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| Shariáh standard on Trade in Currencies |
1. Shari’ah Ruling on Trading in Currencies
1.1. It is permissible to trade in currencies, provided that it is done in compliance with the following Shari’ah rules and precepts:
1.1.1. Both parties must take possession of the counter values before dispersing, such possession being either actual or constructive.
1.1.2. The counter values of the same currency must be of equal amount, even if one of them is in paper money and the other is in coin of the same country, like a note of one pound for a coin of one pound.
1.1.3. The contract shall not contain any conditional option or deferment clause regarding the delivery of one or both counter values.
1.1.4. The dealing in currencies shall not aim at establishing a monopoly position, nor should it entail any evil consequences to the interest of individuals or societies.
1.1.5. Currency transactions shall not be carried out on the forward or futures market.
1.2. It is prohibited to enter into forward currency contracts[1]. This rule applies whether such contracts are effected through the exchange of deferred transfers of debt or through the execution of a deferred contract in which the concurrent possession of both of the countervalues by both parties does not take place.
1.3. It is also prohibited to deal in the forward currency market even if the purpose is hedging to avoid a loss of profit on a particular transaction effected in a currency whose value is expected to decline.
1.4. It is permissible for the Institution to hedge against the future devaluation of the currency by recourse to the following:
1.4.1. To execute back to back interest free loans using different currencies without receiving or giving any extra benefit, provided these two loans are not contractually connected to each other.
1.4.2. Where the exposure is in respect of an account payable, to sell goods on credit or by Murabahah in the currency of the exposure.
1.5. It is permissible for the Institution and the customer to agree, at the time of settlement of the instalments of a credit transaction (such as a Murabahah), that the payment shall be made in another currency applying the spot exchange rate on the day of payment.
1.6. Possession in sales of currencies
1.6.1. When
a contract is concluded for the sale of an amount of
currency, possession must be taken for the whole amount that is the subject
matter of the contract at the closing of the transaction.
1.6.2. Taking possession of one of the counter values by one party without taking possession of the other is not enough to make a currency dealing transaction permissible. Likewise, taking partial possession is not sufficient. Taking possession of part of a counter value is valid only in respect of the part, possession of which is complete, whereas the remaining part of the transaction remains invalid.
1.6.3. Possession may take place either physically or constructively. The form of taking possession of assets differs according to their nature and customary business practices.
1.6.4. Physical
possession takes place by means of simultaneous
delivery by hand.
1.6.5. Constructive possession of an asset is deemed to have taken place by the seller enabling the other party to take its delivery and dispose of it, even if there is no physical taking of possession. Among other forms of constructive possession that are approved by both Shari’ah and business customary practices are the following:
a) To credit a sum of money to the account of the customer in the following situations:
1. When the Institution deposits to the credit of a customer’s account a sum of money directly or through a bank transfer.
2. When the customer enters into a spot contract of currency exchange between himself and the Institution, in the case of the purchase of a currency against another currency already deposited in the account of the customer.
3. When the Institution debits - by the order of the customer - a sum of money to the latter’s account and credits it to another account in a different currency, either in the same Institution or another Institution, for the benefit of the customer or any other payee. In following such a procedure, the Institution shall adhere to the principles of Islamic law regarding currency exchange. A delay in making the transfer is allowed to the Institution, consistent with the practice whereby a payee may obtain actual receipt according to prevailing business practices in currency markets. However, the payee is not entitled to dispose of the currency during the transfer period, unless and until the effect of the bank transfer has taken effect so that the payee is able to make an actual delivery of the currency to a third party.
b) Receipt of a cheque constitutes constructive possession, provided the balance payable is available in the account of the issuer in the currency of the cheque and the Institution has blocked such a balance for payment.
c) The receipt of a voucher by a merchant, signed by the credit card holder (buyer), is constructive possession of the amount of currency entered as payable on the coupon provided that the card issuing Institution pays the amount without deferment to the merchant accepting the card.
