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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:

  1. 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.
  2. 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.
  3. 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.
  4. 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".

Conclusions:
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

Posted in :

fiat money exchanged

initially I thought you made a very interesting point. the fact that currency of different countries can be compared with dates of different qualities whose differential price according to Prophet's SAW teachings can be discovered in the market by exchanging it with goods of different genre. Its clearly obvious though that although this is ideal it would not work in practice even if the global economies were all subscribing to the idea beacuse the system would not be efficient.

on the on other hand, your objection to the buy/sell spreads is preposterous. the whole idea about spreads is that there are matchmakers who bring foreign exchange market to life. these people who match sellers with buyers need to be paid for their services. without them how would you find a counterparty to sell or buy currency overnight?

buy/sell spread is Riba...

I think your take of first impression seems natural that you are also confirming in your subsequent statement calling it ideal; the purpose of message in mentioned hadith is not the one that you have deduced considering it as inefficient for practices i.e., in fact the purpose in adapting via route of market is not the exchange with a different genre but to define the exchange-relation between two qualities through this procedure (some one called it “mark to market” procedure or you can name it ‘valuation’). If the central banks or any other authority defines exchange-rates between currency pairs that will do the procedure though in a different way so there is no issue of efficiency. It is being done today that we all know and is acceptable too.

The buy/sell spread is Riba that is what I am arguing and I think this point of view is not ridiculous as you have labeled. It is a matter of respecting social norms of valuation, such businesses at the cost of social subjugation is not acceptable; there are ways rather more efficient ways to do it for the genuine requirement of people. The harms of forex are evident if one see by neutral eyes not already conquered minds.

EXCHANGE CONTROL(EC )

Salam brother,
Thank you for the reply.
If I am not wrong you are advocating and supporting exchange control.EC is practised by China and was carried out by my country Malaysia.There are huge literature on pros and cons of EC.

For Muslims if EC acts as an effective deterrent to riba and damaging speculation ( Soros ) then it should be adopted without hesitation.The issue here is whether it is effective in the sense that the implementation does not backfire causing severe hardships to Muslims.China could do it because of its size and that US is indebted to it.Saddam tried to do it albeit in a different way but was "cut Off' literally that is.

Ben Othman

NO exchange controls

Br. Ben Othman,
Al Salam Alaikoum!

Good to have your further interaction. Thanks.

Basically the philosophy of any control mechanism allows something to do but within specified limits, do and not-do, if apparatus design to control is not perfect having loopholes and deficiencies which might be a case more often than not for the reason that human beings are fallible creature and so their schemes, it can probably backfire. Since controls are meant to manage allowed activities therefore controls are inefficient and bring corruption with it, for many other reasons as well I am not for any Exchange Control rather to incorporate the single exchange rate (preventive laws) at system level i.e., at the central banks of country which will be auto-run type mechanism not requiring any monitoring or control. Exchanging currencies is the right and real demand of the people which has to be served but currency trading is artificial speculative activity serving no real demand of the people, this is not difficult to implement if will is there, and since this preventive measure is to avoid Riba which is a divine directive so it is not going to backfire. Wassalam

