Riba in the Forex Market

By Jamari Mohtar

Jan 16, 2018


IT WAS some 35 years ago that I learnt in detail about Riba (usury) as an economics undergraduate at the International Islamic University Malaysia.

One particular course, Fiqh For Economist, had me riveted on the juristic discussion on Riba, while the course on the Evolution of Western Economic Thoughts gave me, among other things, a good grounding on the various theories justifying the existence of interest in the economy.

Some of the takeaways from these two courses that are still etched on my mind are:

  • Riba and interest are both prohibited in Islam because both pertain to the receipt of, or payment for, something that involves an unjustified countervalue;
  • Usury (excessive amount of interest) is riba, but riba does not necessarily mean usury. There is no English equivalent to the Arabic word, “riba”;
  • The absence of interest in an Islamic economy doesn’t mean that capital (as in one of the factors of production in an economy) is free. The rate of return becomes the pricing mechanism that allocates the efficient use of capital;
  • While interest is an institutional reality, rather than an economic necessity, rate of return is both an economic necessity and an institutional reality;
  • As borrowing-lending relationship is an exchange process that does not create surplus value, as opposed to a production process that creates one, the payment or receipt of interest in a borrowing-lending relationship is unjustified.
  • Trading is also an exchange process, but unlike the exchange process of borrowing and lending, trading creates surplus value because what is being traded (exchanged) consists of either intermediate goods or finished goods that have undergone a production process. Moreover, there is then the value-added process to market and sell the goods. Thus, seeking profit via trading is permissible.
  • In order to make borrowing-lending relationship permissible in Islam, one could either demand just the principal amount at the end of the relationship, or one could convert the relationship into a trade through an equity relationship via partnership (syirkah) or joint venture (mudarabah), or through other instruments of Islamic financing that are also equitable such as murabahah (cost plus mark-up), ijarah (leasing), wakalah (agency), etc.; and
  • Riba can be present in both loan and trading transactions.

Contradictory classifications

To refresh my mind on the topic of riba, and keep up with the recent development on the issue, I did some research on riba and found two contradictory classifications of riba.

The first classification in simple schematic diagram is shown below:

class1The diagram below is the second classification:

class2The two diagrams above show glaring contradictions in that the neat division of riba into interest in loan (anNasiah) and interest in trade (alFadl) in the first diagram is rendered chaotic by the second diagram when both anNasiah and alFadl come under alBuyu (interest in trade).

So the big question – is anNasiah an interest levied on loan or trade? After all these years of Islamic banking and finance experience, I’m surprised that no one attempts to reconcile this contradiction.

Let’s get to the crux of the matter.

Riba anNasiah

Going by the primary sources of Islam, the classical jurists are unanimous in saying that anNasiah is the riba mentioned in the Quran, while alFadl is mentioned in the Ahadith.

That is why anNasiah is also known as the Riba of the Quran or Riba alJahiliyyah because the Quran refers to anNasiah as the riba practised during the Jahiliyyan period (Age of Ignorance before the advent of Islam). So, Riba alQuran and Riba alJahiliyyah and for that matter, Riba alQardh and Riba adDuyun are all synonyms of Riba anNasiah.

Why then do you sub-divide anNasiah into all these synonyms as a sub-classification when they are all the same thing, as seen in the first diagram or sub-classifying adDuyun into alQardh and alJahiliyyah, as in the second diagram? It is superfluous to have a sub-classification on the basis of synonyms because there is really no different among them to justify a sub-classification.

It makes more sense to sub-classify anNasiah into just Riba alJali (obvious interest) and Riba alMubashir (direct interest) in the first diagram. In alJali, “obvious” is a new element in the synonymity, while in alMubashir, “direct” is the new element.

Riba alFadl

 The above riba is mentioned in the Ahadith of the Prophet (peace be upon him). As such, Riba asSunnah or Riba alBuyu’ are synonyms of alFadl that do not justify a sub-division, simply because they are all the same thing.

Riba alGhayr (indirect interest) and Riba alKhafi (hidden interest) are sub-division in the first diagram that is acceptable because the new elements of synonymity are “indirect” in the former and “hidden” in the latter.

