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"ISLAMIC LAW" and Finance

Tuesday, April 21, 2009 03:59 Singapore
UNIUTARAMALAYSIA
LAWREV-PRO
7 CHIJIL 521
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The material accompanying this summary is subject to copyright. Usage is governed by contract with Thomson Reuters,
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Chicago Journal of International Law

Winter 2007
Articles
Symposium: Islamic Business and Commercial Law
In the Name of Allah, Merciful and Mercy-Giving
*521 COMPENSATION FOR AN OBLIGATION TO SELL CURRENCY IN THE FUTURE (HEDGING)
[FNa1]
Dr. Nazih Hammad [FNaa1] [FNd1]
Copyright (c) 2007 Chicago Journal of International Law, University of Chicago Law School; Dr. Nazih
Hammad
All praise is Allah's, Lord of the Worlds! Peace and Blessings be upon the Prophet, Muhammad, his
Family, and his Companions!
I. Introduction
This Article establishes a Shari'ah ruling [FN1] for an important contemporary issue that has been the
subject of much inquiry: whether Islamic law permits forward currency contracts (that is, hedging against
currency risk). Specifically, this Article addresses what happens when a financial institution offers an obligation to sell or buy a specific currency at a specified time in the future at a pre-determined rate of exchange
in return for a specified amount, regardless of whether the buyer decides to proceed with the exchange contract. Is it lawful for the client (a trader, manufacturing company, Islamic bank, government, or other transaction participant) to purchase that obligation in order to avoid potential losses resulting from market fluctuations in the prices of currencies? In other words, is it lawful, with respect to the Shari'ah, to hedge against
currency risk by purchasing a forward currency contract? This issue is particularly significant *522 given
the needs of Islamic financial institutions, trading houses, manufacturers, and even governments and their
agencies. But the issue has yet to become the subject of serious academic research or proficient legal scholarship by those qualified to establish a Shari'ah ruling on the matter.
Since this Article focuses on the issue of selling obligations or obtaining compensation for obligations, part II of this Article will discuss the meaning of an obligation as understood here. Part III will
provide context to the definition of obligation by considering how Islamic law, or fiqh, characterizes
compensation for obligations. After this introductory, but essential, review, this Article will discuss, in part
IV, the legal justifications for the conclusion that the obligations described above are consistent with the requirements of Islamic law. Finally, this Article will conclude with a discussion of the practical effect of the
approval, from an Islamic law perspective, of the use of options.
II. Obligation: Concept and Types
The categorization of an idea depends upon how it is conceptualized. Thus, we must begin with a definition of obligation and an explanation of its meaning in Islamic law. As Zaruq stated in his Maxims, a

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discussion of anything is actually an offshoot of how its essence and benefit are conceptualized through acquired or obvious intellectual perceptions, to which reference may be made when considering the instances
of its occurrence, in terms of accepting or rejecting [the concept] and in terms of assigning generalities and
details [to the concept]. [FN2]
An obligation is the requirement that a person act, or refrain from acting, in the interests of another. For
example:
(a) A person who destroys valuable property is responsible (daman) to the owner of the property
for its destruction. This responsibility is an obligation. Likewise, delivering an item that has been sold
and guaranteeing the item against hidden defects are obligations that fall upon the seller in the interest
of the buyer. Similarly, where a deed brings something from a state of nothingness into a state of being, paying the purchase price of the deed and taking delivery of it are obligations that fall upon the
buyer in the interest of the seller. All of these are positive obligations.
(b) Not transgressing against the body, wealth, or reputation of another is an obligation required by the
Shari'ah on all who are subject to the Shari'ah. Likewise, the deposit (wadi'ah) contract imposes an obligation upon a deposit holder--in the interest of the depositor--not to transgress upon or neglect a deposit. Also,
in a sale of an *523 option of stipulation (khayar al-shart) or for an'urbun, the option specified in each of the
two contracts obligates the seller not to refuse or otherwise obstruct the buyer from voiding the sale during
the prescribed period. Each one of these obligations is a requirement to refrain from a deed, where refraining
from a deed means restraining oneself from bringing that deed about when it is contemplated. All of these
are negative obligations.
The source of an obligation may be the Shari'ah (as in the obligation to support one's family), a contract
(as in the obligation of a lessee to pay rent or a guarantee against defects in the item that is sold by a seller to
a buyer), or a detrimental action (as in a guarantee against destruction or compensation for damages of all
sorts).
Furthermore, the locus of an obligation may be either lawful or unlawful. For example, lawful obligations include: (1) the obligation of a seller to deliver the item(s) sold to the purchaser; (2) the obligation of a
borrower or a lessee not to transgress or fail to maintain borrowed or leased property; and (3) the obligation-when these have been stipulated in the contract of marriage--of a husband not to take another wife while
married to his present wife or to refrain from taking her from her homeland. On the other hand, unlawful obligations include: (1) the obligation of a borrower to pay interest on an amount he has borrowed; (2) the obligation of a muhallil in a marriage of tahlil to cohabit with the wife; and (3) the obligation of a sales agent
to his principal to withhold disclosure of defects to buyers.
III. The Fiqh Interpretation of this Case

