Trading in currencies

Definitions
Sarf: defined as follows Exchange of absolute price against absolute price Absolute Price vs. Relative Price Subject matter of Sarf usually quoted in its own i.e. currency in terms of currency, such quotation is known as absolute price. Contrarily, goods are generally quoted in terms of currency; such quotation is known as relative prices. Thaman A thing generally acceptable medium of exchange, unit of account and standard of deferred payment Thaman Khilqi (Natural Money) Gold and silver posses the natural potential to serve as money ( ) and that potential can easily be traced out from authentic tradition of Holy Prophet (prayers and peace of Allah be upon him): Gold for gold, silver for silver until he said equal for equal, like for like, hand to hand, if the kinds of assets differ, you may sell them as you wish provided it is hand to hand.1 Thaman Hukmi (Constructive Money) Contemporary currencies are agreed upon as constructive money for being used as money unanimously, inferred from following declarations: Paper money has all the characteristics of gold and silver. It is thaman from the point of view of the Shariah and consequently it is subject to all the rules of the Shariah pertaining to riba, zakat, salam and other contracts which are applicable to gold and silver.2 It is also consented that one countrys currency is different from that of others country. Actual Possession Instant physical delivery by hand for exchanged counter-values Constructive Possession Putting the subject matter on the free disposal, control and discretion of other party by seller, enabling other party to take the delivery at its consent, is known as constructive possession.

Conceptual Framework: Guidelines with Shariah Basis

The distinguished conditions of sarf are as follows: 1. For same species e.g. dollar to dollar or gold to gold (homogeneous currency) Exchange in absolute prices must be; i. Spot or instantaneous, and ii. Equality in counter values Shariah Basis: While exchanging gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates and salt for salt, do so on Mithlam-bi-mithl (like for like) and yadamm-bi-yad (hand to hand or on spot) basis. Thus whosoever gave more or demanded more verily he dealt in Riba. Both the taker and the giver are equal i.e. equally guilty in this regard.3

2. For heterogeneous currencies (dollar to rupees or gold to silver) Exchange in absolute prices of heterogeneous currencies must be i. Spot or instantaneous ii. Equality in counter-values is not the pre-requisite for permissibility. Shariah Basis: Dont trade one dinar (gold coin) for two dinars and one dirham (silver coin) for two dirhams.4 3. Currencies are stipulated as heterogeneous (different from each other) but paper and coin in the same currency are alike and are subject guideline no 1. Shariah Basis: It is lawful to sell currencies that are different in Genus from each other because every currency is considered as a kind of money on its own, like that of gold and silver.5 4. Differential in quality of goods (of the same species) does not render the goods as heterogeneous e.g. 18 carat and 22 carat are homogeneous and subject to guideline 1. Shariah Basis: Once Hazrat Bilal (r.a) brought to the Prophet (prayers and peace of Allah be upon him) some good quality dates. The Prophet (prayers and peace of Allah be upon him) inquired as to where he got those dates. Hazrat Bilal (r.a) replied: We had some radi (inferior quality) dates. I sold two saa of them for one saa of good quality dates in order to give them to the Prophet (prayers and peace of Allah be upon him) to eat. Upon hearing this, the Prophet (prayers and peace of Allah be upon him) exclaimed: Oh no! Oh no! That is Riba. That is exactly Riba! Dont do that again. If you want to buy (goods) dates for (inferior) dates next time, first sell your dates, and then buy the new ones with the sale proceeds.6 (Currencies can be taken analogues to dates).

