I used to practice money exchange, and I asked Zaid bin 'Arqam about it, and he narrated what the Prophet said in the following: Abu Al-Minhal said, "I asked Al-Bara' bin `Azib and Zaid bin Arqam about practicing money exchange. They replied, 'We were traders in the time of Allah's Messenger (ﷺ) and I asked Allah's Messenger (ﷺ) about money exchange. He replied, 'If it is from hand to hand, there is no harm in it; otherwise it is not permissible."
Hadith Commentary: The Prohibition of Delayed Exchange in Currency Trading
This narration from Sahih al-Bukhari (2060, 2061) establishes a fundamental principle in Islamic commercial law regarding currency exchange (sarf). The Prophet's instruction "If it is from hand to hand, there is no harm in it; otherwise it is not permissible" contains profound wisdom for preventing economic injustice.
The Condition of Immediate Exchange (Taqabud)
The requirement for "hand to hand" exchange (taqabud) means both parties must complete the transaction immediately in the same sitting, without any delay in receiving the exchanged currencies. This prevents uncertainty (gharar) and potential disputes that arise from deferred exchanges.
Scholars interpret this to mean that if gold is exchanged for gold, or silver for silver, they must be equal in weight and handed over immediately. When exchanging different currencies (like gold for silver), the exchange must occur immediately though the amounts may differ based on market rates.
Wisdom Behind the Prohibition
Delayed currency exchange creates riba (usury) because it allows one party to benefit from the time value of money without bearing corresponding risk. This violates the Islamic principle that money should serve as a medium of exchange rather than a commodity that generates profit through mere delay.
The prohibition also prevents market manipulation and speculative practices that could destabilize currency values and harm the broader economy, particularly affecting the poor and those with fixed incomes.
Practical Application in Modern Finance
This ruling applies to all spot currency transactions in contemporary banking. Forex trading must involve immediate settlement rather than forward contracts that delay actual currency delivery.
Islamic financial institutions structure currency exchanges to ensure both parties receive their respective currencies within the same session, either through direct handover or through simultaneous bank transfers that are effectively immediate.