A. Foundations of the Ruling and the Basis for Consideration

A Shari'ah ruling on the lawfulness of selling an obligation to exchange currency in the future at a predetermined price hinges on the degree to which such an obligation has commercial value from a judicial perspective. If the obligation has commercial value, it may be lawfully compensated for by something else with
value. Thus, the obligation may be sold in exchange for another item of known value because a sale is an exchange of value for value. However, if the obligation does not have commercial value, then it may not be
lawfully compensated for by something else with commercial value because this would amount to the consumption of wealth in return for nothing, and this is clearly prohibited by the Shari'ah. Thus, an understand-

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ing of the legal ruling in regard to this issue requires a study of two matters: (1) the nature of wealth and the
elements of value in the Islamic legal tradition (al-fiqh) and (2) the degree to which value is realized and its
elements are present in an obligation.
*524 1. The Nature of Wealth (mal) and the Shari'ah Concept of the Wealth
The entire community of Islamic jurists--including Shafi'ites, Malikites, and Hanbalites--are of the opinion that there are three elements of wealth. That is, three elements which, when present, will lead to the conclusion that the obligation has value and, from a Shari'ah perspective, can be exchanged for a counter-value.
Those three elements are: (1) that the obligation be an intended usufruct, or contain the same; (2) that the
usufruct has a monetary value in commercial practice or custom; and (3) that the usufruct be lawful from a
Shari'ah perspective (at least when one is in a state of ease and has the ability to make choices).
Support for these three elements can be derived from various sources of Islamic legal commentary. Since
justifications for Islamic legal conclusions must be derived from historical texts, it is necessary to review
relevant passages. The following is a brief list of legal characterizations of wealth.
(a) Wealth is defined in the Commentary on Tarshih al-Mustafidin as whatever has, in and of itself, an intended usufruct that may be considered as such by the Shari'ah so that it may be exchanged
for a customary form of finance when one is in a state of having the ability to choose. [FN3]
(b) According to al-Maziri: Something without usufruct from the outset is neither lawful to contract for
nor [may one contract] by means of. This is because to do so would be to consume peoples' wealth in return
for nothing. [FN4]
(c) Al-Suyuti, in his al-Ashbah wa'l-Naza'ir, quotes Imam Shafii as having said that [t]he term wealth
will not apply except to that which has a price by which it may be sold or which may be charged to whoever
damages it, regardless of how insignificant [the price may be]. [FN5]
(d) Ibn Taymiyah wrote: Usufruct without a price [known] by custom is like an object without a price
such that it is not a lawful subject for either a contract of lease or sale. [FN6]
(e) The qadivial judge Ibn al-'Arabi defined wealth as follows: It is whatever covetousness covets and is
suitable by custom and by law to be benefited by. [FN7]
*525 (f) Ibn 'Aqil defined wealth in the following manner: It is what commonly changes hands in legal
contracts made by people seeking profit and earnings; contracts which obligate money and rights as responsibilities, owing to the desire of people to have things and to make use of them. [FN8]
(g) Al-Qarafi wrote in his al-Dhakhirah:
Physical assets and usufructs are of three categories. Among these are: (i) that for which recompense is
acceptable, like wheat or a residential lease; (ii) that for which recompense is unacceptable--either because it
is prohibited by the Shari'ah, like wine and song; (because it is not something that is customarily valued, like
a single grain of wheat or one's handing another his shoe; or because it is has no purpose whatsoever, like a
grain of sand or the movement of a finger); and (iii) that concerning which there is a difference of opinion as
to whether or not mutual recompense is acceptable, like manure, phlebotomy (blood letting as a medical procedure), or cupping (a medical procedure similar to phlebotomy). [FN9]
(h) In both al-Iqna' and its commentary, Kashshaf al-Qina', the legal definition of wealth is given as
whatever has a legitimate usufruct for other than a needs-related interest or a [life-saving] essential. Such
a definition excludes whatever is without use to begin with, (for example, insects), whatever has illegitimate

