Forex or FX (Foreign Exchange) is the foreign exchange market where currencies are bought and sold, in real time. This market, which enables to exchange a currency against another, is deemed to be the most liquid of all, with daily exchange volumes that can be up to 100 times larger than the New York Stock Exchange.
Forex can be used to hedge against unfavorable movements or exchange rates in the future. It also enables to cover payment transactions and transfers of funds between different countries with different currencies. Quotations are made in real time and fluctuate according to economic data, status of other markets, economic health of a country, see policy data … etc.
Lawfulness of Forex trasactions
Muslim scholars are generally unanimous on the lawfulness of exchange of currencies of different countries on a timely basis at a rate different from the unit. Indeed, the currencies are separate entities with different values and different purchasing power. However, there were diametrically opposed opinions in the past on the lawfulness of currency exchange on a prospective basis, where the rights and obligations of both parties pertain to a later date. The difference of views is mainly related to the doubts about the presence of elements in these transactions prohibited in Sharia such as Riba (usury), Gharar (excessive uncertainty), and Qimar (game of chance and speculation).
With regard to the comparison with Riba, some legal experts compare paper currencies with gold and silver, which were the main medium of exchange in the early days of Islam. They refer to the hadith of the Prophet Muhammad (saws) “Do not sell gold for gold except if the exchange is done equal quantity against equal quantity, and do not differ between the quantities, and do not sell gold which is not present against the gold now“. However, in case of exchange of currencies of different countries, the intrinsic value of the currency cannot be directly identified or assessed, contrary to gold or silver which can be weighed. Therefore, the orders for prohibition of Riba, cannot be applicable to the currencies.
On the other hand, Gharar suspicion and speculation arises from the fact that the future currency exchange contracts involve the sale of a non-existing object or an object that is not in possession of the seller. Some Ulemas have suggested that, nowadays, future contracts are generally allowed, since the probability of delivery fault is minimal in the future markets organized today. Indeed, the nature of future standardized contracts and transparency of operating procedures in the organized future markets are meant to reduce the probability of fault. Nevertheless, the assertion continues to be rejected by the majority of scholars, because of the fact that these contracts almost never involve delivery by both parties. In addition, the volatility of exchange rates makes them unpredictable at least for majority of the stakeholders in the market. And any attempt to speculate in theoretically infinite hope of gains would be a game of chance for these participants.
Forex in Islamic banks
Islamic banks spot exchange foreign currency in various transactions such as bank transfers, payment for goods imported from another country, payment for services invoiced in a foreign currency, sale or purchase of a cash currency or traveler’s check, or when a customer deposits a check denominated in a foreign currency and require payment of it in local currency. In addition to spot transactions, some Islamic banks undertake FX transactions on the basis of future contracts, options or currency arbitrage, although some of these type of transactions are subject to controversy over its validity.
There is normally no initial costs involved in foreign exchange transactions, however, Islamic banks derive a financial advantage from it by incorporating a margin in the transaction or the price agreed in the contract. This means that the bank rate may be different from market rates prevailing at that time, where the bank makes a profit on a transaction.