The words Dont trade one dinar (gold coin) for two dinars and one dirham (silver coin) for two dirhams are general and do not describe the quality; hence justifying the transaction on the basis of differential in quality is irrelevant. 5. Exercise of option in Sarf is inconsistent with the injunctions of Shariah. Shariah Basis: Stipulation of an option may delay the exchange of counter-values. Moreover, inclusion of option renders the contract non-binding, while the contract of Sarf must be conclusive at the time of contract. 6. Forward and Future trading in Sarf contract is not in conformity with the legal and regulatory framework of Sarf. Shariah Basis: It includes deferment of counter-values which is not allowed in Shariah (In Sarf both counter-values must be exchanged at spot). It is reported that Prophet (prayers and peace of Allah be upon him) has prohibited the sale of debt against debt (i.e. credit with a credit)7. 7. Guideline 5 & 6 will remain intact even if they are used for hedging purposes. Shariah Basis: Sadd al-darai; Means to unlawful end shall be blocked.8 8. Objective of Sarf contract should preserve the Maqasid Al-Shariah to safeguard the well-being of individuals and societies i.e. No monopolies and hoarding should be formulated as the consequence of the Sarf contract. Shariah Basis: To avoid the public injury a private injury may be suffered.9 No harm should be caused and none should be suffered.10 (The private benefit is sacrificed for community benefit). 9. Partial possession is only valid for a part for which counter value is already received. Whereas remaining parts possession for which counter value is deferred remains invalid. Otherwise whole possession must be taken place at the time of exchange of currencies.

10. Nature of possession will be determined by Urf i.e. customary practice, unless otherwise stipulated. Shariah Basis: The reason is that the lawgiver has used the term possession in an unqualified sense and has deemed it the basis of rules. He did not elaborate it, and there is no definition for it in the language. It is for this reason that recourse is to be had to custom (urf)11 11. An agent can be appointed in Sarf by fulfilling the requirements Islamic Contract of Agency because principal and agent enjoys same contractual standing i.e. an agent may do what a principal is able to.

Shariah Basis: Contract of agency derives its permissibility from the Quran, the Sunnah and Ijma (consensus of the legal community).12(For further details see Shariah Standard No. 23: Agency) 12. Contractual correspondence through modern means of communications is agreed upon as Majlis i.e. physical presence of parties at one place. However, minimum reasonable delay in transmission of contractual correspondence of Surf Contract is justified by Urf (business practice) is found legitimate, if any. Shariah Basis: If any two parties enter into a contract at the same time while they are in different places this includes contracting through telephone and wireless devices contracting between these two parties is considered as contracting between two present parties.13 13. An offer made through use of modern means of communication remains binding on the offeror till the prescribed time period in the offer. Shariah Basis: When the offering party issues an offer through electronic means, he is committed to keep his offer during the specified period in the offer. He does not have the right to retreat from it.14 14. Binding bilateral promises to sell and purchase currencies is prohibited. However, if the bilateral promises are non binding on both parties than it is permissible. Shariah Basis: The reasons for impermissibility of binding promises: i. Binding bilateral promises forms a contract ii. Possession become deferred Forward contract Such a promise, if considered binding on both parties, will fall under the general prohibition against the sale of debt for debt and will therefore be unlawful. If, however, the promise is considered not to be binding on both parties, then it will be lawful.15 15. However, unilateral promise is legitimate even if binding in the eye of Shariah. Shariah Basis: The International Fiqh Academy has issued a resolution endorsing a unilateral binding promise: i. It should be one-sided promise. ii. The promise must have caused the promisee to incur some liabilities. iii. If the promise is to purchase something, the actual sale must take place at the appointed time by the exchange of offer and acceptance. Mere promise itself should not be taken as the concluded sale. iv. If the promisor backs out of his promise, the court may force him either to purchase the commodity or pay actual damages to the seller.16 16. Simultaneous & parallel purchase and sell of currencies is not permissible. Shariah Basis: The reasons are as follows:

