TERM REPORT
“CURRENCY TRADING BETWEEN ISLAMIC AND CONVENTIONAL BANK “
MONEY
Money is the most strategic factor in
the functioning of any financial system. The status, value, role and functions
of money in Islamic finance are different from those in conventional finance.
In the conventional system, money is considered a commodity that can be
sold/bought and rented against profit or rent that one party has to pay,
irrespective of the use or role of the lent money in the hands of the borrower.
As this is not the case in Islamic finance, the philosophy, principles and
operation of Islamic finance differ to a large extent from the principles and
operation of conventional finance.
Experts in Islamic economics concede
the advantages of money as a medium of exchange. The holy Prophet (PBUH)
himself favored the use of money in place of exchanging goods with goods. The
prohibition of Riba Al-Fadl in Islam is a step towards the transition to a
money economy and is also a measure directed at making barter transactions
rational and free from the elements of injustice and exploitation.
STATUS OF PAPER MONEY
As the banking and financial system
revolves around money, this author decided to discuss the matter of money as a
part of the chapter on the features of Islamic finance. The present form of
money has evolved over time from various types of goods used as money and
metallic money to paper and electronic money. Money in the present form, or the
currency notes in vogue, are a kind of Thaman (a unit of account to serve as
the price of anything), just like gold and silver used to be in the past. In
this form it is wanted only for exchange and payments and not for
itself, as it has no intrinsic value.
Accordingly, the present fiat or fiduciary money represents monetary value for
all purposes of making payments; the currencies of all countries are unlimited
legal tender and creditors are obliged to accept them for recovery of debt.
Linking money to productive purposes
brings into action labour and other resources bestowed by Allah (SWT) to initiate
a process from which goods and services are produced and benefits passed on to
society. Therefore, paper money is subject to all the tenets of Shar¯ı´ah
relating to Riba, debts, Zakat, etc. One cannot sell a 10 dollar bill for 11
dollars because the bill represents pure money and has no intrinsic value.
Notes of any particular currency can be exchanged equal for equal. Currency
notes of different countries are considered monetary units of different species
and therefore can be exchanged without the condition of equality but subject to
the conditions of Bai‘ al Sarf (currency exchange), briefly discussed in
foregoing paragraphs, i.e. hand to hand.
TRADING CURRENCIES
Paper currencies cannot be sold or
bought like goods having intrinsic value. The Shar¯ı´ah has treated money
differently from commodities, especially on two scores: first, money (of the
same denomination) is not held to be the subject matter of trade, like other
commodities. Its use has been restricted to its basic purpose, i.e. to act as a
medium of exchange and a measure of value. Second, if for exceptional reasons,
money has to be exchanged for money or it is borrowed, the payment on both
sides must be equal, so that it is not used for the purpose it is not meant
for, i.e. trade in money itself. In the context of trading in goods, as
distinct from Exchange of various currencies, Shaikh M. Taqi Usmani in SAB Judgement says:
“The commodities can be of different
qualities. Therefore, transactions of sale and purchase are effected on an
identified particular commodity. Money has no quality except that it is a
measure of value or a medium of exchange. All units of money of the same
denomination are one hundred per cent equal to each other. If A has purchased a
commodity from B for Rs.1000/ = he can pay any Note(s) of Rupee amounting to
Rs.1000”. This real nature of money, which should have been appreciated as a
fundamental principle of the financial system, remained neglected for
centuries, but it is now increasingly recognized by modern economists. Professor John Gray (of Oxford University),
in his recent work False Dawn, has remarked:
“Most significantly perhaps,
transactions on foreign exchange markets have now reached the astonishing sum
of around $1.2 trillion a day, over fifty times the level of world trade.
Around 95 percent of these transactions are speculative in nature, many using
complex new derivatives, financial instruments based on futures and options.
This virtual financial economy has a terrible potential for disrupting the
underlying real economy, as seen in the collapse in 1995 of Barings, Britain’s
oldest bank.”
The evil results of such an unnatural trade were pointed out by Imam
Al-Ghazali 900 years ago in the following words:
“Riba (interest)
is prohibited because it prevents people from undertaking real economic
activities.This is because when a person having money is allowed to earn more
money on the basis of interest, either in spot or in deferred transactions, it
becomes easy for him to earn without bothering himself to take pains in real
economic activities. This leads to hampering the real interests of humanity, because
the interests of humanity cannot be safeguarded without real trade skills,
industry and construction.”
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