http://www.daruliftaa.com/question.asp?

txt_QuestionID=q-19101599

Trading in Currencies

Question #: q-19101599
Date Posted: 2004-06-30

QUESTION

Is it permissible to buy and sell currency in the foreign exchange market with the intention
to make a profit based on mathematical models and economic forecasts?

ANSWER

In the name of Allah, Most Compassionate, Most Merciful,

Scholars of the past considered paper currency to be representing gold and silver, hence they
did not regard it to be something that had a value in of itself. Paper money was merely
thought to be a certificate indicating that its holder owns gold and silver to the value of the
note.

When one gave another a paper note, he was not giving any money that had a value in of
itself, rather one was merely delivering a certificate that enabled the receiver to recover its
amount in gold or silver.

Therefore, they stated that if Zakat was given in paper currency, one’s Zakat was not
fulfilled, for one has not given any money to the poor. One’s Zakat will only be fulfilled
when the recipient gets hold of gold or silver which the paper currency represents, or when
one purchases an item with the money. Similarly, they stated that purchasing gold or silver
with paper currency is not permissible, because it is like exchanging gold for gold, and the
condition in exchanging gold with gold or silver is that both parties must take possession of
the things exchanged in the same session, whereas here, the one taking the paper note is not
physically taking possession of gold or silver. He is only receiving a certificate on the back
of which there is gold or silver.

The Sound Position

However, most contemporary scholars such as Shaykh Taqi Usmani and others declared that
paper currency has now become a medium of transaction in of itself; hence it is considered
to be in place of gold and silver.

They state that the promise to pay gold and silver which appears on these paper notes is now
meaningless and of no significance. The notes cannot be converted into gold, and they are
accepted as money throughout the world. One cannot legally demand the one paying in
notes that he must pay in gold or silver.

Paper currency no longer represents gold or silver, because in reality there is no guarantee of
gold being on the back of every note. It is considered to be a legal tender and has now
become a medium of transactions in of itself; hence it has taken the place of gold and silver.

Based on this, they state, the obligation of Zakat will be fulfilled by giving paper currency to
the poor and needy. Also, one will be permitted to purchase gold and silver with these notes.

Moreover, Shaykh Taqi Usmani is of the view that paper currency is not to be treated as
gold and silver, rather it is a separate unlimited legal tender. It would fall into the category
of what the early Muslims called Fulus. (See: Buhuth fi Qadhaya Fiqhiyya Mu’asira, p. 147-
161)

Trading in currency

Based on the above brief explanation, trading in currencies of the same country with excess
on one side, like exchanging one pound for two pounds is unlawful, for that constitutes Riba.
However, it would not be necessary that both parties take possession of money exchanged in
the same session, as is the case with exchanging gold for gold. The reason being is that
paper currency is not treated like gold and silver, rather it is legal tender and medium of
exchange in of itself. However, one party must take possession in the session (majlis) of
transaction, because departing (iftiraq) one another with debts on both sides is not permitted.

If the currency was exchanged at par value, such as exchanging one pound for one pound,
then this is without doubt permissible.

As far as exchanging the currencies of different countries is concerned, this is permissible

even with excess on one side, such as exchanging one pound for two dollars. The reason
being is that the genus (jins) of both currencies is different, and when exchanging items of
varied nature, it is permitted to have excess on one side.

Therefore, it is permitted to trade in currencies of different countries and to make profit from
such trade. However, it would be necessary that one party takes possession of his currency at
the time of transaction, for departing with debt on both sides is not permitted according to
the Hadith.

Note that this permissibility is in normal circumstances, but scholars mention that trading in
currencies at a rate that is against the rate determined by the government will not be
permitted, although it can not be considered Riba.

This is based on the ruling that one must obey the law of the land in things that are not
contrary to Shariah. Thus, if the government fixes a rate of exchanging pounds for dollars,
then it will be sinful from an Islamic perspective also to trade in the black market at a
different rate. However, one will not receive the sin of being involved in Riba.

And Allah knows best

Muhammad ibn Adam
Darul Iftaa
Leicester , UK