This concept of factoring is not allowed in Islam. The surplus received, in addition to what the debt was bought, is Ribā (interest). This agreement does not comply with the Shari'ah. It is not allowed to enter into such an agreement due to Riba's participation (interest).
Money conditionally paid by the borrower to a lender in excess of the principal of the loan is subject to interest and is illegal under Sharia law. Views vary as to whether factoring is haraam or halal. For many, they see it as a classic case of usury, since bills themselves are essentially debts and the sale of debts in Islam is haraam. Then, discounting the debt, they see it as a clear case of usury.
Others may see traditional factoring in a different light and see the ways in which Halal is or can be done. Its objective is to support these firms in their relationships with public sector clients. Islamic financial experts are continuously working on different financial products to comply with Islamic financial principles, as required by a significant number of the Muslim population worldwide. Functionally, the Islamic financial system is not much different from the traditional financial system.
The basic difference lies in practices and norms based on certain moral principles guided by Islam. Islamic financial products are prepared in accordance with these standards. As an important financial product, invoice financing is no exception. Like many other financial components, the Islamic financial system offers a bill financing solution that is based on Islamic principles.
Interests are prohibited in Islamic finance, so other structures must be used. Sharia compliant factoring is rare in the Gulf, although in Malaysia it is offered in a format that involves the sale of debt in exchange for cash, with Islamic banks acting as intermediaries. Many scholars from outside Malaysia consider the format, known as bai al dayn, to be inadmissible. Offers an unparalleled level of trust and efficiency at every step of the invoice processing process.
These have had to be developed because factoring is essential today for many companies in the UK and beyond to help them solve their cash flow problems. Less than a third of Gulf banks offer sharia-compliant factoring services, according to a study commissioned by the International Finance Corporation last June. In this type of financing, the company obtains an agreed sum in advance and the collection of invoices becomes the responsibility of the lender. In these types of loans, the company sells its receivables to the lender and obtains the amount agreed against them.
If you want to learn more about factoring or are considering it for your business, get in touch today and talk to an independent factoring broker who can answer all your questions and provide independent advice. These Islamic factoring services adhere to Sharia principles and offer efficient working capital and liquidity solutions without resources. Invoice discounting is a form of short-term loan that is often used to improve a company's working capital position and cash flow. The transaction between the buyer and the seller is independent of the transaction between the seller and the factor.
For these types of loans, the lender will evaluate the bills and the financial health of the customers to whom these bills are intended. Oil-producing countries have enormous business potential, which naturally leads to a greater demand for invoice financing. Through this network, suppliers will be able to obtain rapid flows of funding on their invoices throughout their work for government agencies, guaranteeing liquidity for the duration of their contracts. Created by Dubai Economy, in partnership with factoring and forfaiting company Dar Al Tawreeq, the program will be based on an intelligent and cutting-edge software platform powered by the Dubai Financial Management System.