Islamic Legality of FOREX business?
On a regular basis, I receive inquiries from visitors of my website asking for the legality of forex business from Islamic point of view, sometimes the hammer is straight – is it halal or haram? It looks these callers had done some Internet research on the subject and still searching for an answer or need to explore other point of views. Even though it is not my jurisdiction to fix on the matter however since I have an explanation that is conceptual instead of focused legal tweaking and is different from other learned Islamic experts’ plus many private callers (in email) seem satisfied with my approach, so it might be helpful for a larger audience to post it here.
A brief summary of these kinds of Q & A as observed is:
What callers seek primarily:
Do forex or money-exchange businesses involve Riba?
How learned experts classify it mostly:
Foreign currency if traded on-spot with full settlement of account – is permissible; if traded with margin or delivery is deferred then impermissible.
All money transactions in Islamic jurisprudence (Fiqh) are covered under the contract of Sarf which is based on a single famous hadith of six commodities articulating two major conditions of “hand to hand” and “equal for equal” exchange. The learned Shariah Board Scholars of IFIs seem highly concerned with “hand to hand” condition and they simply translate it as “spot and full settlement” but they don’t discuss “equal for equal” condition as what it stands for? Have they reached some undisclosed consensus for “not to discuss or explain this condition”? I have no idea. Ironically for today’s IFIs operations, one of the two foreign currencies in transaction is treated as “commodity” by these experts which is simply abusing of Fiqh, why? Just to replicate the practice of treasury’s dealing of conventional banking to their Islamic counterparts.
The neglected “equal for equal” condition of well-known hadith says - there exists no possibility of pricing the exchangeable commodities, it further translates that the conversion exchange-rate between a pair of currencies shall only be one i.e., only official exchange-rate is valid and the lower buy and upper sell rates are invalid. The exchange of foreign currencies shall be carried out this way as hadith demands; it is evident now where currency trading will plunk?
Let me offer few more thoughts to consider in this case:
- Currency is not considered as a commodity which is agreed vision of almost all school of thoughts in Islamic economic ideology. Let us however consider it as a commodity even then all paper currencies are ONE commodity principally - PKR, SAR, AED, USD, Euro, PSTG, etc. etc., all are same because they all are fiat currencies only backed by "trust", even if backed by "gold" or any other commodity, the genus is same, only quality may be different.
- While treating currency/money as commodity, it is sure that some one in the system is free to set the price of this commodity and if one can price money/currency then what else is riba. If I can price my dollar today for more than a dollar tomorrow, then why it is interest/riba? There are two types of transactions where riba can be involved, one is a loan and the other is exchange (swap). Riba in loan transactions is reasonably understood, but riba in exchange is not yet recognized clearly, we are basically mislead by the term "trading" in currency business, when we don't accept it a commodity (or different commodities) then there is no possibility of trading, it can only be exchanged and exchange must be equal and hand to hand. The bid and offer rates are the front end mechanics required for currency business but does not conform to the above rule stipulated in noble hadith.
- One of the main function of the currency/money has remained the unit of account through out history for pricing products, commodities, services etc., we all know the use of gold and silver as currency/money and as a reference for defining prices. Do you not think that we are in an era where the pricing reference is changed on minute by minute basis? We have replaced a real intrinsic value currency with a fiat currency, and the worst thing is that because of changing its value minute by minute, we are changing the reference of pricing accordingly, how much distortion is created in the economy with this artificial behaviour defined for currency/money. In my views, this is very unrealistic and one major cause of economic problems in today’s time since we do not have a universal stable reference for pricing, and if we can solve this issue fairly, we can overcome many economic problems and miseries.
- Unfortunately, we all are not observing the devastating results of currency business, you may visit the BIS (Bank for International Settlement) of Basel website to get the statistics on daily forex trade volume, link here, shocking more than 3 trillion dollars daily exceeding several times the physical trade size of the world, calculate the minimum yield of forex trade in PIPs and do your research, how much value in terms of any currency is eroded daily? Who's money is that? Who's bearing the loss of value? You can’t ignore the vital condition of hadith.
For business purposes, such easy and powerful money earning mechanics is appealing and practiced all around including Islamic Banks, but I can assure you that if we keep on justifying such activities, we are about to see "Islamic Capitalism".
In my understanding, Islamically foreign currencies can only be exchanged on official declared rates and can’t be traded on different buy/sell rates.
I have tried to explore this particular noble tradition from a different perspective in my paper titled as “Riba and Hadith of Six Commodities”, you can download it from ssrn.com at http://ssrn.com/abstract=1790222
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