Shari’ah Model of Foreign Exchange

By Mohd Ma’Sum Billah, PhD, Dr. Faisal Mahmoud Atabani

Abstract

Foreign exchange (FOREX) market is not a new phenomenon in the applied economic environment, which acts as a centre for facilitating legitimate currency conversion from one to another in standard and acceptable value. In a FOREX market, buyers and sellers trade (exchange) one currency with another on a published (indexed) rate of value.[1] As a sale contract, the currency of the seller and the currency of the buyer both position as the consideration in the deal, while the subject matter of the contract is the act of exchanging two different currencies. In Islamic money market such transaction is recognised and is known as al-Sarf, which is justified by the Shari’ah principles.  Allah (swt) directed mankind to exchange goods and utilities through buying and selling (trading) with mutual consent without allowing any wrongful objective or element involved herein. Because, the rational outlook of a legitimate transaction is to ensure a just and comfortable socio-economic status quo for all, besides encouraging mankind to be productive.[2] Allah (swt) thus, commanded to the effect: “O you who believe, do not consume your property among yourselves wrongfully, but let there be trade and traffic by mutual consent…”[3]

The purpose of this research is to discuss the issues pertaining to FOREX or currency exchange model under the Shari’ah principles. The main issue with regard to currency is to establish whether paper currencies fall under thaman haqiqi (gold and silver), or thaman istalahi (inferior metals which serve as means of exchange). If paper money is considered as thaman haqiqi, subsequently, the concept of bai-sarf (exchange) must be applied to them. A further analysis ought to be made to rule out possible issues that facilitate FOREX  (trading) under the broad principles of Shari’ah.

[1]         The foreign exchange market, Institute of Bankers Malaysia (http://www.ibbm.org.my), 20^th March 2000 at p. 1.

[2]         Yusuf al-Qaradawi, The lawful and the prohibited in Islam, Hindustan Publications, India, 1986 at p. 252-253.

[3]         Al-Qur’an, Al-Nisa’: 29.