Could you please clarify the rules of purchasing gold, silver, and currencies?

In the Name of Allah, the Most Gracious, the Most Merciful.

As-salāmu ‘alaykum wa-rahmatullāh wa-barakātuh.

Introduction

As a Muslim, one recognizes that the purpose of his creation is the worship of his Creator. He makes a conscious effort to stay away from whatever is prohibited. He practices upon the ways of his beloved Prophet (peace and blessings be upon him), and he strives to achieve the pleasure of his Lord. There can be no bigger calamity in the life of a Muslim than to incur the displeasure of his Lord, the epitome of which is the declaration of war from the One he worships and the one on whose path he follows, i.e. his glorious Allah Ta’ālā and his beloved Prophet (peace and blessings be upon him). Allah Ta’ālā announces in the Quran,

يَا أَيُّهَا الَّذِينَ آمَنُوا اتَّقُوا اللَّهَ وَذَرُوا مَا بَقِيَ مِنَ الرِّبَا إِنْ كُنْتُمْ مُؤْمِنِينَ * فَإِنْ لَمْ تَفْعَلُوا فَأْذَنُوا بِحَرْبٍ مِنَ اللَّهِ وَرَسُولِهِ وَإِنْ تُبْتُمْ فَلَكُمْ رُءُوسُ أَمْوَالِكُمْ لَا تَظْلِمُونَ وَلَا تُظْلَمُونَ (البقرة: 278-279)

O you who believe, fear Allah and leave whatever interest remains, if you are believers. And, if you do not, then take notice of war from Allah and His Messenger. But, if you repent, you shall have your capital. Do not deal unjustly and you shall not be dealt with unjustly. (Quran: 2:278-279)

Alhamdulillah, many Muslims have prevented themselves from engaging in interest through avoiding conventional mortgages, by opening non-interest paying bank accounts, and other similar methods of paying/accepting interest payments. However, many are unaware that interest may occur in other forms of transactions, as well, even when there is no reference to the word “interest,” such as transactions related to gold and silver and transactions associated with the purchase (or exchange) of currencies.

Interest (Ribā) Explained

In order to avoid interest, one must first understand what constitutes it. Interest may occur in a transaction when trading two commodities (i.e. what the purchaser gives to the seller and what the seller gives to the purchaser) if:

1.      The items are measured in either weight or volume (makīlī or mawzūnī), and/or

2.      The items are of the same species (jins)

If both commodities contain the above two characteristics, then it is necessary to trade them both in equal amounts (tasāwī) and in a cash (as opposed to credit) transaction, where both parties take possession in the same gathering. If the two items are traded in unequal amounts, this constitutes Ribā al-Fadl, which is interest due to an increase on one side. If the transaction is on credit, such that one (or both) of the parties does not take possession in the same gathering, then this will also constitute Ribā al-Nasī’ah, which is interest due to a delay in taking possession.

For example, if two people trade one type of wheat for another type of wheat, then it is necessary for both parties to trade in equal amounts (for example, five kilograms of wheat from each side) and in a cash transaction. This is because wheat is measured in volume and both the commodities are the same (i.e. wheat). Hence, if they trade four kilograms of wheat for five kilograms of wheat, this will constitute Ribā al-Fadl. Additionally, if one (or both) party also trades on credit, it will constitute Ribā al-Nasī’ah.

On the other hand, if only one out of the two characteristics is found, then Ribā al-Fadl would not apply. However, it is still necessary for it to be a cash transaction, although, in this case, possession from one of the two parties would also suffice. If at least one of the two parties does not take possession in the same gathering, it would constitute Ribā al-Nasī’ah.

For example, if one person trades four kilograms of wheat for five kilograms of barley, then this is permissible, as long as at least one of the two parties takes possession of the goods in a cash transaction, since wheat and barley are both measured in volume, but they are different species. Similarly, if one person trades four pens of Brand A for five pens of Brand B, this is permissible, as long as at least one of the two parties takes possession in a cash transaction, since both are of the same species (i.e. pens), but they are not measured in weight or volume. Rather, they are determined by count.[1] Thus, only one out of the two characteristics exists in such a scenario.

Finally, if neither characteristic is found, then the items may be traded in any quantity and a cash transaction is not necessary. For example, if one person trades four pens for five pencils, it is permissible and neither party is required to take possession of the other’s goods in the same gathering. This is because pens and pencils are not measured in weight or volume, nor are pens and pencils from the same species.

An apparent exception to the above principles is when trading methods of payment, namely gold, silver, and currencies. If a person trades gold for silver, the amounts may be different (one ounce of gold for fifty ounces of silver, for example), but both parties, not just one, must take possession of the other’s goods in the same gathering. Such a transaction is known as sarf,[2] one of the requirements of which is possession from both sides.[3] As for trading one currency for another, the amounts may be different (for instance, one dollar for fifty rupees), but at least one party must take possession in the same gathering. This is necessary to avoid a type of transaction known as bay’ al-dayn bi al-dayn, which the Prophet (peace and blessings be upon him) expressly forbade.[4] The details of sarf and bay’ al-dayn bi al-dayn are not relevant here, but it is necessary to note that if possession is not taken in this manner, it will constitute as Ribā al-Nasī’ah.

Summary of Interest

In summary, the products two parties are trading may have one or both of the following characteristics:

1.      Measured in weight or volume

2.      Same species

When both characteristics are present in the products, the products must be sold in equal amounts and possession must be taken from both sides within the same gathering. If the products are not sold in equal amounts, it constitutes Ribā al-Fadl, whereas if either party does not take possession, it constitutes Ribā al-Nasī’ah.

However, if only one out of the two characteristics is present in the products, the products may be sold in any amounts, but at least one party must take possession of the product. If neither party takes possession within the same gathering, it constitutes Ribā al-Nasī’ah.