i. Simultaneity in execution will result in deferred sale of currency. Do not sell what you do not have17 ii. Strong possibility of contingency between contracts especially in case of no prior reserve and no established market. iii. Inclusion of bilateral promise Guideline 14 17. A Wakeel cannot become Kafeel even in currency operations. 18. Debts owned by the parties in different currencies can be exchanged or set-off through Sarf contract. Shariah Basis: It is reported on the authority of Abdullah bin Umar (r.a) who said I have met the Prophet SAAWS at the house of Hafsah (r.a) and I said to him O Prophet of Allah, I would like to ask you: I sell a camel in al-Baqi for a price quoted in dinar but I take dirham, and I sell for a price quoted in dirham but I take dinars, I take this from this and I give this from this. The Prophet SAAWS replied: there is no objection to you taking the other currency based on the price of the day, provided you do not leave each other with something remaining owed as a debt between you.18 19. Combination of currency exchange and transfer of money is permissible through constructive delivery proved by banks documentary evidence. Shariah Basis: If a transfer of money is to be made in a currency different from the currency of the amount paid by the applicant, then the transaction is based on currency exchange and transfer of money. The currency exchange takes place before the transfer, that is, the customer pays the amount of money to the bank and the bank, after agreeing on the currency exchange rate that is printed on the receipt delivered to the customer, issues a bank draft on the basis of transfer of debt in the sense that has been mentioned.19 20. For indulging in Sarf contract a person must own what he wants to sell. He can meet this discrepancy by taking some loan from lender. Considering the lender holds no chance to derive any benefit from this currency exchange, directly or indirectly. Otherwise it will be tantamount to Riba. As Every loan that entails benefit is Riba.

Scenario based Interpretation

1. Shariah ruling on trading in currencies 2/1 It is permissible to trade in currencies, provided that it is done in compliance with the following Shariah rules and precepts: (a) Both parties must take possession of the counter values before dispersing, such possession being either actual or constructive. Shariah Justification Refer to guideline 1 and 2 Illustration : A & B enters into a contract of Sarf whereby A exchanges Rs. 1000 into Dollars at spot exchange rate. (b) The counter values of the same currency must be of equal amount, even if one of them is in paper money and the other is in coin of the same country, like a note of one pound for a coin of one pound. Shariah Justification Refer to guideline 1, 2 and 3 (c) The contract shall not contain any conditional option or deferment clause regarding the delivery of one or both counter values.

Shariah Justification Refer to guideline 5 Illustration :A enters into a contract with a Money Exchanger in order to exchange $1000 for Rupee at spot exchange rate but Money Exchanger wishes to delay the delivery of rupees beyond the time justified by Urf (practice). (d) The dealing in currencies shall not aim at establishing a monopoly position, nor should it entail any evil consequences to the interest of individuals or societies. Shariah Justification Refer to guideline 8 Illustration :A money exchange company starts money laundering by exchange and transfer of money or enters into Sarf contract to control the whole supply of a specific currency so that to form a monopoly. (e) Currency transactions shall not be carried out on the forward or futures market. Shariah Justification Refer to guideline 6 Illustration :Money exchanger contacts (at 2-Jan) with a person A to supply 50 dollars against rupees at some future date (3-March). 2/2 It is prohibited to enter into forward currency contract. This rule applies whether such contracts are affected through the exchange of deferred transfers of debt or through the execution of a deferred contract in which the concurrent possession of both of the counter values by both parties does not take place. Shariah Justification Refer to guideline 2/1 (e) Illustration :It involves two scenarios: 1. Person A and B execute a 3 month forward currency contract and then exchange deferred counter values (debt) at maturity. 2. Person A and B enters into 3 month forward currency contract but do not execute it. They forward this deferred contract to maturity and then execute i.e. contract itself is deferred. Maxim: In contracts effect is given to objectives and meanings not to words and forms.20 2/3 It is also prohibited to deal in the forward currency market even if the purpose is hedging to avoid a loss of profit on a particular transaction effected in a currency whose value is expected to decline. Shariah Justification Refer to guideline 7 Illustration :Money exchanger contracts (at 2-Jan) with an Importer A to supply 1000 dollars against rupees at some future date (3-April) as A is exposed to exchange rate risks owing to persistent devaluation in rupee and this risk can reduce his profits potentially. 2/4 It is permissible for the institution to hedge against the future devaluation of the currency by recourse to the following: Shariah Justification Permissibility for individual may or may not mean permissibility for institution but permissibility of institution implies individual permissibility. (a) To execute back to back interest free loans using different currencies without receiving or giving any extra benefit, provided these two loans are not contractually connected to each other. Justification Risk management by prudential controls Illustration :Pakistani Company A is an importer of goods X and has to pay $1000 after 5 months, hence expose to currency risk. For hedging he goes to Broker B, purchase $1000 @ Rs. 82, for example and lend it to B for 5 month, whom A is a customer fulfilling MBR (Minimum Balance Requirement). Now B independently lends Rs.84000 (82,000+2,000; justifying currency risk taken by B) to A for the period of 5 months, and that is not contingent to previous debt arrangement. After 5 months, at the need of A, debts will be paid by both parties. (b) Where the exposure is in respect of an account payable, to sell goods on credit or by Murabaha in the currency of the exposure.

