Islamic Factoring
Islamic International Factoring provides a Shariah-compliant alternative to conventional factoring, facilitating global trade finance through ethical financial practices.
Islamic Export Factor
An Islamic International Factoring transaction with an Islamic Export Factor and conventional Import Factor. Whatever the Islamic financial transaction is used as a basis for Islamic Factoring, the Receivable is assigned to the Import Factor under the GRIF and Supplemental Agreement for Islamic International Factoring. For the Import Factor there is no more differences in their action than the deviations listed earlier.
Islamic Import Factor
The flow of transactions is not different for an Islamic Import Factor. A conventional Export Factor assigns its receivables to the Islamic Import Factor under the GRIF and Supplemental Agreement for Islamic International Factoring on the basis of their conventional Factoring agreement with the supplier. The only restriction for the Export Factor may be the related goods or services that must be agreed on at the time of approval.
Principle Of Islamic Finance
- No Interest (Riba): Strictly prohibited in all transactions.
- No Extreme Uncertainty (Gharar): Contracts must be clear and certain.
- Permissible (Halal) Trade: Only Shariah-compliant goods and services allowed; unlawful earnings prohibited.
- Good Faith & Fair Transactions: Fraud, unjust enrichment, and misrepresentation are not allowed.
Different from conventional factoring
- No Interest (Riba)– Late payments incur a pre-agreed late payment amount, not interest.
- Shariah-Compliant Goods & Services– Only permissible trade is allowed, and goods/services must be pre-approved.
- No Prohibited Assignments– Transactions involving forbidden contracts cannot be assigned.
Similarities Between Murabahah and Factoring
- Order-Based Approval: An order or sales contract is approved by the factor as perArticle 17 of the GRIF.
- Ownership of Receivable: The factor becomes the sole owner of the receivable, and all supplier rights are transferred as perArticle 12 of the GRIF.
- Payment Obligation: The factor must pay the purchase price of the receivable on an agreed date as perArticles 23 & 24 of the GRIF.
- Bona Fide Sale: The receivable must relate to a legitimate sale of goods or services as perArticle 28 of the GRIF.
Process Flow
Exporter to Importer
Order Placement: Buyer places an order.
Goods Delivery & Invoicing: Seller delivers goods and issues an invoice.
Receivables Assignment: Export Factor assigns receivables to the Islamic Import Factor under GRIF & Supplemental Agreement.
Shariah-Compliant Financing: Optional financing through an Islamic financial instrument instead of interest-based financing.
Seller Payment: Islamic Import Factor pays the Seller.
Buyer Payment: Buyer pays the Import Factor upon maturity.
Final Settlement: Import Factor deducts commission and transfers the balance.
Islamic Banking: Enhancing Financial Inclusion and SME Support
History
“Islamic banking has the potential to foster greater financial intermediation and inclusion, especially among Muslim populations, over 24% of the global population, that may be under-served by conventional banks, and to facilitate lending in support of small and medium-sized enterprises”, says the IMF.
Key Principles Of Islamic Finance
The main principles of islamic finance are:
- Avoidance of Extreme Uncertainty (Gharar): Contracts must be clear and transparent, avoiding excessive uncertainty.
- Permissibility of Trade (Halal Transactions): Goods, services, and activities must comply with Shariah principles, prohibiting unlawful (haram) earnings.
- Trust and Ethical Conduct (Amanah & Uqud): Financial dealings must be based on honesty, fairness, and adherence to contracts, prohibiting fraud and unjust enrichment.
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