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Letter of Credit in UAE (LC)
In the UAE, a global trade powerhouse with a trade volume surpassing AED 2.2 trillion in 2024, the letter of credit (LC) is a vital financial instrument that ensures secure and efficient international transactions. Acting as a guarantee from a bank, an LC protects both buyers and sellers by ensuring payment is made only when agreed-upon conditions are met. This makes it indispensable for businesses navigating the complexities of global trade, particularly in the UAE’s dynamic economy, where cross-border commerce with Asia, Europe, and Africa thrives.
This comprehensive guide explores the letter of credit meaning, delves into the types of letter of credit, and outlines the letter of credit procedure in UAE. We’ll cover everything from how to obtain a letter of credit to comparing LCs with other financial tools like performance bonds and letters of guarantee. Additionally, we’ll highlight how Tulpar Global Taxation, a leading UAE-based financial service provider, simplifies the LC process, ensuring compliance, cost-efficiency, and seamless trade operations. Whether you’re an importer, exporter, or SME, this guide equips you with the knowledge to leverage letters of credit in international trade effectively.
What Is a Letter of Credit and Why Does It Matter?
A letter of credit is a financial document issued by a bank that guarantees a buyer’s payment to a seller, provided the seller fulfills specific conditions, such as delivering goods or submitting required documents. If the buyer fails to pay, the issuing bank steps in to cover the payment, reducing risks for both parties. This mechanism is particularly critical in the UAE, where trade with over 190 countries drives economic growth.
The letter of credit meaning lies in its ability to foster trust in international transactions. For example, a UAE-based importer purchasing machinery from Germany can use an LC to assure the supplier of payment, while the supplier ensures delivery as per agreed terms. According to UAE Central Bank data, LCs facilitated over 40% of the UAE’s import-export transactions in 2024, underscoring their pivotal role in the nation’s trade ecosystem.
Tulpar Global Taxation enhances the value of LCs by offering expert guidance to UAE businesses. From drafting compliant LC terms to coordinating with banks, Tulpar ensures seamless transactions that align with international standards like UCP 600 and UAE regulations.
How Does a Letter of Credit Work?
The letter of credit process is a structured mechanism that ensures secure trade. Here’s a detailed breakdown:
- Trade Agreement: The buyer and seller agree on transaction terms, including the use of an LC, specifying details like goods, price, and delivery timeline.
- LC Application: The buyer applies for an LC through their bank providing details such as transaction amount, beneficiary information, and required documents.
- LC Issuance: The issuing bank issues the LC and sends it to the seller’s bank (the advising bank) for verification.
- Document Submission: The seller ships the goods and submits documents (e.g., commercial invoice, bill of lading) to the advising bank, proving compliance with LC terms.
- Verification and Payment: The advising bank verifies the documents. If compliant, the issuing bank releases payment to the seller, completing the transaction.
This process minimizes risks like non-payment or non-delivery, making LCs a cornerstone of secure trade. Tulpar Global Taxation streamlines this process by reviewing documents, coordinating with banks, and ensuring adherence to UAE’s trade regulations, saving businesses time and reducing errors.
Why Is a Letter of Credit Critical in the UAE?
The UAE’s strategic location as a global trade hub, connecting East and West, makes letters of credit in international trade indispensable. Here’s why LCs are critical:
- Risk Mitigation: LCs protect against payment defaults, non-delivery, or fraud, ensuring both parties fulfill their obligations.
- Regulatory Compliance: The UAE’s stringent trade laws, enforced by the UAE Central Bank and Dubai Customs, require secure financial instruments. LCs ensure compliance with these regulations.
- Global Trust: With trade partners spanning Asia, Europe, and Africa, LCs build confidence in cross-border deals, fostering long-term relationships.
- Economic Impact: LCs support the UAE’s trade-driven economy, projected to grow by 4.2% in 2025, by facilitating secure transactions worth billions.
Tulpar Global Taxation plays a pivotal role in maximizing these benefits, offering tailored LC solutions that align with your business goals, whether you’re importing raw materials or exporting finished goods.
Who Issues the Letter of Credit?
