Currency trading is just one foreign exchange (Forex) market aspect. It entails a variety of contracts (futures, forwards, and options), interest dealing, and investor speculation – all of which are large, so-called, forbidden in Islam. Profiting through currency trading, on the other hand, is acceptable under religious law.
As a result, one of the most complex questions in Islamic finance is whether Forex trading is halal (permissible) or haram (forbidden).
Some groups think the former, while others feel such dealings violate religious laws. Both points of view will be presented before we propose a suitable solution that allows Muslims to trade on the foreign exchange market while still adhering to Islamic laws.
If forex trading is permissible under Islamic law is difficult to answer definitively. Although Islamic authorities agree that currency exchange is halal (i.e., permissible under Islamic law) under specific conditions, there is significant disagreement over what those conditions are.
Currency trading is just one foreign exchange (Forex) market aspect. It entails a variety of contracts (futures, forwards, and options), interest dealing, and investor speculation – all of which are large, so-called, forbidden in Islam. Profiting through currency trading, on the other hand, is acceptable under religious law.
As a result, one of the most complex questions in Islamic finance is whether forex trading is halal (permissible) or haram (forbidden).
Some groups think the former, while others feel such dealings violate religious laws. Both points of view will be presented before we propose a suitable solution that allows Muslims to trade on the foreign exchange market while still adhering to Islamic laws.
If forex trading is permissible under Islamic law is difficult to answer definitively. Although Islamic authorities agree that currency exchange is halal (i.e., permissible under Islamic law) under specific conditions, there is significant disagreement over what those conditions are.
Prophet Mohammed’s saying on the subject
Gold for Gold, silver for silver, wheat for wheat, barley for barley, dates for dates, salt for salt, like for like, same for same, hand to hand.
If the types are different, sell however you like, so long as it is hand to hand.
Forex trading is permissible under Islamic law. Something is “haram,” or forbidden, according to Islamic law, when the teachings of the Holy Qur’an judge it so. Gambling and riba, commonly known as interest or usury, are among the activities prohibited by the Holy Qur’an.
Because the latter two activities are associated with forex trading, several scholars have contended that forex trading is haram according to Islamic principles.
Many people have pointed out that not all forex trading accounts, such as Muslim forex accounts, include interest and gambling.
Furthermore, Muslim scholars agree that exchanging currencies on the spot is permissible. This is because spot settlement may significantly minimise the usury aspect of forex trading. On this basis, Muslim theologians have agreed that forex trading is halal.
Islamic jurists generally agree that because different currencies from different nations are distinct entities with different values or inherent worth and buying power, they may be exchanged on a spot basis at a rate other than unity.
Additionally, it seems that most scholars believe that it is improper for two parties to exchange currencies on a forward basis—that is, when both parties’ rights and obligations are tied to a future date.
However, jurists differ considerably when one of the parties rights, which are the same as the counterparty’s obligation, is deferred to a future time.
In Islamic terms, usury or riba refers to any business contract or transaction involving an interest charge. The Holy Quran is unequivocal on this point, condemning financial transactions based on usury.
According to the Holy Quran
God deprives interest of all blessings but blesses charity; He loves not the ungrateful sinner.
Financial transactions with the risks of riba are strictly condemned. Muslims should also remember that not all Muslim theologians agree on what constitutes riba and what does not. Despite this, the prohibition on interest has led to the development of the Islamic banking industry.
forex brokers generally make money by paying or charging the interest differential between the two components of any currency pair while the position is held overnight. This is referred to as swap commission and is a kind of interest.
However, given the preceding points, it is clear that Islam forbids such interest rates.
However, forex brokers introduced Islamic forex trading to make forex trading more beneficial for Muslims. Brokers in an Islamic atmosphere enable investors to hold positions overnight without paying interest or the swap commission.
These swap-free forex accounts remove the barrier of usury and enable Muslim investors to participate in forex trading. Furthermore, the regular or spot forex trading accounts are for immediate trading and have no overnight interest costs. They also eliminate the riba element from forex trading.
The Islamic legitimacy of forex trading and all other modern forms of currency exchange is a hotly debated topic among Muslim scholars. Muslim authorities have passed many fatwas in support or opposition to the act of Forex trading.
Consider the following Hadith
Ubeda b. al-Simit (Allah be pleased with him) reported Allah’s Messenger (Peace be upon him) as saying: “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 is made hand to hand.
If these classes differ, then sell as you wish if payment is made hand to hand.
Sahih Muslim 1587c
However, it is normally accepted that forex trading is halal.
In his fatawa, Sheikh writes
Dealing in currency, buying and selling, is permissible, but that is subject to the condition that the exchange is hand-to-hand if the currencies are different. For example, suppose a person sells Libyan currency for American or Egyptian or whatever currency hand to hand.
In that case, there is nothing wrong with that, such as if he buys dollars for Libyan currency hand to hand, exchanging it in one sitting, or he buys Egyptian or English currency, etc. for the Libyan or whatever currency hand to hand, there is nothing wrong with that.
But if there is a delay, then it is not permissible, and if the exchange is not done in the same sitting, it is not permissible because it falls under the category of riba-based transaction. So the exchange must take place in the same sitting, hand to hand if the currencies are different.
Majmoo’ Fataawa Ibn Baaz 19/171-174
Furthermore, currency trading is permissible, provided all parties follow Islamic rulings.
Of course, there were no computers or telephones back then, so making a deal face to face (or hand to hand) wasn’t a big deal. In fact, one may extrapolate that a deal between two different parties was natural and accepted.
