Currency Trading in Islam View@Unikl

ISLAMICE ECONOMIC AND FINANCE ( EBB10203)
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(1) What is Currency trading?

The Currency trading market is a multi-trillion dollar market where world currencies are
exchanged back and forth on a daily basis. Retail currency trading is typically done through
brokers and market makers. Traders can place trades through their brokers who will in turn place
a corresponding trade on the interbank market. Currency values can change for many reasons.
Sometimes they react to political and economic news, sometimes they are driven by speculators,
and sometimes they are driven by international business flows.
If companies in the United States are importing large quantities of products made in Europe, they
will need to exchange their US Dollars for Euros to pay for the products. When this is done in
very large quantity over a short period of time, it raises the demand for Euros and the value of
the Euro versus the US Dollar increases. This happens because dollars are being sold on the open
market, while Euros are being bought.
Currency trading can be very risky. Currencies tend to be very volatile compared to other
markets. The real key to success with currency trading is to use conservative risk management.
There are many components to effective currency risk management, but the bottom line is to use
caution and have a trading plan.
Currencies are traded by individual retail investors, financial institutions, and corporations doing
business. Retail investors and banks are trade to make profits and corporations usually trade in
the normal course of the international business process.

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(1) Currency Trading In Islam View

There also seems to be a general agreement among a majority of scholars that on the view
currency exchange on a forward basis is not permissible, that is when the right and obligations of
both parties relate to a future date. However there is considerable difference of opinion among
jurists when the rights of either one of the parties, which is same as obligation of the
counterparty, is differed to a future date.
To elaborate, let us consider the example two individuals A and B who belong to two different
countries, Malaysia and US respectively. A intends to sell Malaysia Ringgit and Buys US dollar.
The converse is true for B. The Ringgit - Dollar exchange rate agreed upon is 1:20 and the
transaction involves buying and selling of $50. The first situation is that A makes a spot payment
of RM 150 to B and accepts payment of $50 form B. The transaction is settled on a spot basis
from both ends. Such transactions are valid and Islamic ally permissible. There are no others
opinions about the same.

The second possibility is that settlement of the transaction from both ends is differed to a future
date, say after six months from now. That implies that both A and B would make and accept
payment of RM 150 or $50, as the case maybe, after six months. The predominant view is that
such a contract is not islamically permissible. A minority view considers it permissible.

The third scenario is that the transaction is partly settled from one end only. The example, A
makes a payment of Rs1000 now to B in lieu of promise by B to pay $50 to him after six months.
There are diametrically opposite views on the permissibility of such contacts which amount to
BAY' el-SALAM in currencies

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(2) Permissibility of currency trading transactions

In Islamic finance, there is a general consensus among Islamic scholars on the view that
currencies of different countries can be exchanged on a spot basis at a rate different from unity,
since currencies of different countries are distinct entities with different values or intrinsic worth,
and purchasing power.
However, there were diametrically opposite views, in the past, on the permissibility of
currency exchange on a forward basis, that is, when the rights and obligations of both parties
relate to a future date. The divergence of views on the permissibility of currencies exchange
contracts can be traced primarily to the issue of existence of the following elements; Riba
(usury); Gharar (excessive uncertainty); and Qimar (speculation/gambling). Riba in currency
trading
Regarding the comparison with Riba, some jurists compare paper currencies with gold
and silver, which were universally acceptable as principal means of exchange in the early days of
Islam. They refer to hadith of the holy prophet (peace be upon him) "Sell gold for gold, silver
for silver... in same quantities on the spot; and when the commodities are different, sell as it suits
you, but on the spot."

However, the case of exchange involving paper currencies belonging to different
countries, the intrinsic value or worth of paper currencies cannot be identified or assessed unlike
gold and silver which can be weighed. Hence, the Sharias injunctions for Riba prohibition are
not applicable to paper currencies. Such exchange would be permissible as long as it is free from
any injunction regarding the rate of exchange and the manner of settlement.

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(3) Ghrarar (Uncertainty) and Qimar (speculative) in currency trading

Regarding Gharar and speculation, the prohibition of futures and forwards involving
exchange of currencies is justified by the fact that such a contract involves sale of a non-existent
object or of an object not in the possession of the seller. Some recent scholars have opined that
futures, in general, should be permissible, because the efficient cause, that is, the probability of
failure to deliver was quite relevant in a simple, primitive and unorganized market.

