Is Forex trading halal or haram in Islam is one of the most complex questions in Islamic finance. The stock market is complex, but the Forex market (though it may not seem) is even more complicated.
Forex is more than just trading currencies, it involves many types of contracts (futures, forwards, and options), interest (Riba), and speculation. On the flip side, making a profit from currency trading is permissible in Islam. However, this is the short answer, and to truly understand the concept, we will need to dive deeper and ask the more difficult questions.
In this article, we will explore Forex trading and whether it is Haram or haram in Islam in the light of fatwas by religious scholars.
Classic Forex trading is regarded Haram by most Muslim scholars as it involves some form of Riba and Gharar (because of the loans used to make large transactions). Although, trading currencies and making a profit is not Haram as long as you’re following the rules of Shariah. If you want to become a Forex trader, then Islamic Forex accounts that practice Shariah principles are a great place to start.
Table of Contents:
1. What is Forex Trading?
2. Types of Tradings that are Haram in Islam
3. Why and When is Forex Trading Considered Halal?
4. When And Why Is Forex Trading Considered Haram?
5. Is Forex Trading Considered to be Gambling?
6. What is Islamic Forex Trading?
7. Fatwas about Forex Trading Being Halal or Not
What is Forex Trading?
Forex stands for Foreign Exchange and is the largest financial market on Earth. It runs 24 hours a day, five days a week, which makes it a very liquid market to invest in. Forex trading works similar to trading other securities such as stocks with one exception, Forex trading is done in pairs of two currencies.
For example, Eur/USD (euro to U.S. Dollar). In Forex Trading, investors sell one currency to buy another. Since currency prices are always fluctuating, they make a profit when the currency they bought moves up against the currency they sold.
What’s interesting about the Forex market is that it does not operate out of a physical place – a building. Rather, it’s a network of trading terminals and computer networks. Participants in the Forex network include brokers, commercial banks, investment bankers, and retail investors. Since there’s no physical space involved, the transactions take place online.
Types of Tradings that are Haram in Islam
Islam emphasizes fair trading in all business transactions and discourages dealings that have a negative impact on one (or the other party). There are four types of tradings that are considered haram in Islam:
- Loans with Interest: money borrowed with interest.
- Riba: any other transaction where interest is incurred on certain conditions.
- Pledge on a loan: when the lender can sell the loan contract to recover his/her money if the borrower is unable to settle the debt (or interest) within a certain time period.
- Short selling: borrowing and selling an asset that you don’t own.
Why and When is Forex Trading Considered Halal?
The basic idea of Forex is that you make money (profit) by buying and selling different currencies. In itself, buying and selling currencies is not Haram, but it is subject to certain conditions. (source)
Dealing in Two Different Currencies
According to the fatwa below and the interpretation of multiple sheikhs, dealing in two different currencies is permissible in Islam as long as the contract and exchange are made in the same sitting.
If there is a delay between making the contract and the exchange, then it is not permissible, as it’s regarded as a riba-based transaction.
According to a report narrated by Ubaadah ibn-al-Saamit, Hazarat Muhammad (Peace be upon Him) said:
Gold is to be paid for by gold, silver by silver, wheat by wheat, barley by barley, dates by dates, and salt by salt, like for like and equal for equal, payment being made hand to hand. If these classes differ, then as you wish, payment is made hand to hand.Narrated by Muslim, 1587 (source)
Dealing in The Same Currency
Dealing in the same type of currency (for example, one USD for two USD) is considered Riba and is not permissible in Islam. In the case of the same currency, both the amounts should be equal and the contract and exchange must take place in the same sitting.
When And Why Is Forex Trading Considered Haram?
Exchanging currencies and making a profit is considered permissible, but Forex is much more complicated than that. The fluctuation in currency is very small and currencies move only a small fraction at a time. Therefore, to make a profit in Forex trading, you need to invest a large sum.
For example, if someone makes a cent in profit for every pound they invest, then for a thousand dollars, they will make a ten dollar profit, which is not exactly an attractive amount. On the other hand, if someone invests a hundred thousand dollars, then they will make a profit of a thousand dollars, which is serious money.
Not everyone has this kind of money at hand, so how do you invest money that you don’t have?
This brings us to our next point, leverage – borrowing. Forex companies do more than just investing. Forex brokers connect potential investors with banks and institutions from which they borrow money to invest (on certain conditions). They also often trade in futures and forwards contracts that are considered haram in Islam (source).