Excess in countervalue

I had a problem grasping the concept of a countervalue during my varsity days but the concept is actually very simple to understand.

When you buy a 2kg sugar from your grocer costing say RM 5, you hand him a 5-ringgit note (the medium of exchange) that you have to part away with, and in return you get a just countervalue, which is the 2kg sugar.

Similarly when someone lends you RM5, he had to part away with his 5-ringgit note but at a time mutually agreed by both, you’ll return him the 5-ringgit which is a just countervalue for the lender. If the countervalue becomes more than RM5 at the agreed time of settlement, this is an unjust countervalue because the excess amount cannot be justified.

The element of interest on excess countervalue is both present in interest in loan and interest in trade. So strictly speaking, sub-classifying riba on the basis of excess in countervalue for trade, which gives the impression that such element is not present for loan is not that accurate as depicted in the first diagram.

Similarly, to say that delayed-payment interest is present in interest in loan as in the first diagram is also not accurate as delayed-payment interest can also be present in interest in trade.

The only sensible thing in the first diagram is its neat division of riba into interest in loan and interest in trade.

The second diagram too has a neat division like the first diagram i.e. Riba adDuyyun (interest in loan) and Riba alBuyu’ (interest in trade) but it becomes problematic when it puts Riba anNasiah as interest in trade while the first diagram puts anNasiah as interest in loan, leading to the contradiction I mentioned earlier.

I also notice in my research that the division of riba into anNasi’ah and alFadl is the approach favoured generally by the professional Islamic bankers and Muslim economists, while the sub-division of Riba alBuyu’ (interest in trade) into anNasi’ah and alFadl is generally favoured by the fuqaha (jurists).

And both are sitting together in Syariah supervisory board of Islamic financial institutions. I just hope that they can reconcile this glaring contradiction.

Foreign Exchange Market

As a matter of general principle, since trading in a forex market is a worldly affair that has nothing to do with rites of worship (ibadah khusus), it is permissible to trade there unless there is a nash (primary evidence) from the Quran and Sunnah expressly stipulating that trading in a forex market is forbidden.

There is no such nash in forbidding the trading simply because the forex market and all the sophisticated techniques of trading in it are a modern invention.

“Thou knowest best thine own worldly affair”, says a Hadith of Prophet Muhammad (pbuh). (Soheh Muslim)

Let’s now dissect the various transactions in a forex market.

First, you have margin trading, which is basically your financial broker advancing you some monies for you to trade in the forex market.

This is a loan transaction where it is not permissible in Islam if the repayment involves interest (Riba anNasi’ah). But this does not negate the permissibility of trading in a forex market because margin trading is not an integral component of the forex market. You can do away with margin trading. If you don’t have enough money to trade in the forex market, then don’t trade there.

Next, the trading of currencies itself in a forex market.

In my term paper while taking a course on International Finance in my final year at the IIUM, I proposed that trading in the forex market involves Riba alFadl. I have lost the term paper but from what I can recall here was my argument.

Riba al-Fadl, which is interest in trading, occurs when you exchange goods of the same genre, as seen in the Hadith below:

From Abu Said al-Khudri: The Prophet (pbuh), said: “Do not sell gold for gold except when it is like for like, and do not increase one over the other; do not sell silver for silver except when it is like for like, and do not increase one over the other; and do not sell what is away [from among these] for what is ready.” (Soheh Muslim)

In that term paper, I argued that it doesn’t make sense for one to engage in barter trading involving the exchange of say, 8kg of gold for 8kg of gold. Might as well, you don’t trade. So why is the Prophet (pbuh) advocating such a trade?

Then comes the following Hadith:

From Abu Sa’id: “Bilal brought to the Prophet, peace be on him, some barni [good quality] dates whereupon the Prophet asked him where these were from. Bilal replied, “I had some inferior dates which I exchanged for these – two sas (quantities) for a sa.” The Prophet said, “Oh no, this is exactly riba. Do not do so, but when you wish to buy, sell the inferior dates against something [cash] and then buy the better dates with the price you receive.” (Soheh Muslim)

In the above Hadith, which is a case of trading goods of the same genre (dates versus dates) but with different quality, it is still riba alfadl if the amount traded is not equal, but the Prophet (pbuh) taught us how to avoid riba alfadl by advocating the use of a medium of exchange (monies).