Justification Risk management by prudential controls Illustration Bank has $5m on its liability side (e.g. Dollar Mudarabah Account) and is subject to currency risk. One way to hedge this risk is to finance $5m or more in Asset side (e.g. Murabaha Financing). In this way loss occurred from liability side will be compensated by gain arising from the asset side pertaining to adverse exchange rate fluctuation. 2/5 It is permissible for the institution and the customer to agree , at the time of settlement of the installments of a credit transaction (such as a Murabaha), that the payment shall be made in another currency applying the spot exchange rate on the day of payment. Justification - Valid Sarf Contract Person A, at the settlement of Murabaha installment, is requested by the bank to transfer his rupee payment into dollar at spot exchange rate. 2/6 Possession in sales of currencies 2/6/1 When a contract is concluded for the sale of an amount of currency, possession must be taken for the whole amount that is the subject matter of the contract at the closing of the transaction. 2/6/2 Taking possession one of the counter values by one party without taking possession of the other is not enough to make a currency dealing transaction permissible. Likewise, taking partial possession is not sufficient. Taking possession of part of a counter value is valid only in respect of the part, possession of which is complete, whereas the remaining part of the transaction remains invalid. Shariah Justification Refer to guideline 9 Illustration Person A contracts to exchange Rs.10,000 against $100 with B. B agrees later to pay $40 primarily. So this contract will only be valid up to the exchange of Rs. 4,000 as a counter value of partial possession of $ 40. Otherwise if he agrees to pay $100 (whole possession) contract will be valid for Rs. 10,000 (i.e. whole counter value) 2/6/3 Possession may take place either physically or constructively. The form of taking possession of assets differs according to their nature and customary business practices. 2/6/4 Physical possession takes place by means of simultaneous delivery by hand. Shariah Justification Refer to guideline 10 Illustration Sarf contract, as a business practice, are carried out through bank transfers advocating constructive delivery although hand to hand delivery is also possible. 2/6/5 Constructive possession of an asset is deemed to have taken place by the seller enabling the other party to take its delivery and dispose of it, even if there is no physical taking of possession. Among other forms of constructive possession that are approved by both Shariah and business customary practices are the following: Shariah Justification Refer to guideline 10 (a) To credit a sum of money to the account of the customer in the following situations: (1) When the institution deposits to the credit of a customers account a sum of money directly or through bank transfer. Illustration A, Money exchanger, instantaneously transfers 100$ to the account of customer B from his foreign currency bank account after receiving the counter value of 100$ at Spot exchange rate. (2) When the customer enters into a spot contract of currency exchange between himself and the institution, in the case of purchase of a currency against another currency already deposited in the account of the customer. Illustration Person A enjoys customer-ship of ABC bank and posses Rs.1m in his bank account. Later on he decides to convert Rs 0.5m into dollars at spot exchange rate and requests bank to do so. Bank will credit his new dollar account and will debit his rupee account.

