Exchange of Gold and Silver (Ṣarf)

Key Concepts and Principles

This study guide focuses on the Islamic legal principles governing the exchange of gold and silver (Ṣarf) and their application to modern currency notes, drawing from the provided excerpts. Understanding these principles is crucial for comprehending permissible and impermissible transactions in Islamic finance.

1. Ṣarf (صرف): Exchange of Gold and Silver

Rules for exchanging gold for gold and silver for silver: Equality in amount and immediate, hand-to-hand exchange are mandatory.
Rules for exchanging gold for silver (or vice versa): Disparity in amount (tafāḍul) is permissible, but the exchange must still be immediate and hand-to-hand.

2. Ribawi Items (أصناف ربوية): Goods Subject to Riba

Gold and silver are considered ribawi items due to their intrinsic value and potential use as a medium of exchange.
The principles of equality and immediacy in exchange are crucial to avoid riba (usury) in transactions involving these items.

3. Tafāḍul (تفاضل): Disparity in Exchange

Permitted when exchanging different types of ribawi items (e.g., gold for silver) as long as the exchange is immediate.
Prohibited when exchanging the same type of ribawi item (e.g., gold for gold).

4. Nasee’ah (نسيئة): Deferment in Exchange

Prohibited in all exchanges of ribawi items, regardless of whether they are of the same or different types. The exchange must be immediate and hand-to-hand (taqābuḍ fi al-majlis – تقابض في المجلس).

5. Bay’ al-Ghā’ib bi al-Nājiz (بيع الغائب بالناجز): Selling the Absent for the Present

Prohibited in the exchange of gold and silver. Both items of exchange must be present in the meeting of the contract and taken into possession.
This is because gold and silver are specified by possession, not merely by identification.

6. Thamn Khalqī (ثمن خلقي): Natural Value

Items inherently possessing value and accepted as a medium of exchange by creation and Shariah, such as gold and silver.

7. Thamn ‘Urfī (ثمن عرفي) / Thamn I‘tibārī (ثمن اعتباري): Customary Value / Conventional Value

Items not intrinsically valuable but accepted as a medium of exchange through social convention and legal recognition, such as currency notes and coins.
Their status as a medium of exchange can be revoked by government or collective decision.

8. Taqābuḍ fi al-Majlis (تقابض في المجلس): Immediate Possession in the Session

Generally required in the exchange of ribawi items, particularly gold and silver (Thamn Khalqī).
The requirement for Thamn ‘Urfī (currency notes) is debated among scholars. Hanafis generally require at least one party to take possession in the session to avoid “bay’ al-dayn bi-al-dayn” (sale of debt for debt).

9. Bay’ al-Dayn bi al-Dayn (بيع الدين بالدين): Sale of Debt for Debt

Impermissible in Shariah. Occurs when neither party takes possession of the exchanged items during the contract session, resulting in a mutual exchange of debts.

10. Purchasing Power (القوة الشرائية): – The ability of a currency to buy goods and services. Fluctuations in purchasing power due to inflation or deflation raise questions about loan repayment.

11. Inflation (التضخم) and Deflation (الانكماش): – Inflation: Increase in the general price level and decrease in the purchasing power of currency. – Deflation: Decrease in the general price level and increase in the purchasing power of currency.

12. Hawala (حوالة): Informal Funds Transfer System – A system where money is transferred without physically moving it, often across borders. Its permissibility depends on adherence to market value and avoidance of interest.

13. Tas’īr (تسعير): Price Fixing by the Government – Scholars debate whether transacting currencies above or below official rates constitutes usury or merely a violation of government regulations.

Ahadeeth of Tirmidhi Shareef discussed in this chapter

Hadeeth 1:

Narrated Nafi’:

“Ibn ‘Umar and I went to Abu Sa’eed and he narrated to us: ‘the Messenger of Allah (ﷺ) said – and I heard him with these [two] ears: “Do not sell gold for gold except kind for kind, nor sliver for silver except kind for kind, do not exchange more of one than the other, and do not sell what is not present from them for what is present.”

[Abu ‘Eisa said:] There are narrations on this topic from Abu Bakr, ‘Umar, ‘Uthman, Abu Hurairah, Hisham bin ‘Amir, Al-Bara’, Zaid bin Arqam, Fadalah bin ‘Ubaid, Abu Bakrah, Ibn ‘Umar, Abu Ad-Darda’, and Bilal.

[He said:] The Hadith of Abu Sa’eed, from the Prophet (ﷺ) [about Riba] is a Hasan Sahih Hadith.

This is acted upon according to the people of knowledge among the Companions of the Prophet (ﷺ) and others, except for what has been related from Ibn ‘Abbas; he did not see any harm in exchanging gold for gold or silver for silver, more for less, when it is done hand in hand, and he said: “Riba’ is only in credit.” Similar it has been related from some of his companions. It has been related that Ibn ‘Abbas changed his opinion when Abu Sa’eed narrated it to him from the Prophet (ﷺ). The first view is more correct.

