer) a full confirmation fee and then cover part of the risk via a cheaper third-party guarantee/insurance – effectively earning a spread (‘Straightforward and efficient’ – Tat Yeen Yap explores partial confirmations of letters of credit – Trade Finance Global). In contrast, a straight partial confirmation might reduce the fee proportionally.
• Partial confirmation, on the other hand, is straightforward and efficient (as one commentator put it) (‘Straightforward and efficient’ – Tat Yeen Yap explores partial confirmations of letters of credit – Trade Finance Global). It’s a direct arrangement that doesn’t require additional contracts with third parties or complex structures. The confirming bank just limits its liability and there’s less administrative work involved. The trade-off is that it requires the beneficiary’s buy-in (since the beneficiary has to accept less than full coverage) (‘Straightforward and efficient’ – Tat Yeen Yap explores partial confirmations of letters of credit – Trade Finance Global) (‘Straightforward and efficient’ – Tat Yeen Yap explores partial confirmations of letters of credit – Trade Finance Global). The alternatives like risk participation or MDB guarantees typically do not require the beneficiary’s involvement – they are between banks/insurers behind the scenes, so the beneficiary gets 100% cover without having to agree to split risk.

In practice, a confirming bank facing a large LC will evaluate all these options. They might first try to arrange a participation or guarantee to cover the excess amount. If those can’t be arranged in time or are too costly, they might propose a partial confirmation to the beneficiary as a simpler solution. Sometimes a combination is used (e.g., confirm a portion, and insure another portion).

Conclusion

Partial confirmation of letters of credit is a useful mechanism in trade finance to bridge the gap between a beneficiary’s desire for payment security and a bank’s need to manage risk exposure. While UCP 600 and ISBP 745 do not explicitly spell out partial confirmations, the practice is supported by the flexible framework of UCP 600 – which allows a confirming bank’s undertaking to be for a different amount than the LC, and permits banks to decline confirming amendments or portions they can’t cover (‘Straightforward and efficient’ – Tat Yeen Yap explores partial confirmations of letters of credit – Trade Finance Global) (‘Straightforward and efficient’ – Tat Yeen Yap explores partial confirmations of letters of credit – Trade Finance Global).

When implementing a partial confirmation, all parties should maintain clear communication. The confirming bank should notify the issuing bank and obtain the beneficiary’s consent, and it must clearly document the terms of its limited undertaking. Beneficiaries should fully understand which part of the credit is protected by the confirmation and which part remains at their own risk, so they can make informed decisions and possibly hedge the uncovered risk through other means.

From a business perspective, partial confirmations can facilitate trade deals that might otherwise not happen – for example, enabling a large export to a risky country by at least securing a portion of the payment. It shows flexibility and partnership: the confirming bank is willing to put some “skin in the game” but within prudent limits. Exporters, importers, and banks should weigh the cost and benefit: a partial confirmation typically carries a lower fee than a full confirmation (since less risk is taken), making it an attractive compromise in some cases.

Finally, thanks to the development of various risk mitigation tools, banks today have multiple ways to support transactions. Alternatives like MDB trade guarantees, risk participations, reimbursement undertakings, and credit insurance can complement or substitute partial confirmations (‘Straightforward and efficient’ – Tat Yeen Yap explores partial confirmations of letters of credit – Trade Finance Global) (‘Straightforward and efficient’ – Tat Yeen Yap explores partial confirmations of letters of credit – Trade Finance Global). These tools help ensure that even if one bank cannot shoulder the entire risk, the trade can proceed with adequate safeguards.

In conclusion, partial confirmation is an example of the adaptability of trade finance practice. It requires careful handling under the rules, but when done correctly, it strikes a balance between prudence and support for international trade. Both exporters and bankers should be aware of this option as part of their toolkit. By understanding the concept, legal basis, best practices, and alternatives outlined above, practitioners can confidently utilize partial confirmations to facilitate trade while managing risks effectively.

Sources:

• International Chamber of Commerce – UCP 600, Articles 8(d), 10(b), 7(c) (Partial Confirmation for Letters of Credit?) (‘Straightforward and efficient’ – Tat Yeen Yap explores partial confirmations of letters of credit – Trade Finance Global) (governing rules on confirmation and amendments)
• ICC Banking Commission, Guidance on Partial Confirmations (informal practice commentary) (‘Straightforward and efficient’ – Tat Yeen Yap explores partial confirmations of letters of credit – Trade Finance Global) (‘Straightforward and efficient’ – Tat Yeen Yap explores partial confirmations of letters of credit – Trade Finance Global)
• Tat Yeen Yap, “Straightforward and efficient – partial confirmations of letters of credit” – Trade Finance Global (2022) (‘Straightforward and efficient’ – Tat Yeen Yap explores partial confirmations of letters of credit – Trade Finance Global) (‘Straightforward and efficient’ – Tat Yeen Yap explores partial confirmations of letters of credit – Trade Finance Global) (industry expert analysis and examples)
• IFC – Global Trade Finance Program (trade guarantee program details) (IFC’s Global Trade Finance Program | www.ifc.org/GTFP) (example of MDB guarantee for LCs)
• ICC Publication 745 – ISBP 2013 for UCP 600 (does not address partial confirmation, but forms part of standard practice context)