Forex trading is one of the largest financial markets in the world. It involves the online trading of gold, silver, and currencies. Today you’ll be reading about what forex trading is. What does Islam say about it? Is it halal or haram? This write-up will help you reach conclusion on whether Forex Trading is legal in Islam or not.
We will also take into consideration the “Islamic account” offered by the brokers. Is those Islamic Accounts Shariah-compliant?
What Is Forex Trading?
In simple terms, Forex Trading means ‘Foreign Exchange Trading’. So, it simply means, the trade of currencies.
Forex is the largest financial market with a daily volume of $6.6 trillion. It is really easily accessible online and you’ll see a lot of adverts for brokers as well.
In a nutshell, the idea is that you make money online by buying and selling currencies. So if some currency goes up, you’ll make a profit off that.
For example, if you buy €5000 worth of dollars, and the dollar goes up, you’ll make €6000. That means you made a €1000 profit.
How Does Forex Trading Work?
Forex is not necessarily what we have just outlined. For a start, the most crucial difference is that currencies only move a tiny fraction every single day. So, in order for you to take advantage of that movement daily, you need to be investing huge amounts of money.
For example, let’s say that for every pound you invest, a cent profit is what you achieve. So if you invest €1000, on that day, you’ll make a $10 profit. Not a lot of money, right? But if you invest €1000,000, you’ll make a $1000 profit.
Your next question should be, how will you invest that much money when you don’t have money in the first place? This is where you go to leverage.
Concept of Leverage in Forex Trading
What these forex companies do, is that they give you access to something called leverage or borrowing. It means that for every €1 that you invest, you can take positions of €50, €100, etc. And what that does is it massively magnifies your returns, both profitable and your losses.
Is Leverage Permissible in Islam?
Strictly speaking, borrowing from someone, and using leverage is not haram in itself. So if you go to someone, and let’s say you borrow €100. You use that €100 to buy something and you want to leverage that transaction because if you only have €2 yourself, and you borrowed that €100, suddenly you can do a lot more with it. You can make a lot more profit out of it as well. And then you make that profit, and you give that €100 back as an interest-free loan. That’s perfectly fine.
The subtle issue that’s going on here is that a forex broker is not giving you that loan without any conditions attached to it. A forex broker only gives you that loan because you’re necessarily going to transact through them. That is, you’re going to give them a brokerage fee. More precisely, you’re going to give them a set return for every single loan that they give out.
That is understood by classical Islamic scholars as something that is interest. It is a fixed return, on the basis of a loan, and that is not permissible.
Forex Trading Doesn’t Involve A Loan Or Two Transactions
Now you’ll be wondering, why forex isn’t how it’s been characterized above. Actually, forex is an instrument, so there’s no loan going on. There are no two transactions in one. It’s all just one package.
But if that is the case, then forex is a derivative. Because of the kind of instrument, it is; it doesn’t have intrinsic value in itself. It derives its value from something underlying by either currency. But you’re not actually buying the currencies, and if that’s the case, then forex is unambiguously not permissible.
Because derivatives are seen as haram by a vast majority of scholars.
Forex Trading Islamic Accounts | Legal in Islam?
Some brokers offer something called Islamic Accounts. And they say that if you invest through that, then that’s going to be an entire sharia complaint.
Challenge each of these brokers to give you their sharia certification. Also, make sure to talk to the sharia scholar that they refer to. Because if you do that, a majority of them will have no sharia certification. Even if you get through a scholar, it will turn out that the scholar is not credible at all.
The reason is that an “Islamic account” takes away the interest portion of carrying trade. But it leaves the other non-sharia complaint issues exactly as they were which means it remains non-permissible.
So, these were some of the basis on which FX Trading works.
However, to determine whether Forex Trading is legal or illegal in Islam; there is a dire need for Ijma. And Ijma is entirely missing.
Now, let’s see what different Islamic Scholars have to say about Forex Trading. Do they see Forex Trading as halal or haram?
Views of Islamic Scholars on Forex Trading
Different scholars have different views on Forex trading. Below we’ll be discussing the different views of some prominent scholars of Islam.
1. Engineer Muhammad Ali Mirza | Forex Trading is Halal
Engineer Muhammad Ali Mirza says that,
“Forex Trading is an OTC (over-the-counter) business. You earn profit by the up and down of the value of different currencies worldwide. It is completely halal because you’re exchanging currency for currency. It would’ve been an issue if you were exchanging money, but in forex trading, you only exchange currencies and there is no problem with that.
For example, if you buy gold, and the value of gold goes up in the market, you’ll be getting a profit. So, it won’t be haram. Similarly, if you buy a currency, and its value of it goes up, you earn a profit. There’s nothing wrong with it.”
2. Mufti Tariq Masood | Forex Trading is Illegal
When asked about his views on whether forex trading is halal or haram, Mufti Tariq Masood said,
“In order to buy or sell anything (gold, silver, currencies, etc.) it’s important for you to have it in your physical possession. You can’t sell anything until it’s in your possession, except for things that can’t be shifted from one place to another, e.g., plot, house, etc. When you buy or sell currencies online, you don’t physically possess the currency, instead, you just buy the currency and assume that you own it. This is completely haram and non-permissible.”
3. Dr. Zakir Naik
Dr. Zakir Naik is a globally known Islamic scholar. His views on Forex trading are:
“As far as forex trading is concerned, if you follow the rules of sharia, it’s completely permissible. For example, if a person goes and buys a foreign currency; for example, if you exchange dollars, and buy sterling pounds, later on, the sterling pounds go higher, and you sell that sterling pounds and earn profit through it. It’s permitted, as long as it is done on the spot with your own money.
But when you do forex trading on a larger scale, with different things involved, there are many haram things involved in it. For example, you may book for buying, and then you delay the deal, this is haram.
Many things are associated with forex trading, especially when you do it on a larger scale. There may be sutures, that is haram. There is borrowing, there are options, there’s future, all of these involve haram elements, which makes the whole thing haram”.
Conclusion: Is Forex Trading Legal In Islam?
Forex trading itself is not haram. Although, there are many factors involved that make it haram. It’s safe to say that the halal and haram of forex trading depends on one’s action. If it’s done the right way, it’s halal. If not, it’s haram.
Also Read: Is Bank Profit Haram in Islam?