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uses (for example, wine), whatever has a use that is permitted owing to a needs-related interest (for example,
a dog), [FN10] and whatever has a use that is permitted only because it is deemed essential for the preservation of life (for example, improperly slaughtered flesh for one in a state of near starvation or wine taken to
facilitate swallowing while one is choking). There is a caveat here: the apparent meaning of the foregoing
definition is similar to that implied by others. That is, a usufruct may not be sold, even though in the definition of sale (bai') it is mentioned as legitimate. For this reason, the definition given here should mention that
the subject of sale is either an unqualified lawful asset or usufruct; or the definition might have explained
that wealth is inclusive of both physical assets and usufructs. [FN11]
*526 B. The Degree to Which Elements of Wealth are Realized in Forward Currency Contracts
Based on the preceding exposition on the nature and concept of wealth from a Shari'ah perspective, compensation for a forward currency contract may be considered lawful because the contract contains the three
elements of wealth discussed above.
1. The First Element: That the Obligation be an Intended Usufruct
If Islamic legal terminology describes an item as having meaningful use when the item has a proper
objective (either in terms of attracting benefit or repelling detriment), then a forward currency contract undoubtedly has a meaningful use. A purchaser of such an obligation intends to attract benefit or repel detriment. This goal is accomplished, for example, when a merchant or manufacturer hedges against a possible or
expected loss caused by market fluctuations in the prices of currency. In order to maintain production, merchants and manufacturers are required to import raw materials on a regular basis using deferred payments in
one foreign currency or another. These merchants or manufacturers then sell the raw materials (or what they
have become after manufacture) for local currency in cash, credit, as a part of export agreements, or by
means of salam sales, istisna', or some other contract. By purchasing forward currency contracts, merchants
and manufacturers can hedge against disastrous losses or even bankruptcy that can result from fluctuating
exchange rates.
2. The Second Element: That the Usufruct Have Value
When considering whether forward currency contracts have a generally acknowledged monetary value,
no consideration should be given to the absence of such obligations in former times. The operative Shari'ah
principle here is that a usufruct that was not considered wealth from a legal perspective at any time in the
past may indeed be considered wealth if it is accorded value at some other time. The Shari'ah ruling in the
matter depends upon custom (al-'urf), and there is no denying that rulings based on custom change with
time. This principle is well-established as a legal maxim among the Islamic jurists.
This explanation clarifies the opinion of the Imam al-Qarafi prohibiting recompense for a guarantee (that
is, a responsibility for a financial obligation) on the basis that it was not a usufruct accorded value by commercial custom in his times. Based on the lack of custom, Imam al-Qarafi did not consider a guarantee
wealth and stated in writing that it was not lawful to exchange a guarantee for a counter-value. Imam alQarafi's conclusion is consistent with the preferred opinion in the Maliki school of jurisprudence. Following
the classification of physical assets and usufructs given by al-Qarafi in al-Dhakhirah (discussed *527
above), a guarantee falls in the second category because, though a guarantee may have value in theory, it is
not valued customarily. It was therefore unlawful, in the time of Imam al-Qarafi, to offer a guarantee in return for compensation. [FN12]
In our own times, however, a guarantee is valued in commercial custom, and, on that basis, satisfies the
second element for wealth. Furthermore, because the fundamentals upon which al-Qarafi's prohibition have

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changed, a Shari'ah ruling should not rest on antiquated opinions.

This treatment is justified by analogy to another well-known ruling from the Maliki school mentioned by
Ibn Rashid al-Qafasi, an authority on Maliki jurisprudence. In the course of his discussion of the prohibition
against the types of deferred payment sales that seek to achieve what appears to be unlawful by means of
what is apparently lawful, he wrote:
Malik prohibited the same in order to block ostensibly lawful means to unlawful ends. In such a
situation one must look to what has left the hand and to what returns to it and then compare the one to
the other. If it is found to be something that would be lawful if the transaction had begun with it, then
you may deem it lawful. But if not, then deem it unlawful; that is, if it is something that is often
sought after (like a sale or credit). If it is something that is not often sought after (like a guarantee for
a price), then there are two well-known opinions. And if it is something that is highly unlikely (like
one's saying, Give me credit and I'll give you credit.), then the most accepted opinion is that it will
be lawful, as opposed to what Ibn Majishun had to say on the matter. [FN13]
3. The Third Element: That the Usufruct Be Lawful
It is a well-established matter in Shari'ah law that the lawfulness of a usufruct requires the support of a
legal or scriptural text that expressly mentions the lawfulness of that particular usufruct. This is something
that is neither sought after nor stipulated as a condition precedent in regard to any usufruct or contract in the
general run of financial exchanges. Rather, the usufruct must not be contrary to that which is established and
approved by a legal or scriptural text. Indeed, a legal maxim states that Anything that has to do with basic
human necessities will be suitable as an object for contractual buying and selling. Only that which has been
expressly prohibited by Allah or His Prophet will be prohibited because the precedent in all financial contracts and transactions is permission and lawfulness. [FN14]
With regard to the focus of our study, the lawfulness of forward currency contracts depends on the purpose of buying the obligation. If the purpose of *528 buying the obligation is no more than to speculate on
currency prices-- with the expectation of benefiting from a rise in prices--rather than to actually take possession of the currency, then the usufruct sought from the purchase will not be a lawful one. This is because
such a purpose resembles gambling. In this manner, the characteristic of wealth (true value) is negated in the
obligation and such an obligation may not be exchanged for value. [FN15] In this context, the obligation
will be no more than a form of conventional options contracts prohibited by the Shari'ah, as declared in a decision by the Islamic Fiqh Academy at Jeddah, which states:
Options contracts as currently applied in the world financial markets are a new type of contracts
which do not come under any one of the Shari'a nominate contracts. Since the object of the contract is
neither a sum of money nor a utility or a financial right which may be waived, then the contract is not
permissible in Shari'a. [FN16] Furthermore, Ibn al-Qayyim wrote that:
The purpose for which the Almighty legislated sale and made it lawful was for the seller to receive a price for the property and for the payer of the price to become the owner of the property. In
this way, both receive what they seek from the sale. One benefits from the selling price and the other
from the item that is sold. This will only come about if the buyer seeks the subject of the sale either to
benefit himself or to trade and if the seller seeks the price . . . . If each of the two parties to the sale
seeks these things, then the reason for which the Almighty legislated the contract will be realized in
practice and in theory. However, if the contract is sought merely in order that it may be voided, then it
is not intended; and if it is not intended, then its existence will be the same as its non-existence, and
anything leading to it will be folly. [FN17]
If, however, the intention behind the purchase of the obligation is to take actual possession of the currency in the future, the usufruct of the obligation may be considered, from a Shari'ah perspective, to have

