[ms] FX Forward According to Islam as a Value Protective Mechanism: An Analysis on Wa‘d

Abstract

FX forward is a contract to buy or sell certain amount of foreign currency at a pre-agreed or locked-in exchange rate, but the delivery of currencies is done on the future. Although this contract is needed for the purpose of hedging, but the issue arises, whether FX forward fulfill the ruling of al-sarf. How to ensure that this contract is free from prohibited elements as it is needed in the context of the global economy? Since this contract involves the exchange of currency in the future, it violate the sarf requirement of spot exchange, thus incurring riba al-nasi’ah. Therefore, this paper seeks to examine Islamic FX forward contract that is structured using wa‘d mulzim on one party. To achieve the objective, this study applies content analysis and interview method. The interviews are done with some shariah scholars and market players from local banks. This study found that, in order to make FX forward meets the condition of spot exchange of currencies, majority of banks adopt the principles wa‘d mulzim at an early stage and the actual contract occurred on the delivery date. However, the practice of wa‘d mulzim has drawback as it only protects the right of banks, while customers who are commonly the promissor exposed to the risk of default. To overcome this problem, the principle of wacdan should be explored to study its suitability and potentiality as a basis in structuring Islamic hedging products.