The issuing bank meaning in letter of credit refers to the bank that issues the LC on behalf of the buyer, guaranteeing payment to the seller. In the UAE, reputable letter of credit providers like Emirates NBD, HSBC, Standard Chartered, and First Abu Dhabi Bank are trusted for their expertise in trade finance. The issuing bank assesses the buyer’s creditworthiness, may require collateral (e.g., for a cash backed letter of credit), and ensures the LC complies with international standards like UCP 600.
Tulpar Global Taxation partners with these banks to expedite LC issuance, negotiate favorable terms, and ensure compliance, making the process seamless for UAE businesses.
Benefits of Using a Letter of Credit
Using an LC offers numerous advantages:
- Security for Sellers: Guarantees payment upon meeting conditions, reducing financial risk.
- Protection for Buyers: Ensures goods are delivered as agreed before payment is released.
- Flexibility: Supports various transaction types, from small-scale imports to large-scale exports.
- Global Acceptance: LCs are recognized worldwide, making them ideal for UAE’s diverse trade partners.
Tulpar Global Taxation enhances these benefits by providing end-to-end support, from LC structuring to document verification, ensuring businesses maximize the value of letter of credit payment processes.
Exploring the Types of Letters of Credit
Understanding the types of letter of credit is essential for selecting the right one for your trade needs. Each type serves a specific purpose, and choosing the appropriate LC can optimize costs, reduce risks, and enhance transaction efficiency. Below, we explore the different types of letter of credit commonly used in the UAE.
Commercial Letter of Credit
A commercial letter of credit is the most common type, used for purchasing goods or services in international trade. It ensures the seller receives payment upon submitting documents proving shipment, such as a bill of lading or certificate of origin. In the UAE, commercial LCs are widely used in sectors like electronics, textiles, and oil, where high-value transactions are common.
For instance, a UAE-based importer might use a commercial LC to purchase machinery from Japan, ensuring payment only when goods are shipped. Tulpar Global Taxation assists by drafting precise LC terms, reviewing documents, and coordinating with banks to prevent discrepancies.
Standby Letter of Credit
A standby letter of credit acts as a backup mechanism, guaranteeing payment if the buyer fails to meet contractual obligations. Unlike a commercial LC, it’s not intended for routine payments but serves as a safety net. In the UAE, standby LCs are prevalent in construction, real estate, and infrastructure projects, where financial risks are significant.
For example, a contractor might secure a standby letter of credit to assure a supplier of payment if a project milestone is delayed. Tulpar Global Taxation ensures these LCs comply with UAE Central Bank regulations, minimizing risks and ensuring smooth execution.
Irrevocable Letter of Credit
An irrevocable letter of credit cannot be modified or canceled without the consent of all parties, offering maximum security for the seller. In the UAE, irrevocable LCs are preferred for high-value transactions, such as oil exports or machinery imports. The irrevocable letter of credit form outlines strict terms, ensuring clarity and trust between parties.
Tulpar Global Taxation specializes in drafting irrevocable LCs, ensuring compliance with international standards and UAE laws to prevent disputes and delays.
Revocable Letter of Credit
A revocable letter of credit can be modified or canceled by the issuing bank without the seller’s consent, offering less security. While less common in the UAE due to its flexibility, it’s used in low-risk transactions with trusted partners. Tulpar Global Taxation advises businesses to opt for irrevocable LCs in most cases, as they provide greater protection in the UAE’s high-stakes trade environment.
Transferable and Back-to-Back Letters of Credit
- Transferable Letter of Credit: Allows the beneficiary to transfer the LC to another party, often used by intermediaries in UAE’s trading sector. For example, a Dubai-based trading company might transfer an LC to a supplier to facilitate a deal.
- Back-to-Back Letter of Credit: Involves two LCs to support trade through intermediaries, common in the UAE’s re-export market. For instance, a trader might use a front-to-back letter of credit to buy goods from China and sell them to Europe.
Tulpar Global Taxation ensures these complex LCs are structured correctly, reducing risks and optimizing costs for intermediaries.
Cash Backed Letter of Credit
A cash-backed letter of credit is secured by cash collateral, reducing risk for the issuing bank. This is ideal for SMEs with limited credit history, as it builds trust with international suppliers. In the UAE, cash-backed LCs are popular among small businesses entering global markets. Tulpar Global Taxation helps SMEs secure these LCs, negotiating favorable terms and ensuring compliance.