1.7. Agency in trading in currencies
1.7.1. It is permissible to appoint an agent to execute a contract of sale of a currency with authorisation to take possession of and deliver the counter value.
1.7.2. It is permissible to appoint an agent to sell currencies without authorizing him to take possession of the amount sold, provided the principal or another agent takes possession at the closing of the transaction, before the principal parties are dispersed.
1.7.3. It is permissible to authorise taking possession of the countervalues after the execution of a contract of currency exchange, provided such possession is completed by the authorised agents at the closing of the transaction, before the principal parties are dispersed.
1.8. Use of modern means of communication for currency trading
1.8.1. Bilateral contracting between two parties at different remote places using modern communication means has the same juristic consequences as execution of the contract in one and ame place.
1.8.2. An offer made for a stated period, which is transmitted by one of the prescribed means of communication, remains binding on the offer or during that period. The contract is not completed until acceptance by the offeree, and taking possession of the countervalues (either actual or constructive) by both parties, has taken place.
1.9. Bilateral promise to purchase and sell currencies
1.9.1. A bilateral promise to purchase and sell currencies is forbidden if the promise is binding, even for the purpose of hedging against currency devaluation risk. However, a promise from one party is permissible even if the promise is binding.
1.9.2. Parallel purchase and sale of currencies is not permissible, as it incorporates one of the following invalidating factors:
a. There is no delivery and receipt of the two currencies bought and sold, and thus the contract amounts to a deferred sale of currency.
b. Making
a contract of currency exchange conditional on
another contract of currency exchange.
c. A
bilateral promise that is binding on both parties to the
contract of currency exchange, and this is not permissible.
1.9.3. It is not permissible for one of the partners in Musharakah or Mudarabah to be a guarantor for the other partner, to protect the latter from the risks of dealing in currencies. However, it is permissible for a third party to volunteer being a guarantor for that purpose, provided this guarantee is not stated in the contract.
1.10. Exchange of currencies that are debts owed by the parties
An exchange of amounts denominated in currencies that are
debts
established as an obligation on the debtor is permissible, if this results
in the settlement of the two debts in place of a bilateral exchange of
currencies, and in the fulfilment of the obligations in respect of these
debts. This covers the following cases:
1.10.1.
Discharge of two debts when one party owes an amount from
another party denominated in (say) dinar and the other party owes an amount
from the first party denominated in (say) dirham. In this context, both may
agree on the rate of exchange between the dinar and the dirham in order to
extinguish the debts, wholly or partially. This type of
transaction is known as al-Muqassah (set-off).
1.10.2. The creditor’s making payment of a debt due to him in a currency different from that in which the debt was incurred, provided the settlement is effected as a spot transaction at the spot exchange rate on the day of settlement.
1.11. Combination of currency exchange and transfer of money
It is permissible to execute a financial transfer of money (remittances) in a currency different from that presented by the applicant for the transfer. This transaction consists of a currency exchange effected through actual or constructive possession by delivering an amount of currency that is evidenced by a bank draft, followed by the transfer of the amount using currency that is bought by the applicant for the transfer of money. It is permissible for the Institution to charge a fee for the transfer.
1.12. Forms of dealing in currencies via Institutions
1.12.1.
Among the forms that are not permitted is the customer
of an Institution entering into currency trading for an amount of money
exceeding the amount of money he owns, using credit facilities granted by the
Institution which handles the currency trading, thus enabling the customer to
enter into a transaction for an amount in excess of what he would
otherwise be able to pay for.
1.12.2. It is not permitted for the Institution to lend the customer a sum of money on the condition that currency dealing must be effected with that Institution and not with any other. If there is no such condition, then there is no Shari’ah prohibition.
[1] A currency forward is a binding contract in the foreign exchange market that locks in the exchange rate for the purchase or sale of a currency on a future date. A currency forward is essentially a customizable hedging tool that does not involve an upfront margin payment
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