Is Forex Trading Allowed in Islam?
*This article was updated on May 17, 2017*
The question as to whether Forex trading is permissible according to Islamic law is a difficult question to conclusively answer. Although Islamic authorities certainly agree that currency exchange under certain conditions is halal (i. e., permissible according to Islamic law), there is some dispute regarding under exactly what conditions. Let’s examine the issues one by one after looking at the saying on the subject by the Prophet Mohammed (peace be upon him):
“Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, salt for salt, like for like, same for same, hand to hand. If the types are different then sell however you like, so long as it is hand to hand.”
Is there such a thing as halal Forex trading? Is Forex halal or haram?
Forex Trading - Halal or Haram Fatwa.
Usury is of course completely prohibited in Islam, and is defined very widely. This implies that any kind of deal or contract which involves an element of interest (riba) is not permissible according to Islamic law. For a long time, retail Forex brokers reflected the market practice of paying or charging to the trader the interest differential between the two components of any currency pair whose position remains open overnight. Eventually, most Forex brokers responded to market forces (and pressure from Islamic traders) by becoming “Islamic Forex Brokers” and offering “Muslim Forex Accounts” which operate without standard interest payments. You might ask how they did so and maintained the profitability of their operations. This was achieved by charging increased commissions in spot Forex trades, and this practice has become the hallmark of nearly all Islamic Forex brokers. Arguably, this in itself is just a camouflaged interest component, and if this view is taken, it makes Forex trading problematic according to Islamic law.
The interest problem also eliminates any possibility of trading Forex forwards, as there is always an interest element involved in these transactions.
However, “regular” spot Forex trading offered by Forex brokers, with no overnight interest payments or charges, could clear the hurdle of riba.
What Islam Says on Online Forex Trading.
Having reduced the issue to one of trading spot Forex and assuming there is no interest element deemed to be involved, we move onto the next issue. It would seem to be permissible only “so long as it [the exchange] is hand to hand”. So clearly, the Prophet Mohammed (peace be upon him) had in mind exchanges of different types of commodities that would be made between two parties, recognizing that this was a natural and just aspect of commerce. The question here lies in what is considered to be “hand to hand”. In the olden days, there were of course no computers or telephones, so the aspect of making a deal face to face (or hand to hand) wasn’t much of a question. In fact, one could extrapolate that it was natural and accepted for a deal to made between two different parties. In modern times, it can be argued that in regards to Forex trading, the deal is made between a Forex broker and a trader, so this would qualify under such a definition of two different parties, which would be permissible according to Islamic law.
A further widely recognized stipulation is that the actual exchange must take place during the same “sitting” in which the contract is made - in other words, trades must be concluded more or less immediately. We would seem to be on solid ground here, as when a trade is made with a Forex broker, it takes effect immediately. Interestingly, this could suggest that all non-market trades (i. e. stop or limit orders) are haram!
It is here that we arrive at the biggest hurdle in attempting to answer the question “Is Forex halal or haram?” Generally, Forex traders do not expect to take actual delivery of the currency they are “buying”, and never actually own the currency that they are “selling”. They are simply speculating that the value of one with go up and the value of another will go down. Is such speculation permissible according to Islamic law?
This is an extremely difficult question to answer and it may be one that should be discussed with your own religious leader rather than being decided base on an internet article. Nevertheless, we’ve researched the issue thoroughly and will be outlining some points of thought below.
We can start by saying that Islam recognizes that nearly all adult human beings strive to improve their financial positions, and that life involves a large element of uncertainty. In life we are confronted with many choices, the outcome of which is unclear, and we strive to use intelligence and skill in choosing the available option that will produce the superior outcome. However, we then must go on to say that gambling is strictly forbidden by Islamic law, even as a form of recreation or entertainment when undertaken with small monies which the gambler might be said to be able to afford to lose.
