Loan Involving Two Currencies

Answered according to Hanafi Fiqh by

Q: Mufti sahib I went in to a transaction with a brother as follows :

I wanted some cash money for my business so I told the brother if he would be interested in some US$ which I will sell him at a much lesser rate then the prevailing rate, e.g. prevailing rate K5.00 /$1 and offered rate K3.7 /$1 where he must give me the local currency (Kwacha) and I will only give the dollars to him after a year.

Finally we agreed on an amount US $100,000 for which he gave me KWACHA K370,000/ as per agreed rate. When time came for me to give him the US DOLLARS $100,000 I didn’t have the cash so I asked the brother if we could turn around once more on a new rate and we continued turning around the same initial amount for 3 years as I didn’t have the money, eventually the amount had increased 3 folds.

During this period I did give him some little  money  but in Kwacha, I still haven’t paid him and now I have been told my some ulema that such transactions are not permissible.

Mufti Sahib  when the deal was agreed in 2011. Some ulema had permitted such transactions but later they also disapproved of such transactions.

1)      Are such transactions allowed?
2)      Does the transaction remain valid since it was allowed during that period and the fatwa came later?
3)      Turn around of the same deal again and again due to not having the money allowed?

A: The initial deal was permissible. To exchange one currency for another on an agreed rate is lawful, as long as one of the two currencies was taken possession of. You did take possession of the Kwachas, so that made the deal lawful. A fixed rate of exchange was also agreed on.
However, after one year it was not permissible to turn around the debt on a new rate. In effect, it meant that you had increased the amount of money you owed him, and such increase was based solely on the fact that you were unable to effect payment at the stipulated time. This is the exact type of riba or usury that the Holy Quran has prohibited: interest charged for an extension of payment. Likewise the increase that you agreed upon in the following two years was also haraam for it constituted ribaa.

At this stage the deal is still valid but you only owe him the initial $100,000 and nothing more. You need to inform him that whatever agreement the two of you had made to increase the amount of dollars by lowering the agreed rate of Kwacha/Dollar, is now null and void. The first amount agreed upon when the deal was done, will remain in force. Whatever money you paid him in Kwachas must be calculated according to the initial rate of K3.7 /$ and deducted from the total debt.

Make taubah sincere for agreeing to a riba deal. Allah Ta’ala knows best

Mufti Siraj Desai
Darul-Uloom Abubakr
Port Elizabeth
South Africa