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value under certain *529 circumstances. Therefore, it may be lawful to recompense such obligations with
money. Suppose a purchaser resorts to the purchase of the obligation because it is impossible to cover a real
need for currency in the future and to hedge against possible loss resulting from currency price fluctuations.
Under these circumstances--and in the light of contemporary international business practices in industries
which depend upon raw materials sold in currencies other than those used for the sale of the items manufactured--it will be lawful to recompense such obligations with money. In regard to this matter, al-Imam alShawkani wrote that [a]nything to which a lawful usufruct may be attributed may lawfully be sold.
However, anything which has no usufruct to begin with (or which has an unlawful usufruct) may not be lawfully sold. This is because the means to the unlawful is itself unlawful. [FN18] In further support of this,
Ibn al-Qayyim wrote that:
the evidence of the Shari'ah and its principles show that the purposes of transactions are to be
considered; these affect the correctness or incorrectness of the contract and its lawfulness or its unlawfulness. In fact, [the purpose of a contract] is even more potent than that because it has an effect
on deeds--in terms of lawfulness or unlawfulness--that are not contracts, such that [the purpose of the
doer] will render a deed lawful at one time and unlawful at another, depending on the doer's intention;
in the same way, it will render a deed either correct or incorrect, depending on the purpose [of the
deed]. [FN19]
Given the nature of this Article, specifically the intent to issue a Shari'ah ruling, it is necessary to again
review additional commentary by Islamic legal jurists. The jurists of the Maliki school of jurisprudence have
opined in their texts that the buying and selling of a dog, if it is wanted for no more than company or play,
will be prohibited because a dog may not be considered wealth when it has no legitimate purpose other than
company or play. However, if a dog is sought for its hunting ability or as a protector of a home, goods, or
livestock, the dog's sale and purchase will be lawful because the dog is considered wealth in view of those
legitimate functions. Therefore, the dog may be exchanged for wealth. [FN20] Following his mention of this
case, the jurist, al-Tasawwuli in al-Buhjah, wrote that everything that is taken for the purpose of [deriving
from it] a legitimate benefit may be exchanged for wealth. [FN21]
The opinion of the Hanafi jurists is similar. Al-Sarakhsi wrote in al-Mabsut that [i]f it can be established that something is appraisable wealth and it has a *530 legitimate use, its sale will be as lawful as any
other form of wealth. [FN22] Following this, he said that [o]urs is the same opinion in regard to a lion; if
it is possible to teach it hunting, the sale is permissible. But if is impossible to teach it hunting and it has no
permissible usufruct, then it is forbidden. [FN23]
According to the community of Islamic scholars, these opinions are based on the prohibition against the
sale of whatever is unclean (for example, dung, urine, and animal waste). Consumption of such things is
prohibited because they have no legitimate use. Even so, after they discerned ways of lawfully using some
of these things, the jurists of the Hanafi, Maliki, and Zahiri schools (in addition to some of the Hanbali jurists who cited an opinion of Ahmad ibn Hanbal), gave permission for the buying and selling of anything in
which there was a legitimate and purposeful use, including droppings or manure for fertilizing agricultural
lands and dung for burning in fires used for cooking or heating. In this regard, consider the following comments by Islamic jursists:
(a) Al-Tasawwuli, the Maliki jurist, wrote an opinion giving permission for the sale of impure oil
to those who would use it repair pipes, burn it in lamps, or make soap from it. [FN24]
(b) Ibn Majishun also said: There is no objection to selling manure because it is of benefit to people.
[FN25]
(c) It is recorded in Al-Mudawwanah, on the authority of Ibn al-Qasim: I said, Have you considered
manure? Does Malik allow its sale? He replied, I never heard anything on the subject from Malik, and I

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have no objection to its sale myself. [FN26]