(3) When the institution debits- by the order of the customer - a sum of money to the latters account and credits it to another account in a different currency, either in the same institution or another institution, for the benefit of the customer or any other payee. In following such a procedure, the institution shall adhere to the principles of Islamic law regarding currency exchange. A delay in making the transfer is allowed to the institution, consistent with the practice whereby a payee may obtain actual receipt according to prevailing business practices in currency markets. However, the payee is not entitles to dispose of the currency during the transfer period, unless and until the effect of the bank transfer has taken effect so that the payee is able to make an actual delivery of the currency to a third party. Illustration Keeping 2/6/5, a (2) intact, Person A may have a new credited Dollar account in his bank or in another bank. Now if A requests his Bank to transfer the X amount in to another bank for himself or for the benefit of a payee C, then As bank is bound to transfer the dollar bearing Sarf rulings. A reasonable delay according to practice is allowed in this transfer. However payee is entitled to actual receipt as per contemporary practices but not free to dispose currency until transfer completes. (b) Receipt of a cheque constitutes constructive possession, provided the balance payable is available in the account of the issuer in the currency of the cheque and the institution has blocked such a balance for payment. Illustration B agrees to pay $5 to A for a cheque of Rs. 500 provided that A has Rs. 500 in his account and the bank will freeze it at the level of Rs. 500. (c) The receipt of a voucher by a merchant signed by the credit card holder (buyer) is constructive possession of the amount of currency entered as payable on the coupon provided that the card issuing institution pays the amount without deferment to the merchant accepting the card. Illustration A wants to purchase $50 from a broker by paying rupees through credit card at spot exchange rate. The voucher signed by buyer A will be an evidence of constructive possession made through an accounting treatment (direct credit to Broker). It shows immediate transfer of funds from As agent i.e. bank to Broker constructively. Note: Merchant in the standard is replaced by the Broker to confine the illustration to Sarf contract. 2/7 Agency in trading in currencies Shariah Justification Refer to guideline 11 (a) It is permissible to appoint an agent to execute a contract of sale of a currency with authorization to take possession of and deliver the counter value. Illustration Person A through his agent A* enters into Sarf contract with B or the agent of B*. Contract can be executed by the agents and they can receive counter values. (b) It is permissible to appoint an agent to sell currencies without authorizing him to take possession of the amount sold, provided the principal or another agent takes possession at the closing of the transactions, before the principal parties are dispersed. Illustration Person A through his agent A* enters into Sarf contract with B or the agent of B*. Authority of A* and B*are limited to sell the currencies but possession will be taken by the principals before the separation of principal parties. (c) It is permissible to authorize taking possession of the counter values after the execution of a contract of currency exchange, provided such possession is completed by the authorized agents at the closing of the transactions. Illustration Principal A enters into Sarf contract with Principal B after the execution of contract counter values may be received by their authorized agents before their separation. Note: Different school of thought on explaining separation of parties will be dealt later.

2/8 Use of modern means of communication for currency trading Underlying Reason Refer to guideline 12 (a) Bilateral contracting between two parties at different remote places using modern communication means has the same juristic consequences as execution of the contract in one and the same place. (b) An offer made for a stated period, which is transmitted by one of the prescribed means of communication, remains binding on the offeror during the period. The contract is not completed until acceptance by the offeree, and taking possession of the counter values (either actual or constructive) by both parties, has taken place. Illustration Person A offers to sell $1m at spot exchange rate to a Pakistani B within 15 days through Western Union. A remains bound till the fifteenth day. B can initiate the contract by accepting the offer before fifteenth day and by exchanging counter values actually or constructively in this contract. Reasonable time taken by Western Union in transfer across the country is legitimate as Western Union have received or paid counter values in capacity of agent. 2/9 Bilateral promise to purchase and sell currencies (a) A bilateral promise to purchase and sell currencies is forbidden if the promise is binding, even for the purpose of hedging against currency devaluation risk. However, a promise from one party is permissible even if the promise is binding. Shariah Justification Refer to guideline 14 Illustration Person A promises to purchase $50 by paying rupees at some future exchange rate after 15 days. Person B promises to sell the same after 15 days in counter. If these promises are considered binding they become a future contract hence invalid, even for the purpose of hedging as explained in context of forward contract earlier. (b) Parallel purchase and sale of currencies is not permissible, as it incorporates one of the following invalidating factors: (1) There is no delivery and receipt of the two currencies bought and sold, and thus the contract amounts to a deferred sale of currency. (2) Making a contract of currency exchange conditional on another contract of currency exchange. (3) A bilateral promise that is binding on both parties to the contract of currency exchange and this is not permissible. Shariah Justification Refer to guideline 16 Illustration Person A purchases $50 from someone and at the same time enters into a contract of selling $50 given Person A holds neither prior reserve nor any access to established currency market i.e. no reasonable certainty of the delivery of subject-matter. (c) It is not permitted for one of the parties in Musharakah or Mudarabah to be a guarantor for the other partner, to protect the latter from the risks of dealing in currencies. However, it is permissible for a third party to volunteer being a guarantor for that purpose, provided this guarantee is not stated in the contract. Shariah Justification Refer to guideline 17 Illustration Partner A cant give guarantee to his co-partner conducting Sarf operations. However, a person C from outside the firm can do so voluntarily given this guarantee is separate from contract. 2/10 Exchange of currencies that are debts owed by the parties An exchange of amounts denominated in currencies that are the debts established as an obligation on the debtor is permissible, if this results in the settlement of the two debts in place of a bilateral exchange of currencies, and in the fulfillment of the obligations in respect of these debts.