However, this should be no longer cause for concern in todays organized futures markets
where the standardized nature of futures contracts and transparent operating procedures on the
organized futures markets are believed to minimize this probability of failure.

Nevertheless, such contention continues to be rejected by the majority of scholars; they
underscore the fact that futures contracts almost never involve delivery by both parties. On the
contrary, parties to the contract reverse the transaction and the contract is settled in price
difference only.

In addition, regarding the forecast ability of exchange rates, they are volatile and remain
unpredictable at least for the large majority of market participants. And any attempt to speculate
in the hope of the theoretically infinite gains would be a game of chance for such participants.

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(4) Currency trading in Islamic banks

Islamic banks exchange currencies on the spot in transactions such as a bank transfer or
remittance expressed in a foreign currency, payment for goods imported from another country,
payment for services billed in a foreign currency, in the case of a sell or a purchase of a foreign
currency in cash or travelers cheque or bank draft against another currency, or when a client
deposits a cheque or bank draft made out in a foreign currency and requires payment in local
currency.

In addition to spot transactions, a currency trading transaction may be undertaken by
banks on the basis of forward contracts, futures contracts, option contracts, swap contracts and
currency arbitrage. Even though, some of these transactions are controversial as Islamic financial
instruments, because it is arguable that the element of speculation and interest is built into these
contracts.

Also, while there are normally no up-front costs involved with currency trading transactions,
Islamic banks still derive a financial benefit by incorporating a margin into the transaction or the
contract rate. This means that the banks rate may be different from the market rate prevailing at
that time, whereby the bank makes a profit on a transaction.

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(5) Hedging tools

Today currency markets are characterized by volatile exchange rates. In a volatile market,
the participants are exposed to currency risk and Islamic rationality requires that such risk should
be minimized in the interest of efficiency if not reduced to zero. Islamic currency trading
hedging mechanisms are designed to achieve the objectives of the conventional currency hedging
contracts while being in conformity with the Islamic commercial jurisprudence principles. This
implies the need to ensure that the contract is free from Riba, Gharar and Maysir. Some these
mechanisms are:

A forward contract involving currencies allows one currency to be sold against another,
for settlement on the day the contract expires; it eliminates the risk of fluctuating exchange rates
by fixing a rate on the date of the contract for a transaction that will take place in the future.

A futures contract involving currencies is an agreement to buy or sell a particular
currency for delivery at an agreed-upon place and time in the future; however, these contracts
very rarely lead to the delivery of a currency, because positions are closed out before the delivery
date.

A foreign currency option is a hedging tool, similar to an insurance policy that allows
one currency to be exchanged for another on a given date, at a prearranged exchange rate,
without any obligation to do so; foreign currency options eliminate the spot market risk for
future transactions.

A swap contract involving currencies is an agreement to exchange one currency for
another and reverse the exchange at a later date; it is based on a notional principal amount, or an
equivalent amount of principal, that sets the value of the swap at maturity but is never
exchanged; Currency swaps are used to gain liquidity.

Currency arbitrage aims to take advantage of divergences in exchange rates in different
money markets by buying a currency in one market and selling it in another market to take
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benefit of the differing interest rates.

From the Sharias viewpoint, the problem with the above structures arises when the parties
involved want to exchange currency sometime in future but already fixing a rate which is fixed
today while the contract is sealed today. This contravenes to the basic Sharias rules governing
the exchange of currency (Bai` Sarf). In Bai` Sarf, it is a requirement for an exchange which
involves two different currencies to be transacted on spot basis. Hence it is prohibited to enter
into forward currency contracts whereby the execution of a deferred contract in which the
concurrent possession of both the counter values by both parties does not take place.
Nevertheless, in order to minimize the risk of uncertainty of prices in the future, forwards,
futures, options and swaps markets for currency-trading have also emerged for Islamic banks
although the general ruling of Sharias scholars is that hedging is not permissible.

