3 Things You Need To Know About Forex Trading in Islam

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 it halal?

Based on the fatwa of the Indonesian Ulema Council, it is allowed to buy or sell currencies when:

  1. 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
  1. There is a need for transaction
  2. If the currencies are the same, it should be done in cash.
  3. 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.”

Other Must-Consider Aspects

  1. 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.

  1. 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.

  1. 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).

Conclusion

In conclusion, 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.

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