In measuring these two competing elements, it can be said that it is the method of speculation that makes the difference. One author has examined the subject and stated that speculation on the basis of fundamental analysis is permissible, but technical analysis is not, and an interesting reasoning is given: placing trades based on technical analysis is essentially tantamount to betting on the bets of others, and relying upon the behavior of the crowd to influence your speculation is drenched with the essence of gambling, which is forbidden by Islamic law.
However, this argument can certainly be criticized as spurious as related to market realities. For example, is a speculator who believes that the U. S. Dollar will rise against his Euros due to economic fundamentals bound to simply make the trade immediately, and forbidden to take any action to time the trade entry to a psychologically opportune moment?
Once you’ve done your research thoroughly, you can decide whether Islamic Forex is right for you.
A stronger argument could be made that a Muslim has no business speculating on the currency markets unless he or she has a firm basis upon which to anticipate success. This would mean that trades must involve either some element of fundamental analysis or technical analysis which the trader actually has a firm reason to believe in. One example might be trend following trends that have an academically established track record as a profitable trading method in liquid financial markets, and trading these trends using Islamic FX Brokers. A trader could argue that a strong technical trend is easier to establish – and is also likely to have an underlying (if invisible) “fundamental” reason behind it - than a classical fundamental economic outlook which might be disputed by professional economists!
Creating a Muslim Forex Account.
There is no question that currency exchange is permissible in Islam, provided that there is no interest element, that it is made hand to hand (though this phrase can be translated in multiple ways), and that the exchanger has a valid reason to anticipate a probable profit based upon an analysis that does not rely upon the psychology of gambling. On a minimal basis, Islamic Forex brokers can be used to trade, which should at least remove arguably all of the riba challenges. As we have seen, there are certain grey areas within this qualification that must be investigated deeply in good faith and conscience by anyone wishing to begin halal Forex trading with a Muslim Forex account.
Conclusion.
It should be stressed that though we’ve researched the issue of Islamic Forex and its validity within Islamic law at length, we are in no way attempting to provide religious guidance for readers of this article or their acquaintances. As evidenced in the research presented here, there are certainly many people who believe that in the right circumstances, Islamic Forex trading is permissible. However, there may be some that aren’t comfortable using these workarounds, and this is a completely valid approach as well. If you are interested in researching more on the issue or considering how each Forex broker implements their Islamic Forex system, we recommend that you evaluate our top Islamic Forex brokers and speak to their teams if you have any questions or concerns about how their practices relate to Islamic law. A solid and respectable Forex broker will have concrete answers and will make you feel at ease, not uncomfortable.
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Risk Disclaimer: DailyForex will not be held liable for any loss or damage resulting from reliance on the information contained within this website including market news, analysis, trading signals and Forex broker reviews. The data contained in this website is not necessarily real-time nor accurate, and analyses are the opinions of the author and do not represent the recommendations of DailyForex or its employees. Currency trading on margin involves high risk, and is not suitable for all investors. As a leveraged product losses are able to exceed initial deposits and capital is at risk. Before deciding to trade Forex or any other financial instrument you should carefully consider your investment objectives, level of experience, and risk appetite. We work hard to offer you valuable information about all of the brokers that we review. In order to provide you with this free service we receive advertising fees from brokers, including some of those listed within our rankings and on this page. While we do our utmost to ensure that all our data is up-to-date, we encourage you to verify our information with the broker directly.
Forex Trading in Islam – Halal or Haram?
Home » Forex » Forex Trading in Islam – Halal or Haram?
Is Forex Trading Allowed in Islam?
Sharia law states that only physical trading is permissible and that traders are not allowed to profit from interest rate differentials. This means that Carry forex trading is not allowed in Islam, neither is speculative trading in the form of gambling. There are many grey areas around these restrictions, nonetheless, Muslims are allowed to do spot forex trading for the purpose of hedging business risks, and for speculative market objectives which are also meant to hedge market risk, which if not implemented it will allow someone else to profit at their expense.
