Understanding Islamic Finance - Doha Academy of Tertiary Studies

88 Understanding Islamic Financeother person. But it is necessary for the banks to keep in mind the Islamic rules governingthe contract of “Sarf”.If such crediting takes some time to enable the beneficiary to draw the amount so credited,this delay can be allowed, provided that it does not exceed the usual period normally allowedin such a transaction. However, the beneficiary of such crediting cannot deal in the currencyduring the allowed period until the crediting takes its full effect by enabling the beneficiaryto draw the amount.Explaining the relevance of this Hadith, Imam Nawavi, an eminent commentator of SahihMuslim, 11 says that (in the case of all commutative contracts) when the effective cause(‘Illah) of prohibition of exchange of two commodities is different, a shortfall/excess ordelay in payment are both permissible, as, for example, in the sale of gold or dollars forwheat (the former being a medium of exchange and the latter an edible item); when thecommodities are similar, an excess/deficiency or delay in payment are both prohibited, e.g.gold for gold or wheat for wheat; when the commodities are heterogeneous but the ‘Illah isthe same, as in the case of the sale of gold for silver or Rupees for Dollars (the common‘Illah being their use as media of exchange) or of wheat for rice (the common ‘Illah beingedibility), then an excess/deficiency is allowed while a delay in payment is not allowed. Assuch, futures trading in commodities like gold and silver that serve as Thaman is forbidden.After analysis of the Fiqh literature on the exchange of similars, we come across thefollowing significant points:• Exchange should be without any “excess”. It follows that the debt contract must be settledwith reference to the “original legal standard”. Money is used as a medium of exchange. 12• Since the value of money can rise as well as fall during inflation and deflation respectively,the settlement of a debt contract should be made in terms of the original date of agreement,which can be taken as a base year. 13We need to keep in mind the difference between the natures of sale and loan contracts.An exchange in the form of loans, which intrinsically means a delay in repayment, must beof equal amounts. This is because loaning is a virtuous act in which exactly the same/similaramount has to be returned. If the borrowed commodity is fungible, as currency notes are,exactly its similar is to be repaid; in the case of nonfungible goods, the loan contract needsto be made in terms of money and in the case of two similar goods, the condition of excesspayment of either is prohibited, even when it is a transaction of exchange/sale, not a loan.While barter transactions are very rare in the modern age and banks are not likely toengage in such activities, foreign exchange dealings are included in the normal activities ofbanks and financial institutions. It is imperative, therefore, that when a sale transaction istaking place among currencies, the exchange has to take place instantly and not on a deferredbasis. There are numerous traditions of the holy Prophet (pbuh) to this effect.As regards currency futures, some scholars forbid them while others distinguish betweenthe following two cases: the first is where one currency is delivered on the spot and the other11 Discussion on ‘Illah can be seen in Sahih Muslim with annotation by Nawavi, 1981, 11, pp. 9–13. For the juristic views ofvarious scholars, see Al Muhallah, 7, pp. 403–426.12 A famous Hadith about the dates of Khaiber may be referred to in this regard. In order to avoid Riba, dates of low quality weresold in the market and then with the money received, dates of good quality bought (Muslim, 1981, 11, pp. 20, 21).13 The holy Prophet advised a Companion accordingly (regarding stipulating price in dinars (gold) but paying in dirhams (silver);Ibnul Qayyim, 1955, 4, p. 327).