No matter how numerous and varied the transactions of exchange are, they would always be confined to the trading of one currency for another of the same type, or the trading of one currency for another of a different type. The transaction only occurs either between ready cash for other ready cash, or between a Dhimma (credit) for another credit. The exchange cannot take place between cash and a credit. When the exchange transaction takes place, it becomes effective once the contracts and the cashing in have taken place, and neither of the two contracting parties can go back on his word, unless it became established that there had been a case of serious fraud or defect, in which case it is permitted for one of the contracting parties to withdraw from the deal. If, for instance one of the contracting parties found a defect in that which He had purchased, for example He found that the silver He had bought contained copper, or that the silver turned black, He has the option to return the goods He had bought or to accept them based on the agreed price at the time of the transaction. This means that the returning of goods is allowed as long as it is at the same rate as the time of the deal. If one of the contracting parties accepted the goods, the transaction would be valid, and if He decided to return them, the deal would be cancelled. If, for instance one bought 24 carat gold for 24 carat gold, only to find that the gold purchased is only 18 carats, this would be considered fraud, and in this case He would have the choice of either accepting the deal at the agreed price of exchange at the time of the transaction or rejecting it. So, if the person who exchanged the gold for gold decided to accept the gold with its defect at a discount, this would not be allowed because there would be a higher value placed on one of the two commodities, and there is an absence of equivalence which is a condition of a deal of the “same type”.

Another example would be if an indebted person said to his debtor: “Reduce some of my debt and I will hurry in repaying the remainder of the debt.” This is also not allowed because it would be the trading of a ready sale for a future sale without equivalence i.e. it is as if the indebted person sold his debt “promptly” to his debtor for less than the original transaction, thus creating a disparity which is Riba. Likewise, if the debtor said to the indebted: “I would give you ten Dirhams if you accelerated the repayment of the 100 you owe me”, this is not allowed because there would be a disparity in the value which is Riba. Muslim reported on the authority of Abu Sa’id Al-Khudri that the Messenger of Allah (pbuh) said: “Trade gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates and salt for salt, like for like, and hand to hand, for whoever increases or takes an increase will fall into riba, for the taker and the giver alike.”

Another example would be if one person owed another gold and the latter owed the former silver, and they exchanged what each owed the other i.e. if the former settled what He owed in gold with what He is owed in silver, this type of exchange would be lawful, for the immediate payment of debt is like the immediate payment of goods. Also, if a person bought goods in gold, and the seller cashed the value of the goods in silver, this type of transaction would be permitted, for it would be permitted to pay off one of the currencies by another currency, and this deal would be an exchange with an asset and debt (credit). This is because Abu Dawud and Al-Athram reported in their “Sunan” on the authority of Ibn Umar who said: “I used to trade in camels in the Baqee’, so I would sell in Dinars and get paid in Dirhams, or sell in Dirhams and get paid in Dinars. I would take this from that and give this from that, so I went to the Messenger of Allah (pbuh) at Hafsa’s house, and I said: ‘O Messenger of Allah (pbuh) will you please listen, I want to ask you something. I sell camels in the Baqee’, I sell in Dinars and get paid in Dirhams or I sell them in Dirhams and get paid in Dinars. I take this from that and give this from that.’ The Messenger of Allah (pbuh) answered: ‘There is nothing wrong in this as long as you trade according to the market value of the day and as long as you do not part company from the other party with something still outstanding between the two of you.”’

Also, if a person bought from another a genuine Dinar for two fake Dinars, this would not be allowed. However, if He bought a genuine Dinar for silver Dirhams, then bought with the Dirhams two fake Dinars, this would be allowed whether He bought them from the same person or from another. This is so because Muslim reported on the authority of Abu Sa’id who said: “Bilal came to the Messenger of Allah (pbuh) with some Barni (fine quality) dates, so the Messenger of Allah (pbuh) enquired: ‘Where did this come from?’ Bilal replied: ‘These are dates of inferior quality we had for some time, and I exchanged two sa’as of inferior quality for one sa’a of fine quality as food for the Messenger of Allah (pbuh).”’ Upon this the Messenger of Allah (pbuh) said: “Woe! this is real Riba so do not do that. If you wish to buy dates (of superior quality) you could sell the dates (of inferior quality) in a separate bargain and then buy the (superior quality dates).” Also, Abu Sa’id and Abu Hurairah reported in an “agreed upon” Hadith “that the Messenger of Allah (pbuh) appointed a man as a tax collector over Khaybar, so He came to Him one day with some fine quality dates called Janeeb. Upon this the Messenger of Allah (pbuh) said: ‘Are all the dates of Khaybar like this?’ He said: ‘No, by Allah, O Messenger of Allah! We buy one Sa’a of these fine quality dates for two Sa’as of inferior dates and also two Sa’as of it for three Sa’as.”’ Upon this the Messenger of Allah (pbuh) said: “Do not do this; rather sell the inferior quality of dates you have for dirhams and then buy the Janeeb dates with the use of dirhams.”

Here, the Messenger of Allah (pbuh) did not order the man to sell his dates to a person other than the one He would buy them from, and if the selling of dates to the same person He buys from was Haram then the Messenger of Allah (pbuh) would have explained this to his tax collector. It was therefore permitted because He sold one type of good (dates) for another type (dates) without any preconditions or secret agreement (connivance) so it is allowed, as if He had bought from another person. Likewise, it would be permitted to sell gold for silver, and then buy silver. However, if this were subject to a prior arrangement and secret deals, it would not be allowed, and it would be regarded as a prohibited ploy. This is because any type of trickery is prohibited and unlawful in Islam i.e. any attempt to portray a contract as legitimate with the intent to commit a forbidden act using deception. This includes soliciting an action that Allah  has forbidden, neglecting an action that Allah (swt) has commanded, suppressing a right etc. This is because whatever leads to Haram is itself Haram, and because Ahmed reported on the authority of Ubada Ibn As-Samit that the Messenger of Allah (pbuh) said: “A group from my ummah will one day consider “khamr” (intoxicants) lawful after they give it a different name.” Ahmed also reported on the authority of Abu Malik Al-Ashja’i who said that He heard the Messenger of Allah (pbuh) say: “People from my ummah will drink alcohol (Khamr) while giving it a different name.”

Therefore, exchange is one of the lawful transactions in Islam according to specific rules determined by the Shar’a. It can be conducted in local transactions as well as foreign. Just like the exchange of gold for silver and silver for gold of the same currency of the country, this can also be performed in a foreign currency, whether at home or abroad, and whether the exchanges were monetary or commercial as well as where the exchange of a currency for another is involved. In order to elaborate on the foreign exchange between various currencies, we need to study in depth the nature of money.