People use various types of trading nowadays. One of the most popular trading styles is forex trading. Forex stands for foreign exchange. In today’s article, we will talk about forex trading and look deeper into it to know whether it is permissible in Islam or not. Let’s start with its definition.
What is Forex Trading?
Forex trading is a global market where you can buy and sell currencies. The currencies are arranged in pairs when you want to do forex trading. For example, USD/JPY. This represents the U.S. dollar (USD) versus the Japanese yen (JPY). There will be a price for the pair, let’s say, 110 dollars. This means that buying 1 USD costs 110 JPY. If the price rises to 120, it now costs 120 to purchase one US dollar. USD has grown in value (JPY has fallen) since buying 1 USD now costs more JPY.
It will give profits when buying 1 dollar with 110 JPY and selling 1 dollar with 120 JPY.
Is Forex Trading Halal?
Based on the fatwa of the Indonesian Ulema Council, it is allowed to buy or sell currencies when:
- There is no speculation (not for profits)
“Money is a medium to facilitate the exchange of an item, not a commodity that can be traded”
-Ibn Taimiyah
- There is a need for transaction
- If the currencies are the same, it should be done in cash.
- If the currencies differ, it should be done in cash and using the current exchange rate.
According to Imam Bukhari, Ibn Shihab narrated the authentic hadith of the Prophet Muhammad (PBUH).
“The selling of gold for gold is Riba (usury) except if the exchange is from hand to hand and equal in amount, and similarly, the selling of wheat for wheat is Riba (usury) unless it is from hand to hand and equal in amount, and the selling of barley for barley is usury unless it is from hand to hand and equal in amount, and dates for dates, is usury unless it is from hand to hand and equal in amount.”
Must Read: 3 Things You Need To Know About Forex Trading in Islam
Understanding Forex Trading in the Context of Shariah
Forex trading, or foreign exchange trading, involves the buying and selling of currencies on a global market. It operates 24 hours a day and is one of the largest financial markets in the world. However, its permissibility in Islam hinges on several factors, including the presence of interest (riba), uncertainty (gharar), and speculation (maysir). Each of these elements must be carefully examined to determine whether forex trading aligns with Islamic principles.
Criteria for Permissibility in Islamic Finance
In Islamic finance, several criteria must be met for a financial transaction to be considered halal (permissible). These criteria are derived from Shariah law and are intended to ensure fairness, transparency, and ethical conduct in financial dealings.
Prohibition of Riba
Definition: Riba, or interest, is strictly prohibited in Islam. This includes any guaranteed interest on loaned money. The prohibition of riba is based on the belief that money should be a medium of exchange and not a commodity that can earn guaranteed returns without productive effort.
Application: In the context of forex trading, riba can occur through swap fees, which are interest payments made for holding a currency position overnight. To avoid riba, Muslim traders must use swap-free accounts, which do not charge interest. These accounts are specifically designed to comply with Shariah principles.
Example: If a trader holds a currency position overnight, they may incur a swap fee based on the interest rate differential between the two currencies. For example, holding a position in a currency with a higher interest rate against a currency with a lower interest rate would typically result in a swap fee. In a Shariah-compliant account, these fees are waived.
Avoidance of Gharar
Definition: Gharar refers to excessive uncertainty or ambiguity in a contract. It is prohibited because it can lead to disputes and unfair advantages, as both parties in a transaction should have clear and complete information.
Application: In forex trading, gharar can manifest in several ways, such as unclear contract terms, the timing of transactions, and ownership issues. To be halal, forex trades must be conducted with full transparency and immediate transfer of ownership. This means that all terms must be clearly defined, and both parties must know exactly what they are agreeing to.
Example: A trade that involves ambiguous terms about the delivery of the currency or the timing of the transaction would be considered gharar. To avoid this, forex trades should be executed with clear and immediate exchange of currencies at the current market rate.
Prohibition of Maysir
Definition: Maysir, or gambling, is forbidden in Islam. This includes any activity that involves high levels of speculation and risk without productive effort. The prohibition of maysir is intended to prevent financial practices that rely on luck rather than skill and effort.
Application: Forex trading can be considered maysir if it involves excessive speculation and betting on currency price movements without a genuine need for currency exchange. Trades must be conducted with the intention of legitimate economic activity rather than mere speculation.
Example: A trader who engages in high-frequency trading with the primary goal of profiting from short-term price movements without any underlying economic activity may be engaging in maysir. To avoid this, traders should focus on longer-term trades that are based on genuine currency needs.
Practical Considerations for Muslim Forex Traders
Choosing a Shariah-Compliant Broker
Muslim traders must select brokers that offer Islamic accounts. These accounts are designed to be Shariah-compliant, with no interest charges and adherence to ethical trading practices. It is essential to verify the broker’s compliance with Islamic finance principles, often certified by a Shariah board.