(d) Ibn Hazm said: The sale of dung and manure for the purpose of fertilizing and the sale of urine to
the manufacturer of dyes is lawful. Even so, there are some scholars who prohibit it. [FN27] Thereafter, Ibn
Hazm cited proofs and offered a series of arguments for the permissibility of all manner of impurities when
there are legitimate uses for them.
(e) Al-Sarakhsi wrote in his al-Mabsut: The prohibition against consuming something does not necessarily mean that its use is also prohibited. For example, the consumption of impure oil is prohibited, but its
sale is legal. Likewise, the sale of dung is legal, *531 even though its consumption is prohibited. So, even
though dung is inherently impure, [FN28] its sale is lawful. [FN29]
(f) Al-Mayyarah said in his Commentary on al-Tuhfa: It was mentioned previously that a condition for
the subject of a sale is that it be pure. It is for this reason that the sale of something impure, like dung, is
prohibited. Even so, the jurists have given license for the sale of these things when there is a need to benefit
from them. [FN30] Afterward, he drew an analogy between this issue and the sale of water whose characteristics have changed (following its collection in washing places) for legitimates uses elsewhere. AlMayyarah also wrote: Chapter: On the Sale of Animal Excrement. The author of al-Muqarrab quoted Ibn
al Qasem who said, There is no objection to the sale of camel or sheep dung or cow manure. Based on this,
it is lawful to sell guano [droppings] from domesticated pigeons and chickens. [FN31]
In sum, given the existing legal commentary and the use of forward currency exchange obligations to
further legitimate ends, it is clear that the sale of an obligation for a delayed exchange is analogous to the
current sanction on the sale the sale of waste, urine, animal excrement, and other impure substances. What
was once prohibited because of its impurity is now sanctioned because of its now legitimate use.
IV. The Legal Justification for Lawfulness
Having established textual justifications for the legitimate purpose underlying present day forward currency contracts, this Article will now turn to a discussion of the legal justification for forward currency contracts from the Islamic perspective. The legal justification depends on two considerations: (1) the general
legal orientation and (2) the legal maxim concerning hardship.
A. The General Legal Orientation
Concerning the lawfulness of compensation for obligations with a useful and legitimate purpose, a general legal justification may be discerned from the reasoning of renowned scholars from different schools of
Islamic jurisprudence and the words and deeds of the great scholars of the Companion generation. [FN32] A
*532 two-stage analysis will clarify the high points of this orientation. First, we consider certain legal parallels to forward currency contracts. Second, we attempt to infer from these legal parallels the lawfulness of
buying and selling forward currency contracts by negating the differences between such contracts and other
obligations with a useful and legitimate purpose. [FN33] Certainly, drawing analogies between legal cases
and their parallels is an established method for finding rulings on cases never previously considered by jurists. [FN34]
Many legal scholars have recorded that it is lawful to give or take monetary compensation for a variety
of different obligations if these include a legitimate benefit for the obligee. All of these preexisting cases
may be considered legal parallels to the subject of our study and may be extrapolated for the purpose of establishing a similar ruling of lawfulness in our novel case. Accordingly, on the condition that these obliga-

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tions are undertaken for lawful purposes, we have the opinions of scholars from the Maliki school of jurisprudence concerning lawful monetary compensation for a variety of simple obligations. These include, for
example, a husband's obligation to his wife--in return for compensation that he takes from her--not to marry
another (while still married to her); and a wife's obligation not marry another man after her husband's death.
[FN35]
B. The Legal Maxim Concerning Removal of Hardship
Among the better known principles of the Shari'ah is that of easing difficulties for people and relieving
them of the responsibility for actions or *533 omissions that would lead to undue hardship. [FN36] Accordingly, if the Supreme and All Wise Legislator prohibited people from contracting over obligations for which
people have a real need and cannot do without, then people would find themselves in hardship. Thus, it is
the Almighty's justice and His mercy to humankind that He has made such contracts lawful--as a fundamental ruling--as long as these contracts benefit people and contain nothing prohibited by Allah or His Prophet.
[FN37]
In this context, forward currency contracts are often used by merchants, contractors, and manufacturers
who must purchase raw materials using foreign currencies and who later sell--either all at once or in a series
of consignments--the goods or products made from such raw materials for payment in another currency. If
these merchants, contractors, and manufacturers were prohibited by the Shari'ah from purchasing forward
currency contracts, they would fall into certain hardship, asperity, and hazardous situations that could result
in bankruptcy or unbearable losses. Forward currency contracts allow such parties to set in advance the
prices of their goods in local currencies and continue importing, exporting, manufacturing, and marketing
their goods without having to bear prohibitive currency risks that have the potential to disrupt their trade or
to destroy their business.
The matter is much the same with regard to a state that produces oil or any other raw material traded in
international markets. Suppose that such a state sells quantities of its products on credit in US Dollars. Suppose further that the state makes budget estimates for the coming year in the local currency on the basis of
an expected exchange rate for US Dollars. If the exchange rate for the US Dollar is lower than the expected
rate, the shortfalls could easily lead to dangerous shortages in the national budget, thereby negatively affecting the government's ability to manage its affairs. The state's inability to meet its financial obligations or to
carry out its plans for the future in a timely fashion may expose it to economic and social upheavals that
have no solutions. Such a financial risk may *534 not be managed without taking the precaution of purchasing an obligation from a financial institution to exchange US Dollars at a set price at specified future dates.
V. The Extent of the Need to Deal with this Case
From the preceding, it should now be obvious that, in the present age, there is a real and specific need to
allow a country that exports international commodities to enter forward currency contracts in accordance
with established Shari'ah principles. The same reasoning applies to merchants, traders, manufacturers, and
others who pay for imported goods in one currency and sell those goods (or products made from them) in
another currency for cash, credit, or by means of contracts of export, salam, istisna', and the like, from Islamic banks and finance houses.
Even if forward currency contracts may have originally been unlawful, the pressing and specific need for
such transactions in the modern marketplace is clearly a strong argument for--and sufficient proof of--the
lawfulness of such compensation as an exceptional ruling based on a special need. [FN38] As demonstrated
above, an analysis of general legal principles, analogies drawn from a variety of parallel rulings, and prin-