Yet, these objections may be arguable, since hedging helps to eliminate Gharar by enabling the
importer to buy the needed foreign exchange at the current exchange rate, since Islamic banks
only invest the foreign currencies purchased by them in a Sharias-compliant manner as far as is
possible and since the principle of protection of wealth is respected. In addition, genuine
speculation is allowed in Islam, as opposed to professional speculation, where the speculator is
not a genuine investor.

Most of the Islamic financial contracts provided by Islamic banks will be exposed to foreign
exchange fluctuations arising from general currency trading spot-rate changes in foreign
operations and the resultant foreign currency receivables and payables. Islamic banks can charge
fees based on various Islamic contracts and to curb speculation and misuse, hedging could be
confined to foreign exchange receivables and payables related to real goods and services only.

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(6) Islamic currency trading Swap

The swap introduced by Islamic banks, based on concepts such as Waad, Murabahah,
Musawamah and Tawarruq is deemed by scholars as permissible as long as it is free from
elements that contravene the Sharias, and for the purpose of fulfilling the need for hedging.

Therefore Sharias parameters in structuring and executing swap are very important to
ensure market practitioners truly fulfill and adhere to the requirement outlined by Sharias. Two
broad categories of Sharias parameters on Islamic currency trading Swap are suggested, namely
the guidelines on combining various contracts in one single transaction and the other is on
guidelines of how to demarcate Islamic swap purposes either to hedge or to speculate.

The two commonly offered structures of Islamic currency trading Swap in the market are
based on the contract Bai` Tawarruq or the concept of Waad (promise/undertaking). The
arrangement based on Tawarruq it is structured with the application of two sets of Tawarruq (at
the beginning) to enable the same effect as currency trading Swap to be achieved.

While the second structure based on the concept of Waad involves exchange of
currencies at the beginning, and promise or undertaking (Waad) to carry out another Bai` Sarf at
the future date based on the rate determined today. At the expiry date, the second Bai` Sarf will
be implemented to get back the original currency.

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(7) Currency Trading Law In Malaysia
The National Fatwa Council ruled currency trading by money changers or between banks was
allowable but trading by individuals creates confusion among the faithful. Council chairman
Abdul Shukor Husin warned there are many doubts about it (currency trading) and it involves
individuals using the Internet, with uncertain outcomes,. A study by the committee found that
such trading involved currency speculation, which contradicts Islamic law, he was quoted
saying. A council official confirmed the ruling to AFP but gave no further details. Islam lays out
a strict code of ethics for business that forbids speculation and usury.
Three Method of Exchange Market Entry
Generally, there are three methods for traders participating in the foreign exchange market that
is:
I. Spot Market
Spot currency market is a fundamental way for currency trading. Spot market means buy a
currency with another currency with instant delivery. Spread means the difference between the
bid price and the ask price of currency. Spot market transactions are usually settled within two
banking days. Spot market is more liquid than the futures market.
II. Currency Futures
Currency forward sale and purchase agreement involving contract value in a standard size
.These futures contracts may also involve cross rate (cross rate) between some currencies such
as the Saudi Arabia (Riyal) and Ringgit Malaysia. Currency bid prices at the futures market is
the same for all regardless of neither the individuals, companies, brokers, banks nor the central
bank.
A trader wishing to buy and sell futures contracts must pay initial margin through their broker
before making any transactions.
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III. Currency option
Currency options offer the right to buy or sell a currency at a set price. There are two types of
options, namely call options and put options. Currency Option may be sold and purchased
through a broker. Brokers will charge a commission based on the number of contracts bought
and sold. Besides the exchange, options are also traded over the counter (OTC). The
characteristics such as the type of currency, currency unit, the strike price and maturity of the
options explained in the contract according to customer demand.

IV. Swaps
Buy and sell at the spot price and the forward price of done simultaneously.
HUKUM AND LAW CURRENCY TRADING IN ISLAMIC