And this is acted upon according to the people of knowledge [among the Companions of the Prophet (ﷺ) and others]. It is the view of Sufyan Ath-Thawri, Ibn Al-Mubarak, Ash-Shafi’i, Ahmad, and Ishaq. It has been reported that Ibn Al-Mubarak said: “There is no difference over exchange.”

Hadeeth 2:

Narrated Ibn ‘Umar:

“I would sell camels at Al-Baqi’, so I would sell them for Dinar but take in place of them Dirham, and, I would sell for silver and take Dinar in its place. So I went to the Messenger of Allah (ﷺ) and found him leaving the house of Hafsah. I asked him about that and he said: ‘There is no harm in that when it (equals) the price.'”

[Abu ‘Eisa said:] We do not know of this Hadith being Marfu’ except from the narration of Simak bin Harb from Sa’eed bin Jubair, from Ibn ‘Umar.

Dawud bin Abi Hind narrated this Hadith from Abu Sa’eed bin Jubair, from Ibn ‘Umar in Mawquf form.

This is acted upon according to some of the people of knowledge. There is no harm in paying for gold with silver and silver with gold. This is the view of Ahmad and Ishaq. Some of the people of knowledge, among the Companions and others, disliked that.

Hadeeth 3 :

Narrated Ibn Shihab:

From Malik bin Aws bin Hadathan that he said: “I once said: ‘Who can change some Dirham?’ So Talhah bin ‘Ubaidullah – and he was with ‘Umar bin Al-Khattab – said: “Leave your gold with us, then return to us when our servant comes and we will give you your silver.” ‘Umar bin Al-Khattab said: “No! By Allah! Either give him his silver or return his gold to him. Indeed the Messenger of Allah (ﷺ) said: ‘Silver for gold is Riba, except for hand to hand; and wheat for wheat is Riba except for hand to hand; and barley for barley is Riba except hand to hand; and dried-dates for dried-dates is Riba except for hand to hand.'”

[Abu ‘Eisa said:] This Hadith is Hasan Sahih. This is acted upon according to the people of knowledge. And the meaning of Ha’ Wa Ha’ is hand to hand.

Excerpt taken from Tuhfatul Alma’ee of Mufti Saeed Palanpuri rh.

The term Ṣarf (صرف) refers to the exchange of gold and silver, specifically dinars and dirhams. The rule here is that if the exchange involves the same type of commodity, i.e., gold for gold or silver for silver, then equality in amount is necessary, and the exchange must also be done hand-to-hand. However, if the exchange is between different commodities, i.e., gold for silver or silver for gold, then tafāḍul (disparity in exchange) in amount is permissible, but the exchange still needs to be hand-to-hand. Sayiduna Abdullah ibn Al-Mubarak rh states, “This is indeed a fortunate chapter in which there is no disagreement!”

Benefit: Now, currency notes have replaced dinars and dirhams. What is the ruling regarding them? It should be understood that currency notes essentially represent a reference to gold and silver. Each note is endorsed by the governor stating that he is liable to pay the bearer a certain amount, meaning if someone demands precious metal, the governor is obliged to pay an equivalent amount of gold or silver. However, these are like ‘show teeth’ which are not used for eating. If someone takes a hundred note to the bank and demands precious metal, the manager would rebuke him and might even call the police, who would arrest him for not trusting the government’s notes and throw him in jail. Therefore, these notes are merely ‘show teeth’ with no gold or silver behind them. This notation builds trustworthiness with currency and is the basis for its circulation. If the government were to declare today that the thousand notes are discontinued, no one would value them at all. Hence, these notes are considered customary value (thamn ‘urfi) and will be regarded in terms of both their face value and their function as goods.

Issue: Zakat is obligatory on currency notes because they are included in the category of wealth that zakat is due on. If we consider them as goods, then zakat would not be obligatory because zakat is not due on goods not intended for trade, and notes are not for trade.

Issue: Similarly, it is not permissible to sell the currency of one country for that of itself with a surplus or deficit. Here again, the consideration of value matters.

[Imagine two individuals, Person A and Person B, engaging in a currency exchange involving U.S. dollars. Person A has $1,000 and wishes to exchange this amount for a different denomination or series of the same currency (U.S. dollars) held by Person B. Perhaps Person A has older notes and desires newer ones, or notes from a specific series for collection purposes.

Under Islamic law, this exchange is permissible only if the following conditions are met:

Equality in Amount: Person A must receive exactly $1,000 from Person B, without any surplus or deficit. If Person A gives $1,000 and receives $1,010, the additional $10 received by Person A constitutes riba al-fadl, which is prohibited. This is because the transaction involves a surplus on one side, giving one party an unfair advantage, akin to interest.

Immediate Transfer: The exchange must occur in the same sitting where the contract is made. Delaying the receipt of the exchanged amount by either party introduces the possibility of riba an-nasi’ah, which refers to the increment or delay in completion of the terms agreed upon. If Person A hands over $1,000 but will receive $1,000 from Person B only a week later, this delay is prohibited as it opens the door to potential exploitation and unfair gains due to changes in the currency value or other factors during the interim.]