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ciples governing financial compensation bolster the case for legitimizing forward currency contracts.
The justification underlying exceptional rulings generally, and this ruling specifically, was explained by
al-'Izz ibn 'Abd al-Salam when he said:
A Maxim Concerning Exceptional Rulings: Know that the Almighty legislated for His subjects
the expending of effort in turning away detriment in both worlds [this one and the next] or in one of
the two; and that every legal maxim is joined by a single occasioning factor. Even so, He excepted
from the general rule anything in the avoidance of which there is undue hardship or in which there is
benefit that overrides detriment. All of this was done out of mercy for His subjects . . . in their interests, and from His kindness. [FN39] *535 Further justification for such an exceptional ruling is
found in the well-established principle that necessity renders prohibited things permissible. [FN40]
Among the comprehensive legal maxims there is one that states, A special need will render the prohibited permissible. [FN41]
Need is reached when a person arrives at a state of exhaustion and difficulty if he does not commit what
is prohibited. [FN42] Moreover, if necessity is a state of recourse for committing what is prohibited by
law [FN43] or a man's reaching a point at which if he does not commit what is prohibited, he will perish,
or very nearly, [FN44] then in the eyes of the law, a need is equal to a necessity if, as many jurists have indicated, a need, whether public or private, is to be dealt with as a necessity. [FN45] Therefore, in matters
of contract, need is reached if not entering into the contract will result in hardship because of the loss of the
opportunity to avail oneself of an otherwise legitimate transaction. Since, as we just discussed, needs in this
context are too be treated as necessities, then the law will permit the use of forward currency contracts.
VI. Conclusion: Shari'ah Rules in Regard to Compensation for Obligations
This judgment is based on a comprehensive look at the schools of jurisprudence and an evaluation of
their opinions on related subjects. In particular, I have formulated this judgment in the light of the sources,
general principles, and purposes of the Shari'ah--especially those related to attracting benefit and repelling
detriment or relieving people of hardship--and in view of the needs and circumstances of the modern world.
After carefully considering the case at hand, it is apparent that every sort of obligation--whether of commission or omission; by means of contractual *536 agreement or otherwise; for compensation, charity, or
otherwise--may be bought or sold for money, if the following four conditions are met:
1. The one contracting for the obligation must have a real use for it.
2. The use must be a lawful one.
3. The use must have a monetary value recognized by custom.
4. It must be possible to fulfill the obligation.
And Allah knows best.
[FNa1]. Translated from the original Arabic text by Yusuf Talal DeLorenzo (with gratitude to Abdulkader
Thomas and Muhamed Becic).
[FNaa1]. Dr. Nazih Hammad was a professor of Islamic law for seventeen years at the faculty of the Shariah, Umm al-Qura University, Saudi Arabia. He is a member of the OIC Fiqh Academy in Jedda and a member of the Shari'ah board for the Accounting and Auditing Organization for Islamic Financial Institutions
(AAOIFI) in Bahrain, which is responsible for establishing formal standards for the Islamic finance industry. Dr. Hammad is the author of several books in Arabic on topics of Islamic transactional law, including a dictionary of Islamic financial terminology. He has contributed many research papers, also in Arabic,

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on subjects of immediate relevance to modern Islamic banking and investment. Dr. Hammad is a member of
the Shari'ah supervisory boards of several Islamic banks and investment funds. He resides in Vancouver,
Canada.
[FNd1]. The Chicago Journal of International Law expresses no opinion as to the accuracy of this Article's
Arabic citations and references.
[FN1]. Al-hukm al-Shar'i, literally a legal characterization.
[FN2]. Abu'l-'Abbas Zaruq, Qawa'id al-Tasarruf (Maxims) 3 (Egypt: Maktabat al-Kuliyyat al-Azhariyyah
1988).
[FN3]. 'Alawi Saqqaf, Tarshih al-Mustafidin 'ala Fath al-Mu'in 218 (Egypt: Mustafa al-Babi al-Halabi
1964).
[FN4]. Muhammad al-Maziri, II al-Mu'lim fi Sahih Muslim 157 (Beirut: Dar al-Gharb al-Islami 1992).
[FN5]. Jalal al-Din al-Suyuti, al-Ashbah wa al-Naza'ir 327 (Egypt: Mustafah al-Babi al-Halabi 1958).
[FN6]. Muhammad al-Ba'li, Mukhtasar al-Fatawa al-Misriyah 368 (Egypt: Al-Sunna al-Muhammadiyyah
1949).
[FN7]. Muhammad Ibn al-'Arabi, II Ahkam al-Qur'an 607 (Egypt: Dar Ihya' al-Kutub al-'Arabiyyah 1956).
[FN8]. Abu al-Wafa' 'Ali Ibn 'Aqil, I al-Wadih fi usul al-Fiqh 191 (Beirut: Mu'assasat al-Risalah 1999).
[FN9]. Ahmad ibn Idris al-Qarafi, V al-Dhakhirah 478 (Beirut: Dar al-Gharb al-Islami 1994).
[FN10]. It should be explained that the sale of dogs is generally understood to be prohibited in the Shari'ah.
However, the matter is explained later in this Article.
[FN11]. Mansur al-Buhuti, III Kashshaf al-Qina' 141 (Mecca: Matba'at al-Hukuma 1974).
[FN12]. Al-Qarafi, V al-Dhakhirah at 478 (cited in note 9).
[FN13]. Ibn Rashid al-Qafasi, Lubab al-Lubab 144 (Tunis: Matba'at al-Tunisiyya 1927).
[FN14]. Ahmad Ibn Taymiyah, Nazariyat al-'Aqd 226 (Egypt: Al-Sunna al-Muhammadiyah 1949).
[FN15]. Translator's Note: In order for there to be a market in the first place, there need to be both hedgers
and speculators. In short, without the participation of speculators, modern markets cannot function. Therefore, in view of the need of hedgers for such markets, and in view of the economic importance of such markets for production and positive growth, the ruling should be in favor of the lawfulness of both hedging and
speculation. After all, speculation, in varying degrees, is present in nearly every form of trade and contracting. Moreover, the characteristic of wealth is not negated for the speculator because that it is what he thrives
on; such speculation is his goods in trade. So, without both hedgers and speculators, there is no liquidity and
there is no market. A moral judgment on the assumed motives of speculators should not cancel the overall
benefits to the market, consumers, and society in general. And Allah knows best.
[FN16]. Islamic Fiqh Academy, Resolutions and Recommendations of the Council of the Islamic Fiqh
Academy 1985-2000, Decision 63 (1/7) at 131 (Islamic Development Bank 2000).
[FN17]. Muhammad Ibn Qayyim al-Jawziyah, III I'lam al-Muwaqqi'in 'an rab al-'alamin 239 (Egypt: Al-