What this implies for the forex market is, since the trading of currencies falls under trading of goods (or entities) of the same genre i.e. currency versus currency, Riba alFadl is obviously present.

If one wants to argue that the trading in the forex market is that of trading same genre entities with different quality in the sense that the Ringgit is obviously of a different quality from the US Dollars, then it is still Riba alFadl if the trading is done on the basis of a different price, as in 1RM is equal to USD0.253 as my currency conversion app shows.

As it does not make sense to trade on the basis of 1RM is equal to USD1 unless economic and political developments in Malaysia comes to a stage where there is parity between the Ringgit and the US Dollar, it simply means trading in a forex market involves Riba alFadl.

Unless; one sells the ringgit for some medium of exchange (?), and with that medium of exchange (?), one then buys the USD. This is taking the cue from the Hadith about trading of dates of different quality.

I pose a question mark in bracket because in the case of trading goods of the same genre with different quality, the medium of exchange is money (currency).

But in the case of trading a pair of currencies with different quality, the pertinent question to be asked is what is the medium of exchange for currencies? To make it more enigmatic, the question can be rephrased as: what is the medium of exchange for mediums of exchange?

I remember vividly ending my term paper with the following challenge: Until and unless Muslim economists and the fuqahas can create or devise a medium of exchange for currencies, then I’m afraid trading in the forex market will always involve Riba alFadl.

Before I end, I would like to make two additional remarks:

The first is using a medium of exchange is just one condition to avoid Riba alFadl in a transaction involving same genre entities with different quality. The Hadith below specifies another condition – it must be hand to hand i.e. a spot transaction as opposed to a delayed payment or credit transaction:

Ubaida b. al-Simit (Allah be pleased with him) reported Allah’s Messenger (pbuh) as saying: “Gold is to be paid for by gold, silver by silver, wheat by wheat, barley by barley, dates by dates, and salt by salt, like for like and equal for equal, payment being made hand to hand. If these classes differ, then sell as you wish if payment is made hand to hand.” (Soheh Bukhari).

The second remark, which I also included in my term paper, is the genuine disadvantage for traders and businessmen involved in international trade who are faced with a risk exposure to movement of currencies on a daily basis such that they need to engage in the forex market for hedging and arbitraging purposes, otherwise their business will be ruined.

In such a case, there is a maslaha (public interest) principle for allowing them to hedge or arbitrage in the forex market under the Islamic principle of darurah (dire need).

The same goes for the government, which needs to hedge/arbitrage against risk exposure of currency movements that will disadvantage the country. As pointed out by Second Minister of Finance Johari Abdul Ghani, this is not the same as gambling in the forex market.

Wallahu musta’an.


A global federation of educators to bridge gap between theory & practice of Islamic Finance


I am under the impression that fatwa-shopping refers to the e-fatwa that proliferates on the Internet where one can pick and choose the fatwa (religious edict of a Mufti) that is in alignment with one’s own view or interest.

This cherry picking of fatwa is often done to ‘whack’ the views of others that one differs from in matters of peripheral differences of opinion on some religious issues. Very often too, this pick-and-choose fatwa is used to reinforce one’s view in a controversial religious issue by exclaiming: “I told you so… this fatwa is proof that my position is right.”

But don’t be surprised that this phenomenon of fatwa-shopping may occur at the professional discipline of Islamic Finance.

The issue was first raised in 2009 when Sheikh Muhammad Taqi Usmani of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), a Bahrain-based regulatory institution that sets standards for the global Islamic Finance industry, said that 85% of sukuk, or Islamic bonds, were un-Islamic.

This was later reiterated by financial journalist John Foster, a former editor of Islamic Business & Finance magazine. Here’s his account:

“… this new generation of Islamic bankers had cut their teeth in the City and Wall Street, and were used to creating sophisticated financial products.

“They often bumped heads with the Sharia scholars who authorised their products as Sharia compliant.

