Trading in Currencies | Sales-Based Contracts

Core Rules

Same currency exchange: Must be equal amounts AND immediate (spot). No excess, no delay. A note of one pound and a coin of one pound of the same country are still the same currency — they must be exchanged equally and concurrently.

Different currency exchange: Amounts may differ (exchange rates), but delivery must be IMMEDIATE (spot) by both parties. Each country's currency is treated as its own kind because it has been so designated by the issuing authority.

Two further conditions apply to every currency exchange. First, the contract must contain no conditional option or deferment clause regarding the delivery of either counter-value. Second, the dealing must not aim at establishing a monopoly position or entail evil consequences for individuals or the broader market.

Possession in Currency Exchange

In the classical fiqh of sarf, physical or constructive possession (qabd hukmi) is required in the same contracting session. Possession of part of a counter-value is valid only for that part; the remainder of the transaction is invalid until possession of the rest is taken.

Bank account credit

Crediting a sum to the customer's account constitutes constructive possession — whether by direct deposit, by spot exchange against another currency already in the customer's account, or by debiting one account and crediting another in a different currency. A short delay consistent with prevailing market practice is permitted, but the recipient cannot dispose of the funds until the transfer has actually taken effect.

Cheque (with reservation)

Receipt of a cheque can constitute constructive possession only if the cheque's amount is available in the issuer's account in the cheque's currency and the institution has blocked that balance for payment. An ordinary cheque without such blocking does not transfer possession — it is a payment instruction, not a delivery.

Credit-card voucher

A merchant's receipt of a voucher signed by the cardholder constitutes constructive possession of the amount entered on the coupon, on condition that the card-issuing institution pays the amount to the merchant without deferment.

Agency arrangements

Both parties may execute the exchange through agents, provided that — through principal or agent — possession of both counter-values is taken at the close of the transaction, before the principal parties separate.

Bilateral and Unilateral Promises in Currency Exchange

A binding bilateral promise to buy and sell a currency at a future date is forbidden — even when the purpose is hedging against currency devaluation. The doctrinal reason is that two binding promises facing each other are economically equivalent to a forward sale, and the spot-possession requirement of Sarf cannot be satisfied if the parties have already committed to settle in the future.

A unilateral binding promise from one party only is, however, permitted. The asymmetry matters: the promisor is bound, but the promisee retains the option of whether to enter the actual exchange contract when the time arrives. The exchange itself must still be a spot transaction concluded at that future moment by fresh offer and acceptance.

Parallel purchase and sale of currencies — where a party simultaneously buys one currency and sells the equivalent amount of another, with each contract conditional on the other — is also impermissible. The arrangement collapses into either a deferred currency sale, a contract conditional on another contract, or a binding bilateral promise of currency exchange — each independently prohibited.

Shari'ah-Compliant Hedging Alternatives

Back-to-back interest-free loans in different currencies — two parties may each lend an interest-free Qard to the other in different currencies for matching tenors. Neither loan accrues benefit; the two contracts are not contractually linked. The economic effect mirrors a forward currency hedge without entering a forbidden forward contract.
Settle credit transactions in another currency at spot — the institution and the customer may agree at the time of payment of an instalment in a credit transaction (such as Murabahah) to settle in a different currency, applying the spot rate on the day of payment. The substance is Muqassah — extinguishing a debt in one currency by paying in another at today's rate.
Sell on credit in the currency of the exposure — where the institution faces an account payable in a foreign currency, it may sell goods or extend Murabahah financing in that same currency. The receivable then naturally offsets the payable.

Set-Off (Muqassah) of Debts in Different Currencies

When two parties owe each other amounts in different currencies, they may agree to extinguish both debts by reference to the spot exchange rate. This is treated not as a fresh currency exchange but as a discharge of pre-existing obligations through Muqassah (set-off). The classical authority is the well-known hadith of Ibn 'Umar (RA), who asked the Prophet ﷺ about selling camels priced in dinars but accepting payment in dirhams (and vice versa); the Prophet ﷺ permitted it on condition the rate used is the rate of the day and no debt remains outstanding between the parties when they part.

Margin Trading and Credit-Facility Speculation

A customer trading currencies for an amount exceeding what he actually owns — using credit extended by the institution that is also handling the currency dealing — is impermissible. The structure combines a loan with a transaction that yields the lender a benefit (commission, spread, or financial gain on the leveraged exposure), reproducing the loan-with-benefit prohibition. Where the institution lends without conditioning the loan on dealing through it, ordinary fiqh rules govern; the prohibition targets the conditional combination, not the loan or the trade in isolation.