From Abu Sa'id al-Khudri r.a that the Prophet had said: "Do not sell gold for gold except total
(weights) similar (sold) with a similar amount, and do not you have preferred one of them
against the other, and do not sell silver for silver except amount (weight) that is identical with a
similar amount, and do not you have preferred one of them against the other, and do not sell it in
the event of one (the exchange of goods) there (in the contract) and one of been delivered
immediately. "
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(8) Riba (Interest/Usury)
An-Nisai reported on the authority of Ubada Ibn as--Samit that the Messenger of Allah (SAW)
said: Gold for gold, ore and coins alike, weight for weight, and silver for silver, ore and coins
alike, weight for weight, and salt for salt, dates for dates, wheat for wheat, barley for barley,
equally and similarly; so he who were to increase or take an increase, he would fall into usury.
The hadith has explained the situation in which prohibition applies, which is the difference of
weight in gold and silver, and the difference of volumetric measure in wheat, barley, salt and
dates; this is a determination of what type of things the exchange i. e the trading takes place, not
a reason for the prohibition.
As for the evidence that usury can only take place in the six mentioned items, this is
derived from the general consensus of the Sahabah and because Muslim reported on the authority
of Ubada bin as-Samit that the Messenger of Allah (SAW) said: The gold for gold, the silver for
silver, the wheat for wheat, the barley for barley, the dates for dates and the salt for salt; like for
like, measure for measure and hand for hand (i. e. immediately) and if they differed sell as you
wish as hand to hand. The general consensus of the Sahabah and the hadith have mentioned that
specific things are subject to riba, thus it cannot occur except within these things.
(1) As for the Messenger of Allah (SAW)'s hadith reported by Muslim on the authority of
Mumar bin Abdullah: "The food for food, in equal quantities", and the hadith reported
by Ahmed on the authority of Abu Said Al-Khudri that the Messenger of Allah (SAW)
divided among them different types of food, some of which was better than the other, so
he said: We started bidding amongst ourselves so the Messenger of Allah (SAW)
prohibited us from doing so and ordered us not to trade in it except by measure for
measure with no increase whatsoever, as well as the hadith reported by An-Nisai on the
authority of JAbur that the Messenger of Allah (SAW) said: "A heap of food must not be
traded for another heap of food, nor the heap of food for the fixed measure of food"; all
these Ahadith do not indicate that the reason of prohibition is the food.
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(2) And it would be wrong to say that usury in wheat, barley, dates and salt is forbidden
because such items are estimated in volumetric measure, thus making the reason of
prohibition the fact that such types of foodstuffs are estimated in volumetric measure; this
is wrong because the weight and measure were mentioned in the hadith as a description
to those types of foodstuffs and not as a reason.

(3) Therefore, if usury occurred in every type of food, the above mentioned foods would
have been the subject of usury; this indicates that the hadith of food is general and usury
occurs in the types specified by the Messenger of Allah (SAW) in his saying : "The
wheat for wheat, the barley for barley, the date for dates.. "..

