Forward Currency Cover
Islamic forward currency contracts are permissible when executed with the firm intention of delivering and receiving the currency on the specified future date. If delivery and receipt of the counter currencies bought and sold is not made, this will not be a valid transaction. Due to the Shar¯ı´ah restrictions, it can only be a unilateral promise to sell in the future at a pre-agreed rate rather than an actual sale contract. The unilateral promise or moral obligation is considered binding and is effective and well-recognized in the market; a defaulting party is debarred from doing any further business. A bilateral promise to purchase and sell currencies is forbidden if the promise is binding.
Accordingly, contemporary Shar¯ı´ah scholars have observed that forward foreign currency cover is permissible subject to the following conditions:
1. The amount of foreign currency is needed for genuine trade or payment transactions. The need will have to be supported by appropriate documents so as to prevent forward cover for speculative purposes. This means that a currency dealer would not be permitted to get a cover.
2. The forward cover shall be through a unilateral promise to sell or purchase and it shall not be a sale/purchase agreement. This means that sale/purchase shall take place simultaneously at the agreed time in future at the rate agreed upon initially at the time of agreement to sell or purchase.
3. While it will be permissible to fix the price of foreign currency in terms of domestic currency according to the promise, no forward cover fee can be recovered. However, an amount may be demanded by the bank from its client in advance by way of earnest money against foreign currency agreed to be purchased/sold at a future date. If, at the agreed time, the party does not perform, the bank can recover the actual loss, if any, and adjust the earnest money there against.
📓Understanding Islamic Finance
©️Muhammad Ayub
Islamic forward currency contracts are permissible when executed with the firm intention of delivering and receiving the currency on the specified future date. If delivery and receipt of the counter currencies bought and sold is not made, this will not be a valid transaction. Due to the Shar¯ı´ah restrictions, it can only be a unilateral promise to sell in the future at a pre-agreed rate rather than an actual sale contract. The unilateral promise or moral obligation is considered binding and is effective and well-recognized in the market; a defaulting party is debarred from doing any further business. A bilateral promise to purchase and sell currencies is forbidden if the promise is binding.
Accordingly, contemporary Shar¯ı´ah scholars have observed that forward foreign currency cover is permissible subject to the following conditions:
1. The amount of foreign currency is needed for genuine trade or payment transactions. The need will have to be supported by appropriate documents so as to prevent forward cover for speculative purposes. This means that a currency dealer would not be permitted to get a cover.
2. The forward cover shall be through a unilateral promise to sell or purchase and it shall not be a sale/purchase agreement. This means that sale/purchase shall take place simultaneously at the agreed time in future at the rate agreed upon initially at the time of agreement to sell or purchase.
3. While it will be permissible to fix the price of foreign currency in terms of domestic currency according to the promise, no forward cover fee can be recovered. However, an amount may be demanded by the bank from its client in advance by way of earnest money against foreign currency agreed to be purchased/sold at a future date. If, at the agreed time, the party does not perform, the bank can recover the actual loss, if any, and adjust the earnest money there against.
📓Understanding Islamic Finance
©️Muhammad Ayub