Issue: A person took a hundred note to exchange at a shop, and the shopkeeper gave him fifty and said to take the rest later. This is permissible because the consideration here is for (the note being) the goods. If the consideration was for value, then such a transaction would not be permissible because, in the case of Ṣarf, it is necessary to take possession of the exchange in the same meeting.

Issue: Likewise, exchanging the currencies of two different countries with a surplus or deficit is permissible. Here too, the consideration is for the (note being) goods, and it is necessary that one counterpart in the exchange be immediate and the other can be deferred, otherwise, the exchange would be entirely void.

[Suppose Person A in the United States wants to exchange US Dollars (USD) for Euros (EUR) with Person B in Germany. Let’s consider that the current exchange rate is 1 USD to 0.9 EUR.

Immediate and Deferred Exchange Elements:
- Immediate Exchange: Person A gives $10,000 to Person B.
- Deferred Exchange: Person B agrees to provide €9,000 to Person A, but the transfer of euros will happen after a month due to Person B’s cash flow issues or similar reasons.
Terms of the Exchange:
- The transaction involves a surplus or deficit inherently because of the nature of different currencies and their values against each other.
- Immediate delivery is satisfied by Person A, who transfers the dollars immediately.
- The deferred part of the transaction is accepted for the euros, which Person B will transfer later.

Conditions to Ensure Permissibility:

There should be no benefit derived from the delay in payment other than the agreed-upon exchange of currency amounts.
The deferred payment in this example must be clearly defined and agreed upon by both parties at the time of the contract agreement.
The terms, including the exchange rate, amount, and date of deferred payment, must be fixed and not subject to any condition that introduces uncertainty or speculation.]

In essence, while gold and silver are natural value (thamn khilqi), currency notes are considered customary value (thamn ‘urfi) based on government trust. Therefore, they will be considered for their value, and since they are not naturally value-holding, they will also be considered as goods. The rulings will be organized considering both aspects.

Hadith (1): Nafi’ rh states: I and Sayiduna Ibn Umar rd went to see Sayiduna Abu Sa’id al-Khudri rd. Ibn Umar had become blind towards the end, and at that time, I served as his guide. He narrated to us a Hadith where the Messenger of Allah ﷺ emphasized saying: “I heard this Hadith with my own two ears, there is no doubt in my mind about it – do not exchange gold for gold unless it is equal and do not exchange silver for silver unless it is equal. One should not increase one side of the exchange over the other, and an absent party (not present at the meeting of the contract) should not be exchanged for a present one, meaning both parties must exchange hand-to-hand.”

Explanation: Like Sayiduna Ibn Abbas rd, Sayiduna Ibn Umar rd also initially believed that tafāḍul (tafāḍul (disparity in exchange) in exchange) in the exchange of gold and silver was permissible when traded hand-to-hand. However, when they learned that Sayiduna Abu Sa’id al-Khudri rd narrated a Hadith stating it was impermissible, Nafi’ rh accompanied him to clarify this issue. Sayiduna Abu Sa’id al-Khudri rd reiterated the Hadith because Ibn Umar was of a different opinion on the matter initially. Therefore, he stressed that he had heard the Hadith himself, meaning he had no doubt about the transmission of this instruction.

It should be noted that Sayiduna Ibn Umar was mistaken about a Hadith which will be discussed later, and Sayiduna Ibn Abbas had a misunderstanding from the Hadith, “Interest is only in credit,” thinking it to indicate a literal exclusion. However, the Hadith was meant to instill the severity and ugliness of credit interest, but Ibn Abbas took it to mean a literal exclusion.

The detail is that true Riba is Riba al-Qardh, which is why the Quran explicitly mentions it, and Riba al-Fadl has been considered a secondary type of Riba, and Riba an-Nasi’ah is even a level below that, making it a third-grade Riba. This classification should not confuse anyone to think that avoiding Riba al-Qardh is necessary but Riba al-Fadl is less emphasized because it is of a secondary level. However, such an opinion is not found among the community; everyone understands that both types of Riba are equally problematic. There could be a misunderstanding regarding Riba an-Nasi’ah, being considered inferior to the others, which is why to emphasize its severity, it was stated: “Interest only occurs in credit transactions,” meaning do not consider it trivial; it is indeed true interest.

In summary, this exclusion is figurative, but Ibn Abbas mistakenly took it as literal, believing that interest occurs only in credit transactions and not in immediate ones, whether sold at parity or with a surplus or deficit. However, when Sayiduna Abu Sa’id al-Khudri rd narrated this Hadith to them, they retracted their original statement (and Sayiduna Ibn Umar was initially mistaken by a future Hadith which was later clarified).