“However, these bankers had a way of dealing with this, as one investment banker based in Dubai, working for a major Western financial organisation explains:

“We create the same type of products that we do for the conventional markets. We then phone up a Sharia scholar for a Fatwa [seal of approval, confirming the product is Shari’ah compliant].

 “If he doesn’t give it to us, we phone up another scholar, offer him a sum of money for his services and ask him for a Fatwa. We do this until we get Sharia compliance. Then we are free to distribute the product as Islamic.”

But I don’t think most Syariah scholar sitting on the Syariah Supervisory Board (SSB) of Islamic financial institutions (IFIs) are easily compromised though I’m very much surprised by the magnitude of sukuk that Sheikh Muhammad Taqi Usmani claimed to be un-Islamic (read: non Syariah compliant).

Furthermore, there are genuine differences of opinion among the asatizah on some aspects of Fiqh Muamalat (Commercial and Transaction Laws in Islam).

In this regard, Malaysian small investors of Islamic financial products are fortunate because there is now the Ombudsman Financial Services (OFS), which began operation on Oct 1.

Bank Negara gave its seal of approval for the operationalization of the OFS to provide a fair and efficient avenue for financial consumers to resolve disputes against financial service providers.

This means consumers that have issue with the Syariah compliance of an Islamic financial product or service that they have bought may bring it up to the OFS, which is an independent redress mechanism with minimum formality for financial consumers to resolve disputes with financial service providers.

To those of my asatizah friends who happen to sit on SSB of IFIs, I hope you have the integrity to realise that religious injunctions are not for sale. My doa that you’ll be given the guidance by Allah to act in an honest, just and equitable manner, Aamiin.


A global federation of educators to bridge gap between theory & practice of Islamic Finance

By Jamari Mohtar

Guest Writer

Focus Malaysia | Oct 22, 2016


KL Declaration calls for Centre for Islamic Economics IIUM to play key role as Secretariat to the proposed International Federation of Islamic Economics and Finance Educators (I-FIEFE)

I NODDED in full agreement when the Kuala Lumpur Declaration at the end of the 11th International Conference on Islamic Economics and Finance (ICIEF) held in the capital of Malaysia recently, made a clarion call for the setting up of an International Federation of Islamic Economics and Finance Educators (I-FIEFE) to bridge the gap between the theory and practice of Islamic Economics and Finance, and produce qualified manpower for the industry.

The KL Declaration also calls for the Centre for Islamic Economics, International Islamic University, Malaysia (IIUM) to play a key role as the Secretariat for I-FIEFE. The secretariat is expected to commence work immediately with support from all parties including the government of Malaysia as well as agencies such as the Islamic Research and Training Institute (IRTI) of the Islamic Development Bank (IDB) Group and to have visible and tangible output within one year.

It’s high time that the practitioners of Islamic Finance pay heed to the fundamentals of Islamic Economics as the foundation of their activities in providing Islamic financial services and products so that both theory and practice move in unison and in equilibrium in order that Islamic banking and finance serve the genuine needs of the ummah.

“This requires policy measures that are not only pro-growth but also will ensure the attainment of equity and the socio-economic progress of all segments in society,” says Professor Mohamed Aslam Haneef, chairman of the Conference, who read what become known as the Kuala Lumpur Declaration on Oct 13, at the end of the three-day Conference.

Explaining on the theme of the Conference which is Rethinking Islamic Economics and Finance: Paving the Way Forward for Inclusive and Sustainable Development, Professor Aslam tells FocusM: “The rethinking theme is in response to the much muted unhappiness among academics and the common man who are increasingly critical of the present day practice of Islamic Banking and Finance (IBF).”

Professor Aslam who’s also IIUM’s Director, Centre for Islamic Economics also poses the question: “Do IFIs (Islamic financial institutions) play any developmental role and are helping to solve the major socio-economic problems of the ummah or just a bank for rich Muslims and corporations?

“For too long, IBF has become an ‘industry’ for the shareholders and moved away from it being a ‘movement’ with an ummatic vision. Yes, they are syariah-compliant but not necessarily ethically rich and concerned,” he sighs, reflecting a sense of disappointment at the way Islamic Economics and Finance have evolved since the inception of the first International Conference on Islamic Economics at Mecca 40 years ago which gave birth to the nascent discipline of Islamic Economics in the first instance, and IBF subsequently.

