Invoice Financing based upon Islamic Principles — InvoiceMate

5 min readJun 28, 2022

In the following lines, we will have an overview of invoice financing based on Islamic principles.

Islamic financial experts continuously work on different financial products to make them comply with the Islamic financial principles as required by a significant number of the Muslim population worldwide. Functionally Islamic financial system is not much different from the traditional financial system. The basic difference lies in the practices and rules based on certain moral principles guided by Islam. Islamic financial products are prepared according to these standards. Being an important financial product, invoice financing is no exception to that. Like many other financial components, the Islamic financial system offers an Invoice financing solution that is based on Islamic principles.

Islamic Financial System

Islamic finance can be explained as ethical lending or ethical investing governed by the Islamic shariah (Way of life) principles. These principles can be described as follows:

The financing (service or product)

  • Should be free of unjust increment or enrichment (Interest)
  • Should comply with the principles of equity and justice
  • Should be linked with a real economic or trade activity (buying, selling, leasing, manufacturing, etc.)
  • Should carry free consent of all the concerned parties
  • Should not contain the element of exploitation
  • Should not contain any practice that is not considered Halal in Islamic Shariah
  • Should not include the trade of the items forbidden by Islamic shariah.

Islamic Financial Instruments

The major Islamic financial instruments are as follows


Mudarabah is profit and loss sharing according to Shariah principles. For example mutual funding.


Musharakah is a partnership based on profit and loss sharing according to Shariah principles. For example partnership between two people where one is sharing investment while the other sharing skills.


Murabaha is an interest-free, cost-plus financing solution based on Shariah principles. For example installment sales.


Ijarah is a contract of leasing of services or assets. Examples can be car and house financing.


Sukuk is debt financing. Government bonds can be an example of Sukuk.


Salam is forward selling where the buyer buys a product at future date by fully paying in advance. For example the future selling of a commodity.

Invoice Financing based Upon Islamic Principles

Invoice financing that is based upon shariah principles is known as Islamic Invoice Financing or sometimes Shariah-compliant invoice financing. Before further explaining, first, take a look at what is Invoice financing.

Invoice Financing

Invoice financing is the process where the business borrows against its receivable invoices. This borrowing can be from a financial institution, individual, or some entity. The lender will be charging some agreed percentage as interest and/or service charges upon the maturity of the terms. Invoice financing is usually a short-term form of financing. Depending upon the mechanism, invoice financing can be classified into two categories, that are:

  • Invoice Financing
  • Invoice Factoring

Invoice Financing

Invoice financing is also known as accounts receivable financing or invoice discounting (confidential). In this kind of borrowing the business uses its invoices as collateral and gets a percentage of the receivable amount straightaway. Once the invoice terms get mature the borrowed amount inclusive of an agreed-upon percentage as interest/service charges are paid back to the lender. For this type of borrowing the lender will evaluate the invoices and the financial health of the customers upon whom these invoices are drawn. The whole amount of receivable may not necessarily be financed. It can be a percentage of that. This type of financing is also called confidential invoice discounting where the business gets invoice financed without disclosing this to the concerned customers of invoices. The business collects the payment from its customers and pays back the owed amount to the lender. In this type of financing, the responsibility of collecting the amount and paying it back to the lender remains with the business.

Invoice Factoring

In this kind of borrowing, the business sells its receivable invoices to the lender and gets the agreed amount against those. The lender collects the sum from the customers once they become due. In this type of financing, the business gets an agreed sum upfront and the collection against invoices becomes the responsibility of the lender. After the collection of the amount due against the invoices, the lender keeps the financed amount plus service charges and gives the remaining amount to the business.

Islamic Invoice Financing

Let’s see how Islamic Invoice Financing/Factoring works and the potential of the industry.


The basic idea behind invoice financing based upon Islamic principles is to keep it interest-free. For that purpose, the financing can be done using multiple Islamic financial instruments. Invoice financing based upon Islamic principles is usually executed through three major shariah-based products:


In the past few years, the global invoice financing/factoring market has seen tremendous growth. The Islamic countries have also been a part of the global economy. These markets also want to take advantage of different financing instruments to expand their businesses. A significant majority of these markets prefer Islamic financing where available. That leads to a great potential for invoice financing in both import/export and local businesses. Oil-producing nations have a huge business potential naturally leading to greater demand for invoice financing.

In the year 2021, the OIC countries contributed more than $3.5 Trillion to the global economy and are expected to reach $4 Trillion figures by the end of 2023. Global Islamic finance assets are increasing at more than 6% CAGR.

Presently Islamic finance market stands at $2.2 Trillion and is expected to grow by 10% during 2022–23. This shows the appetite for Islamic Invoice financing.

Invoice financing has great benefits for both large-scale businesses and MSMEs. Strengthening the invoice financing system based on Islamic shariah principles would lead to more adoption of invoice financing/factoring among the Muslim population living in Islamic countries as well as in the rest of the world. Many non-Muslim countries like UK and Hongkong have already started Islamic financing services through their banking system to attract the Muslim population around the world to contribute more actively to the economies of their respective countries. Invoice financing based upon Islamic principles can significantly change the economic outlook of a large number of the Muslim trade community.

InvoiceMate by MateSol offers the world’s first blockchain-based invoice management system. It offers an unparalleled level of trust and efficiency at each step of the invoice processing journey. Moreover, it offers a unique function of ‘Know your Invoice’ to enable transparency of invoice processing required by the banks and other lending institutions. This way medium, small and individual businesses can also have better prospects of invoice financing not possible otherwise.

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Originally published at on June 28, 2022.