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(9) Currency Trading (Sarf)
If we were investigate all the varying types of trade contract of a financial nature, existent in
world markets, we would find that purchase and sales transactions occur in six types:
1- The exchange of a currency with the same type of currency, such as the exchange of old Iraqi
dinar notes for new notes.
2- The exchange of one currency for another currency, such as the exchange of the Egyptian
pounds for dollars.
3- The purchase of certain goods with a certain currency and the purchase of that currency with
another currency, such as the purchase of aircraft with dollars and the exchange of those dollars
for Iraqi dinars in one single deal.
4- The sale of certain goods in sterling and then exchanging them for dollars.
5- The sale of certain bonds in a certain currency.
These five transactions are trade contracts of a financial nature. As for the purchase and
the sale of bonds and shares, this is categorically forbidden under the Shari'ah rules, for the
bonds have a determined rate of interest thus usury occurs in them; it is even in itself, a usurious
transaction. A stock represents a part ownership in a company that is unlawful in the first
instance, thus trading in stock is forbidden, and it is also forbidden to deal in the stock of all the
public companies, whether these were companies that deal in lawful trade, such as the industrial
and commercial public companies, or companies that deal in unlawful trade such as the banks'
stocks. As for the purchase of goods with a certain currency, the exchange of that currency for
another, or the sale of certain goods for certain currency and then exchanging that currency for
another currency; these represent two transactions, a transaction of purchase and sale and a
transaction of exchange; therefore they follow the rules of trading and exchange, and they should
be subject to the separation of the deal.
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The sale of one currency for another is a transaction of exchange, and it is permitted; this
is so because exchange is the swapping of money for money, from gold and silver, either equally
by its own type, or differently and equally by other than its type. The exchange takes place in the
money as it takes place in gold and silver, for the description of gold and silver applies to it in its
quality as a currency, money is not analogous to gold and silver but is one of its forms, for it is
based on either of them in their monetary valuation.
So if a person were to purchase gold for silver, coin for coin, by saying for instance: I
sold to you this golden dinar for these silver dirhams, by nominating them while present at the
time of sale, or if he were to purchase gold for silver, for other than its coins, as when signing a
contract on a described monetary item while not being present, and he says: I sold to you this
Egyptian pounds for ten Hijazi dirhams, these examples are permitted, for the monies are
determined in the contracts, thus the ownership of the assets is established.
Therefore, trading gold for silver is permitted, whether this was pounds for dirhams,
silver jewellery or for Niqar (i.e. silver dust). The Niqar is the silver equivalent of Tibr (i.e. gold
dust). It is also permitted to trade silver for gold, whether jewellery, bullion or gold dust.
However, all such trade must be conducted hand to hand and described, either equally or
unequally, weight for weight, or known quantity (Jizaf) for known quantity, or weight for known
quantity in all the mentioned types, provided the exchange is in two different types, for if they
were from the same type, this can only be equal and should not be unequal. Gold could be traded
for gold, whether this were dinars, jewelry, bullion or ore, weight for weight, substance for
substance, hand to hand, and in principle, quantitative disparity is not permitted. Silver could
also be traded for silver, be it dirhams, jewelry or Niqar, weight for weight, for description, hand
to hand, and quantitative disparity is also not allowed in principle.
Therefore, the exchange between the same types of currency is permitted, provided that
it is equal, hand to hand and description for description. The exchange between two different
currencies is also permitted and in this case, the condition of equality and disparity does not
apply, but this must be exchanged hand to hand, and description for description.
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Evidence for the permissibility of exchange is derived from the hadith reported by At-
Tirmidhi on the authority of Ubada bin As-Samit who said that the Messenger of Allah (SAW)
said: You may trade gold for silver as you wish, hand to hand. Muslim also reported on the
authority of Ubada bin as-Samit who said: I heard the Messenger of Allah (SAW) forbid the
trading of gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, salt
for salt, unless this was in equal quantities and description for description. He who increases or
takes an increase would fall into usury (riba).
Muslim also reported on the authority of Abu Bakra who said: He (SAW) has ordered us
to buy gold for silver as we wished, and to buy silver for gold as we wished. A man asked him
(SAW) so he said: Hand to hand. He added: That is how I heard it. At-Tirmidhi reported on the
authority of Malik Ibn Aws Al-Hadathan who said: I came asking who would exchange some
dirhams, whereupon Talha Ibn Ubaydullah as he was sitting with Umar bin al-Khattab, said:
Show us your gold, and then come to us at a later time, when our servant would come we would
give you your silver (dirhams). Upon this Umar said: No by Allah, you shall give him his silver
coins or return his gold to him, for the Messenger of Allah (SAW) said: Exchange of silver for
gold has an element of riba in it unless it is exchanged hand to hand, wheat for wheat is riba
unless it is hand to hand, barley for barley is also riba unless it is exchanged hand to hand and
dates for dates is also riba unless it is hand to hand.
It is therefore forbidden to trade gold for silver except hand to hand, for if the two trading
parties parted company before they exchanged hand to hand, the exchange would be unlawful.
Bukhari and Abu Dawud reported on the authority of Umar that the Messenger of Allah (SAW)
said: Exchanging gold for silver is riba except hand to hand.
It is conditional that the two contracting parties cash in at the place of negotiation, for once they
separate prior to the cashing in, the sale would not lawfully be considered to have taken place;
this is so because the exchange is the inter-trading of prices, and to cash in at the place of
negotiation is a prime condition for the exchange to be valid. Bukhari reported on the authority
of Malik Ibn Aws who said: The Messenger of Allah (SAW) said: Trading gold for silver is riba
unless it is hand to hand. At-Tirmidhi also reported that the Messenger of Allah (SAW) said:
Trade gold for silver as you wish, as long as it is hand to hand.
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The Messenger of Allah (SAW) has prohibited the trading of gold for silver in credit, and has
also prohibited the trading of an absent substance for a present one. Therefore, the exchange
must take place at the place of negotiation, for if the contracting parties separated before cashing
in, the exchange would be invalid due to the non-fulfilment of one of its main conditions. If
however, part of the deal was exchanged at the place of negotiation, the deal would then be
partly valid to the extent of the exchanged amount and its equivalent on the opposite part of the
deal, and it would be invalid for the remainder of the deal and its opposite part of the deal. This
is so because it is permitted to divide the deal into parts.
For instance, if a person exchanged one dinar for ten dirhams with a person who has only five
dirhams, it would be invalid for them to separate before the full ten dirhams are cashed in. If the
five dirhams were cashed in and they separated, the exchange would be invalid for half the
dinars and valid in the other half, equivalent to the five dirhams which have been cashed in, this
is because it is permitted to divide the deal of sale. If the person with the five dirhams borrowed
the remainder of the money from the other person or a third party, to complete the deal, the
exchange would be valid, as long as the borrowed sum does not constitute a condition in the
deal, for if it was a condition in the deal, it would be invalid.