When trading gold for silver, the items may be sold in any amounts, but both parties, not just one, must take possession of the goods. On the other hand, when trading one currency for another, it is necessary to take possession of at least one currency. Otherwise, such transactions would constitute Ribā al-Nasī’ah.

Status of Currencies

The jurists (fuqahā’) have determined that currencies are a separate entity of their own and are not in the ruling of gold and silver, as they once were. The same ruling that applies to the trading of gold and silver does not apply to currencies.[5] Rather, they are in the same ruling as any other product, except that it is necessary for at least one party to take possession in a currency exchange, as mentioned previously.

Therefore, it is permissible to trade one currency for another, but one must remain cognizant of the following scenarios and its corresponding rulings:

1.      Neither party takes possession of the currency from the other

a.      This sale is impermissible

2.      Both parties take possession from the other

a.      This sale is permissible

b.      The currencies may be sold at any rate

3.      Only one of the two parties takes possession from the other

a.      Deferred payment is not stipulated in the agreement

                                                              i.      This sale is permissible

                                                           ii.      The currencies may be sold at any rate[6]

b.      Deferred payment is stipulated in the agreement

                                                              i.      This sale is permissible

                                                           ii.      The currencies may only be sold at the current market rate, otherwise it will become a means of effecting interest bearing transactions[7]

In summary, one currency may be traded for another at any rate, as long as one party takes possession in the same gathering. However, in the case where the contract stipulates deferred payment on one side, the currencies may only be traded at their current market rate.

Purchase of Gold/Silver with Currency

As discussed, currency is not in the ruling of gold and silver. Rather, it is its own entity. While gold and silver are measured in weight, currency is measured in count. Hence, the trade of gold/silver with currency does not meet either of the two characteristics of possible interest bearing transactions, i.e. both products are not measured in weight or volume (rather, only one is) and both are not the same species either. Therefore, one may trade any amount of gold/silver for any amount of a certain currency. For example, one may purchase one ounce of gold for fifty dollars.

However, since gold/silver and currency are methods of payment, at least one party must take possession in the same gathering. If neither party takes possession, then the transaction is invalid.[8]

Status of Credit Cards

When a person engages in a transaction, he is obliged to fulfill his payment and he remains indebted until he does so. Either the person may pay himself or he may assign a willing third party to pay on his behalf. The latter option is known as hawālah.

The scholars, dating back to Imam Abu Yusuf and Imam Muhammad, the two famous students of Imam Abu Hanifah (may Allah have mercy on them all), have disagreed whether a hawālah frees the original party from the actual debt itself or not,[9] as that is now the responsibility of the willing third party. While some jurists (fuqahā) have alluded to the former as the more correct opinion,[10] other have expressly mentioned that a hawālah frees the person from the actual debt, not just from the demand to pay it.[11]

Credit card transactions are a form of hawālah, where the purchaser transfers the debt to the card issuer, who in turn pays the merchant. Thereafter, the card issuer invoices the customer for the debt it had paid on his behalf. Since this is a valid form of transaction in the Sharia, it is permissible for a person to own and utilize a credit card. However, this is contingent on the purchaser’s confidence in paying the card issuer the full amount before the due date in order to avoid any interest payments.

As for credit card fees, there are two, namely an annual fee on certain cards charged to the customer, and a charge to the merchant for processing the transaction. Both fees are permissible since it is in lieu of services provided to the customer and merchant, respectively.[12]

Purchase of Gold/Silver with Credit Cards

Lastly, the issue remains about purchasing gold/silver with a credit card and its similarities to and differences from rulings discussed under “Purchase of Gold/Silver with Currency.”

A credit card transaction consists of two major functions: authorization and payment processing. When a merchant swipes the customer’s credit card, the authorization process checks whether the card is valid and the funds are available. Within a few seconds, the merchant receives either an approval or decline. Thereafter, the processing of the transaction begins with the eventual transfer of funds into the merchant’s account. Although the authorization only takes a few seconds, the payment processing is much longer and more complex. It may take from one business day up to, on average, two to three days before the merchant receives the funds in its account.[13] This has also been verified after speaking personally to several experts within the industry, including those who have worked extensively with or for Visa, MasterCard, Discover, and numerous banking institutions, specifically within finance and merchant processing.

Therefore, it is evident that when a customer purchases using a credit card, the merchant is confident of eventually receiving the funds, but he has not actually yet received it. The merchant does not have possession of the money immediately after swiping the credit card.

Since the condition in purchasing gold/silver with money is that at least one party must take possession, and the merchant does not receive possession of the money when using a credit card, it is necessary for the customer to take possession of the gold/silver. If the customer does not take possession of the gold/silver, the transaction will be void, as neither party would have taken possession.

Hence, if the customer would like any work done on the gold/silver post purchase, he must still take physical possession of it first. Thereafter, once this transaction is complete, the customer may give back the gold/silver to the seller for any further work on it.

The above rulings in this section pertaining to taking possession of the gold/silver apply when purchasing with a check or debit card, as well. In both cases, the merchant does not gain immediate possession of the funds.

Conclusion

In summary, it is permissible to trade gold and silver for each other in any amount, as long as both parties take possession within the same gathering. Additionally, it is permissible to trade one currency for another at any rate, as long as one party takes possession within the same gathering. If one party stipulates deferred payment, then the parties can only trade the currencies at the market rate.

Moreover, one may purchase gold and silver through a credit card, but it is necessary for the purchaser to take possession of the gold/silver, or else the transaction will be void.

And Allah knows best.

Mufti Abrar Mirza

Chicago, IL (USA)

Under the Supervision of Mufti Ebrahim Desai (South Africa)

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