Repaying a Debt in a Different Currency

Question:
As-salamu alaykum. If someone borrows money in one currency, for example U.S. dollars, is it permissible to repay that debt later in another currency, such as riyals, rubles, or pounds?

Should the repayment amount be calculated according to the exchange rate on the day the debt is repaid?

Quan2um Shariah Advisor Ibrahim ibn Muhammad:

As a general rule, a debt must be repaid in the same amount and in the same currency in which it was received. Any prior agreement that contradicts this principle in a loan contract is invalid and impermissible.

If there is a need to give U.S. dollars in exchange for riyals or another currency, then such a transaction must be structured as a sale contract, not as a loan contract.

Shariah analysis and explanation:
In a sale contract, the items being exchanged and all essential terms of the transaction must be clearly known to both parties. Any uncertainty that may lead to disagreement between the parties can render the transaction defective — bayʿ fāsid. Therefore, the payment date and the amount to be paid must be determined in advance at the time the contract is concluded.

A common practice is that the borrower repays the amount not according to a fixed exchange rate agreed on the day of the transaction, but according to the exchange rate on the date the debt is repaid.

For example, Abdullah receives 1,000 U.S. dollars from Khalid on January 20, 2024, on the condition that on February 20, 2024, he will repay the equivalent of 1,000 U.S. dollars in riyals. The permissibility of this structure is discussed by contemporary scholars, because there is a difference of opinion regarding whether the exchange of different currencies falls under the rules of bayʿ al-ṣarf — currency exchange — or not.

According to the scholars who consider currency exchange to fall under bayʿ al-ṣarf, deferred settlement is not permissible, because in a ṣarf transaction both parties must take possession of the exchanged values within the same contract session. Based on this view, exchanging dollars for riyals is permissible only if both currencies are delivered and taken into possession immediately.

In contrast, Mufti Taqi Usmani and a number of other scholars hold that the exchange of different currencies does not fall under the strict rules of ṣarf, but is instead an ordinary sale of two different values. Therefore, such a transaction must comply with the general rules of trade, including the requirement that the price and quantity be clearly determined.

In the example above, the value of 1,000 U.S. dollars was not fixed on the day of the transaction, but was linked to the value of the riyal on the repayment date. At first glance, this means that the price of the transaction remains uncertain, and such uncertainty may render the contract defective — fāsid.

All scholars agree that the price must be determined at the time the contract is concluded, even if payment will be made later. As a general rule, it cannot be left uncertain until a future date. However, some scholars allow this if the parties have agreed in advance on a clear and objective method for determining the price in the future.

Mufti Taqi Usmani explains that goods are of two types. The first type consists of goods whose prices may differ significantly depending on the seller and do not have a single generally accepted standard. Such goods cannot be sold at an undefined “market price.” The second type consists of goods whose value is determined by a generally accepted and objective market standard. In this case, selling at the market price is permissible if the parties have agreed in advance on the time at which that standard will be applied.

Based on this view, it is permissible to exchange currencies of different denominations with reference to a future market exchange rate, provided that the date and time for determining the rate are clearly fixed at the time the contract is concluded. This is necessary to remove uncertainty and possible disagreement regarding the repayment amount.

Conclusion:
Based on this view, it may be considered permissible to sell 1,000 U.S. dollars on January 20, 2024, on the condition that its market equivalent in riyals will be repaid on February 20, 2024, if the date and method of determining the exchange rate were clearly agreed upon in advance by both parties.

Evidence and sources:

Fiqh principle:
As a general rule, a debt is repaid in the same amount and in the same currency, unless the parties conclude a separate valid sale contract.

Bayʿ al-ṣarf:
According to the scholars who classify currency exchange as ṣarf, both exchanged values must be delivered to the parties within the same contract session.

Mufti Taqi Usmani:
Selling at the market price is permissible in cases where the price is determined by a recognized and objective standard, and the date for applying that standard has been agreed upon in advance.