Example: Brokers such as XM, IC Markets, and AvaTrade offer Islamic accounts that comply with Shariah principles. These accounts typically have no swap fees and operate on a commission-based model to ensure compliance.
Types of Forex Trading Allowed
Spot Trading: Spot forex trading, where currencies are exchanged immediately at the current market rate, is generally considered permissible. This type of trading avoids the issues of riba, gharar, and maysir, provided it is conducted transparently.
Example: A spot trade involves buying EUR/USD at the current market rate and settling the trade within two business days. This type of trade is conducted transparently with immediate exchange of currencies.
Forward and Futures Contracts: These contracts involve agreements to buy or sell currencies at a future date and often include interest components. As such, they are typically not permissible in Islamic finance.
Example: A forward contract to buy USD/JPY at a predetermined rate three months from now involves future settlement and potential interest components, making it non-compliant with Shariah principles.
Common Misconceptions about Forex Trading in Islam
Forex Trading as Gambling
Many people equate forex trading with gambling due to the speculative nature of currency markets. However, not all forex trading is speculative. Spot trading conducted with the intention of genuine currency exchange is distinguishable from gambling and can be halal. The key difference is the intention and the underlying economic activity.
Example: A trader who buys USD/JPY to pay for an upcoming purchase in Japan is engaging in a legitimate economic activity, unlike a trader who buys the same pair purely for short-term profit.
The Role of Leverage
Leverage allows traders to control larger positions with a smaller amount of money. While leverage itself is not haram, the interest (riba) on leveraged positions can be. Muslim traders should ensure their leveraged trades do not involve interest payments. Many brokers offer leverage on Islamic accounts without interest charges.
Example: A trader using a 1:100 leverage ratio to trade EUR/USD must ensure that their broker does not charge interest on the leveraged amount. This can be verified by using an Islamic account.
Additional Factors Influencing the Permissibility of Forex Trading
Regulatory Oversight
The presence of strong regulatory oversight ensures that forex trading practices are fair and transparent. Muslim traders should prefer brokers regulated by reputable financial authorities to ensure adherence to ethical standards.
Example: Brokers regulated by authorities such as the Financial Conduct Authority (FCA) in the UK or the Australian Securities and Investments Commission (ASIC) are considered reliable.
Ethical Business Practices
Beyond technical compliance with Shariah principles, the overall ethical business practices of the broker are important. This includes fair treatment of clients, transparent fee structures, and responsible marketing practices.
Example: Brokers that provide comprehensive educational resources, transparent pricing, and ethical marketing are more likely to align with Islamic principles.
Other Must-Consider Aspects
- Swap-fee
Swap-fee is the difference in the reference interest that applies to each country whose currency is traded in the forex market. This interest will be charged if the trader does his past midnight transaction. As you can see, the swap fee has a riba (interest) issue, making forex trading not sharia-compliant.
- Ownership Issue
If we travel to foreign countries, we must exchange the money for that country’s currency. Usually, we exchange it at the nearest money changer and own that money directly after we do the transaction. That is called physical forex trading and is allowed in Islam. However, it is different from online forex trading. In online trading, the trader owns and does not withdraw the money. This is not allowed because it contains gharar (uncertainty) since we do not hold real money just like in physical forex trading.
- Physical delivery issue
This issue also exists in online forex trading. When we exchange our money in a money changer, we can hold the real money directly. Otherwise, the broker does not have the money to deliver to the trader in online forex trading. So, they only play with the price. This is not Sharia-compliant because it also contains maysir (speculation).
Bottom Line
Forex trading is not Sharia-compliant. Because it contains maysir (gambling), gharar (uncertainty), and riba. Borrowing money with the condition that the money is used to buy something from the lender is haram. This is because the loan in this situation will provide the lender with a legally guaranteed advantage.
FAQs
Is forex trading halal or haram in Islam? Forex trading can be halal if conducted in compliance with Shariah principles, avoiding riba, gharar, and maysir. Spot trading without interest is generally considered permissible.
What types of forex trading are allowed in Islam? Spot trading is generally allowed, while forward and futures contracts are typically not permissible due to interest and uncertainty components.
Can Muslim traders use leverage in forex trading? Muslim traders can use leverage as long as the trades do not involve interest payments. It is important to choose a broker offering Shariah-compliant accounts.
What is a swap-free forex account? A swap-free forex account, also known as an Islamic account, is designed to be compliant with Shariah law. It does not charge interest on overnight positions.
How can I ensure my forex trading is Shariah-compliant? Choose a reputable broker offering Islamic accounts, engage in spot trading, and avoid transactions involving interest, excessive speculation, or ambiguity.
Are there any Islamic financial instruments that can be used in forex trading? Yes, instruments such as Mudarabah (profit-sharing) and Musharakah (joint venture) can be used in forex trading to ensure compliance with Shariah principles.
