Riba and Currency Exchange (Sarf)
riba (interest/usury) is the practice of taking property (or anything that serves as a medium of exchange) for another property of the same type unequally. The money exchange (Sarf) is the practice of taking a property for another property from gold and silver of the same type equally, or of two different types equally or unequally. The exchange can only take place in trade, as for usury, it can only happen in a trade (bay’u) transaction, in a loan (qardh) or in a Salam (advance sale or forward buying). Trading (al-Bay'u) is the practice of exchanging property for property resulting in an exchange of property; this is permitted for Allah (SWT) says: "And Allah has made trading lawful" [TMQ 2:275]. And because Bukhari reported on the authority of Hakeem Ibn Hizaam that the Messenger of Allah (SAW) said: "The two trading parties possess the right of withdrawal unless they separate." As for the Salam, this means handing over a commodity immediately for a defined commodity which is to be handed over at a specific time in the future (ajal). Salam also known as Salaf (credit). It is one type of trading and it is contracted in the same way as the trading, but with the wording of Al-Salam. This is permitted for Allah (SWT) says: "When you contract a debt for a fixed period, write it down" [TMQ 2:282]. Ibn Abbas said: I bear witness that the guaranteed Salaf (borrowing), to a fixed future date, has been made lawful and allowed by Allah "Azza Wa Jall", then he recited the verse: "When you contract a debt for a fixed period, write it down" [TMQ 2:282]. Also because the two Sheikhs (i.e. Bukhari & Muslim) reported on the authority of Ibn Abbas who said: “The Messenger of Allah (SAW) arrived in Madinah while people were lending and borrowing dates over two or three years, so he (SAW) said: ‘If any of you lends anything, let it be in a known measure or a known weight and for a known period of tim’." As for the Qardh (loan), it is a type of Salaf, which is to give property to someone in order to restore it from him later and this is lawful. Muslim reported on the authority of Abu Rafi'i “that the Messenger of Allah (SAW) borrowed a young camel from a man, then he received Sadaqah in the form of camels. So he (SAW) ordered Abu Rafi'i to give the man his young camel; Abu Rafi'i came back to him and said: I only found a four year old camel. Upon this he (SAW) said: Give it to him, for the best people are those who pay back their debt in the best manner.” Ibn Hibban reported on the authority of Ibn Mas'ud that the Messenger of Allah (SAW) said: “No Muslim would give another Muslim a loan twice, except that one would be written for him as charity.” Also because it has been established that the Messenger of Allah (SAW) used to borrow.
Usury does not take place in the Bay’a (trade) and the Salam (advance sale) except in six items only, and they are: Dates, wheat, barley, salt, gold and silver. As for the Qardh (loan), usury can take place in all its types i.e. in everything; it is forbidden for a person to lend something to another, and to expect more or less for it, or to receive something different in return. The settlement of the loan or anything borrowed should be by the same amount and the same type of goods borrowed. The difference between the trading and the Salam on the one hand, and the Qardh on the other hand, is that the former can be exchanged for a different type or for the same type, whereas the Qardh can only be for the same type and nothing else. 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. The Shari'ah principle stating that: "All things are origin ally permitted unless there is evidence about the prohibition" applies to the things in which riba occurs. Evidence has not been established in any other things but these six that are mentioned, therefore riba only occurs in them; things which are from the same origin and things which their description fit the six mentioned are included and they follow the same rule, but nothing else. As for the reason (illah) behind prohibiting these things, there is no Shari'ah text to that effect, therefore no reason must be deduced in this instance, simply because the reason must be a Shari'ah one and not rational; and if the reason cannot be deduced from a text, it cannot be recognised.
As for the analogy of the reason, this also cannot be deduced in this instance, for the condition of making analogy on the reason itself must be the presence of a clear and understood description in order to be able to make a sound analogy; if there were no clear description to be found, there can be no reason behind the rule of prohibition; and things like a primary noun (not derived from a verb form) and a vague description cannot be regarded as divine reason, and analogy cannot be made from it. For instance, when the Messenger of Allah (SAW) said, as reported by Ibn Majah on the authority of Abu Bakra: "A judge must not pass judgement between two disputing parties when in a State of anger." Anger was considered as the reason for preventing the passing of judgement; this is so because it is clearly understood that anger is the preventive factor, thus it was an "illa" (reason); the reason itself was deduced from the understanding of the text, which is that the prevention was because of it. This understanding entails that the mind is confused; therefore analogy can be made with anger on anything that has made anger the reason i.e. that has caused the mind to be in a State of confusion, such as severe hunger for instance. In such cases, it would be right to make analogy with the anger on anything else, for the expression of "anger" is a description to something that prevents the passing of judgement. This is unlike Allah (SWT)'s saying: "Carrion meat has been made unlawful to you" [TMQ 5:3]. Carrion is not an expression that entails an understanding of prohibition, therefore, it cannot be used as analogy and the prohibition would in this case be restricted to the carrion meat. Also if usury has been prohibited in the wheat, it cannot be used as analogy for anything else, for wheat is a primary noun, and not an expression that carries an understanding. It would be wrong to say that usury has been forbidden in the wheat because it is food, for it is not an expression that carries an understanding, thus it cannot be considered as a reason for the prohibition and it cannot be used as an analogy on other things.
As for the Messenger of Allah (SAW)'s hadith reported by Muslim on the authority of Mu’mar bin Abdullah: "The food for food, in equal quantities", and the hadith reported by Ahmed on the authority of Abu Sa’id 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. Rather they merely indicate that usury does occur in the foodstuffs, therefore it includes all types of foodstuffs which makes it a general rule; then came the hadith of the Messenger of Allah (SAW) to specify the types of food in which usury occurs; this is so because there are many other types of foodstuffs where usury, if it occurred, would not be forbidden e.g. aubergines, courgettes, carrots, the sweet, peppers, garlic and grapes are foodstuffs. Usury does not occur in them according to Ijma of the Sahabah, despite the fact that the expression of food does apply to them, for they are edible things; and because Muslim reported on the authority of Ayisha (ra) that the Messenger of Allah (SAW) said: "No prayer when food is ready" i.e. one should preferably eat before praying if the food is ready to eat. 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...". And just as the Qur’an can be specified by the hadith, so can the hadith be specified by another hadith. Therefore, usury in the trading and the Salam occurs only in the six types mentioned.
Furthermore, it would be wrong to claim that usury has been forbidden in gold and silver because they are estimated in weight, making the reason of prohibition the fact that they are weighed items. 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. 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. Therefore, usury does not occur in every measured or weighed item, but only in the six types mentioned, in weight for gold and silver, and in measure for the others.
As for lending and borrowing (qardh), this is permitted in the six types mentioned and in other types and in any other thing that can be subject to ownership and whose ownership is lawfully transferable. Usury in this case can only occur if a demand for a higher return or a lower return is made, or if a condition is laid for less than what has been loaned i.e. a lower quality.
Currency Exchange (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.
6- The sale of stocks in a certain company, in a certain currency.
These six 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.
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, jewellery, 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, jewellery 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 type 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. 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.”
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.
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".
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."
Another example 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 Hafsa’s 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.’"
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 sa’as of inferior quality for one sa’a 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 Sa’a of these fine quality dates for two Sa’as of inferior dates and the two Sa’as of it for three Sa’as. 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 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.