Issue: In the transaction of Ṣarf (exchange of gold and silver), it is necessary for both items of exchange to be present in the meeting of the contract. If one item is present in the meeting and the other is not, then the sale is not permissible. This is because the values (gold and silver) are not specified by mere identification but by actual possession. Hence, if there is an exchange of values and one item is taken into possession during the meeting while the other is not present, then the second item does not become specified. Therefore, this transaction becomes a sale of what is present for what is deferred (bay’ al-‘ayn bi al-dayn), and a deferred sale in the exchange of values is forbidden. Consequently, a transaction involving the exchange of gold and silver where one item is absent and the other is deferred is not permissible.

Hadith (2): Ibn Umar states: “I used to sell camels at the market near the Baqi’ cemetery. Sometimes I would sell camels for dinars, but if the buyer did not have dinars, I would take dirhams instead, and sometimes I sold for dirhams and took dinars in return. Someone said to me: ‘This is not permissible.’ Thus, I went to the Messenger of Allah ﷺ, who was leaving the house of Sayidatuna Hafsah rd at the time. I asked him about this matter, and he said: ‘There is no harm in doing so based on the rate of that day. For example, if a camel is sold for ten dinars and the buyer wishes to pay in dirhams, then one should see what the dinars are worth on that day. It is permissible to take dirhams based on their value.'”

Explanation: This is the Hadith that led to Ibn Umar’s misunderstanding that exchanging gold for silver, or vice versa, is permissible if done hand-to-hand with some tafāḍul (tafāḍul (disparity in exchange) in exchange). This misconception was rooted in the belief that gold and silver do not always equate in fineness (the English word ‘carat’ comes from ‘qirat’ which means the mineral state of gold and silver, known as ‘ayyar’ in Arabic). Ibn Umar thought that taking into account the day’s price, it was permissible to exchange dinars for dirhams and vice versa with a difference because gold and silver are not always equivalent; there are differences in their carat value. Therefore, exchanging gold and silver with tafāḍul (disparity in exchange) is permissible when considering their price. However, this assumption was incorrect because dirhams and dinars are different entities, so while it might be acceptable to adjust quantities between these currencies based on current values, it is not correct to assume that tafāḍul (disparity in exchange) is permissible in exchanges involving gold and silver. Gold and silver are ribawi items, and no visible difference between good and bad quality is recognized in ribawi items. If one must demonstrate a difference, it should be through an exchange of gold for silver or silver for gold, showing the tafāḍul (disparity in exchange) in their mineral state.

Hadith (3): Malik bin Aws bin al-Hadthan says: “Once, I was carrying gold from my home to be exchanged. I approached Sayiduna Umar rd where he was sitting with some Companions. I went to them with the gold and asked, ‘Who will exchange it for dirhams?’ Sayiduna Talha bin Ubaidullah, who is one of the Asharah Mubasharah, was present there. He said, ‘Show me your gold.’ After examining it, he said, ‘Our servant is not here right now. When he arrives, you can take your silver.’ Sayiduna Umar rd said, ‘By Allah, no! Either give him the silver now or return his gold.’ This is because the Messenger of Allah ﷺ has said: ‘The exchange of silver for gold is interest unless it is hand-to-hand (هَاءَ وَهَاءَ, which means ‘take and give’, indicating an immediate exchange). The same applies to the exchange of wheat for wheat, barley for barley, and dates for dates, which must also be hand-to-hand. This means that for ribawi items, whether the exchange is between different types or the same type, the counter-values must be exchanged immediately, and credit is forbidden.”

Excerpt Taken from Taqreer al Tirmidhi of Mufti Taqi Uthmani

Sayiduna Nafi’ rh says that once he and Sayiduna Abdullah ibn Umar rd went to Sayiduna Abu Sa’id al-Khudri rd. He narrated to us a Hadith where the Messenger of Allah ﷺ emphasized saying: “I have heard this statement with these two ears of mine, meaning I have no doubt whatsoever in the transmission of this command.” In terms of grammatical rules, the phrase should have been: I heard it with these two ears (samī‘tuhu aḏanay hātayn). The word “hātān” being in the nominative case as the subject or for emphasis. However, “hātayn” being in the accusative case can be interpreted in two ways: one is that it is accusative for the sake of specification, or it is accusative for the sake of commendation. Another interpretation could be that “hātayn” was spoken against grammatical rules, as sometimes Arabs in haste use a word contrary to grammatical norms, and this was the case here.

Nevertheless, the Noble Prophet ﷺ instructed: “Do not sell gold for gold unless it is equal for equal, and do not sell silver for silver unless it is equal for equal, one counterpart should not exceed the other. And do not sell what is absent (al-ghā’ib) for what is present (al-nājiz).” “Al-ghā’ib” refers to what is not present at the meeting of the contract, and “al-nājiz” refers to what is present.

In the sale of Ṣarf, immediate possession during the session (taqābuḍ fi al-majlis) is necessary.