Shariah Justification Refer to guideline 18 This covers the following cases: (a) Discharge of two debts when one party owes an amount from another party denominated in (say) dinar and the other party owes an amount from the first party denominated in (say) dirham. In this context, both may agree on the rate of exchange between the dinar and the dirham in order to extinguish the debts, wholly or partially. This type of transaction is known as al-muqasah(set-off). Illustration Person A and B owes to each other in different currencies. They can set-off their debts wholly or partially at spot exchange rate. (b) The creditors making payment of a debt due to him in a currency different from that in which the debt was incurred; provided the settlement is effected as a spot transaction at the spot exchange rate on the day of settlement. Illustration Refer to illustration 2/5 2/11 Combination of currency exchange and transfer of money It is permissible to execute a financial transfer of money (remittances) in a currency different from that presented by the applicant for the transfer. This transaction consists of a currency exchange affected through actual or constructive possession by delivering an amount of currency that is evidenced by a bank draft, followed by the transfer of the amount using currency that is bought by the applicant for the transfer of money. It is permissible for the institution to charge a fee for the transfer. Shariah Justification Refer to guideline 19 Illustration Person A posses PKR1m and wishes to transfer this amount in US as per spot exchange rate (Rs/$). He submits his rupees to bank and collects a bank draft quoted in dollars. This bank draft shows the constructive possession on behalf of person A and is issued after transferring the rupees into dollars. Bank can charge X amount of services for transfer. 2/12 Forms of dealing in currencies via institutions (a) Among the forms that are not permitted is the customer of an institution entering into currency trading for an amount of money exceeding the amount of money he owes, using credit facilities granted by the institution which handles the currency trading, thus enabling the customer to enter into a transaction for an amount in excess of what he would otherwise be able to pay for. (b) It is not permitted for the institution to lend the customer a sum of money on the condition that currency dealing must be affected with that institution and not with any other. If there is no such condition, then there is no Shariah prohibition. Shariah Justification Refer to guideline 20 Illustration Person A wishes to start currency exchange contract through an institution B which provides such facility. Islamic law provokes A to do so if A does not own any currency. So B lends him an amount X without any condition i.e. A may start exchange with another institution. If B stipulates any condition while lending and latter on derive any benefit (price differentials or transfer fee) directly or indirectly on the account of lending, it will amount to Riba. Without stipulation such practice will be allowed.