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(10) Exchange Transaction
No matter how numerous and varied the transactions of exchange are, they would always
be confined to the trading of one currency for another of the same type, or the trading of one
currency for another of a different type. The transaction only occurs either between ready cash
for other ready cash, or between a "dhimma" (credit or security) for another credit. The exchange
cannot take place between cash and a credit. When the exchange transaction takes place, it
becomes effective once the contracts and the cashing in have taken place, and neither of the two
contracting parties can go back on his word, unless it became established that there has been a
case of serious fraud or defect, in which case it is permitted for one of the contracting parties to
withdraw from the deal.
If, for instance one of the contracting parties found a defect in that which he had
purchased, for example he found that the silver he had bought contained copper, or that the silver
turned black, he has the option to return the goods he had bought or to accept them based on the
agreed price at the time of the transaction. This means that the returning of goods is allowed as
long as it is at the same rate as the time of the deal. If one of the contracting parties accepted the
goods, the transaction would be valid, and if he decided to return them, the deal would be
cancelled.
If, for instance one bought 24 carat gold for 24 carat gold, only to find that the gold purchased is
only 18 carats, this would be considered fraud, and in this case he would have the choice of
either accepting the deal at the agreed price of exchange at the time of the transaction or rejecting
it. So, if the person who exchanged the gold for gold decided to accept the gold with its defect at
a discount, this would not be allowed because there would be a higher value placed on one of the
two commodities, and there is an absence of equivalence which is a condition of a deal of the
"same type".

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Another example would be if an indebted person said to his debtor: "Reduce some of my
debt and I will hurry in repaying the remainder of the debt." This is also not allowed because it
would be the trading of a ready sale for a future sale without equivalence i.e. it is as if the
indebted person sold his debt "promptly" to his debtor for less than the original transaction, thus
creating a disparity which is "riba". Likewise, if the debtor said to the indebted: "I would give
you ten dirhams if you accelerated the repayment of the 100 you owe me", this is not allowed
because there would be a disparity in the value which is riba. Muslim reported on the authority of
Abu Said Al-Khudri that the Messenger of Allah (SAW) said: "Trade gold for gold, silver for
silver, wheat for wheat, barley for barley, dates for dates and salt for salt, like for like, and hand
to hand, for whoever increases or takes an increase will fall into riba, for the taker and the giver
alike."

Other example, such as would be if one person owed another gold and the latter owed the
former silver, and they exchanged what each owed the other i.e. if the former settled what he
owed in gold with what he is owed in silver, this type of exchange would be lawful, for the
immediate payment of debt is like the immediate payment of goods. Also, if a person bought
goods in gold, and the seller cashed the value of the goods in silver, this type of transaction
would be permitted, for it would be permitted to settle one of the currencies by another currency,
and this (deal) would be an exchange with an asset and debt (credit), this is so because Abu
Dawud and Al-Athram reported in their "Sunan" on the authority of Ibn Umar who said: I used
to trade in camels in the Baqee, so I would sell in dinars and get paid in dirhams, or sell in
dirhams and get paid in dinars. I would take this from that and give this from that, so I went to
the Messenger of Allah (SAW) at Hafsas house, and I said: O Messenger of Allah will you
please listen, I want to ask you. I sell camels in the Baqee, I sell in dinars and get paid in
dirhams or I sell them in dirhams and get paid in dinars. I take this from that and give this from
that. The Messenger of Allah (SAW) answered: There is no harm in this as long as you trade
according to the market value of the day and as long as you do not part company from the other
party with something still outstanding between the two of you." (Malaysia, 2010)