Among the priorities of the proposed I-FIEFE are:

  • Develop a global database of Islamic economics and finance education, which would cover programmes, curriculum and ‘talent’ development and is to be published as an ‘Islamic Economics and Finance Education’ report with the support of IRTI and other partners;
  • Holding international workshops/seminars and continuous education programmes for university lecturers to improve the standards of teaching and research in Islamic economics and finance, especially in the OIC-Member states; and
  • Conducting and coordinating greater research collaboration and academic/student exchange between member institutions.

The 11th Conference was held under the auspices of the IIUM, co organized with IRTI of the IDB Group, the International Association for Islamic Economics (IAIE) as well as the Ministry of Finance, Malaysia as a strategic partner.

Risk sharing to replace existing risk transfer/shifting system

In his keynote address at the Conference, Professor Abbas Mirakhor of the Malaysia-based International Centre for Education in Islamic Finance (INCEIF) which is dubbed by analysts as the Global University of Islamic Finance, lamented at how a risk transfer or a risk shifting in the context of risk sharing in a debt based system often ends up with the taxpayers assuming the risk without their knowledge.

“Although the 2013 Declaration of the 9th Conference at Istanbul stipulated that the essence of Islamic Economics is risk-sharing, nonetheless a risk sharing arrangement that is the result of a risk transfer taking place without the knowledge of the one who now assumes the transferred risk on why the risk is shifted to him or her, is obviously haram.

“The party that is being subject to a risk transfer must be informed at the beginning, not at the end of the transaction that he is subjected to a risk transfer in order to make the transaction Syariah-compliant,” adds Professor Abbas.

Hearing Professor Abbas, my mind was transported back to the time some 30 years ago when I was among the pioneer batch students of Islamic Economics at the IIUM where I often wondered why my lecturers sanctioned the idea of a loss-offsetting reserve for a theoretical Islamic Bank where in good times, the investors/depositors were not given their maximum rate of return but instead that amount which was more or less equivalent to what an investor would earn in an interest based system.

The excess that was being withheld from the investor was placed in a loss-offsetting reserve so that the theoretical Islamic Bank in bad times can still dish out a rate of return which was more or less the equivalent of the interest rate earned by an investor/depositor in a conventional bank via drawing out funds from the loss-offsetting reserve. And the investors/depositors were not told of this mechanism in advance.

The rate of return by definition is a variable amount whose final value is dependent on the risk undertaken for a given period of time by the depositors/investors. Because of this variability in amount, a distinction is made between an ex-ante rate of return and ex-post rate of return in which the former refers to an estimated as opposed to actual average rate of return over the life of an investment, while the latter refers to a calculation of the actual rate of return over the life of an investment. In cases where there was uncertainty as to the rate of return before the investment was made, one calculates the ex-post rate of return after the completion of the investment to determine how closely the investment matched its estimates.

The rate of interest, on the other hand is a fixed amount that an investor/depositor is always entitled to, regardless of the risk undertaken. Making the rate of return riskless is tantamount to transforming it into an interest rate, for in economics, a riskless rate of return is another name for interest rate.

Granted that the first Islamic bank needed to use interest rate as a shadow rate of return for benchmarking purpose, otherwise its viability would be affected at its pioneering stage, it would be mind boggling that this need for a shadow rate of return based on the movement of interest rate is still justified after 30 years of Islamic banking, and with the mushrooming of Islamic banks the world over.

Continuing this practice goes against the grain of economic theory because in conventional economics, it is for the rate of interest to follow the rate of return instead of the other way round. For instance, when the rates of return are high, people will move their funds out of a debt system like banking to the equity system like the stock exchange, and this in turn will drive up the interest rate to stop the exodus of funds to the equity market. Conversely, when rates of return are falling, people will move their funds out of the equity market to the banking system. This exodus of funds into the banking system in turn will drive down the interest rates.

It is on this basis that Muslim economists are unanimous in declaring that interest rate is an institutional reality rather than an economic necessity! The rate of return, on the other hand, is both an economic necessity and an institutional reality.