Generally Muslims are not allowed to do Carry forex trading, to trade forward and futures markets, or anything to do with profiting from interest rates or transactions which have to do with the future. Transactions must be spot type, and in a broader sense must serve a good purpose.
It is possible to use Islamic forex brokers which strongly comply with Sharia law. The interest rate issue has been solved, there are already brokers, even non Islamic brokers which do not pay or charge overnight interest rate on trades held, this is offset by larger margin requirements or possibly higher commission charges. But there are brokers today which actually require larger margins to allow you to trade, charge normal, low commissions, and no interest rate credits or charges are applied. This is often favored even by non Muslim forex traders.
The Big Picture.
Things are not simple when it comes to world finance, and many people, Muslims and non Muslims debate various issues regarding the benefits and the negative effects that market speculators bring to the real economies of various countries. These speculators have made markets much more liquid, resulting in more stable commodity and currency prices, but are also blamed for the poverty that exists in heavily indebted countries, where the local currency may have fallen too much. And Sharia law is about doing the right thing, and prohibits making a profit at the expense of the poor, even if it is against open market principles. That’s why Muslim traders want to act morally, in every trade and investment they make.
The problem arises when various small businesses in Muslim countries, such as import-export businesses are faced with adverse forex rates, in this case Muslims are allowed to offset forex risk and market adversity. In other cases, such as when a Muslim country has borrowed money from the IMF, it pays back the debt, and with interest. So the citizens of that country feel the effects of interest charges. The IMF and other lending organizations will either charge interest, or they will devalue that country’s currency, which is another way for paying off its national debt.
These are complicated cases, and Muslim traders and business owners should seek the specific advice of Islamic scholars, on how forex trading can be used in such cases to offset the negative effects coming from the outside market, while not breaching Sharia law. And there are ways to do it.
Where Investment Banks Stand.
There is a myth that investment banks make a lot of money in the forex market, without taking risks, that is absolutely not true! Investment banks, no matter how big they are, do take the same risks as other traders take. They are only slightly more wiser than most forex traders and often not wiser than individual private, more experienced traders. And when a risk event hits them, they can fail and go bankrupt just a fast as a small retail trader can lose all their money.
We have seen examples of Barings Bank, Long Term Capital Management, which went bust trading the financial markets, as well as the massive losing trades of other large banks that are still around today. So the markets are definitely not forgiving of mistakes and bad guesses, anyone can lose money. It’s just that most of these banks have different views on global finance and morality, compared to Sharia law. There are grey areas, with issues that have not been fully decided as being legal or not legal, by Sharia law, but on the big picture Sharia law prohibits profiting out of the misery of other problems, while it allows you to profit when your investment will help create something physical in the end, something that will benefit society and mankind.
So in that regard, today’s non Islamic investment banks, fall somewhere in between, they don’t fully obey Sharia law, but they are not in complete breach of it either. They do all kinds of investments, both beneficial and damaging to some local economies. For example, they provide liquidity, which is good, all liquidity from speculators makes markets smoother, and food commodity prices are not allowed, by the market itself, to skyrocket, this makes these commodities more affordable around the world, while also providing an incentive for more people to invest in the production of these commodities. One bad thing speculators can do, is accelerate the decline of a local currency, profiting in the process, and making life even more miserable for the people of that country. And speculators are simply the number of people, small traders, big traders, and banks, which take part in those trades. The trades are still risky for these traders, as the market could go either way, but when they are right they do make money at someone else’s expense, and when that someone else is already poor, Sharia law sees the injustice and wants to prevent it from happening. Other religions also have similar views, though there’s no actual law to discourage and prevent traders from specific types of forex trades.
What Muslim Forex Traders Should Do.
