In the name of Allah, the Most Gracious, the Most Merciful. All praise belongs to Allah, Lord of the Worlds. Prayers and salutations be upon the Master of the Messengers ﷺ, and upon his family and Companions. There is no power nor strength except through Allah, the Mighty, the Wise.
Currency conversion and the transfer of debts from one currency to another for economic reasons are among contemporary issues. However, the matter is founded upon legal principles and subsidiary rulings addressed by the fuqahāʾ in their works. It is known as ṣarf. It is also an area in which mistakes are frequent and falling into ribā is common.
Thus, if either the debtor or the creditor wishes to substitute the debt between them with another currency, this is permissible according to the majority: the Ḥanafīs, the Shāfiʿīs (according to the later position), and the Ḥanbalīs. It is considered the substitution of a debt for a present countervalue, and the governing principle is: Liabilities stand in the place of tangible assets. However, this transaction must be regulated by specific conditions in Islamic law, namely:
- It is permissible for the creditor and debtor to agree, on the day of payment and not before it, that the debt be discharged in a currency different from the currency of the original debt, provided that this is done according to the exchange rate on the day of payment.
- Likewise, in the case of an instalment debt denominated in a particular currency, it is permissible to agree on the day of payment that a specific instalment be paid in full in another currency, according to the exchange rate of that day.
- In all cases, it is a condition that nothing remain in the debtor’s liability from the amount upon which the currency exchange has been concluded.
- It is permissible for the contracting parties, at the time of the original contract, to stipulate that the deferred price or deferred rent be denominated in a currency to be paid either as a lump sum or in fixed instalments, whether in multiple currencies or in a specified quantity of gold, and that payment then be made according to that agreement.
- As for a debt incurred in a particular currency, it is not permissible to agree that it be recorded in the debtor’s liability as the equivalent value of that currency in gold or in another currency, in the sense that the debtor becomes bound to discharge the debt in gold or in the other agreed currency. This is what is commonly referred to today among traders as ‘fixing the debt in another currency’ or ‘pegging the debt to gold without possession’.
Imām al-Nawawī (Allah have mercy upon him) said:
The new position is that substitution in lieu of the price is permissible. If he substitutes it with something sharing the same effective cause of ribā, such as dirhams in exchange for dinars, then taking possession of the substitute in the same session is stipulated.
Imām Shams al-Dīn al-Ramlī (Allah have mercy upon him) said:
If he substitutes it with something sharing the same genus of ribā, such as gold for gold, then the previously mentioned conditions are required: immediacy, equivalence, and mutual possession. Or, if it shares the same effective cause of ribā, such as dirhams for dinars, then taking possession of the substitute in the same session is stipulated, in order to avoid ribā.
Imām al-Marghīnānī (Allah have mercy upon him) said:
If a man is owed ten dirhams by another, and the debtor sells him one dinar for ten dirhams, hands over the dinar, and the two debts of ten are set off against one another, this is permissible. The meaning of the case is where he sells it for ten unrestricted dirhams. The reason is that this contract creates a price that becomes obligatory upon him and must be specified through possession, as we have mentioned—that is, in reference to his statement that both counter-values must be possessed before separation—whereas an existing debt does not possess this quality.
ʿAllāmah al-Buhūtī (Allah have mercy upon him) said:
If a man is owed one dinar by another, and the debtor pays him in dirhams, separately, little by little, then if he gives him each individual amount of dirhams, one dirham or more, calculated against the dinar by saying, for example: ‘This dirham is for one-tenth of a dinar,’ and ‘these two dirhams are for one-fifth of it,’ then the payment is valid, because it is the sale of a debt for a present counter-value. But if he does not do this—such as by giving him the dirhams silently and then later they settle the account after the dirhams have been given, treating them as an exchange at the time of settlement—this is not permissible, because it is the sale of a debt for a debt, and that is not permitted.
If he exchanges what has become established in his liability—even if what is owed in his liability is deferred—for a present countervalue taken into possession in the same session, then the ṣarf is valid.”
The evidence for this is the ḥadīth of Ibn ʿUmar (Allah be pleased with them both) who said: “I used to sell camels in al-Baqīʿ. I would sell for dinars and take dirhams, and I would sell for dirhams and take dinars, taking one for the other and giving one for the other. I came to the Messenger of Allah ﷺ while he was in the house of Ḥafṣa (Allah be pleased with her) and said: ‘O Messenger of Allah, allow me a moment to ask you. I sell camels in al-Baqīʿ: I sell for dinars and take dirhams, and I sell for dirhams and take dinars, taking one for the other and giving one for the other.’ The Messenger of Allah ﷺ replied: ‘There is no harm in taking it according to its rate on that day, so long as you do not separate while anything remains between you.’” Narrated by Abū Dāwūd §3354, al-Tirmidhī §1242, al-Nasāʾī §4582, and Ibn Māja §2262.
Imām Ibn Raslān (Allah have mercy upon him) said:
If mutual possession occurs in the same session, nothing remains between them; and if they have not separated, there is no need to qualify it further by stipulation. This issue is the case of settling a debt for a present countervalue when both are from ribā-bearing properties, and in such a case possession in the same session is categorically stipulated.
Proper Conduct & Etiquette
After clarifying this issue, the extent of the Sharīʿa violations that occur in the marketplaces becomes apparent, both in this transaction and in others that lead people into the mire of ribā and into prohibited sales and dealings. Ignorance is no excuse in such matters while ʿulamāʾ are readily available. It is therefore incumbent upon the trader, and others besides him, to learn the rulings of the transactions they need, including the rulings of sales with respect to validity, irregularity, invalidity, permissibility, prohibition, ribā, and other related matters. This must not be neglected, for such negligence indicates a lack of concern for the Dīn and has grave consequences in the Hereafter.
Imām al-Shāfiʿī and Imām al-Ghazālī (Allah have mercy upon them both) transmitted an ijmāʿ that it is not permissible for a mukallaf person to embark upon any matter until he knows Allah’s ruling concerning it.
Imām al-Qarāfī (Allah have mercy upon him) said:
Whoever sells is obliged to learn what Allah has designated and legislated concerning sale. Whoever leases is obliged to learn what Allah has legislated concerning lease. Whoever enters into a qirāḍ partnership is obliged to learn Allah’s ruling concerning qirāḍ. Whoever prays is obliged to learn Allah’s ruling concerning that prayer.
The Caliph ʿUmar b. al-Khaṭṭāb (Allah be pleased with him) would strike with his whip those who sat in the marketplace without knowing the relevant rulings, and he would say: “Let no one sit in our marketplace who does not know ribā.”
Imām Mālik (Allah have mercy upon him) instructed that anyone who did not know the rulings should be removed from the marketplace, lest he feed people ribā.
The market inspector would walk through the marketplaces, stand at a shop, and question its owner about the rulings that applied to his goods: where ribā could enter into them, and how it could be avoided. If the shopkeeper answered correctly, he would leave him in his shop. If he was ignorant of any of that, he would remove him from the shop and say: “You cannot sit in the marketplace of the Muslims while feeding people ribā and that which is impermissible.”
Some scholars said: “It is not lawful for anyone to engage in trade until he has memorised the Book of Sales (amongst the chapters of Fiqh).”
In earlier times, when merchants travelled, they would take with them a jurist to whom they could refer in their affairs. Thus, a trader must have a jurist as a close adviser.