This Hadith introduces an additional ruling: “Do not sell from it what is absent for what is present” (lā tabī‘ū minhu ghā’iban bi-nājiz). This statement segregates gold and silver from the other four commodities and elucidates a difference. The difference is that when exchanging these four items of the same kind, both tafāḍul and nasee’ah are prohibited. And if neither tafāḍul nor nasee’ah occurs, but the sale is immediate, even if one of the counterparts is not present in the contract session, the sale is still valid. This is because, for these four items, immediate possession during the session is not necessary. However, during the exchange of gold and silver, both tafāḍul and nasee’ah are prohibited, and immediate possession in the session is also necessary; therefore, both counterparts must be present at the contract session. This is because, in the sale of Ṣarf, taking possession of both counterparts in the contract session is essential; otherwise, the sale is not valid.

“In Athmān,” selling “the absent for the present” (bay‘ al-ghā’ib bi-nājiz) is incorrect.

The reason for this difference is that gold and silver (Athmān) are not specified merely by designation, and until an item is specifically set, it remains indeterminate in essence. However, they become specified through possession, unlike other items, which become specified upon designation. Thus, if there is an exchange of Athmān, and one counterpart is taken into possession during the session while the other is not present, then the second counterpart does not become specified, and this transaction becomes a sale of what is present for what is deferred (bay‘ al-‘ayn bi-al-dayn), which is a nasee’ah sale. And nasee’ah in the exchange of Athmān is forbidden, thus, during the exchange of gold and silver (Athmān), selling “the absent for the present” is incorrect. Unlike the other four items, since they become specified upon designation, selling “the absent for the present” is permissible for them.

Two Aspects of Gold and Silver:

The Hanafis state that gold and silver have two aspects. One aspect is their being weighed. In this regard, they are considered ribawī goods. Therefore, just as tafāḍul and nasee’ah are prohibited within other weighed items of the same kind, tafāḍul and nasee’ah in transactions involving gold and silver are also prohibited. The other aspect is their function as currency, hence the rule “do not sell what is absent for what is present” applies. Therefore, wherever there is currency involved, immediate possession during the session is necessary. For Hanafis, the mere presence of value is not a cause for the prohibition of riba; instead, they consider the quality and type to be the cause. However, they also regard the requirement of immediate possession during the session as conditioned by the aspect of value.

Definition of Thamn Khalqī and Thamn ‘Urfī

The discussion now concerns what constitutes the cause (‘illah) for the requirement of taking possession during the session (taqābuḍ fi al-majlis). Does this relate to Thamnīyat Khalqīyah or does Thamnīyat ‘Urfīyah also fall under this rule?

Thamn Khalqī refers to something that has been designated as a medium of exchange by creation, and which Shariah also accepts as a medium (thamn). For example, gold and silver are referred to as Athmān Khalqīyah.

Thamn ‘Urfī refers to those items not originally designated as a medium of exchange, but which have been accepted as such through social convention, like currency and coins. These are known as Thamn ‘Urfīyah. Therefore, if the government or the people collectively decide to revoke their status as thamn, their status would end because their value as thamn is contingent upon customary practice and legal recognition. They are also referred to as Thamn I‘tibārī.

Variation in Taqābuḍ fi al-Majlis for Thamn ‘Urfī

The question arises: Is the condition of taqābuḍ fi al-majlis specific to Thamn Khalqī or is it also necessary in Thamn ‘Urfī? Imam Shafi‘i rh opines that this condition is specific to Thamn Khalqī; therefore, immediate possession is not necessary for Thamn ‘Urfī. The Hanbalis agree, however, according to Hanafis, taking possession of both counterparts within the session is necessary, meaning at least one party must take possession during the session, even if the other does not. This is because if neither party takes possession of one of the counterparts during the session, then both counterparts remain undetermined, and when they are undetermined, they become a debt on each other, leading to what is termed “bay‘ al-dayn bi-al-dayn,” also known as “bi al-kālī bi al-kālī,” which is impermissible. Thus, the valid method to make this permissible is if possession occurs on one side, then this transaction will not be “bay‘ al-dayn bi-al-dayn,” but rather “bay‘ al-dayn bā al-‘ayn.”

Imam Malik: Imam Malik rh states that all types of thamn are equal, whether they are Khalqī or ‘Urfī. The same rule applies to both, thus possession from both sides within the session is necessary; possession by just one side is not sufficient. This detail is about Athmān ‘Urfīyah, which takes the form of currency and coins.

The Reality of Current Currency Notes

Regarding the current prevalent currency notes, there has been an issue because these notes used to carry a statement asserting, “I will pay the bearer on demand,” but now this statement is being phased out. For instance, this statement does not appear on Riyals, Dollars, Pounds, etc., whereas it is still found on Pakistani Rupees. Before understanding this statement, it is crucial to grasp the reality of these existing currency notes. Originally, these notes were not money in themselves but receipts for money deposited in the State Bank. Initially, scholars from Deoband stated that these notes themselves are not money but receipts for money. Therefore, taking possession of the note does not equate to taking possession of the money; rather, it is considered a transfer of debt, as if the bearer of the note has his money stored in the State Bank. The State Bank is indebted to the bearer, and the note is a receipt for that debt. If this bearer exchanges the note for goods with another person, he is transferring his debt that his money is stored as a debt in the State Bank and this is the receipt; collect it whenever you want. In this case, it does not count as payment but as a transfer of debt. Because of this, in the past century, many scholars in India ruled that buying gold and silver with these notes was not permissible because immediate possession of both counterparts is necessary when buying gold and silver. However, in transactions where gold and silver are bought with a note, possession is taken of the gold and silver, but on the other side, the receipt and documentation are possessed, not the gold itself.

