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Constitution of the Caliphate State / Economic System

Article 168: Exchange and trade of funds

The Constitution of the Caliphate State,

Article 168: It is permissible to have exchange between the State currency and the currency of other states like the exchange between the State’s own coinages. It is permissible for the exchange rate between two currencies to differ provided the currencies are different from each other. However, such transactions must be undertaken in a hand-to-hand manner and constitute a direct transaction with no delay involved. The exchange rate can fluctuate without any restriction as long as it is between two different currencies. All citizens can buy whatever currency they require from within or outside the State, and they can purchase the required currency without obtaining prior permission or the like.

Its evidence are the words of the Prophet  صلى الله عليه وآله وسلم :

«وَبِيعُوا الذَّهَبَ بِالْفِضَّةِ وَالْفِضَّةَ بِالذَّهَبِ كَيْفَ شِئْتُمْ»

and sell gold for silver and silver for gold as you please” (reported by Al-Bukhari from Abu Bakra), and it is reported from Malik b. Aws Al-Hadathan that he said: “I came saying who was prepared to exchange Dirhams (for my gold), whereupon Talha b. Ubaidullah (as he was sitting with 'Umar b. Khattib) said: Show us your gold and then come to us (at a later time). When our servant would come we would give you your silver. Thereupon 'Umar b. Al-Khattib (ra) said: Not at all. By Allah, either give him his silver, or return his gold to him, for Allah's Messenger  صلى الله عليه وآله وسلم said:

«الْوَرِقُ بِالذَّهَبِ رِبًا إِلَّا هَاءَ وَهَاءَ»

Exchange of silver for gold is interest (usury) except when (it is exchanged) on the spot (hand to hand).(reported by Muslim).

It is reported that Al-Bara’ b. ‘Azib and Zayd Bin Arqam used to be partners, and so they bought silver for money and a deferred payment, and when the Messenger of Allah  صلى الله عليه وآله وسلم heard about this he  صلى الله عليه وآله وسلم ordered them with the words:

«أَنَّ مَا كَانَ بِنَقْدٍ فَأَجِيزُوهُ، وَمَا كَانَ بِنَسِيئَةٍ فَرُدُّوهُ»

Whatever is paid by money is permitted, and whatever is a deferred payment must be returned (rejected).” reported by Ahmad from Abu Al-Minhal, and Al-Bukhari reported from Sulaiman Bin Abi Muslim who said: “I asked Abu Al-Minhal about money exchange from hand to hand. He said: “I and a partner of mine bought something partly in cash and partly on credit.” Al-Bara’ b. ‘Azib passed by us and we asked about it. He replied: “I and my partner Zayd Bin Al-Arqam did the same and then went to the Prophet and asked him about it. He said:

«أَنَّ مَا كَانَ بِنَقْدٍ فَأَجِيزُوهُ، وَمَا كَانَ ِنَسِيئَةً فَرُدُّوهُ»

“Whatever is paid by money is permitted, and whatever is a deferred payment must be returned (rejected). ””; in other words, they were currency traders. These narrations are evidence for the permissibility of currency exchange, and this can take place in domestic transactions as well as foreign transactions, so just as the gold of a currency can be exchanged for its silver and vice versa, in the same way foreign money can be exchanged for local money, irrespective of whether that was done domestically or outside the country, and when two different currencies are exchanged there is a difference between them called the exchange rate. The exchange rate is the proportion between the weight of pure gold in the currency of a state and the weight of pure gold in the currency of another state. For this reason, the exchange rate will change according to the change in this proportion and according to the change of price of gold in the countries.

The rules of exchange between silver and gold apply to contemporary paper money because the Illah (money and value) are present in it due to law of the State binding monetary transactions with it. That is because the narrations regarding exchange are reported to do with minted gold and silver as names of a genus, which has no understanding derived from it nor is any analogy made to it, and in the same manner the reports came to do with Dinar and Dirham coinage, and from this the Illah of money can be derived, in other words, its use for prices and wages, and so analogy can be made from that. So in the narration of Malik b. Aws mentioned previously he used to exchange Dirhams, and Dirhams is a word which is understood as money. And so accordingly whatever is applied to the exchange between gold and silver in terms of what is permitted and prohibited is applied to exchange between fiat currency according to the contemporary laws of states, in other words, the exchange between one genus must be exchanged on the spot and in equal amounts, and exchange between two different types must be done on the spot, but the price between the two can be as you please.

The Shari’ah rule regarding exchange rate is that it is permitted, and is not restricted by anything, since currency exchange is permitted, and so accordingly the price of exchange (exchange rate) is permitted. Hence, anyone can buy a currency which he wants according to the price which he desires, and all of that falls under the permissibility of exchange.

This is the proof of this article for the permissibility of currency exchange, and the permissibility for its price to fluctuate.

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