The foreign exchange market, better known as the forex or FX market, refers to a market where currencies are bought and sold. Trading volume in the global FX market was reported to average USD5.3 trillion per day in April 2013. According to the Bank for International Settlements’ 2013 Triennal Central Bank Survey, the turnover was driven primarily by financial institutions. The FX market in Malaysia is experiencing a similar trend with significant growth contributed by the financial sectors. Due to its importance, this paper attempts to study Sharīʿah issues surrounding FX trading, with special focus on spot FX trading. An earlier study undertaken by the Specialist Risk Unit (SRU) of Bank Negara Malaysia (BNM) found that Islamic financial institutions (IFIs) do not have in their possession sufficient currency at the time of selling the currency (on the deal date), which could trigger a fundamental issue from the Sharīʿah perspective. The normal practice of financial institutions, including IFIs, is to not stock a huge amount of foreign currencies prior to selling currencies to their customers or counterparties. The market norm is that when the spot FX trading involves huge amounts, an IFI will first sell the currency to its customers; and after the sale is done, the IFI will then purchase the currency from an interbank party. The amount purchased from the interbank party will then be credited into the customers’ account after two working days (T+2).
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