Thus, buying gold and silver at that time was problematic, so many legal stratagems were used to justify it, like one stratagem was that if you wanted to buy gold worth a hundred rupees, you would also add one rupee and say that this gold is in exchange for one rupee and whatever else, gems etc., are worth a hundred rupees. A rupee did not back silver; rather, it was itself made of silver. Therefore, it was made permissible by creating a transaction of buying silver with gold or silver with silver.

Payment of Zakāt with Currency Notes

Similarly, Zakāt cannot be paid with a note until the poor person collects gold from the State Bank in exchange for the note, or until the poor person spends that note for their needs. Thus, whatever books of fatwas from Darul Uloom Deoband and others are available, these issues are described in the same way.

Paper Notes Have Now Become Thamn ‘Urfī

This was the situation when rupees used to have silver backing. Now the situation has changed. Now there is neither gold nor silver behind this rupee, nothing, therefore the ruling has also changed. Hence, now these notes are not just receipts but themselves constitute Thamn ‘Urfī, and due to being Thamn ‘Urfī, it is sufficient to take possession of one of the counterparts during the contract session. Possession from both sides is not necessary. And if these Athmān ‘Urfīyah of the same kind, like Pakistani rupees exchanged for Pakistani rupees, then tafāḍul is prohibited, because these are Athmān ‘Urfīyah, not specified by setting aside, and in the case of tafāḍul, there will be an excess without compensation, because in Athmān, intrinsic qualities matter, hence tafāḍul is prohibited. In summary, the ruling of today’s notes in exchange transactions is similar to that of buying and selling small change (bay‘ al-fals bi-al-fals) where it is not Ṣarf, hence possession of one of the counterparts is sufficient, but due to being Thamn ‘Urfī, tafāḍul is not permissible.

Exchange of Currencies Between Different Countries

However, if these notes are of different kinds, such as the Pakistani Rupee, Saudi Riyal, Iranian Toman, and American Dollar, they are of different genres. This is why their names, scales, and the units by which they are denominated also vary. Therefore, tafāḍul (disparity) is permissible during their exchange, thus it is permissible to sell one Riyal for eight Rupees, and one Dollar for thirty-one Rupees. Since these are not calibrated by weight but are numerical, nasee’ah (deferment) is also not prohibited, but permissible. This is because nasee’ah is only prohibited when either value (qadr) or kind (jins) is involved, and where neither value nor kind are involved, nasee’ah is not prohibited. Therefore, if one party gives Pakistani Rupees in the session and the other agrees to give an equal amount of Riyals one month later, this arrangement is permissible.

The Issue of Hawala

This leads us to the issue of “Hawala.” For example, a person in Saudi Arabia tells another to give him a certain amount of Riyals in exchange for an equivalent amount of Pakistani Rupees to be delivered to a specific person in Karachi. This practice is currently known as the business of Hawala and is considered lawful. However, since it can be used as a means to obtain interest, it is only permissible if it equates to the market value (qīmat miṯl). Anything above the market value is not permissible, as it would open the door to usury. For instance, if the market value (miṯl) of one Riyal is eight Rupees, and I give someone ten Riyals asking them to pay me a hundred Rupees after one month, since ten Riyals equate to eighty (80) Rupees and I am receiving a hundred Rupees, this transaction becomes a form of interest. If this were to be permitted, then all those involved in interest-based transactions would benefit from this method. Therefore, although tafāḍul is permissible, it must align with the market value (qīmat miṯl).

Stance of Arab Scholars

However, many scholars in the Arab world believe that these currency notes are no longer Athmān ‘Urfīyah but have now become substitutes for gold and silver. Therefore, all the rules that apply to gold and silver also apply to these currency notes, including the necessity of taking possession of the counterparts within the session, and nasee’ah is also prohibited. According to these scholars, the business of Hawala is also not permissible. However, my inclination is that these are not real Athmān but are still Athmān ‘Urfīyah, hence the rules of Ṣarf do not apply in their exchange.

