Foreign exchange in conventional banking industry: an analysis from shariah perspective

Foreign exchange is the largest market in the world and operates 24 hours a day. Foreign exchange consists of FX Spot, FX Forward, and FX Swap. Shariah guidelines stipulate that any currency exchange must adhere to the rule of al-ṣarf whereby the exchange of different currencies must exchanged immediately hand-to-hand. Generally, conventional foreign exchange practice contradicts the requirements of al-ṣarf because it involves an element of riba. However there are different views from Islamic scholars on the permissibility of these transaction. Therefore, the aim of this study is to analyse these foreign exchange transactions from a Shariah perspective. The result of this study shows that FX Spot complies with Shariah guidelines when subject to the requirements of al-ṣarf. Meanwhile FX Forward and FX Swap are outside the bounds of these guidelines.