I'll be taking a seminar on Islamic finance, and I'll have a question regarding factoring. Factoring is buying receivable from vendors. it is fairly common in the furniture and garment industries, where retailers may take 90 days or more to pay the supplier (you!). So the suppliers, who may be owed $100,000, may sell those receivables to a factor for say $94,000, thus the factor earns maybe $6,000 for waiting a few months for $94,000.
Sometimes the factor requires the factor must pre-approve the customers, but in any event a deal is struck.
So if it is forbidden to take usury (money on money) is factoring the same thing but in reverse?
In Islamic finance anyone lending money is expected to share the risk, even if it is decided at what rate in advance (say 20% of the profits.) Under no circumstances may one agree to pay or receive a guaranteed rate of "interest." One earns this percentage for providing money that allows the deal to happen.
In factoring the money is provided after the profits are realized, not before as in finance. So in factoring, there is really not much risk. And in factoring, the vendor is not paying money on money, since there is no loan.
In Islamic finance money is for buying things and then selling and making a profit. A factor buys commercial paper for money, ($94k in the case above) and then sells it for more money ($100K in the case above).
So it seems to me, in Islamic finance, factoring would be legitimate. I'll find out if it is halal.
Who cares? With the West in economic decline, and only Islam maintaining the prohibition on usury, it is interesting to see how far we could go if we eliminated usury as a feature of our society (voluntarily of course.) Could we have all of the goods and services we have now and more? With out the force and fraud of modern usury, with its fractional reserve leverage element?
Update: I sure would like to hear from an Islamic scholar as to whether factoring is acceptable.
Sometimes the factor requires the factor must pre-approve the customers, but in any event a deal is struck.
So if it is forbidden to take usury (money on money) is factoring the same thing but in reverse?
In Islamic finance anyone lending money is expected to share the risk, even if it is decided at what rate in advance (say 20% of the profits.) Under no circumstances may one agree to pay or receive a guaranteed rate of "interest." One earns this percentage for providing money that allows the deal to happen.
In factoring the money is provided after the profits are realized, not before as in finance. So in factoring, there is really not much risk. And in factoring, the vendor is not paying money on money, since there is no loan.
In Islamic finance money is for buying things and then selling and making a profit. A factor buys commercial paper for money, ($94k in the case above) and then sells it for more money ($100K in the case above).
So it seems to me, in Islamic finance, factoring would be legitimate. I'll find out if it is halal.
Who cares? With the West in economic decline, and only Islam maintaining the prohibition on usury, it is interesting to see how far we could go if we eliminated usury as a feature of our society (voluntarily of course.) Could we have all of the goods and services we have now and more? With out the force and fraud of modern usury, with its fractional reserve leverage element?
Update: I sure would like to hear from an Islamic scholar as to whether factoring is acceptable.
1 comments:
Sometimes the aspect needs the aspect must pre-approve the clients, but in any occasion a cope is hit.
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