Sunday, March 26, 2006

THE BASIC EXCHANGE CONTRACTS

There is a general concensus among Islamic Jurists on the view that currencies of different countries can be exchanged on a spot basis at a rate different of unity, since currencies of different countries are distinct entities with different values or intrinsic worth, and purchasing power. There also seems to be a general agreement among a majority of scholars that on the view currency exchange on a forward basis is not permissible, that is when the right and obligations of both parties relate to a future date. However there is considerable difference of opinion among jurists when the rights of either one of the parties, which is same as obligation of the counterparty, is deffered to a future date.

To elaborate, let us consider the example two individuals A and B who belong to two different countries, India and US respectively. A intends to sell Indian rupees and Buys US dollar. The converse is true for B. The Rupee- Dollar exchange rate agreed upon is 1:20 and the transaction involves buying and selling of $50. The first situation is that A makes a spot payment of Rs 1000 to B and accepts payment of $50 form B. The transaction is settled on a spot basis from both ends. Such transactions are valid and Islamically permissible. There are no twi opinions about the same.

The second possibility is that settlement of the transaction from both ends is deffered to a future date, say after six months from now. That implies that both A and B would make and accept payment of Rs 1000 or $50, as the case maybe, after six months. The predominant view is that such a contract is not Islamically permissible. A minority view considers it permissible.

The third scenario is that the transaction is partly settled from one end only. The example, A makes a payment of Rs1000 now to B in lieu of promise by B to pay $50 to him after six months. There are diametrically opposite views on the permissibility of such contacts which amount to BAY' el-SALAM in currencies.

The purpose of this paper is to present a comprehensive analysis of various arguments in support and againts the permissibility of these basic contracts involving currencies.

The first form of contracting involving exchange of countervalues on a spot basis is beyond any kind of controversy. Permissibility or otherwise of the second type of contract in which delivery of one of the countervalues is deffered to a future date, is generally discussed in the framework of RIBA Prohibition.

Eccordingly we discuss this contract in detail in section 2 dealing with the issue of prohibition of Riba. Permissibility of the third form of contract in which delivery of both the countervalues is deffered, is generally discussed within the framework of reducing risk and uncertanty or GHARAR involved in such contracts. This, therefore, is the central theme of section 3 which deals with the issue of Gharar. Section 4 attempts a holistic view of the Syaria' relates issues as also the economic significance of the basic forms of contracting in the currency market.