Confirmation is a product, and it has a price

What you are actually buying

Field 49 of credit BCB/IL/0884 said may add. That is a permission, not an instruction. Batinah Commercial Bank was telling Bahari Bank that it may add its confirmation if Qaitbay Garments asks for it and pays for it.

A confirmation is a second bank's own separate promise to pay against a complying presentation. It is not a guarantee of the first bank. It is not insurance. It is not an opinion. It is a separate promise, given by a bank you can reach, that sits alongside the issuing bank's promise. If the presentation complies, the confirming bank pays, and then goes and collects from the issuing bank. Whether it succeeds in that is its problem, not yours.

Three things come with it, and it is worth being exact about which three.

The issuing bank's credit risk. If Batinah cannot pay, Bahari still must.

Country and transfer risk. If Batinah is solvent and willing but the currency cannot be moved out of the country, Bahari still must pay. On a great many credits this is the larger half of what is being bought. It is also the half a factory tends not to think about, because it is nobody's fault when it happens.

Usually, a place of presentation you can walk to. Confirmation normally comes with the credit being made available at the confirming bank's counters, which takes the courier leg out of your expiry clock. Lesson 5 shows how much and how little that is worth.

What confirmation does not buy, and the moment it stops

Qaitbay bought the confirmation. On 4 July it did nothing for them. It is important to understand that this was the product working correctly, not failing.

A confirming bank examines the documents itself, against the same three yardsticks as the issuing bank. Bahari's trade services desk examined the QG-2140 presentation on 4 July and found the freight marking and the applicant's name on its own. Those are two of the four discrepancies the issuing bank would later raise. Because the presentation did not comply, Bahari did not pay under its confirmation. It could not. Its promise is to pay against a complying presentation, and this was not one. It forwarded the documents to Muscat on Qaitbay's instructions, acting as a bank sending papers on, with no promise of its own attached.

That is the sentence to keep. A confirmation covers the bank and the country. It does not cover you. The largest single exposure on almost every credit is your own documents, and it is the one thing no amount of confirmation touches.

There was a real benefit hiding in that morning, and nobody priced it. Bahari found two discrepancies before the documents left Egypt, five days before the issuing bank saw them. Had the presentation been inside its period, those two would have been corrected and presented again for the cost of a re-typed invoice and three days of the shipping line's time. A second examination at your own end, early enough to act on, is the most underrated thing a nominated or confirming bank does.

The price, and what the price tells you

Bahari Bank quoted Qaitbay 0.55% per quarter or part quarter on the credit amount, minimum two quarters. The credit ran from early March to an expiry of 20 July, which is two quarters. So 1.10% of USD 198,000.00, which is USD 2,178.00.

That is the tariff Bahari quoted this account on this credit. Every rate in this course belongs to a named party, and none of them is a market price you should expect to be offered.

Across 14,400 coveralls, USD 2,178.00 is USD 0.151 a piece against a CFR price of USD 13.75. That is 1.10% of the price. It is the same number as the rate, because the fee is charged on the credit amount and the credit amount is the order.

Now the decision. You are paying 1.10% of the exposure to insure the exposure. So the break-even is simple. Buy it if you think the chance of a complying presentation not being paid is worse than about 1 in 91. That chance means the issuing bank failing, or the money being unable to leave the country.

And then the honest part, which is that you cannot estimate that number. You do not know Batinah Commercial Bank. You have no view on Omani transfer risk.

The quote is the estimate. A confirming bank prices confirmation by taking a professional view of exactly those two risks, with information you do not have. So the number they give you is not merely a cost. It is the most informed opinion about your buyer's bank you will ever get for free.

When confirmation is dead weight

Qaitbay's other main customer is a Rotterdam workwear brand whose credits are issued through a large European bank. Bahari quoted 0.12% a quarter on that paper, which is 0.24% for the same length of credit, or USD 475.20 on the same amount.

Qaitbay do not buy it, and they are right not to. The two risks confirmation covers are that bank failing, and euros being unable to leave the Netherlands. Neither is a risk that factory is meaningfully carrying. And the third benefit, a local counter, they already have, because those credits are available with a bank in Alexandria anyway. Buying confirmation there would be paying USD 475.20 for nothing.

Notice that the price said so. At 0.12% a quarter the market is telling you it sees almost no risk, which is exactly the situation in which you do not need to buy protection against it.

Silent confirmation is the other product on the shelf. A bank adds a promise to you without the issuing bank's permission, usually because field 49 said without rather than may add. Bahari quoted 0.80% a quarter for it, which is 1.60% or USD 3,168.00. It is dearer, because the confirming bank has no permission from the issuing bank to fall back on. It is a legitimate product. It changes nothing about the credit's own terms, and your documents still have to comply.

Who pays, and where it has to live

Field 71D on this credit put all charges outside Oman on the beneficiary. So the USD 2,178.00 is Qaitbay's, which means it belongs in the FOB or CFR price before the price is quoted. That is USD 0.151 a coverall, in the costing, in February.

That is the whole of the discipline. Confirmation is not an overhead, and it is not a finance decision taken later. It is a line in the cost of that order, known before the price is given, on the same page as the freight. A confirmation bought in April and not priced in February comes straight out of margin. On this order it would have been exactly a tenth of it: USD 2,178.00 against a gross margin of USD 21,780.00.

Course 13.5 covers credit insurance, which addresses a related risk from a different direction and is priced quite differently. Course 13.7 covers standby credits and bank guarantees, which look like confirmation and do a different job.