Group G 1: Abdifatah Sh Hassan Osoble 2: Ahmed Abdulahi Ali 3: Muse Omar Nor 4: Mowlid Ahmed Ali

Foreign Exchange & Remittances Learning Outcomes:

Explain foreign exchange, foreign exchange market and foreign exchange rate.. Outline what is meant by ‘two way prices’ in foreign exchange Explain the Shari’ah viewpoint on currency trading. Identify different instruments used for remittances in banks

I. Foreign Exchange Foreign Exchange: Foreign Exchange is the mechanism of covering one unit/s of a currency into another currency. Foreign Exchange transactions are executed either between banks or between a bank and a customer. To buy foreign goods or services, or to invest in other countries, companies and individuals may need to first buy the currency of the country with which they are doing business.

Continue Generally, exporters prefer to be paid in their country’s currency or in US Dollars, which are accepted all over the world. When Canadians buy oil from Saudi Arabia, they pay in US Dollars or Saudi Riyals, even though the United States is not involved in the transaction.

Foreign Exchange Market: The Foreign Exchange Market, or the “FX” market, is where the buying and selling of different currencies takes place. The market itself is actually a worldwide network of traders, connected by telephone lines and computer screens – there is no central headquarters.

Continue There are three main centers of trading, which handle the majority of all FX transactions – Unites Kingdom, United States, and Japan. The trade happening in the Forex markets across the globe currently exceeds $ 8.5 trillion/day

Exchange Rate: In finance the Exchange Rates (also known as Foreign Exchange Rate, FOREX Rate or FX Rate) between two currencies specifies how much one currency is worth in terms of the other. Exchange rate is the price of one currency in terms of other currency. For Example: 1 USD = Rs.55.45 INR. In this example, we are pricing the USD in terms of INR. In this case, the USD is referred to, as the Base Currency, while INR is the Counter-Base Currency or the Variable Currency.

“Two-Way” Prices in Foreign Exchange Foreign exchange market quotes a two-way price: A buying price and a selling price. Anybody, can buy FX from the market, or sell FX to the market. Bid Rate: Bid Rate is the buying rate of a currency. It is the price offered for a currency by a currency dealer. Offer Rate: Offer Rate is the selling rate of a currency. The difference between the bid and offer (ask) prices is called ‘spread’ and represents a cost of transaction in a foreign exchange market.

Shari’ah Viewpoint on Currency Trading: it is permissible to trade in currencies provided that it is done in compliance with certain rules. They include: Both parties must take Ownership the Equal before seprating, such ownership being either actual or beneficial. The counter-values of the same currencies must be of equal amount, even if one of them is in paper money and another is coin of the same country. Currency transactions shall not be Accepted on the forward or future market.

Spot Foreign Exchange: A spot foreign exchange transaction, which is executed with an exchange rate popular on the date of transaction, is called a Spot Foreign Exchange transaction. The conversion of the currency or delivery of the contract will take place immediately or 2 working days after the date of the transaction (3rd day). The rate applied to such transaction is known as spot rate.

Forward Foreign Exchange: A Forward Foreign Exchange transaction is a predetermined contract in which the conversion of the currency or delivery will take place at a future specified date with a predetermined exchange rate. Islamic banks engage in foreign exchange forward transaction on the basis of ‘Promise to Purchase’ foreign currencies (w’ad).

II. Remittances Remittances: Remittances mean transfer of money from place to place. Customers require the banks to move their money from one place to another for business and personal reasons. Banks provide such services as ‘remittance’. The common instruments used by banks for ‘remittances’, include: Bank Draft / Demand Draft Manager’s Cheque Cable Transfer / Telex transfer Mail Transfer

Continue Bank Draft: A Bank draft is similar to a check drawn by one bank against funds deposited into its account at another bank, authorizing the second bank to make payment to the individual named in the draft. Bank draft is drawn by a bank on the branch of the same bank or on its correspondent bank. Payment of a draft is guaranteed.   Manager’s Cheque: A manager’s cheque is similar to a bank draft. It is mainly used for internal remittances such as inter-bank settlements, payment to supplier, etc. The payment is guaranteed by the bank.

Continue Cable/ Telex Transfer (TT): Cable or Telex transfer is the quickest method of transferring funds from one place to another place. Banks usually send messages of transferring funds by SWIFT system which is more reliable safer and quicker.   Mail Transfer: It means transfer of funds by e-mail to the account of beneficiary in another branch of the same bank. Banks usually send ‘Bank Drafts’, through e-mail, which is deposited in another branch of the bank in the country or in correspondent bank in a foreign country. The system is known as ‘mail transfer’ because the instruction to pay the fund is given through a ‘demand draft’ which is sent through mail.

Foreign Exchange Remittances: Foreign Exchange Remittances mean transfer of money by foreigners working in a country to their country. In the UAE, foreign workers are paid in Dirham. They give Dirham to the bank/exchange houses, change them into the currency they want and send them to their country through banks/ exchange houses. This procedure of money transfer is called ‘remittances’.