Muslim traders around the world are allowed to trade spot forex, for the purpose of making a direct profit or for hedging against a loss. All trades must be related to some physical transaction which suffers as the result of outside market forces. But in any case no Carry trades are allowed. Muslims do physical transactions and business deals, which may suffer because of the change in the US dollar for example, in such cases they are allowed to protect themselves against such risks, through the forex market. Forex trading is fully justified in such cases, because it may even help stop a small business from going bankrupt and having to fire its workers. It is cases such as these where forex trading is not only allowed, but it is the moral thing to do. Sharia law is still very relevant today, one just has to consult an Islamic scholar to clear the grey areas, and get more problem-specific answers. Why specifically you need to trade forex, and what your goals really are.
Offsetting Market Risk through Forex Trading.
In many cases around the world, citizens are heavily burdened when their domestic currency is devalued. Such as Venezuela’s currency recently was, this makes it impossible for farmers and manufacturers to sustain their businesses, because the raw materials they import have become way too expensive. You would think that a lower domestic currency would make things better, by making exports more competitive, and it actually can happen. But all imported products can become way more expensive than people can afford to pay. And this can cripple the entire economy.
In such cases, Sharia law allows you to implement various economic plans, such as the use of a different currency, or a physical currency such as gold, or other non physical currencies that are backed by gold. Investors and small businesses can in such cases, save their businesses and stop losing their hard earned money. As in the case of Venezuela, there are things people and small business can do, which are fully compatible with Islamic finance, to help rebuild their economy, reduce poverty and to reward foreign investors in the end. It is perfectly moral to profit out of Venezuela but only after your investment helps the people of Venezuela get out of poverty. And even though in Sharia law there’s no interest involved, there are other forms of rewards, which are basically financial rewards, but without the slave-master mentality that interest-bound investments are associated with.
Muslim traders are allowed to use forex in ways not related to interest rates, to make a profit, in order to offset a loss elsewhere. They can trade market volatility on a currency pair, they can trade commodities. But it has to be on the spot market. In other cases, Muslim traders and investors in an oil exporting country, can offset the loss of national income, when crude oil prices fall and keep in falling, by going long USDCAD, or by making direct trades on crude oil that are compatible with Islamic law. There’s nothing immoral about protecting your income. Because if you don’t protect it, then someone else will unfairly benefit at your expense, and at poor people’s expense.
Immoral finance practices are blamed not only by Islamic scholars, but also by other groups, of non Muslim people, who simply see the injustice. That’s why even in non Islamic countries there are some rules which help write off debts of people who have incurred too much debt because of interest rate charges, or rules that limit the amount of interest a bank can gain on a loan. Sharia law goes further, by arguing that you should also have financial goals which should end up benefiting society. And this is a requirement in other religions also, though in a less rigorous way.
The forex market today is neither evil nor good, it can be both, and profits made from it can have different kinds of impacts on the world. All traders, and especially Muslim traders should know that there’s a place for them in the forex market, this market is part of all people’s lives, and it matters, because it affects the cost of an investment, the profitability of a family business, and how import – export is done. Forex affects so many things and helps facilitate and smooth out trading of physical goods, around the world.
The Carry trade strategy is the main strategy that is not allowed in Islamic forex trading, and even that comes with massive risks, risks that even investment banks cannot evaluate. Critics will argue that this strategy should be allowed, even for Muslims, in cases where their own country pays interest rates to some foreign lender, or that the national currency may fall as a result of that debt. Sharia law is against this strategy and against using forex brokers that work with interest rates. Nonetheless, even Muslim traders in heavily indebted countries, can still make Sharia-compatible forex trades that will offset the effects of such national debts, at a personal level. Muslim forex traders are allowed to trade the volatility of the spot forex market, and from that alone, one can offset the negative effects the global markets have on them. Market liquidity is there, it’s the same pool liquidity that contains all effects, both bad and good.
