Does trading in currencies possible in Islamic finance?

CONTINUED financial deals for generated income have emerged as a source of survival for improved integrative well-being. Owing to differences sourced from our differed knowledge, skill and ability (KSA paradigm), the paradoxically thought alleges the greatness of filling a different space and time for wellness – rating individuals from a low of KSA to a high of KSA.

More importantly, trade-based human interaction is broken down into three proliferated thoughts, implying we learn to complement each other's to make a better life.

Led by an exchange of a commodity for a commodity, the transacting parties perform a barter system or SWAP financially. A transaction is called SALE when one exchanges a commodity against money – placing weight on the making of a commodity, which is later mapped using the money for pricing and quantity determinations.

Today, many believe about the importance to create new or at least innovative alternatives to generate side income to improve their financial security. One of them is through MONEY EXCHANGES, not only to generate a complemented source of income per se but also enjoying the experience and benefit (EB) emanated from the behaviour and later, if any, it is shared online via social media platform for ephemeral leisure (EL).

The focal point here is whether exchanging money against money is permissible or not in today's Islamic finance. If so, what are conditions apply? What would be the components? What would be the potential occurred issues ahead?

Our focus is on the term sarf or bay al-sarf. By definition, bay al-sarf refers to a contract of exchange of money for money of the same or different type. Thus far, Bank Negara Malaysia (BNM) has issued Shariah requirements for the transaction and the same goes to the AAOIFI by divulging a standard to govern the transactions.

It is acknowledged via the saying of the PROPHET MUHAMMAD PBUH'S HADITH, who said that “Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, salt for salt – like for like, equal for equal and hand to hand; if the commodities differ, then you may sell as you wish, provided that the exchange is hand to hand” (Muslim & Tirmidhi).

Briefly, the rules of bay al-sarf can be clarified as follows: First, when the money is exchanged to same type money, the conditions are [1] on the spot, and [2] at par.

Practically, it is an eerie sample of example but theoretically is adequate to justify the formation of the ruling for a better grasp that insinuates the currency trading permissibility in Islamic finance.

Second, when one piece of money is exchanged to another type of money, the condition used is “on the spot”. For instance, if the current exchange rate between Malaysian Ringgit (MYR) and Indonesian Rupiah (IDR) is RM1.00=IDR3,546.33 – the inequality of quantity is permitted but spot exchange.

To turn on, bay al-sarf has three equally weighted components. The details are provided.

FIRST, the contracting parties in bay al-sarf should be a seller and a buyer. The parties committed shall be a natural person or a legal entity that must have the legal faculty to enter into the contract concerned.

SECOND, offer (ijab) and acceptance (qabul) should be convenient and endured during the time of the transaction departs. The offer and acceptance may be formulated orally, in writing or by any other methods recognised by Shariah.

THIRD, the currency is the subject matter, which is delivered by the contracting parties during the contract session. The currency used shall be determined and reciprocally agreed by the contracting parties at the time of the contract execution.

More importantly, it is lawful to trade in currencies provided that it is done in compliance with the following SHARIAH RULES that breeds Shariah compliancy. The details are provided.

FIRST, both contracting parties must take ownership of the countervalues before scattering, such possession being either genuine or constructive.

SECOND, the countervalues of the same currency must be of equal amount, even if one of them is in paper money and the other is in the coin of the same country – similar like a note of one MYR for a coin of one MYR.

THIRD, the contract involved shall not contain any conditional option. The contract shall not contain any “deferment clauses” about the delivery of one or both countervalues.

FOURTH, the dealing in currencies is not aimed at fastening a monopoly position nor should it necessitate any sinister outcomes to the interest of individuals or societies.

FIFTH, it is worth noting that the trading is not being carried out on the forward or futures market.

Though admissible, trading in currencies breeds some negative issues that need further consultations to bypass any intense assumptions that mar the well-being of the contracting parties.

Of course, the acquisition of formal learning on the trading system is now vital. Without peculiar educational measures, one might bend to work on riba when the trading is not fitly established according to Shariah. The current writeup is itself an educational handout to spark an improved knowledge about it. The key is a soul reading.

There is also a need for acculturation of Islamic ways of trading in currencies (ITCs) to serve as the engine to engage in the ruling when transacting currencies among the parties concerned, to be adverse against Shariah noncompliance risk and be sharp to grow the ITCs.

To sum up, Shariah demands delivery to be made on the day of the contract, where two conditions apply – be it “on the spot” or “at par” are both equally observed. At one point, standards or guidelines sourced from BNM and AAOIFI is a sign that Islamic finance is not immune from Shariah non-compliance risk and the subjectivity of human conducts.

To realise the ITCs' potentials, leveraging on their prospects and challenges are of utmost importance. The primary focus under this approach is both ethical and Shariah-compliant ITCs, which is vital in advancing the industry, at least.

*The author is an Associate Professor at the Labuan Faculty of International Finance, Universiti Malaysia Sabah, Labuan International Campus. He has a PhD from the International Islamic University Malaysia (IIUM) in Islamic Banking and Finance (PG310163). He can be contacted at This email address is being protected from spambots. You need JavaScript enabled to view it.

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