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Also, if a person bought from another a genuine dinar for two fake dinars, this would not
be allowed. However, if he bought a genuine dinar for silver dirhams, then bought with the
dirhams two fake dinars, this would be allowed whether he bought them from the same person or
from another. This is so because Muslim reported on the authority of Abu Said who said: Bilal
came to the Messenger of Allah (SAW) with some Barni (fine quality) dates, so the Messenger
of Allah (SAW) enquired: Where did this come from? Bilal replied: These are dates of inferior
quality we had for some time, and I exchanged two saas of inferior quality for one saa of fine
quality as food for the Messenger of Allah (SAW). Upon this the Messenger of Allah (SAW)
said: Woe this is real riba so do not do that. If you wish to buy dates of superior quality, you
could sell the dates of inferior quality in a separate bargain and then buy the superior quality.
Also, Abu Said and Abu Hurairah reported in an "agreed upon" hadith that the
Messenger of Allah (SAW) appointed a man as a tax collector over Khaybar, so he came to him
one day with some fine quality dates called Janeeb. Upon this the Messenger of Allah (SAW)
said: Are all the dates of Khaybar like this? He said: No, by Allah, O Messenger of Allah! We
buy the one Saa of these fine quality dates for two Saas of inferior dates and the two Saas of it
for three Saas. Upon this the Messenger of Allah (SAW) said: Do not do this; rather sell the
inferior quality of dates you have for dirhams and then buy the Janeeb dates with the help of
dirhams.
Here, the Messenger of Allah (SAW) did not order the man to sell his dates to a person
other than the one he would buy them from, and if the selling of dates to the same person he buys
from was haram then the Messenger of Allah (SAW) would have explained this to his tax
collector. It was therefore permitted because he sold one type of good (dates) for another type
(dirhams) without any preconditions, secret agreement or connivance, as if he had sold to another
person. Likewise, it would be permitted to sell gold for silver, and then buy silver.
However, if this were subject to a prior arrangement and secret deals, it would not be
allowed, and it would be regarded as a prohibited ploy. This is because any type of trickery is
prohibited and unlawful in Islam i.e. any attempt to portray a contract as legitimate/allowed with
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the intent to commit a forbidden act using deception. This includes soliciting an action that Allah
(SWT) has forbidden, neglecting an action that Allah (SWT) has commanded, suppressing a
right etc. This is so because whatever leads to haram is itself haram, and because Ahmed
reported on the authority of Ubada Ibn As-Samit that the Messenger of Allah (SAW) said: A
section (taifa) from my Ummah will one day consider "khamr" (intoxicants) lawful after they
give it a different name. Ahmed also reported on the authority of Abu Malik Al-Ashja'i who
said that he heard the Messenger of Allah (SAW) say: People from my Ummah will drink
alcohol (Khamr) while giving it a different name.
Therefore, exchange is one of the lawful transactions in Islam according to specific rules
explained by the Shar'a. It can be conducted in local transactions as well as foreign. Like the
exchange of gold for silver and silver for gold of the same currency of the country, this can also
be performed in a foreign currency, whether at home or abroad, and whether the exchanges were
monetary or commercial as well as where the exchange of a currency for another is involved. In
order to elaborate on the foreign exchange between various currencies, we need to study in depth
the nature of money.

