There is some confusion in the UK and elsewhere in the world as to whether factoring is Halal, whether factoring is Haram and whether factoring is Sharia compliant. Much of this confusion comes down to the fact that in Islam, banking and financial activity must be done with the principles of Sharia. Therefore any financial product that complies with the principles of Sharia is Halal (permissible) and any financial product that does not comply with Sharia is Haram (sinful and prohibited).
Sharia prohibits all forms of usury or riba. Essentially, usury and riba are the acceptance of specific interest or fees for loans of money, regardless of whether the payment is fixed or not. That means therefore that a traditional mortgage or loan from a UK bank is Haram because interest is charged on the money that has been lent. However, there are Islamic finance products available that function instead of loans and mortgages. But if Islamic banks and financial products cannot charge interest, how can they be profitable? Hilary Osborne, the Guardian’s Money editor explains it as follows:
“Banks can profit from helping customers to purchase a property using a ijara or murabaha scheme. With an ijara scheme the bank makes money by charging the customer rent; with a murabaha scheme, a price is agreed at the outset which is more than the market value. This profit is deemed to be a reward for the risk that is assumed by the bank.”
It’s clear that whilst loans and mortgages may be deemed Haraam, there are alternative products to replace these. But what about factoring? Is it Halal? Is it Haram? Or are there alternatives? A short definition of factoring is as follows:
“Factoring is a financial transaction whereby a business sells its accounts receivable (i.e. invoices) to a third party (called a factor) at a discount in exchange for immediate money with which to finance continued business.”
Viewpoints vary as to whether factoring is Haram or Halal. To many, they see it as a classic case of usury, the invoices themselves essentially being debts and the selling of debts in Islam is Haram. Then, discounting the debt they see as clear case of usury. Others may see traditional factoring in a different light and see ways that it is or can be made Halal.
However the good news is that there are alternatives and there are factoring or factoring like services that are Halal and Sharia compliant. These Islamic factoring services adhere to Sharia principles and offer efficient working capital and liquidity solutions on a non-recourse basis. The exact details of how they work may vary but what they all share is the compliance to Sharia principles. These have had to be developed because factoring is essential these days for many businesses in the UK and beyond to help them deal with their cash flow problems.
If you would like to know more about factoring or are considering it for your business then get in touch today and speak to an independent factoring broker who can answer all your questions and give you independent advice.
Factoring Solutions is one of oldest established specialist factoring brokers and is available on 01827 707680.