The Shariah Advisory Council of Bank Negara Malaysia (the SAC) 168th Meeting

Shariah Advisory Council of Bank Negara Malaysia (SAC) in its 168th meeting on 28 June 2016 discussed among others issues arising from the Shariah Standard on Bai` al-Sarf (Currency Exchange).

Contract session in bai` al-sarf

The SAC defined the contract session in bai` al-sarf as a duration of time and a place during which the contracting parties meet and enter into a contract that commences with the offer (ijab) and then followed by an acceptance (qabul) to sell and buy currencies from each other and ends by the dispersal of the contracting parties, physically or constructively; or by waiving the right to revoke or to continue with the contract during the contract session (takhayur) by both contracting parties.

The above definition is based on the views of the Muslim scholars that both mentioned situations will cause the contract session to end. The contract is effectively concluded and revocation is no longer possible.

Therefore, the current practice of the delivery of currency in bai` al-sarf after transaction date such as T+2 is considered to have taken place outside the contract session. However, such practice may be allowed due to difficulties and operational constraints.

A clear definition of the contract session in currency exchange business is important in order to ensure the principal requirement of reciprocal and spot exchange and taking possession (taqabudh) of the counter values in bai` al-sarf during the contract session is fulfilled.

Ownership of counter values of bai` al-sarf at the time of entering into the contract

The SAC also decided that it is not a requirement for contracting parties in bai` al-sarf to have prior ownership of the subject matter or counter values (to be exchanged) at the time of entering into the contract. However, delivery and taking possession of the exchanged subject matter or counter values must take place before the contract session ends.

Notwithstanding the above requirement, the delivery and taking possession of the exchanged subject matter or counter values may be allowed to be extended beyond the contract session due to difficulties caused by established business custom and procedures, unexpected disruption to the business or other reasons accepted by Shariah in dealing with currency exchange which are beyond the capabilities of the contracting parties.

This ruling has considered the following:

1. Subject matter in bai` al-sarf  is a price which is in the form of obligation (zimmah) and it is not specified (ta`yin) in any physical form. In addition, the nature of subject matter in bai` al-sarf is different from normal sale contract whereby the subject matter in the normal sale contract must be owned by the seller and must be specified (ta`yin) prior to the sale. Therefore, the strict requirement for the seller to own the subject matter at the time of contract is not applicable to bai` al- sarf.
    
2. The requirement to deliver and taking possession of the exchanged subject matter before the contract session ends is to avoid the practice of concluding a sale without actually taking possession (taqabudh) of subject matter by both contracting parties which is prohibited by Shariah which requires spot delivery to one another.
    
3. The Prophet Muhammad SAW has emphasised the requirement of spot delivery and taking possession (taqabudh) of exchanged subject matter or counter values in bai` al-sarf in the following hadith:

Ubadah bin Samit reported that Rasulullah SAW says; “Exchange gold for gold, silver for silver, grain for grain, barley for barley, dates for dates, salt for salt in the same amount and of the same type and must be handed over in spot manner, namely hand to hand. If what you have exchanged differs in type, you can trade in them as you like but it must be done on the spot basis.”

Based on the above hadith, the muslim jurists are of the view that the delivery and taking possession of subject matter in bai` al-sarf must take place on spot basis during the contract session.

Payment of debt in different currency

The SAC decided that the payment of debt in a currency that is different from the original currency of the debt is allowed provided that it is effected at the prevailing exchange rate or at mutually agreed rate at the time of payment of the debt.

This ruling has considered the following: 

1. It is not permissible for the contracting parties to make prior agreement on the exchange rate in the case of payment of debt in different This prohibition is to avoid the practice of selling a currency with another currency that the exchange is made in future which is a form of riba nasi’ah.
    
2. The deferment of delivery and taking possession of currency as a result of pre- agreed exchanged rate for the payment of debt in different currency may expose the parties to the risk of currency fluctuation at the time of payment in the future which may lead to injustice between the contracting.

This statement aims to inform the rulings of SAC 168th meeting and its related discussions. The effective date of this rulings is subject to the effective date of Policy

Document on Sarf which is expected to be issued by Q3 2017.