In commodity markets such as gold, crude oil or grains, when priced in USD, the impact of the USD is directly seen in the commodity prices. So if one trades for example gold, even physical gold, they are already, also, a forex trader who trades the USD. So the forex market can be used to offset risks in these commodities and to stabilize a business which depends on the price of these commodities. You can find your way to morality and justified forex trading from these trades, and then learn more about Sharia law and how it specifically may or may not permit your new forex trading strategy. In most cases it will permit it.
Forex islam halal haram
In the eyes of the Sharia, there is a huge difference between trading what you have now and what you might have later. Elsa Febiola Aryanti explains.
Many of us have heard of the terms “forex” and “foreign exchange”.
“Forex” refers to the “market” in which international currencies are traded 24 hours a day, every weekday.
The term “foreign exchange” generally refers to the exchange of one currency for another.
Since all this involves money, trading and exchanging, how does Islam view it all? What kinds of foreign exchange transactions are acceptable in Islam?
In short, foreign exchange, in the form of using money as a commodity, is not permitted in Islam. The Sharia places a clear difference between money and commodities. Under its tenets, money is strictly something with which we can exchange for goods and services.
If money of different currencies is going to be exchanged, it should be done in equal values. For example, exchanging US$500 for its equivalent in British pounds is acceptable. It is also acceptable to pay the moneychanger or a bank for the service rendered, in case you are wondering.
There are generally two kinds of foreign exchange transactions: spot and forward.
In a spot transaction , one party promises to pay for a certain amount of currency from a second party within the same day or the next two days. So, broadly speaking, spot transactions use the price that a buyer expects to pay for a foreign currency almost immediately.
For example, a friend has just returned from her holiday in England. You’re planning to go there soon, too. When you agree to buy her British pounds at an official exchange rate, and you settle the amounts immediately, this is considered a spot transaction.
In a forward transaction, one party agrees to exchange currencies with another party at a specific exchange rate, but with the transaction done in the future.
The problem that the Sharia has with forward transactions is that the exchange rates are determined after having considered also the interest (riba) levels of the currencies involved. Hence, not only do forward transactions involve riba, they also treat currencies or money as “commodities”. As you have read earlier, both are against the Sharia’s principles.
Forward transactions are commonly used to reduce the risk of dealing with frequently fluctuating foreign exchange rates. For example, let’s say you’re thinking of buying a holiday home overseas and you already have a budget in mind. To minimise the risk of fluctuating exchange rates, you agree to exchange a known amount today, but you will pay for and receive the local currency in the future, by the time payment is due for your holiday home.
For Muslims, the problem is that taking advantage of such “forward rates” means taking into account the different interest rates of the two countries’ currencies. This is because the forward rate is determined by the spot exchange rate and the difference between the two currencies’ interest rates (since the payment is fulfilled only at a later stage).
In Islam, money should only be viewed as something used to buy goods or services. Money is not a commodity. Money may never be traded like commodities, and the practice of trading with or selling money using speculative steps and involving riba is forbidden in Islam, and is thus haram.
For a foreign exchange transaction to be halal in Islam, it must not be speculative. The buying of British pounds from your friend is an example of a halal transaction, since you legitimately need the pounds for your trip to London.
So, going back to how Islam views foreign exchange: The type that is permissible in Islam is the spot transaction, which is done on the spot or almost immediately, with the rate known to both parties and involves no speculation or interest rates. There’s no problem, then, with visiting moneychangers – just be sure to count your cash before you shop till you drop.
Additional reporting by Ryan Hardy.
This article originally appeared in the July 2012 issue of Aquila Style magazine.
Forex islam halal haram
Category: Halaal & Haraam.
Is forex halal or haram. If halaal please explain why is it so?
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Forex Currency trading.
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In light of the guidance of the Quran and the Sunnah, the majority of the scholars and jurists in Islam are of the opinion that the buying, selling and trading of foreign currencies is permissible in Islam, provided the trading and exchange is done on spot payment and exchanged. Please note here that margin-trading, puts, calls, straddle or any of the derivatives other than spot exchange are held unlawful and prohibited in Islam.
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