Other Specialized LC Types
Additional lc types letter of credit include:
- Confirmed Letter of Credit: Adds a second bank’s guarantee, reducing risk in unstable markets.
- Red Clause Letter of Credit: Provides advance payment to the seller, often used in commodity trading.
- Green Clause Letter of Credit: Includes provisions for storage costs, useful for agricultural exports.
Tulpar Global Taxation evaluates your trade needs to recommend the most suitable LC type, ensuring alignment with your business objectives.
Letter of Credit vs. Other Financial Instruments
To make informed decisions, businesses must understand how a letter of credit compares to other financial tools like performance bonds, letters of guarantee, and cash payments. These comparisons clarify when an LC is the best choice for UAE businesses.
Letter of Credit vs. Letter of Guarantee
- Purpose: An LC ensures payment for goods or services, while a letter of guarantee secures performance of non-financial obligations, such as completing a project.
- Usage: LCs are used in trade transactions; guarantees are common in service or construction contracts.
- Risk: LCs protect both buyer and seller; guarantees primarily protect the beneficiary.
- Cost: LC fees range from 0.5–2% of the transaction value, while guarantee fees vary based on contract terms.
- Documentation: LCs require a detailed letter of credit documents checklist, while guarantees focus on contract performance.
In the UAE, LCs are ideal for import-export deals, while guarantees suit project-based contracts. Tulpar Global Taxation provides expert consultation to choose the right instrument, ensuring compliance with UAE regulations.
Performance Bond vs. Letter of Credit
- Function: A performance bond ensures a contractor completes a project, while an LC guarantees payment for goods.
- Beneficiary: Bonds protect the project owner; LCs protect the seller.
- Cost: Bonds cost 1–3% of the contract value, while LC fees depend on bank terms and transaction size.
- Application: Bonds are common in UAE’s construction sector, while LCs dominate trade.
- Risk Profile: Bonds address project completion risks; LCs mitigate payment and delivery risks.
Tulpar Global Taxation guides businesses in selecting the appropriate tool, ensuring alignment with trade or project goals.
Letter of Credit vs. Cash Payment
- Security: Payment is only released when conditions (e.g., document submission) are met.
- Documentation: Ensures proper paperwork, reducing disputes.
- Trust: Builds confidence with new trade partners, especially in markets with high risk.
- Global Acceptance: LCs are recognized worldwide, unlike cash payments, which may face regulatory scrutiny.
Tulpar Global Taxation helps businesses transition from cash payments to LCs, ensuring secure and efficient transactions in the UAE’s trade ecosystem.
Letter of Credit vs. Open Account
An open account allows buyers to pay after receiving goods, posing risks for sellers. In contrast, an LC ensures payment security.
- Open accounts: Used with trusted partners in the UAE.
- Letters of credit: Preferred for new or high-value transactions to minimize risks.
Tulpar Global Taxation advises on when to use LCs over open accounts, optimizing risk management.
How to Obtain a Letter of Credit in the UAE
Obtaining a letter of credit in the UAE requires a clear understanding of the process and requirements. A structured approach ensures compliance and avoids delays.
Step-by-Step Guide to Obtaining an LC
- Assess Trade Needs: Determine if an LC is necessary for your transaction, such as importing raw materials or exporting finished goods.
- Select an Issuing Bank: Choose a reputable letter of credit provider like Emirates NBD, HSBC, or Mashreq Bank, known for their trade finance expertise.
- Submit LC Application: Provide details like transaction amount, beneficiary information, shipment terms, and required documents.
- Bank Evaluation: The bank assesses your creditworthiness, which may require collateral for a cash-backed letter of credit or financial statements for larger transactions.
- LC Issuance: The bank issues the LC and sends it to the advising bank for verification.
- Document Compliance: The seller submits documents listed in the letter of credit documents checklist, which the advising bank verifies.
- Payment Execution: Upon document approval, the issuing bank releases payment to the seller.
Tulpar Global Taxation streamlines this process by coordinating with banks, reviewing applications, and ensuring compliance with UAE Central Bank guidelines and UCP 600 standards.
Essential Letter of Credit Documents Checklist
- Commercial Invoice: Details the goods, quantity, price, and terms of sale.
- Bill of Lading/Airway Bill: Proves shipment of goods via sea, air, or land.
- Packing List: Specifies packaging details, including weight and dimensions.