Exchange of Currency Notes with Deviation from Official Rates

One issue is that each currency has an official rate set by banks according to government regulation. For example, the official rate for the dollar is currently 30 rupees, but its price varies in the general market, where, for instance, one dollar is going for 32 rupees. Some scholars hold the view that selling currency above or below the official rate constitutes interest (usury). They argue that when the government has set the price of the dollar in rupees, it makes one dollar equivalent to those rupees. Just as you cannot sell ten rupees for 32 rupees, similarly, you cannot sell one dollar for 32 rupees. I do not agree with this stance because setting a price by the government is known as “tas’īr,” and thus, the rulings of tas’īr apply. Now, if both parties agree to exchange at a different price, at most it can be said that they have violated tas’īr. Violating tas’īr is a sin, it would be a sin against the authority (“mukhālafat ul-ulu al-amr”), but it would not be classified as usury, nor would it incur the sin of usury. Therefore, in countries where there is no legal permission for trading currencies, only the sin of opposing the authority would occur. In countries where there are no legal restrictions on trading currencies, like Saudi Arabia or Pakistan, neither the sin of usury nor the sin of opposing the authority would occur.

The Doctrine of Abdullah ibn Abbas on the Permissibility of Tafāḍul

It is narrated from Ibn Abbas that he did not see any harm in selling gold for gold with disparity and silver for silver with disparity if it was done hand to hand. He said, “Interest only arises in cases of deferment (nasee’ah).”

Abdullah ibn Abbas rd deemed tafāḍul permissible in Ṣarf transactions and considered nasee’ah prohibited. He stated, “Interest truly lies in nasee’ah.” This means that interest arises in deferment, not in transactions conducted hand to hand, and these are also the words of a Hadith: “Interest only lies in nasee’ah.”

However, the majority of jurists say that this rule applies when there is an exchange of different kinds of items. In exchanges of the same kind of items, it is not the principle that tafāḍul is permissible. It is known from narrations that Abdullah ibn Abbas rd later retracted his statement, as recorded in Mustadrak al-Hakim and Majma’ al-Tabarani.

Second Hadith on This Topic

Narrated by Ibn Umar rd: “I used to sell camels in Baqī‘ and would sometimes price them in dinars. If the buyer did not have dinars, I would take dirhams instead, and sometimes I would price them in dirhams but take dinars if the buyer did not have dirhams. I approached the Messenger of Allah ﷺ when he was leaving the house of Hafsah rd and asked him about this practice. He said: ‘There is no harm in it if it is done at the equivalent value.'”

Abdullah ibn Umar rd stated that he used to sell camels at Baqī‘. Sometimes he sold them for dinars, setting the price in dinars, but if the buyer did not have dinars, he would accept dirhams instead. And sometimes, it was the opposite; the price would be set in dirhams, but if the buyer did not have dirhams, he would pay in dinars. I went to the presence of the Noble Prophet ﷺ when he was coming out from the house of Hafsah rd. I asked about the permissibility of this practice, to which the Noble Prophet ﷺ replied that if the transaction is based on the equivalent value, there is no harm.

It is permissible to pay in dirhams instead of dinars

The response of the Noble Prophet ﷺ implies that if, for example, you sold a camel for ten dinars, and now the buyer wants to pay in dirhams, then it should be considered what the equivalent of ten dinars in dirhams is on that day. The buyer should pay that amount in dirhams. For instance, if the price of ten dinars is a hundred dirhams that day, it is permissible if the buyer pays a hundred dirhams instead of ten dinars. And if a camel was sold for a hundred dirhams and the buyer has dinars but not dirhams, if the buyer pays ten dinars instead of a hundred dirhams, that is permissible.

The price on the day of payment is considered

Some narrations explicitly state that the price on the day of payment (yūm al-adā’) will be considered valid, not the price on the day of obligation (yūm al-wujūb). For example, if the sale took place on Saturday and the price was set at ten dinars, and on Saturday the price of ten dinars was a hundred dirhams, but the buyer did not pay on Saturday but is paying on Thursday, and on Thursday the price of ten dinars has risen to one hundred ten dirhams, then the price on the day of payment will be considered. Therefore, the buyer will now pay the seller one hundred ten dirhams.

Reason for considering the price on the day of payment

The reason for considering the price on the day of payment is that the essence of a sale implies that if the currency in which the sale was made is not paid immediately, it becomes a debt on the buyer. For example, if the sale was made for ten dinars and they were not paid at the time of sale, those ten dinars become obligatory on the buyer, and until they are paid, the obligation of dinars remains. Now, for instance, if the buyer is paying on Thursday, then on Thursday too, the same ten dinars are obligatory on him, not dirhams. But if he wants to pay in dirhams on Thursday and on Thursday the price of ten dinars is one hundred ten dirhams, he will pay one hundred ten dirhams because that is the price of ten dinars on that day.

The Reality of Current Currency Notes by way of its purchase power

Here, a question arises in our minds that has been troubling since the introduction of the “Rupee note.” Since there is no longer any gold or silver backing these paper notes, what is the reality of these notes? The answer is that the reality of the note now is merely its purchasing power, i.e., these notes have the power to purchase certain goods. In today’s economic terms, when the prices of goods increase, it is said that the value of the rupee has decreased. For example, previously two rupees could buy a kilogram of flour, but now it buys only half a kilogram, meaning the purchasing power of two rupees has halved. Thus, as the prices of goods increase, the value of the rupee continues to decrease. And as prices continuously rise, it means that a hundred rupees had more value in 1990 compared to 1995.