1

1
Financial Islam - Islamic Finance (online articles)
21

(11) Future contract
If the forward market transactions involving delay, so closely related the following hadith:
Malik bin Anas said that he wanted to switch to a hundred dinars and dirhams he was
called by Talha bin Ubaidullah. Both agree with this change. Talha took dinars from Malik and
start saving. Talha Malik then asked to wait patiently until the cashiers back from Ghabaa ' (a
place close to the city of Medina). Hearing this, Umar said, "No, by Allah! Do not leave without
receiving dirhams Talha you. Prophet Muhammad said that the exchange between gold for gold
is riba except exchange between her hands (cash without any delay) and exchange with cereal
grain is usury except hand to hand exchange between (cash without any delay) and the exchange
of barley by barley is usury except exchange between her hands (cash without any delay) and salt
by salt exchange is usury except hand to hand exchange between (cash without any delay).
(Kamali, 2003)
According to Imam Shafi in his book al-Umm, the above hadith clearly proves that the
exchange is not valid if payment is done on even been agreed upon by the two parties to the
contract and the delivery value. "No, by Allah! Do not leave without receiving dirhams Talha
you. Prophet Muhammad said that the exchange between gold for gold is riba except exchange
between her hands (cash without any delay) and exchange with cereal grain is usury except hand
to hand exchange between (cash without any delay) and the exchange of barley by barley is
usury except exchange between her hands (cash without any delay) and salt by salt exchange is
usury except hand to hand exchange between (cash without any delay). (Kamali, 2003)
While according to Mufti Taqi Usmani (1999), futures and forward trading is not allowed
in Islam based on:
1. In shariah clearly stated that the sale or purchase cannot be postponed to the
future. With this all futures and forward contracts are not valid according to
sharia.
22

2. In most transactions are concluded with a settlement for the difference in price
(to profit from the price difference).
2

(12) Comparative in currency trading between conventional and Islamic
CONVETIONAL TRADING ISLAMIC TRADING
Definition Also known as a foreign-exchange rate,
forex rate, or Argio between two
currencies is the rate at which one
currency will be exchanged for another
The Islamic trading is one of the most
active and volatile markets when it
comes to price action, which makes it
the most liquid market for traders. One
of the most simple and less risky
methods of trading as compared to
conventional forex trading is forex
binary options.
Viewpoint One of the biggest advantages of
options trading in the forex market is
that brokers are flexible and allow you
to trade variations. Moreover, you can
achieve high returns as much as 80% or
more in a matter of minutes simply by
predicting the price movement of a
currency pair. Brokers like Anyoption
offer payouts as high as 71% with a
15% cashback if you happen to lose
your contract. They also offer attractive
bonuses on the first deposit.
One of the most difficult dilemmas in
Islamic jurisprudence (Faqih). It requires
the simultaneous exchange of currencies
which make it kind of hand to hand
exchange

2
Future Contracts: Islamic Contract Law Perspective, Mirza Vejzagic online article
23

Hedging tools Making an investment to reduce the
risk of adverse price movements in an
asset. Normally, a hedge consists of
taking an offsetting position in a related
security, such as a futures contract.
To migrate their risk in the financial
markets permitting their core business
revenues to remain consistent and
unaffected by market volatility.
Therefore, educate trading on the
markets risks they are exposed to and
offer them sharia compliant hedging
product that protect them against such
volatility and risks
Law currency
trading
Focus on what deals are general enough
that trading in shares, derivatives,
insurance and other forms of risk are
covered.
focus on what deals are permissible
(Halal) or forbidden (Haram).
These rules apply to any market or other
types of trading

CONCLUSION
As a conclusion, Islamic trading by becoming a permanent feature of the globa
financial system l has proven its viability. It did not, however, quite live up to its original
billing. Rather than being a different trading system, based on partnership finance, which
would bring social and economic development to the Islamic world , Islamic trading have
generally mirrored conventional finance and concentrated on short-term exchange
transactions. Therefore, there are many benefit for applied the currency trading in Islamic
regarding to law currency trading, hedging tools method of excahnge market entry.

24

REFERENCES
Bibliography
http://www.financialislam.com. (n.d.). Retrieved from Financial Islam - Islamic Finance:
http://www.financialislam.com/foreign-exchange.html
http://www.forexonislam.blogspot.com/. (2006, March 26). Retrieved from Forex In Islam.
Kamali, M. H. (2003). Islamic Commercial Law. An Analysis For The Future, 198.
Malaysia, B. N. (2010). Syariah Resolution In Islamic Finance.
Vejzagic, M. (n.d.). http://www.academia.edu. Retrieved from academia.edu:
http://www.academia.edu/1146008/Future_Contracts_Islamic_Contract_Law_Perspective
Warde, I. (2002). Islamic Finance In The Global Economy. Edinburgh: Edinburgh University Press.

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