- Certificate of Origin: Verifies the goods’ country of origin, crucial for customs clearance.
- Insurance Certificate: Confirms coverage for goods in transit, protecting against loss or damage.
- Inspection Certificate: Ensures goods meet quality or regulatory standards.
- Draft/Bill of Exchange: A payment demand presented to the bank.
Tulpar Global Taxation conducts thorough document reviews to eliminate errors, ensuring swift payment release and avoiding costly discrepancies.
Key Considerations When Applying for an LC
- Creditworthiness: Banks may require collateral or financial statements, especially for SMEs.
- LC Type: Choose the right type (e.g., commercial letter of credit or standby letter of credit) based on your trade needs.
- Bank Fees: LC fees range from 0.5–2% of the transaction value, plus additional costs like advising or amendment fees.
- Timeline: Ensure the LC aligns with your shipment and payment schedules to avoid delays.
Tulpar Global Taxation provides expert advice on these considerations, negotiating favorable terms and ensuring efficient LC issuance.
Challenges in Obtaining an LC
- High Costs: LC fees can be significant, especially for SMEs. Tulpar Global Taxation negotiates cost-effective terms with banks.
- Complex Documentation: Errors in documents can delay payments. Tulpar Global Taxation ensures compliance with the letter of credit documents checklist.
- Regulatory Hurdles: UAE’s trade laws and UCP 600 compliance require expertise. Tulpar Global Taxation navigates these regulations seamlessly.
- Credit Requirements: Banks may demand collateral or high credit ratings. Tulpar Global Taxation assists SMEs in securing cash-backed letters of credit.
The Role of Letters of Credit in UAE’s International Trade
The UAE’s position as a global trade hub, with trade routes spanning Asia, Europe, and Africa, makes letters of credit in international trade indispensable. LCs ensure secure and efficient transactions, supporting the UAE’s trade-driven economy.
Why LCs Are Vital for UAE’s Trade Hub Status
- Global Connectivity: LCs facilitate trade with over 190 countries, from China to Germany, ensuring seamless transactions.
- Risk Reduction: They protect against currency fluctuations, non-payment, and non-delivery risks, critical in volatile markets.
- Regulatory Alignment: LCs comply with UAE’s trade laws and international standards like UCP 600, ensuring legal and financial security.
- Economic Impact: LCs support the UAE’s GDP, projected to grow by 4.2% in 2025, by facilitating billions in trade.
Tulpar Global Taxation helps UAE businesses leverage LCs to expand their global footprint, offering tailored solutions for export letter of credit and import letter of credit processes.
Export Letter of Credit Process
- Receiving the LC: The UAE exporter receives the LC from the buyer’s bank, outlining payment terms.
- Goods Shipment: The exporter ships goods and prepares required documents, such as invoices and bills of lading.
- Document Submission: Documents are submitted to the advising bank for verification.
- Payment Receipt: Payment is released upon document approval, ensuring financial security.
Tulpar Global Taxation ensures compliance with export regulations, streamlining document preparation and bank coordination.
Import Letter of Credit Process
- LC Application: The UAE importer applies for an LC through their bank, specifying transaction details.
- Goods Receipt: The importer receives goods upon document verification by the advising bank.
- Payment Execution: The issuing bank pays the seller once conditions are met.
Tulpar Global Taxation assists importers by coordinating with banks, reviewing documents, and ensuring compliance, reducing delays and costs.
Role of LCs in UAE’s Trade Sectors
- Oil and Gas: Irrevocable letters of credit secure high-value exports to global markets.
- Electronics and Technology: LCs facilitate imports of machinery and components from Asia.
- Textiles and Consumer Goods: LCs ensure secure transactions for Dubai’s re-export market.
- Construction: Standby letters of credit support infrastructure projects by guaranteeing contractor performance.
Tulpar Global Taxation tailors LC solutions to these sectors, ensuring alignment with industry-specific needs.
Choosing the Right Letter of Credit Service Provider in the UAE
Selecting a reliable letter of credit service provider is critical for seamless trade operations. Tulpar Global Taxation stands out as a trusted partner in the UAE, offering end-to-end LC solutions.
Why Choose Tulpar Global Taxation?
- Expertise: Deep knowledge of UAE’s financial regulations and global trade standards like UCP 600.
