Forex trading is a condition where we can buy and sell foreign exchange to get a profit, and it may include leverage. If someone wants to do forex trading, they will need a lot of money; not everyone can do that. Thus, there is a feature called leverage. What is leverage? What is the Islamic point of view about it? In today’s article, we will look deeper into leverage and decide whether or not we should use it.
What is the definition of leverage?
Leverage in forex is a unique feature the broker provides to help the trader buy and control the full price. For example, you have $200 in your forex trading account. and you want to do forex trading. But, the contract rule requires you to pay a minimum of $1000. This means you still need $800 to start trading.
In this situation, you can ask for leverage from the broker, who will give you full access to the $1000. There are some leverage ratios that you can choose based on your capabilities. For example, let’s say you select a ratio of 1:500, Which means you can control $500 in equity by only having $1. Therefore, you can trade forex and gain profit and loss based on your activity during the contract.
Then, the question is, “Is it permissible”?
First and foremost, we must remember that forex trading itself is not Sharia-compliant based on the fatwa of most scholars. Even the Indonesian Ulema Council says the only permissible way to do forex trading is an on-the-spot transaction not used for speculation. This clearly states that forex trading is not Sharia-compliant, let alone its features.
Secondly, any benefit generated from a loan is riba. Even if the leverage charges zero percent interest, the broker does not do that for charity purposes. The more leverage the trader buys, the more sales there will be. If traders are not careful enough, they will gain more losses than profits. Otherwise, the broker will not bear any loss.
Thirdly, the prophet Muhammad (PBUH) warned us not to sell something we do not own. We must pay the total stock price to sell it later in stock trading. Otherwise, it is different from the leverage feature. We do not have to pay the total cost to own the asset entirely. Thus, we can also say we sell something we do not own.
To read more about Islamic Finance related topics, please click here and visit our academy.
Besides, feel free to sign up for our free stock screening services at musaffa.com.