Is it permissible to buy and sell currency in the foreign exchange market with the intention to make a profit based on mathematical models and economic forecasts?
In the name of Allah, Most Compassionate, Most Merciful,
Scholars of the past considered paper currency to be representing gold and silver, hence they did not regard it to be something that had a value in of itself. Paper money was merely thought to be a certificate indicating that its holder owns gold and silver to the value of the note.
When one gave another a paper note, he was not giving any money that had a value in of itself, rather one was merely delivering a certificate that enabled the receiver to recover its amount in gold or silver.
Therefore, they stated that if Zakat was given in paper currency, one’s Zakat was not fulfilled, for one has not given any money to the poor. One’s Zakat will only be fulfilled when the recipient gets hold of gold or silver which the paper currency represents, or when one purchases an item with the money. Similarly, they stated that purchasing gold or silver with paper currency is not permissible, because it is like exchanging gold for gold, and the condition in exchanging gold with gold or silver is that both parties must take possession of the things exchanged in the same session, whereas here, the one taking the paper note is not physically taking possession of gold or silver. He is only receiving a certificate on the back of which there is gold or silver.
The Sound Position
However, most contemporary scholars such as Shaykh Taqi Usmani and others declared that paper currency has now become a medium of transaction in of itself; hence it is considered to be in place of gold and silver.
They state that the promise to pay gold and silver which appears on these paper notes is now meaningless and of no significance. The notes cannot be converted into gold, and they are accepted as money throughout the world. One cannot legally demand the one paying in notes that he must pay in gold or silver.
Paper currency no longer represents gold or silver, because in reality there is no guarantee of gold being on the back of every note. It is considered to be a legal tender and has now become a medium of transactions in of itself; hence it has taken the place of gold and silver.
Based on this, they state, the obligation of Zakat will be fulfilled by giving paper currency to the poor and needy. Also, one will be permitted to purchase gold and silver with these notes.
Moreover, Shaykh Taqi Usmani is of the view that paper currency is not to be treated as gold and silver, rather it is a separate unlimited legal tender. It would fall into the category of what the early Muslims called Fulus. (See: Buhuth fi Qadhaya Fiqhiyya Mu’asira, p. 147-161)
Trading in currency
Based on the above brief explanation, trading in currencies of the same country with excess on one side, like exchanging one pound for two pounds is unlawful, for that constitutes Riba. However, it would not be necessary that both parties take possession of money exchanged in the same session, as is the case with exchanging gold for gold. The reason being is that paper currency is not treated like gold and silver, rather it is legal tender and medium of exchange in of itself. However, one party must take possession in the session (majlis) of transaction, because departing (iftiraq) one another with debts on both sides is not permitted.
If the currency was exchanged at par value, such as exchanging one pound for one pound, then this is without doubt permissible.
As far as exchanging the currencies of different countries is concerned, this is permissible even with excess on one side, such as exchanging one pound for two dollars. The reason being is that the genus (jins) of both currencies is different, and when exchanging items of varied nature, it is permitted to have excess on one side.
Therefore, it is permitted to trade in currencies of different countries and to make profit from such trade. However, it would be necessary that one party takes possession of his currency at the time of transaction, for departing with debt on both sides is not permitted according to the Hadith.
Note that this permissibility is in normal circumstances, but scholars mention that trading in currencies at a rate that is against the rate determined by the government will not be permitted, although it can not be considered Riba.
This is based on the ruling that one must obey the law of the land in things that are not contrary to Shariah. Thus, if the government fixes a rate of exchanging pounds for dollars, then it will be sinful from an Islamic perspective also to trade in the black market at a different rate. However, one will not receive the sin of being involved in Riba.
And Allah knows best
[Mufti] Muhammad ibn Adam
Leicester , UK