Shariah standard on gold

How do you sell gold for cash in a Shariah compliant manner?

This is the main point setup in the AAOIFI Shariah Standard on gold which was recently issued and the one that has the widest impact and garnered a lot of attention.

The AAOIFI Shariah Standard stipulates that the exchange for gold and cash needs to be happen on a spot basis in the same contracting session.

What does spot here mean?

AAOIFI determined that the spot exchange needs to be where gold and change is exchanged at the same time and it goes a step further where identification of the gold to be exchanged must exist at that point in time.

This is a departure from the market practices in the global gold market where a spot exchange of gold involving identification of gold happens at T+2 – this is also a departure from the existing AAOIFI Shariah Standard on Currency Exchange where spot usually means T+2 as well.

Why is it crucial for identification of the gold to be manifested at the time of exchange?

The AAOIFI has determined that gold is a unique and special asset and it also is a ribawi item, where very strict rulings need to be put in place and hence the requirement for identification of the gold must happen, taking these special attributes of gold as a real and tangible asset.

Without this strict ruling, it may result in a breach of the ribawi requirements and make it more ineffective for gold to be as part of an alternative asset class in the Islamic Finance space.

So, with these clear rulings as put across by the AAOIFI Shariah Standard, it is hoped that more and more gold-based products can be developed and structured further to allow a more diversified asset class for Islamic investors.

If you are interested to get us to help you with Islamic finance consultancy and Shariah advisory, feel free to contact us. Our team are looking forward to grow your brand with Shariah compliance products and services.