Is invoice discounting permissible?
In the Name of Allah, the Most Gracious, the Most Merciful.
As-salāmu ‘alaykum wa-rahmatullāhi wa-barakātuh.
Invoice discounting is a form of short-term borrowing often used to improve a company’s working capital and cash flow position. Invoice discounting allows a business to draw money against its sales invoices before the customer has actually paid.
In such a financial arrangement, the financier lends money at an agreed percentage of the total value. The borrower will have to pay a fee for this service.
Such an arrangement is not Shari`ah compliant. It is impermissible to enter into such an agreement due to the involvement of Riba (interest). Money paid conditionally by borrower to a lender over and above the capital for the loan is interest and unlawful in Shari`ah.
If a company is in need of financing, we recommend one of the following options:
1) Interest-free loan
2) Short-term investment by a financing company with a pre-agreed profit/loss sharing ratio
3) Balancing one’s sales with more cash sales than credit sales.
Do not hesitate to contact us for further help and guidance on how to make your business Shari`ah compliant.
And Allah Ta’ālā Knows Best
Mufti Faraz Adam,