CURRENCY EXCHANGE IN THE EYES OF THE SHARI`AH

CURRENCY EXCHANGE IN THE EYES OF THE SHARI`AH

Question.

Dealing in foreign currency is halal; the question is about a more specific action in this deal. Where we have two actions:

1-     Long Deal: Where you buy now and sell later ($ against a major currency).

2-     Short Deal: Where you sell now and buy later. The first one is clear, where you buy something and sell later on, but the 2nd one you sell what you don’t' own, so what is the Fatwa about this.

Answer.

 In the Name of Allah, Most Gracious, Most Merciful.

All praise and thanks are due to Allah, and peace and blessings be upon His Messenger.

First of all, we would like to stress that the rules governing currency exchange in the Shari`ah are different from those of the commodities. In Arabic, currency exchange is known as sarf, and such sarf is permissible with certain conditions that will be clarified in the following fatwa issued by Dr. Monzer Kahf, a prominent Muslim economist and counselor:

“Currency transactions are used very often as a vehicle for riba-based borrowing/lending. Therefore, the rules of currency exchange are not the same in the Shari`ah as the rules of other commodities (very Currency Exchange in the Eyes of the Shari`ah similar to currencies the exchange of what we call cash crops, and at the time of the Prophet Muhammad (peace and blessings be upon him) the cash crops were wheat, barley, date and dried grape).

Currency exchange is called in Arabic and in the Fiqh literature "sarf" and the rules of sarf are basically derived from an authentic Prophetic Hadith where the Prophet (peace and blessings be upon him) is reported to have said: “Do not sell gold for gold, except like for like, and do not differentiate among it; and do not sell silver for silver except like for like, and do not differentiate among it, and of these, (gold and silver), do not sell something present for something to be later delivered.” (Reported by Muslim)

Contemplating over the words of the Prophetic Hadith, I can say that it introduces two Conditions:

1. The transaction must be completed with delivery at the time of the contract.

2. If you exchange the same currency (or any of the other four commodities), the quantity must be the same regardless of differences in qualities.

The Hadith then requires that any sarf must have immediate delivery at the time of contract of both currencies exchanged.

Based on this, in currencies both long and short are not permissible because both do not fulfill the condition of immediate delivery or what is known in Arabic as yadan bi yad.

Spot currency transactions in the New York (NY) exchange are executed (delivered) within three days. But although this is not literally yadan bi yad, the Organization of Islamic conference (OIC) Fiqh academy rightly considered delivery as immediate because this is the normal time the no-delayed-delivery transaction takes and the followers of the Maliki school of thought argue that a `very short period for delivery does not matter as long as the transaction is not meant to be a deferred one. Having said this, I should ascertain that you should be careful as you were incorrect in thinking that long currency is clear. Rather, long currency transaction is as forbidden as the short because both of them have a period of time for delivery.

Moreover, one more problem in both the long and the short seems to me in need of some clarification.

In Shari`ah, sale contract may delay either delivery or payment but not both; while in the long and short transactions both are delayed and only a margin is paid by both the seller and the buyer. The OIC Fiqh Academy issued a famous resolution on commodity exchange in which it considered both the long and the short in violation of the Shari`ah conditions and it called for taking the Shari`ah known contract of that salam (that requires full payment at the time of the contract) as a basis for any delivery-deferred transaction in commodities. You may notice that the heat of the market is reduced drastically if you eliminate contracting on margins only and this is one of the objectives of the Islamic Fiqh: to bring transactions down to earth and keep them in close ties with reality or actuality."