Standard Shariah AAOIFI No 1 That Is Outdated ( Trading in Currencies ) (2024)

I have read the AAOIFI Shariah Standard no 1 regarding (المتاجرة في العملات) currency trading, issued in the year 2000. However, I find it needs revision and addition because it only addresses micro issues, such as foreign currency exchange (Forex), basics in bai' al-sarf without addressing the various contexts that exist today such as in the form of online money exchangers, physical or online forex trading, as a source of investment and earning profits (not for hedging) in the difference in currency values that are present physically or online by private platforms or by countries. Also, in a more macro context for example if the forex element is created in the form of Islamic structured products, which gain exposure to currency exchange as their profit benchmark and then involve the buying and selling of currencies with or without it, because they use tawarruq and others.

Indeed, 'forex' and 'forex trading' are different. What is Forex Trading? Foreign Exchange Trading or Forex trading is an activity of trading one currency for another to make a profit from the exchange rate differences at different times. This activity has been extensively carried out by conventional financial institutions to profit from currency value differences. This action makes currency a commodity traded on its own.

For individuals, this activity is also offered by privately operated online platforms.

Currency transactions must be conducted in large amounts. This is because the movement in foreign currency values is very small. The price change of a currency is only in the percentage of cents. For example, the exchange rate MYR/USD changed from 3.3590 to 3.3600, involving a price difference of only MYR 0.0010. However, in transactions involving large values, small changes in currency prices can result in significant profits or losses.

Therefore, currency investors usually use leverage in their transactions. Leverage is a certain amount of loan used for foreign currency transactions. This loan is usually given by foreign currency brokers to their clients. Foreign exchange transactions typically offer high leverage. The value of this leverage depends on the initial margin deposited into their accounts.

Here is the calculation of leverage based on initial margin (margin based leverage):

For example, you want to trade one lot of AUD/USD currency (one standard lot of AUD currency is equivalent to AUD100,000). Therefore, you need to deposit an initial margin of 1%, equivalent to AUD1,000 to enable a transaction of AUD 100,000. This means, your leverage based on margin is 100:1 (AUD100,000/AUD 1000). This margin-based leverage is determined by foreign currency brokers. Each broker has different margin-based leverage.

Some offer margin-based leverage such as 200:1 and up to 500:1. Margin-based leverage of 200:1 only requires a margin of 0.5% while margin-based leverage of 500:1 requires a margin of only 0.2%.

The act of making currency a commodity is not Shariah compliant according to scholars like al-Ghazzali:

كل من عامل معاملة الربا على الدراهم والدنانير – تعامل في غيبة الشرطين أو أحدهما – فقد كفر النعمة وظلم، لأنهما خلقا لغيرهما لا لنفسهما إذ لا غرض في عينيهما، فإذا اتجر في عينيهما فقد اتخذها مقصودًا على خلاف وضع الحكمة.

Meaning: Anyone who deals with the matter of usury on dirhams (silver) and dinars (gold) (or in fiat money and currency at the moment) - dealing without both conditions or one of them - then he has denied the blessing and acted unjustly, because both (gold and silver or currencies) were created for others not for themselves (due to the fact they are medium of exchange) and not for themselves (to be made a commodity) because there is no purpose in themselves (to be traded on its own). Therefore, when traded on the 'ain (currency) itself, it has been considered to have made it a purpose contrary to the wisdom placed.

Ibn Taymiyyah said:

إن المقصود بالأثمان – النقود – أن تكون معيارًا للأموال، يتوسل بها إلى معرفة مقادير الأموال، ولا يقصد الانتفاع بعينها، فمتى بيع بعضها ببعض إلى أجل قصد بها التجارة التي تناقض مقصود الثمنية

Meaning: The purpose of ‘prices’—money—is to serve as a standard for wealth, used to determine the value and price of goods, and not intended for benefit from the object (currency) itself. Thus, when one currency is sold for another on credit with the intent of trading, it contradicts the purpose of thamaniah.

Ibn Qayyim said:

ويمنع المحتسب من إفساد نقود الناس وتغييرها، ويمنع من جعل النقود متجرًا فإنه بذلك يدخل على الناس من الفساد ما لا يعلمه إلا الله، بل الواجب أن تكون النقود رؤوس أموال يتجر بها ولا يتجر فيه

Meaning: A market supervisor is prohibited from corrupting people’s money and altering it, and from making money a commodity because this will bring about a corruption in society that only Allah knows the extent of. Instead, it is obligatory for money to serve as capital that is traded with, and not traded in itself.

Therefore, the ruling on Forex Trading is that it is not Shariah compliant, especially when conducted in currencies managed by conventional companies, as they certainly do not maintain this condition because most forex trading conducted by conventional institutions is 'Forward FOREX' or Forex that uses 'Value forward' (future value) which falls under Riba Nasiah. They also often use SWAPs, options, and other instruments that are not permissible under Shariah.

These instruments do not meet the Islamic requirement of immediate delivery or "qabadh" in Islam, either "actual" (hakiki) or "constructive" (hukmi), at the same time. The issue with FOREX implementation is the delay in delivery from both parties, at which point the contract becomes void (Radd al-Muhtar ala ad-durr, 4/531).

A study by a group of researchers on the ruling of online forex trading by individuals found the following conclusions:

a) Spot forex conducted by individuals through internet platforms differs somewhat from the concept of spot forex conducted at the inter-bank level. From one perspective, it is based on spot forex in terms of the spot value, but in terms of settlement, it does not occur based on T+2. Indeed, settlement does not occur as long as the trader does not close the position they opened.

b) However, from another angle, spot forex is more similar to forward forex because when traders buy a currency from a broker, they do not actually own the currency they buy. Instead, they will enjoy it once they resell it to the broker in the future. What distinguishes spot forex by individuals from forward forex is that the future currency exchange rate is fixed at the rate agreed on the transaction date, while the currency exchange rate in spot forex is not fixed, but based on the fluctuations in the market price of the traded currency.

c) The Malaysian government does not recognize any foreign currency transactions made through unauthorized channels. In fact, there are clear legal provisions regarding this prohibition, through Section 3(1) and Sections 4(1),(2) and (3) of the Exchange Control Act (ECA) 1953. Any individual is absolutely prohibited from dealing in foreign currencies, unless they have obtained permission from the Foreign Exchange Controller, i.e., the Governor of Bank Negara Malaysia.

d) Based on several Shariah issues raised including qard = leverage, riba al-nasi’ah = rollover interest, qabd, selling currency not in possession (qabd) and speculation involving gambling, it is clear that online spot forex operations by individuals do not follow the Shariah guidelines outlined regarding currency trading (bay‘ al-Sarf).

e) Cash purchases made on credit are clearly in contradiction with the Sarf contract and contain elements of riba.

f) If the credit purchase is classified as a loan given by the broker, this still falls under activities prohibited by Shariah because it involves benefiting from a loan, and the prohibition of combining ‘loan’ and ‘sale-purchase’.

g) Selling currency with deferred delivery is prohibited by Shariah. The condition of qabd in the assembly does not exist in this transaction. The permission to delay delivery (qabd) cannot be applied in this transaction as it does not fall under the concept of ‘necessity’ for ‘bonafide’ transactions.

h) Online broker transactions contain elements of bay’ al-najsy, where the trader offers a price not to own the currency but to benefit the seller through a price increase.

i) This transaction also contains ihtikar, which is prohibited by Shariah.

Dr. Zaharuddin Abdul Rahman. PhD

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