SS 1 · Trade

SS 1: Trading in Currencies

What this standard is about

This is AAOIFI's first Shariah standard. It covers buying and selling currencies: spot trades at a counter, electronic trading, currency exchange when two parties settle debts with each other, money market deals, and promises to buy or sell currencies.

It does not cover debt transfers that involve no currency exchange. It also does not cover the discounting of bills of exchange.

Why it exists

Currency exchange (sarf) has strict conditions in Islamic law, going back to the Prophet's teachings. Without these conditions, a currency deal can slip into riba (interest) or gharar (excessive uncertainty). The standard keeps currency trading immediate, equal, and free of hidden interest.

The key rules, simply put

Both parties must take possession of the two currencies before they part. Possession can be actual (cash in hand) or constructive (money credited to an account).
When the two sides are the same currency, the amounts must be equal. A one-pound note for a one-pound coin is fine. A one-pound note for two one-pound coins is not.
The contract must not contain any condition or clause that delays delivery of either side.
Currency dealing must not aim at cornering the market. It must not cause harm to individuals or to society.

An everyday example

A traveler exchanges dollars for euros at an airport counter. The clerk hands over the euros and takes the dollars on the spot. The rate is agreed and both sides leave with their money. The deal is complete before either party walks away.

Words to know

Riba — interest; any guaranteed extra on a loan or exchange. Not allowed in Islamic finance.
Sarf — currency exchange.
Constructive possession — treated as received, for example when money is credited to a bank account.
Gharar — excessive uncertainty in a contract. Not allowed in Islamic finance.

Source

AAOIFI Shariah Standard No. 1 — https://islamicmarkets.com/publications/trading-currencies-statement-of-the-standard