No risk, no reward

The above discussion has ramification on the providers of Islamic financial services and products in that they have a duty to inform their clients on the risk profile of their products and services based on the maxims of “no risk, no reward” and “high risk, high reward”.

Risk here refers to the total or partial erosion of the initial capital of their clients while reward refers to the prospect of earning more than an average rate of return by their clients. It is impossible for all financial institutions (FIs) including Islamic ones to guarantee at the same time both the preservation of the original capital, along with earning a more than average rate of return.

This is the point that lay investors seldom realise and thus were easily taken in by the promise of such double guarantees by unscrupulous representatives of FIs, which were often the cause of global financial instability if this subtle “trickery” occurs on a massive scale.

That is why the Singapore’s Monetary Authority (MAS) has made it mandatory on FIs to rate their financial services and products based on the risk profile of their clients in order to educate them on the risky nature of all their products and services.

At one end of the spectrum are products that guarantee the preservation of the initial capital with a modest rate of return for risk-averse investors, while at the other end are the products meant for risk-taker investors that offer a more than average rate of return with no guarantee of preservation of the original capital. Hence, risks are known and shared equitably.


Financial ombudsman scheme may mitigate fatwa-shopping in IBF

THE Ombudsman for Financial Services (OFS), which has commenced operations since October 1, as the operator of the financial ombudsman scheme, may put a damper to the phenomenon of fatwa-shopping in the Islamic Banking and Finance landscape in Malaysia, if the phenomenon indeed exists here.

Bank Negara gave its seal of approval for the operationalization of OFS beginning October 1 in a media statement on Sept 28. Its operationalization comes under the Financial Services Act 2013 and Islamic Financial Services Act 2013 to provide a fair and efficient avenue for financial consumers to resolve disputes against financial service providers.

The phenomenon of fatwa shopping arises because Syariah scholars sit on the Syariah Supervisory Board (SSB) of Islamic Financial Institutions (IFIs) where their decision on the syariah compliance of the Islamic financial products is very crucial to the offering of the products or services by the IFIs. Many of these scholars are highly regarded, with their opinions having the potential to move markets.

Hence, some analysts have raised some concerns that since syariah scholars are generally employed directly by the financial institutions, their independence can be compromised, since bank managers use their influence to gain more acceptable opinions. This has been commonly referred to as “fatwa-shopping” or “Shariah advisory à la carte”.

The issue was first raised in 2009 when Sheikh Muhammad Taqi Usmani of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), a Bahrain-based regulatory institution that sets standards for the global industry, said that 85% of Sukuk, or Islamic bonds, were un-Islamic.

With the operationalization of OFS in Malaysia, this phenomenon can be mitigated as consumers that have issue with the Syariah compliance of an Islamic financial product or service that they have bought may bring it up to the OFS. This is because OFS serves as an independent redress mechanism with minimum formality for financial consumers to resolve disputes with financial service providers.

But as pointed out by Associate Professor Dr Syed Musa from the IIUM’s Institute of Islamic Banking and Finance (IIiBF), the OFS is an alternative to, and not a replacement for legal actions taken in a court of law, and disputes filed must not exceed RM 250,000.

“The key is still the focus on effective Syariah/corporate governance mechanisms, transparency and product disclosure towards customer care and intimacy to mitigate the Syariah non-compliance risk, without unduly inhibiting the innovative spirit of the industry to come out quickly with various range of products to suit the customers’ varied needs,” he adds.

“The availability of this dispute resolution mechanism may also lower the cost of Islamic financial products since they are viewed as relatively costly vis-à-vis conventional financial products, albeit a perceived one, as brought up by one of the speakers in the Conference.”

Dr Syed Musa is referring to the 11th International Conference on Islamic Economics and Finance held in Kuala Lumpur from Oct 11 to 13. The relatively lower cost alluded by him could be the result of the harmonization process in which both the Islamic and conventional financial products come under the ambit of the OFS.

The services of the OFS are offered free of charge to financial consumers. It operates in accordance with the principles of independence, fairness and impartiality, accessibility, accountability, transparency and effectiveness. A retired Federal Court Judge, Tan Sri James Foong has been appointed as its Chairman.