RIBA

AS A LAY MUSLIM I CANNOT DISPUTE THE RULINGS OF ULAMA BUT I CAN DISAGREE. NOW THAT I CAME ACROSS YOUR VIEW I CAN ADD TO IT.NOBODY WOULD AGREE IF I SAID THAT MY 1GRAM OF 22C GOLD = 7 X HIS 1GRAM OF 22C GOLD. SO WHY IS AMERICA'S PIECE OF PAPER = 7 X MY PIECE OF PAPER (ZAR)?? YOU WILL GET A LENGTHY "EXPLANATION" AS TO WHY! COURSES LIKE ACTUARIAL SCIENCE WERE INVENTED TO PERPETUALLY COMPLICATE THIS "EXPLANATION". AN 'ALIM' ON TV ADVISED NOT TO CONVERT OUR SAVINGS TO GOLD BECAUSE ITS VALUE ALSO FLUCTUATES? $800000000000 OF THE PEOPLE'S MONEY GIVEN TO THE BANKERS AND NOBODY BATTED AN EYELID? ULAMA TELLING US THAT WITH RESPECT TO RIBA NABI(SAW) ONLY MENTIONED CERTAIN COMMODITIES SO IF WE ARE DEALING WITH OTHERS???? "THEIR MASAJID WILL BE FULL BUT NO HIDIYAH WILL COME FROM THERE. THEIR ULAMA WILL BECOME THE LOWEST OF THE LOW. THE FASAD WILL EMANATE FROM THEM GO AROUND AND RETURN TO THEM." (SAHIH HASSAN- ALI (RA).

RIBA

Anonymous,
Why are you so streeessed?
And what do you mean ulama talking about negative things? I am from Malaysia,maybe you can enlighten me on something?
Ben Othman

Foreign Currencies are same class/genus

In response to two similar queries raised on IBFnet forum in response to this blog article, my further explanation for treating foreign currencies as same species/genus is appended below:

The two conditions “hand to hand” and “equal for equal” applies to same species/genus i.e., gold for gold, silver for silver, dates for dates etc., yet different values are possible in the same genus due to various available qualities, for example 18k or 22k in gold, “high quality” and “inferior quality” dates that Bilal (RA) exchanged and Prophet (SAW) declared this exchange involving Riba.

I am saying that all fiat currencies are same species having unlike qualities, for the reason that all paper currencies are backed by “trust” or if backed by any commodity like gold, even then they represent the same genre. What makes them different genus (as gold and silver) except different countries of origin? There is no distinctive and definitive internal property to make them different genus, how one can treat them as different genus only because the issuing authority is different? Can we treat the inferior and high quality dates essentially grown on different tree/farm/land/country as different genus?

What argument (dalil) scholars or Fiqh institutions offer to support their position of treating “foreign currencies” as different classes like gold and silver? This position is without argument. Whereas I have given arguments establishing distinct position.

Islamic Legality of Forex Business

It would have been very, very helpful if you had actually quoted the Hadith that you referred to in the article.

You refer to the Hadith, but you don't actually quote it. That's truly unfortunate. I find many scholars do this and it is quite wrong. You make a great many conclusions and give your opinion on a Hadith without actually stating the Hadith.

Quoting mentioned hadith

I wish to quote both – the hadith in Arabic and its English translation, but do not know as how to enter Arabic in this block, for your reference I am trying Romanized Arabic for specific phrases used in hadith articulating the conditions and then providing you English translation with reference so that if you are interested, you can check it by your self. There are several variants of ahadith in similar context.

The Arabic of conditions in below quoted hadith # 3853 says “mithal bi mithal, sawan bis sawa, yaadan bi yad” which means “like for like, equal for equal, and hand to hand”.

You can check hadith numbers 3853 & 3854 in “The Book of Transactions (Kitaab Al Buyu) of Sahih Muslim Volumes.

Hadith # 3853
Ubida b. al-Simit (Allah be pleased with him) reported Allah's Messenger (may peace be upon him) as saying: Gold is to be paid for by gold, silver by silver, wheat by wheat, barley by barley, dates by dates, and salt by salt, like for like and equal for equal, payment being made hand to hand. If these classes differ, then sell as you wish if payment is made hand to hand.

Hadith # 3854
Abu Sa'id al-Khudri (Allah be pleased with him) reported Allah's Messenger (may peace be upon him) as saying: Gold is to be paid for by gold, silver by silver, wheat by wheat, barley by barley, dates by dates, salt by salt, like by like, payment being made hand to hand. He who made an addition to it, or asked for an addition, in fact dealt in usury. The receiver and the giver are equally guilty.

The online link of above ahadith is here: Reference Link

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