- Custom Solutions: Tailored LC structures for importers, exporters, and intermediaries, from commercial letters of credit to back-to-back letters of credit.
- Bank Partnerships: Collaborates with leading UAE banks like Emirates NBD and HSBC to expedite LC issuance.
- Compliance Assurance: Ensures adherence to UAE Central Bank guidelines and international standards, minimizing risks.
How Tulpar Simplifies the LC Process
- Consultation: Guides businesses in selecting the right LC type based on trade objectives.
- Documentation Support: Prepares and verifies the letter of credit documents checklist, reducing errors.
- Cost Optimization: Negotiates competitive bank fees, making LCs accessible to SMEs.
- Monitoring: Tracks LC execution to prevent delays and ensure compliance.
For instance, a UAE-based SME importing goods can rely on Tulpar to secure a cost-effective LC, streamline documentation, and coordinate with banks for swift execution.
Additional Services by Tulpar Global Taxation
- Trade Finance Consulting: Advises on trade finance letters of credit and other instruments.
- Risk Management: Mitigates currency and market risks through strategic LC structuring.
- Regulatory Support: Ensures compliance with UAE’s trade laws and international standards.
- Training and Education: Offers workshops on how to obtain a letter of credit and best practices for trade finance.
Common Challenges with Letters of Credit and Solutions
While LCs are powerful tools, they come with challenges. Understanding these and leveraging expert support can ensure success.
Documentation Errors
Discrepancies in documents, such as mismatched invoices or incomplete bills of lading, can delay payments. Common errors include:
- Incorrect beneficiary names or addresses
- Missing or incomplete documents
- Non-compliance with LC terms or UCP 600 standards
Tulpar Global Taxation conducts thorough document reviews, ensuring compliance with the letter of credit documents checklist and minimizing delays.
High Costs and Fees
LC fees, ranging from 0.5–2% of the transaction value, can be significant for SMEs. Additional costs include:
- Advising fees: Charged by the advising bank for verifying the LC.
- Amendment fees: Incurred for modifying LC terms.
- Courier fees: For document delivery.
Tulpar Global Taxation negotiates with banks to secure cost-effective terms, making LCs accessible to businesses of all sizes.
Regulatory and Compliance Challenges
Navigating UAE’s trade laws and international standards like UCP 600 can be complex. Non-compliance can lead to rejected documents or delayed payments. Key regulatory considerations include:
- UAE Central Bank guidelines on trade finance
- International Chamber of Commerce (ICC) rules, such as UCP 600
- Customs and tax regulations for imports and exports
Tulpar Global Taxation provides expert guidance to ensure LCs meet all regulatory requirements, reducing risks and ensuring efficiency.
Currency and Market Risks
Currency fluctuations and market volatility can impact LC transactions. For example, a weakening dirham could increase costs for UAE importers. Tulpar Global Taxation advises on hedging strategies, such as locking in exchange rates, and structures LCs to mitigate these risks.
Bank Processing Delays
Delays in LC issuance or document verification can disrupt trade timelines. Common causes include:
- Incomplete applications
- Bank backlogs
- Discrepancies in documents
Tulpar Global Taxation coordinates with banks to expedite processing, ensuring timely LC issuance and payment execution.
Maximizing the Benefits of Letters of Credit with Tulpar Global Taxation
To fully leverage letters of credit, businesses need a strategic approach. Tulpar Global Taxation offers comprehensive solutions to maximize LC benefits:
- Strategic Planning: Aligns LCs with your trade objectives, whether for export letter of credit or import letter of credit processes.
- Risk Management: Mitigates financial, regulatory, and currency risks through expert structuring.
- Efficiency: Streamlines the letter of credit procedure in UAE for faster execution and reduced costs.
- Cost Savings: Negotiates favorable bank fees, making LCs cost-effective for SMEs.
- Scalability: Supports businesses of all sizes, from startups to multinational corporations.
By partnering with Tulpar Global Taxation, UAE businesses can transform LCs into a competitive advantage, ensuring secure, efficient, and profitable trade operations.
The Future of Letters of Credit in the UAE
As the UAE pursues its Vision 2030 goals to diversify its economy, letters of credit will remain a cornerstone of trade. Emerging trends are reshaping the LC landscape:
- Blockchain Technology: Blockchain-based LCs, such as those on platforms like TradeLens, reduce processing times, enhance transparency, and minimize fraud risks.