Explanation of Inflation and Deflation

This also clarifies today’s terms “inflation” and “deflation.” Inflation means that there is more money in the market and in people’s hands, but the goods and services remain the same as before, their supply has not increased. Therefore, when a shopkeeper sees that people have more money and the demand for goods has increased without an increase in supply, he raises the prices, which reduces the purchasing power of the currency and increases prices, known as inflation. And this is what prevents unrestricted printing of currency; legally, the government isn’t restricted in how many notes it can print—it’s up to them, no limit is set. However, the government knows that if it prints too much currency, it will lead to inflation, which will raise prices and the public might turn against the government, so it prints a limited amount of currency to control inflation.

Will the Value of the Rupee Be Considered?

Nowadays, a frequently asked question is if a person lent another a hundred rupees in 1990, and the debtor is repaying in 1995, returning only a hundred rupees is unfair to the creditor. Because the creditor, when he lent a hundred rupees, could have bought a full sack of flour with it, and now the debtor, when returning a hundred rupees, can only buy half a sack. This means the debtor is effectively returning only half of what was borrowed. Therefore, the debtor should compensate for the decrease in value and return two hundred rupees instead because today two hundred rupees have the same purchasing power as a hundred rupees had in 1990. Thus, many argue that insisting on returning the same nominal amount that was borrowed is unfair to the creditor. Therefore, at the time of repayment, the nominal value should not be considered, but rather the actual value of the currency.

Method of Determining the Value of the Rupee

The method for determining the value of the rupee is that it should increase at the same rate as inflation. For instance, if inflation is at five percent, then the debtor should repay the loan with a five percent increase. This proposal is being vehemently discussed nowadays, and the arguments made in its favor are considered by some to be irrefutable.

Religious Argument Against Considering Value Differently

The above proposal is not correct from a Shariah perspective. I present both a textual (naqlī) and a rational (‘aqlī) argument against it. The textual argument is that the principle of Shariah is that debts are to be repaid in kind (al-dayn tuqḍā bi mithlihā), meaning repayment should match the loaned amount in quantity, not in value. In all matters of Shariah, equivalence implies quantity, not value. For instance, if high-quality wheat is being exchanged for lower-quality wheat in the context of ribawī goods, disparity is not allowed because equivalence in quantity is required, not value. Thus, in loan repayment, equivalence in quantity will be considered, not the value. This is supported by a hadith where the Prophet Muhammad ﷺ stated that the value at the time of payment is considered, not the value at the time of obligation. If value equivalence were the consideration, then the price at the time of obligation would be relevant. Suppose a transaction involved ten dinars; if you argue that not the ten dinars but their value was obligated, then the price at the time of obligation would be relevant. However, the Prophet ﷺ stated that the price at the time of payment is what matters, meaning the obligation is for ten dinars from Saturday to Thursday, but if on Thursday, the debtor wants to pay in dirhams and the price of ten dinars is now higher, then he would pay according to that day’s rate, demonstrating that Shariah considers “equivalence in number”, not “equivalence in value”.

Rational Argument

The rational argument is that claims about the devaluation of the rupee and that repaying the nominal amount of the loan is unfair need to be understood in context. Before someone lends money, they should decide whether they want to aid the borrower or share in their profits. If they want to share in profits, they should also share in losses by entering into a partnership or profit-sharing agreement. If they only want to aid, they should understand that lending money is like locking it in a safe; over five years, its value will decrease, resulting in a loss for the person who locked away the money. Who will compensate for this loss? Clearly, no one. Similarly, lending money is like locking it away, so there is no way to compensate for the loss in value of the loaned amount, hence it’s incorrect to consider the purchasing power when repaying debt.

What if the Currency’s Value Drops Significantly?

However, there is a consideration if the value of the currency drops to an extreme degree, as happened with the Lebanese Lira, where one dollar went from being equivalent to three Lira to twelve hundred Lira. In such cases, it might be considered to align this situation with the case of ‘kāsar’, where the value of coins can be considered. Therefore, in such situations, the prevailing value should be paid. This topic is discussed in detail in my book “Ahkām al-Awrāq al-Naqdīyah”. Refer there for further reading.

In the Case of the Four Goods, Mere Designation is Sufficient

As previously mentioned, in the hadith about ribawī goods, for the four specified goods, immediate possession in the session is not required, mere designation is sufficient. However, for gold and silver, immediate possession is also a condition. Although the hadith mentions “hand to hand” for the six goods, the necessity of immediate possession should apply where designation alone is not possible, such as with gold and silver. This interpretation is clarified by another hadith in Sahih Muslim which replaces “hand to hand” with “exact by exact”, showing that the primary intent is exact designation, and since designation without possession is possible for the four goods, immediate possession is not mandated for them, while it is for gold and silver.