Contracts and Deals in Islamic Finance: A User s Guide to Cash Flows, Balance Sheets, and Capital Structures

Chapter 8Bai al Sarf

The contract of bai al sarf is to exchange a price for a price in the same or different currency, that is, an exchange in currency. A number of shariah scholars are of the opinion that bai al sarf can only be done between two of the same kind of medium of exchange such as gold with gold, but generally the majority of the shariah scholars in various jurisdictions feel the exchange could be between two different forms of mediums of exchange such as between gold and silver, and gold and dinar.

In the exchange of price for price in the form of currencies, Islam has put certain rules to limit the use of money strictly as a medium of exchange. The aim is to prevent the “pricing of money” and use of it as a form of commodity, as reflected in a hadith reported by Abu Sa'id al-Khudri, where the Prophet (saw) had said: “Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates and salt for salt, should be exchanged like for like, equal for equal, and hand-to-hand. If the types of exchanged commodities are different then sell them as you wish, if they are exchanged on the basis of a hand-to-hand transaction.”¹

Basic Rulings on Bai al Sarf

According to AAOIFI standards,² it is permissible to trade between currencies, provided that the following criteria are observed:

• Taking possession before leaving one another.

  It is prohibited that any parties leave without having the possession of the currency exchanged. This is due to the fact that ...