- Digitalization: Electronic LCs and e-documents are gaining traction, reducing paperwork and errors. The UAE’s digital trade initiatives, like Dubai’s Blockchain Strategy, support this trend.
- Sustainability: LCs are being used to support sustainable trade, such as green energy exports or eco-friendly goods, aligning with the UAE’s sustainability goals.
- Automation: AI and machine learning are streamlining LC verification, reducing manual errors and improving efficiency.
Tulpar Global Taxation stays ahead of these trends, offering cutting-edge solutions like blockchain-integrated LCs and digital documentation support. By leveraging these advancements, Tulpar ensures UAE businesses remain competitive in the global trade landscape.
Practical Tips for UAE Businesses Using Letters of Credit
To maximize the effectiveness of LCs, UAE businesses should follow these best practices:
- Work with Reputable Banks: Choose letter of credit providers with a strong track record, such as Emirates NBD, HSBC, or Standard Chartered. These banks offer reliable trade finance letter of credit services and comply with international standards. Tulpar Global Taxation partners with these banks to ensure seamless LC issuance.
- Understand LC Terms Thoroughly: Carefully review the irrevocable letter of credit form or other LC terms to avoid discrepancies. Key terms to check include:
- Expiry date and shipment deadlines
- Document requirements
- Payment terms and conditions
Tulpar Global Taxation provides expert reviews to ensure clarity and compliance, reducing the risk of disputes.
- Monitor Market and Regulatory Trends: Stay informed about currency fluctuations, trade regulations, and global market trends. For example, changes in UAE’s free trade agreements or tariff policies can impact LC costs. Tulpar Global Taxation offers market insights and regulatory updates to optimize LC strategies.
- Leverage Expert Support: Partner with Tulpar Global Taxation to navigate the complexities of LCs, from application to execution. Tulpar’s expertise ensures compliance, cost-efficiency, and timely transactions, allowing businesses to focus on growth.
- Plan for Scalability: As your business grows, your LC needs may evolve. Tulpar Global Taxation designs scalable LC solutions, supporting everything from small-scale imports to large-scale export operations.
Conclusion
This guide has explored every aspect of letters of credit, from their definition and types to their critical role in the UAE’s trade ecosystem. By understanding what is meant by letter of credit, navigating the letter of credit procedure in UAE, and partnering with Tulpar Global Taxation, businesses can unlock the full potential of LCs. Whether you’re securing a trade finance letter of credit, exploring LC types, or comparing letter of credit vs. letter of guarantee, Tulpar’s expertise ensures seamless, secure, and cost-effective transactions.
Contact Tulpar Global Taxation today to elevate your trade operations in the UAE and beyond.
A Letter of Credit (LC) is a bank-issued document ensuring payment to a seller once trade terms are met, widely used in UAE’s import-export market for secure transactions.
In 2025, UAE businesses use LCs to guarantee payment in international trade. The buyer’s bank issues the LC, and the seller receives payment upon fulfilling contract terms.
Common types in the UAE include irrevocable, revocable, standby, and commercial LCs, each tailored for specific trade needs like imports or contract guarantees.
UAE businesses apply through banks like Emirates NBD or HSBC, submitting trade contracts and financial documents. Tulpar Global Taxation can assist with compliance.
LCs reduce payment risks, ensure trust in cross-border deals, and support UAE’s 2025 trade goals, especially for SMEs in Dubai and Abu Dhabi.
LC fees in the UAE range from 0.1% to 2% of the transaction value, depending on the bank and risk. Tulpar Global Taxation offers fee optimization advice.
An LC ensures payment for goods, while a bank guarantee secures contract performance. Both are vital for UAE trade, with LCs being more trade-focused.
LCs ensure secure payments, supporting UAE’s role as a global trade hub in 2025, especially for exports to Asia and Europe, minimizing financial risks.
Tulpar Global Taxation provides expert guidance on LC compliance, tax implications, and financial structuring for UAE businesses in 2025 trade deals.
Risks include document errors or non-compliance with terms, which can delay payments. Partnering with experts like Tulpar Global Taxation mitigates these issues.
Contact Us:
- Website: www.tulpartax.com
- Email: info@tulpartax.com
- Phone: +971-54 444 5124