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Sa'ada 1954).
[FN18]. Muhammad al-Shawkani, III al-Sayl al-Jarrar al-Mutadaffiq 'ala Hada'iq al-Azhar 23 (Beirut: Dar
al-Kutub al-'Ilmmiyyah 1984).
[FN19]. Ibn al-Qayyim, III I'lam al-Muwaqqi'in 'an rab al-'alamin at 121 (cited in note 17).
[FN20]. Muhammad Ibn al-'Arabi, II al-Qabas 'ala al-Muwatta 840 (Beirut: Dar al-Gharb al-Islami 1992).
[FN21]. 'Ali al-Tasawwuli, II al-Buhjah fi sharh al-Tuhfah 46 (Egypt: Mustafa al-Babi al-Halabi 1950).
[FN22]. Muhammad al-Sarakhsi, XI al-Mabsut 235 (Egypt: Al-Sa'ada 1906).
[FN23]. Id at 236.
[FN24]. Al-Tasawwuli, II al-Buhjah fi sharh al-Tuhfah at 10 (cited in note 21). Translator's Note: Obviously, the initial prohibition was based on the idea that impure oil was essentially damaged goods as it could
not be used for cooking or consumption.
[FN25]. 'Abd Allah Muhammad Ibn Sha'ath, II 'Iqd al-Jawahir al-Thaminah fi madh-hab 'alim al-Madina
333 (Beirut: Dar al-Gharb al-Islamiyyah 1994).
[FN26]. Sahnun al-Tanukhi, IV Al-Mudawwanah al-Kubra 160 (Egypt: Al-Sa'adah 1905).
[FN27]. 'Ali Ibn Hazm, IX Al-Muhalla 31 (Egypt: Al-Mughiriyyah 1931).
[FN28]. Translator's Note: The sense of the term najis al-'ayn is that the essence of the substance is impure.
[FN29]. Al-Sarakhsi, XXIV al-Mabsut at 15 (cited in note 22). See also Al-Sarakhsi, X al-Mabsut at 198
(cited in note 22); Al-Sarakhsi, XXIII al-Mabsut at 14 (cited in note 22).
[FN30]. Muhammad Mayyarah, I Sharh Mayyarah 'ala al-Tuhfa 83 (Egypt: Al-Istiqamah undated).
[FN31]. Id.
[FN32]. In the hierarchy of evidence in Islamic Law there is a special place for the opinions of the Companions of the Prophet, owing to their having heard his words and teachings, and to their having observed first
hand the ways that he did things. For more discussion, see Bernard Weiss, The Search for God's Law
169-78, 214-20, 664-68, 690-93 (Utah 1992).
[FN33]. Translator's Note: The use of analogy in Islamic legal thought is widespread, and the methodology
for the same may vary considerably between the different schools of jurisprudence. In the interest of maintaining a faithful translation of the original text, I have translated the last part of the sentence in which mention is made of negating differences which is actually a method used by some schools and not others. See id
at 551-654.
[FN34]. See Mustafa al-Zarqa, I al-Madkhal al-Fiqhi al-'Amm. 68 (Damascus: Al-Jami'ah al-Suriyyah 1952)
(discussing the letter of 'Umar ibn al-Khattab to Abu Musa al-Ash'ari that contained instructions about the
fundamentals of making legal judgments. 'Umar wrote, You must then consider the legal parallels so that
you can deduce new rulings [by drawing analogies] from previous cases. So, depend on the ruling that you
consider to be nearest to God and closest to the truth; and then follow it.); Najm al-Din al-Nasafi, Talabat
al-Talabah 130 (Istanbul: Al-'Amirah 1893) (If an event occurs and you are unaware of a ruling for that
event, have recourse to its legal parallels; and [there] you will have the answer.); Ahmad b. 'Abd al-Halim