Once again, borrowing money for forex trading in itself is not haram. The issue here is that there are strings attached to the borrowed money.
The broker only lets the investor borrow money to transact through them on which they can make a brokerage fee – a fixed return on each loan. Islam allows only one type of loan, Qard-e-Hasan – an interest-free loan.
Secondly, in a Forex trade, a swap fee is charged when an investor holds on to an open position overnight. According to most Muslim scholars, this swap or delay fee is considered Riba and is therefore haram (source).
Charging a fixed amount on a loan is Riba which is haram and the Islamic scholars have a consensus over it.
For a transaction that involves Riba, Allah SWT says:
O you who believe! Fear Allah and give up what remains (due to you) from Riba (from now onward) if you are (really) believers. And if you do not do it, then take a notice of war from Allah and His Messenger but if you repent, you shall have your capital sums. Deal not unjustly (by asking more than your capital sums), and you shall not be dealt with unjustly (by receiving less than your capital sums)Quran: Surah Al Baqarah verse 278-279 (source)
Is Forex Trading Considered to be Gambling?
Forex trading is considered Gharar – uncertainty because it involves excessive risk.
In Forex trading, investors borrow huge amounts of money to invest in the Forex market, which brings harm to both the investor and the economy in general.
Not only does this kind of transaction involve risk, but it often involves cheating and misleading people to get easy money. This comes under unlawfully consuming people’s wealth and diverting the wealth in society from fruitful economic activities to unnecessary risks that have no real economic advantage (source).
Furthermore, Forex investors often make an attempt to anticipate the varying value of a currency without owning, buying, or selling the currency. That falls under the category of speculation or gambling deeming the trade haram.
However, Forex is not mere speculation but involves research, market analysis, and making use of historic data to determine the best strategy and minimize risk. Ultimately, we can’t deny that every business has some risk associated with it.
What is Islamic Forex Trading?
Islamic Forex accounts also known as swap-free accounts are halal trading accounts in which interest is not accumulated, collected, or paid. These accounts do not make use of the futures or forward contracts. In an Islamic Forex account, all transactions (including the transaction costs) take place immediately and without any delay.
To be Shariah-compliant, the Islamic Forex accounts observe the following principles:
- No riba-based transactions.
- No gambling or speculation.
- Money is transferred immediately to avoid swap fees or interest.
- Lower financial risk.
Fatwas about Forex Trading Being Halal or Not
Mufti Taqi Usmani, a leading scholar, and Islamic finance expert was asked the following question:
Is Forex currency trading halal? I have attached a document detailing the aspects of the business.
To which he replied in his fatwa:
I went through the papers sent by you. I am of the opinion that these transactions are not compliant with Shariah. The very condition that you cannot take delivery of the purchased currency makes it impermissible. Moreover, there are other elements according to my knowledge that makes this trade unlawful in Shariah, such as, forward sales, short sales etc. This is in addition to the fact that the currencies are originally a medium of exchange and should only be exchanged for personal use in different countries. To make them a tradable commodity only for earning a profit is also against the basic philosophy of Islamic economics. I would therefore not advise you to indulge in this trade.Mufti Taqi Usmani (source)
Another person asked Sheikh Muhammad Saalih al-Munajjid the following question:
Is it permissible to deal in currencies in the foreign exchange market (forex) over the Internet? What is your opinion regarding the issue of tabiyeet (stipulating interest for not using the deal at the same day)? What is also your opinion about the clearing process which is to delay submitting one to two days after the contract ends.Anonymous (source)
To which he replied:
It is permissible to deal in currencies if the deal is done hand to hand and the transaction is free of conditions that stipulate riba, such as the stipulation of fees for delaying the deal, which is interest that is charged to the investor if he does not take a decision concerning the deal on the same day..
The Islamic Fiqh Council of the Muslim World League, in its eighteenth session that was held in Makkah al-Mukarramah from 10 to 14/3/1427 AH (8 to 12 April 2006 CE), has examined the issue of trading in margins, which means that the customer pays a small amount of the value of what he wants to buy, which is called a “margin”, and the agent (the bank or otherwise) pays the rest as a loan, provided that the purchase contract remains in the name of the agent as a pledge for the money that was loaned..Muhammad Saalih al-Munajjid (source)