Appendix A: Relevant Literature on Trading in Currencies

Sarf a. Hadith: Dont trade gold for gold or silver for silver except on the basis of waznamm-bi-wazn (weight), mithlamm-bi-mithl (like for like) and sawaamm-bi-sawaa (equal for equal) Sahih Muslim 2966; Rawi: Abu Saeed Khudri (blessings of Allah be upon him) b. Hadith: Do not sell gold for gold except equal for equal and do not sell what is deferred for a spot exchange Sahih Bukhari; Rawi: Abu Saeed Khudri (blessings of Allah be upon him) c. Maxim: If a riba bearing counter-value is exchanged for similar counter-value, equality and immediate possession are obligatory, and if it is exchange for different species, immediate possession alone is obligatory. When effective causes are different, none of these obligations arise Mansoori; Shariah Maxims on Financial Matters p203 Constructive Money d. Fatwa: It is lawful to sell currencies that are different in Genus from each other because every currency is considered as a kind of money on its own, like that of gold and silver, and therefore it is lawful to sell a particular currency such as dollar, for another currency such as Indian Rupee even for inequality as it is lawful to sell gold for silver for a different weight, provided that bilateral taking possession of the two counter values (two currencies) must take place in the session of the contract. However, if a certain amount of a particular currency is sold for the same currency such as Indian rupee for Indian rupee, then the inequality is unlawful Fatawa al-Shariyyah, Administration of Fatwa of Kuwait 3/160 no.788 e. Fatwa: Paper money assumes the function of gold and silver money from the point of view of the applicability of the rules of riba and zakat as well as being the principles of salam contracts, a capital of mudarabah or investment in a partnership Recommendations of the workshop on Shariah position on Indexation. (25-26 April; 1987) organized by Islamic Development Bank Blocking of Ways Hedging is not only permissible but also desirable activity in Islamic economic system i.e. minimizing undesirable risk and enhancing economic efficiency. But if the end is prohibited then it shall not justify mean. So, hedging through Forwards & Futures can not be allowed. Nature of Possession f. Shaikh Ibne Taimiyyah said, As long as there is no definition for it in the language or in the Shariah, recourse must be had to the custom of the people, like possession mentioned in the words of the Prophet SAAWS, He who buys food is not to sell it until he takes possession of it Muajm Fatawa Ibn Taimmiyah Vol. 3 p.272 g. Al-Khattabi said, Forms of possession differ for things in accordance with a difference in their own forms and in accordance with the varying practices of the people with respect to them Maalim alSunan lil Khaattabi

h. According to al-Wanshirisi, A thing that is acted upon by the people and is preferred by their customs and practices must be accommodated through the Shariah even against disagreement and opposition, as far as possible Al-Wanshirisi, al-Miyar vol.6 p.471 Validity of Contract through Modern means of communication i. When a contract is to be signed, through a written message or a messenger, between two absent parties who are not in the same place and neither of them can see or hear the other a case which includes contracting through telex, fax and pc screens the validity of such contracts starts as soon as

the concerned party receives and accepts the offer International Islamic Fiqh Academy Resolution No. 52 (3/6) j. According to Sharia, when an online contract is signed between two parties who are not in the same place, it is considered as a contract between two absent parties if neither of the two parties can hear the voice of the other. Consequently such contract should become subject to the Sharia rulings on message contract 19th Al-Barakah Seminar on Islamic Economics Status of Promise in Islamic Law Bilateral Promise: Binding Vs. Non Binding A mutual promise in the sale of currencies involving a delay in payment of the price is lawful as long as the mutual promise is not considered binding. This was the majority opinion. If the mutual promise is considered binding, however, this transaction will not be lawful from a Shariah perspective 6th AlBaraka Forum, Fatwa No.23 Unilateral Promise: Binding The promise (unilateral) and its binding nature safeguards the transaction and brings stability and serves the interest of both, so it is lawful for the bank to insist on such promise (murabaha etc) 1st Al-Barakah Seminar.

Appendix B: Conventional Finance Definitions

Bank Transfer It refers to transfer of funds from account of one customer to that of another customer through modern means of communication and accounting systems Cheque A cheque is a document/instrument (usually a piece of paper) that orders a payment of money from a bank account Credit Card A credit card is a small plastic card issued to users as a system of payment. It allows its holder to buy goods and services based on the holder's promise to pay for these goods and services Devaluation It refers to reduction in the value or buying capacity of money. Exchange Rate The price at which one currency can be converted into another known as exchange rate it can be both: 1-Spot Exchange Rate 2-Forward Exchange Rate Forwards & Futures A forward contract commits the user to buying or selling an asset at a specific price on a specific date in the future. A future is a forward contract that is traded on an exchange. Hedging Hedging involves deliberately taking on a new risk that offsets an existing one, such as your exposure to an adverse change in an exchange rate, interest rate or commodity price. Option An option is a contract that gives the buyer the right, but not the obligation, to sell or buy a particular asset at a particular price, on or before a specified date. Money Market Any market where money and other liquid assets (such as treasury bills) can be lent and borrowed for between a few hours and a few months (one-year) are known as money market.

Monopoly When the production of a good or service with no close substitutes is carried out by a single firm with the market power to decide the price of its output, it is known as Monopoly.