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The Islamic finance industry has experienced rapid growth over the past few decades, leading to the emergence of various new issues, one of the most prominent being paper money.
Many jurists have justified its use and sought to align it with Shariah principles. In Resolution No. 9 of the OIC Fiqh Conference held in January 2002, it was established that the rules applicable to metallic money, such as gold and silver, also extend to paper money due to its inherent value as itibary money.
This is particularly relevant in matters related to Zakat, Salam, and Riba. However, the permissibility of trade conditions must adhere to the principles governing Bai’al-Sarf.
Numerous hadith mention the concept of Bai’al-Sarf, providing clarity on how foreign exchange transactions can be Shariah-compliant. Well-known hadith narrated from the Holy Prophet (S.A.W) states:
"While exchanging gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, and salt for salt, exchange like for like (in equal measure) and exchange on the spot. Whosoever paid more than what he received or demanded more than what he gave, verily he has dealt in Riba. Both the payee and the receiver are equal in violating the Law of Allah" (Muslim).
The majority of scholars consider any currency exchange transaction involving gold, silver, or any monetary unit to be governed by the rules, terms, and conditions of Bai’al-Sarf.
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In traditional Fiqh books, Bai’al-Sarf is defined as the sale of an absolute price, or "currency," in exchange for another. This includes transactions involving gold for gold, silver for silver, or the exchange of one type for another.
In order to fulfil the requirements of an Islamic currency exchange, several pillars of Bai’al-Sarf must be taken into consideration.
Contracts that fail to meet these requirements will be classified as Bai Fasid, rendering the contract null or void. The pillars are as follows:
1-There must be a buyer and a seller (Aaqidain) who enter into the Bai’al-Sarf contract with mutual consent.
2-Sigha is an Arabic term that signifies both parties’ willingness to enter into the Bai’al-Sarf contract. This means there must be a clear offer and acceptance (Ijab and Qabool) from both parties.
3-There must be merchandise, including the price and goods involved in the transaction.
This is a broad term encompassing every transaction where a commodity and price are exchanged. In the context of Bai’al-Sarf, the item must exist, hold value, and be owned by both parties.
The condition of bai’al-sarf which must be taken into consideration are:
1- The occurrence of mutual assignment (Immediate Exchange (Hand-to-Hand / Spot Transaction)- Taqābudh).
2- The exchange must be done on the spot and deferment is not allowed. (Deferred Exchange (Delayed Payment- (Bay‘ al-Sarf Mu‘ajjal)) – Violates Taqābudh)
3- The offer and acceptance must be free from the khiyar al-shart.
The key difference between Bai’al-Sarf and conventional forex trading is that in Bai’al-Sarf, all terms and conditions are fulfilled according to Shariah rules, ensuring compliance with Islamic principles.
In contrast, conventional forex trading involves elements of uncertainty (gharar), speculation, and riba, all of which are strictly prohibited from a Shariah perspective. The major differences between both contracts are as follows:
i-Taqabuq: In Bai’al-Sarf, both parties must take possession of the exchanged currencies in the same sitting session.
However, in conventional forex trading, possession of the currencies does not take place immediately but is often delayed, leading to riba in the transaction.
ii-Bai’al-Sarf is a transaction-based contract where currency exchange occurs under specific rules and conditions.
In contrast, conventional forex trading is primarily speculative, where traders buy and sell currencies to profit from price fluctuations, often without taking actual possession of the currencies.
iii-Bai’al-Sarf strictly prohibits the short selling of currencies, meaning one cannot sell a currency without owning it. On the other hand, conventional forex trading allows short selling, which is a common practice in the industry.
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i- Both parties must take possession of the counter-value of the currencies during the contracting session, either through actual or constructive possession.
ii- If both counter-values are of the same currency, they must be of equal value.
iii- The contract must be free from any conditional options or deferment clauses regarding the delivery of one or both counter-value currencies.
iii- Currency transactions should not be conducted based on the future or forward market.
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1- Deferment of one or both counter-values of the currencies make the contract invalid.
2- Bilateral promise is not allowed in the exchange of currency if it is binding and promise from one side is permissible even if it is binding.
3- Parallel purchase and sale of the currencies is not permissible, because it incorporates one of the invalidating factors:
3.1 -There is no delivery and receipt of bought and sold currencies.
3.2 -Making the contract of currency exchange binding on another currency exchange contract.
3.3.-Forward, future and options contract is not allowed.
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References
I- Oziev, G., Mohammed, M. O., & Zaidon, M. H. M. (2016). Currency exchange, its Illah and implications. Journal of Islamic Finance, 5(1), 045-052.
II- Manaf, A. W. B. A., & Markom, R. B. (2015). Currency Trading in Modern Islamic Bank in Malaysia. Malaysia: National University of Malaysia.
III- https://aaoifi.com/ss-1-trading-in-currencies/?lang=en
Disclamer:
This post is for educational purposes only, and the Firm does not directly or indirectly provide these services.
