Advantages and disadvantages of bay’ al-dayn

Dayn means debt and bay’ means trade or exchange. Thus, bay’al-dayn refers to sale of debt. There are disagreements among the scholars whether the debt can be sold or not; some scholars argue that the debt arise from sale of commodity can be sold while other says that selling of debt involves usury or riba and elements of gharar. Despite that, this essay will focus the advantages and disadvantages of bay’al-dayn (sale of debt).
One of the biggest advantages of bay’ al-dayn is that it helps the firm to reduce cash flow problems as it boosts large immediate cash flow to the business .This immediate cash flow will help the business to solve its working capital problems such as paying wages and utilities on time which will ensure the smooth running of the business. The possibility of sale of the debt will further helps smoother cash flow and better financial planning which in turn will help the other operations of the business.
The second advantage of bay’al-dayn is that it will reduce the business administrative cost to a certain extent. It is like out sourcing the business sales ledger and the owners and business managers can concentrate more on managing other areas of business when they have ample free time. In other words, bay’ al-dayn will reduce the time spend on credit control and some other administrative cost like record keepings which would rise cost of running the business thus reducing the overall profit.bay al-dayn may also help the business to eliminate the risk of bad debts and provision for doubtful debts (non-recourse factoring)
Sale of debt to a respected and trust worthy business like to a well known bank may boost the customers’ (debtors) morale to pay debt more quickly. In such a situation the business will enjoy the expansion of market and provide kind of marketing and free advertising to the company. In other words the level of market activities will increase which may increase the future demand for the firms’ product.
The fourth advantage of bay’ al dayn is that it may enable the firm to get useful information about the credit standing of business customers from the company to which the debt is sold and they can help the business to negotiate better terms with your suppliers. Such better terms may include higher trade discounts and longer credit payments as the business popularity in the market is high in the market for debt.
Another advantage of bay’al-dayn is that selling a debt will generate larger immediate cash is flow to the business as soon as orders are invoiced and is available for capital investment and funding of business next orders. For example if the business can pay the suppliers promptly the business is likely to reap higher discount rate from suppliers and better terms like free delivery depending on the market situation. Similarly, huge cash flow at once and on time enable better expansion strategies and funding of mega projects. On time capital expenditure will reduce various costs and will reduce the farms business need for borrowing which is very useful where the borrowing is difficult and interest rate is higher in case if borrowed.
Despite these advantages, there are number of disadvantages in bay’al-dayn. It may give rise to disputes and queries and business is required to be efficient. One of the major drawback of bay’ al dayn is that it will reduce profit margin of sale of every product or supply of services as the business has to share part of profit to the company which buys the debt. In other words if the business wait for the full payment from the debtors they would get higher amount than what they get from the firm which buys the debt.
The second disadvantage is that some of the customers may prefer to deal with the company directly. That means those customers will not be happy if the business sell their debt and in case of bay’al-dayn those customer may prefer brand switching or reduction on their loyalty towards the business. In other words the relationship between the customer and business may worsen in case of bay’ al dayn if the customer may not prefer to deal with the debt purchaser and that will have a long run negative impact on the business. In some cases the suppliers may have some assumptions that the business is having liquidity crises if the business is selling debts especially if the debt price is too low indicating urgent need of cash.
Another con that exists in case of bay’al-dayn is that the buyer of debt may vet the business customers and sometimes may influence the way business is doing its business. The interference on of business-customer relationships will have long term consequences which the business has to take special care. Losing a customer means also blocking of arrival of new customers as well. It is proven fact that finding of new customer is much more expensive than keeping a customer or maintaining the customer loyalty. Therefore it is risky for the business to invole in bay’ al-dayn if its customers are sensitive towards those issues.
Fourth disadvantage is that choosing a good factor or purchaser of debt is important as the way the factor deal with the customers hugely impact the business. Especially what the customer think about the business which is critical in long run. This means even the less sensitive customer may become sensitive towards some issue if the factor deals with them in a wrong manner which is not acceptable to them. So the business must use reputable company which will not damage the business reputation.
Another disadvantage is that bay’al-dayn is costly in many ways. The business may have to pay more or lose more if the factor (buyer of debt) may demand more to cover liability for the bad debts. It may also be difficult to end factoring as business will have to pay off any money it has advanced on invoices if the customer has not paid them yet. And sometimes it makes difficulty in borrowing as book debts will not be available as security.
References: www.livingislam.org www.businesslink.gov.uk www.zaharuddin.net www.insolvencyhelpline.co.uk www.cert.com.my