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Ibn Taymiyyah, Nazariyat al-'Aqd 172 (Egypt: Al-Sunna al-Muhammadiyah 1949) (Compensation [of all
kinds] follows a single canon. The Shari'ah is both appropriate and equitable, such that it places what is
comparable on equal footing and differentiates between what is dissimilar.).
[FN35]. Zuhayli, VII al-Fiqh al-Islami wa Adillatuh 55 (Damascus: Dar al-Fikr 1983).
[FN36]. See Qur'an, 6:6 (Allah does not want to impose hardship upon you ....); Qur'an 22:78 (He has not
placed any hardship upon you in matters of religion.); Ahmad b. 'Abd al-Halim Ibn Taymiyyah, II Jami' alRasa'il 370 (Jeddah: Dar al-Madani 1984) (commenting that [t]he Almighty informs us [in the Qur'an
22:78] that He has not imposed hardship upon us in matters of religion by issuing an emphatic and comprehensive denial. Anyone who believes that there is even a mustard seed's weight of hardship in what He has
commanded has belied both Allah and His Prophet--peace be upon him and that the Almighty informs us
that He does not want to impose hardship on us in the things that He orders us to do. The word hardship is
an indefinite noun here, and this is in order to be inclusive of all manner of hardship.).
[FN37]. Ibn Taymiyyah, Nazariyyat al-'Aqd at 226 (cited in note 14) (Verily, the legal presumption in regard to all contracts is that they are lawful. Only those contracts will be unlawful which have been prohibited by Allah and His Prophet. Nor has Allah ever prohibited a contract in which there is benefit for the believers, unless there is a detriment that overrides it.).
[FN38]. A special need is one in which the need is limited to a group of people joined by a shared characteristic, like the people of a town, a profession, and so on. A general need, however, is one in which the need is
common to all people. See al-Zarqa, II al-Madkhal al-Fiqhi al-'Amm at 997 (cited in note 34).
[FN39]. 'Izz al-Din 'Abd al-'Aziz Sulami, II al-Qawa'id al-Kubra 283 (Damascus: Dar al-Qalam 2000). See
also Ibn Taymiyyah, al-Masa'il al-Mardiniyah, in XXIX Majmu' al-Fatawa (Saudi Arabia 1398AH)
(Whenever there is something for the sale of which a need exists, it may be accommodated in ways that
other things are not accommodated. Thus, the Legislator will allow it because it is needed and despite the
reason for its prohibition.); al-Maqarri, Maxims of al-Maqarri 81 no 875 (unpublished manuscript, stored at
the King Faysal Center in Riyadh) (The general spirit of legal accommodation by Malik [the namesake of
the Maliki school of jurisprudence] requires exceptions to legal presumptions by analogy to what is stated in
the texts [of the Qur'an and the Sunnah].); Al-Zayla'iy, IV Tabyin al-Haqa'iq Sharh Kanz al-Daqai'q 87
(Egypt: Bulaq 1313AH) (Whenever the requirement is greater, so also must the latitude be greater.); and
Ibn al-'Arabi, II al-Qabas 'ala al-Muwatta at 790 (cited in note 20) (Maxim Seven: The consideration of
need in allowing what is prohibited is like the consideration of necessity in making the unlawful lawful.).
[FN40]. See 'Ali al-Haydar, Majallah al-Ahkam al-'Adaliyah art 21 (Beirut: Maktabat al-Nahda undated);
Muhammad al-Zarkashi, II al-Manthur fi al-Qawa'id 317 (Kuwait: Wizarat al-Awqaf al-Kuwaytiyyah 1982);
Zayn al-Din Ibrahim Ibn al Nujaym, al-Ashbah wa al-Naza'ir 94 (Damsacus: Dar al-Fikr al-'Arabi 1982); alSuyuti, al-Ashbah wa al-Naza'ir at 84 (cited in note 5).
[FN41]. al-Zarkashi, II al-Manthur fi al-Qawa'id at 25 (cited in note 40).
[FN42]. al-Suyuti, al-Ashbah wa al-Naza'ir at 85 (cited in note 5); 'Ali al-Haydar, I Durar al-Hukkam Sharh
Majallat al-Ahkam 34 (Beirut: Maktabat al-Nahda undated).
[FN43]. al-Haydar, I Durar al-Hukkam at 34 (cited in note 42).
[FN44]. al-Suyuti, al-Ashbah wa al-Naza'ir at 85 (cited in note 5).
[FN45]. al-Haydar, Majallah al-Ahkam al-'Adaliyah at art 32 (cited in note 40); Ibn al Nujaym, al-Ashbah

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wa al-Naza'ir at 100 (cited in note 40); al-Suyuti, al-Ashbah wa al-Naza'ir at 88 (cited in note 5).
7 Chi. J. Int'l L. 521
END OF DOCUMENT

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