Can we use invoice factoring?

Q: I have a pharmacy and for all medical items we dispense, I claim a reimbursement from the NHS. They will pay me 2 months in arrears, so as an example, March payment will be paid on the 3rd of May.

There is a finance company that can pay March’s payment at the end of March. They buy the book debt from me for the value of those debts less their fees. The fee is a set percentage (0.9%) of the value that they advance to me for the acquisition of those debts.

I was told that this procedure is as same as an invoice factoring, would this be permissible according to Shariah?

لجواب حامدا ومصليا ومسلما ومنه الصدق والصواب


A: The factoring procedure described is not permissible for two reasons:

1.      Firstly, it involves the sale of debt to other than the debtor which is not permissible.

2.      Secondly, the debt is sold at a discount which amounts to riba.

If the sale of the debt is with recourse to the seller in the event of default by the debtor then this is effectively a combination of a loan and the assignment of debt [hawala].  The factor loans the discounted amount to the ‘seller’ on the condition that he assigns the debt of the full amount to the factor.  Whilst this is no longer the sale of debt to other than the debtor it still suffers from the prohibition of riba as the assignment of debt must be at par.

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