In modern times, it might be argued that since forex trading is conducted between a forex broker and a trader, it falls within the definition of two different parties, which is permissible under Islamic law.
Another widely recognised stipulation is that the actual exchange occurs during the same “sitting” in which the contract is made—in other words, trades must be concluded relatively immediately.
We find ourselves on solid ground here since it takes effect immediately when a trade is made with a forex broker. Surprisingly, this might imply that all non-market trades (i.e., stop or limit orders) are prohibited!
This is the most difficult part of answering the question, “Is forex halal or haram?” forex traders generally do not expect to receive physical delivery of the currency they are “buying,” and they never hold the currency they are “selling.”
They are merely speculating that the value of one will rise while the value of the other will fall. Is such speculation permissible under Islamic law?
This is a complex question to answer, and it may be one that you should debate with your religious leader rather than making a decision based on an internet article. Nonetheless, we’ve extensively researched the subject and will outline some of our findings below.
Islam recognises that practically all adult humans strive to better their financial situations and that life is fraught with uncertainty.
We are confronted with numerous choices in life, the outcome of which is unclear, and we strive to employ intelligence and skill in choosing the accessible option that will generate the superior outcome.
However, we must add that Islamic law strictly prohibits gambling, even as a form of recreation or entertainment, when done with small amounts of money that the gambler can afford to lose.
The method of speculation makes the difference in measuring these two competing elements. One author investigated the subject and stated that speculation based on fundamental analysis is permissible.
Still, speculation based on technical analysis is not, and interesting reasoning is examined.
Placing trades based on complex technical analysis is essentially equivalent to betting on the bets of others, and relying on the crowd’s behaviour to influence your speculation is drenched with the essence of gambling, which is forbidden by Islamic law.
However, this argument may easily be criticised regarding market realities. Is a speculator, for example, who believes that the US Dollar would appreciate against his Euros owing to economic fundamentals obligated to make the trade immediately and barred from making any effort to schedule the trade entry to a psychologically opportune moment?
After comprehensive research, you may choose if Islamic forex is right for you.
A stronger argument may be made that a Muslim has no business speculating on currency markets unless they have a firm basis from which to anticipate success.
This would involve that trades must include some fundamental or technical analysis in which the trader has a firm reason to trust.
One example is a trend following trends with an academically established track record as a profitable trading method in liquid financial markets and trading these trends utilising Islamic FX Brokers.
A trader may argue that a strong technical trend is easier to establish and more likely to have an underlying (though invisible) “fundamental” reason than a classical fundamental economic perspective, which professional economists may dispute!
An Islamic investor’s top priority is to generate halal income, avoid sources of income that are against Islamic law, and refrain from engaging in transactions that are against Islamic law.
For those with the analytical skills to understand the causes and contributing factors that influence currency fluctuations, trading in foreign currencies provides a very strong investment option.
Foreign exchange trading is not just a necessary option for people; for others, it may even be necessary to protect against foreign losses due to exchange currency fluctuations.
Suppose you design T-shirts and export them to Europe while living in Asia. Now, it’s possible that you won’t be paid when you ship the goods to your customers.
Let’s assume they agree to pay you in USD in three months. According to the current exchange rate of Rs. 85 for every USD, if you had sold a dozen T-shirts for $300, you might have received Rs. 25,500 today if the payment had been received immediately. But the payment often takes some time to arrive.
Now, if you receive payment in three months and the rupee appreciates against the US value, your payment will be less than Rs 25,500. Consider a situation where the exchange rate changed towards the end of the third month when you anticipate a payment, and it is now Rs 80 for 1 USD.
If you exchange $300 for rupees at the current exchange rate, you would only get Rs 24,000.
Now imagine that you live in Asia, design T-shirts, and import a specialised machine from Germany to finish your clothing.
If you had purchased a machine for $3000, it would now cost Rs 240,000 if you immediately made the payment and purchased the current exchange rate of Rs 80 to 1 USD. But let’s suppose you agreed to pay in three months.
Now, you will pay more than Rs 240,000 if the value of the rupee relative to the USD decreases in three months. When you pay for the machine at the end of the third month, let’s say the exchange rate has changed and is now Rs 85 for 1 USD.
If you use the current exchange rate to convert your rupees into dollars, you will need to pay Rs 250,500.
These instances demonstrate that acquiring a sufficient amount of foreign currency may be beneficial. At the same time, it is affordable, and then it is used to pay for goods and services when they are more expensive. Planning for the future is not forbidden in Islam.
People may thus trade in different currencies on the spot since they are both regarded as different commodities. However, this should only be used to reduce currency risk. However, it is advisable to steer clear of currency forwards, futures, options, swaps, and short sales.
Mufti Taqi Usmani once said
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.
Another topic that has sparked heated debate in Muslim circles is short-selling. We shall address its permissibility according to Islamic rulings in this section since it is very relevant to forex trading. Many modern trading terminologies are derived from the stock market.
Short selling in the stock market refers to an advanced strategy used by expert investors to speculate on the decline of the stock market or the prices of securities.
The strategy is utilised to generate profits. Stock traders accomplish this by borrowing shares of a stock that they predict will fall in value, selling them to a willing buyer, and then paying interest to the stock lender.
Given the above Islamic rulings, it is aforementioned that such a transaction is haram since it operates within the framework of riba. Let us now examine the meaning of this phrase in the context of forex trading.
Short selling in the forex market refers to the common practice of establishing a position in the hopes that the market would decline in value. The position is afterwards closed, and the Forex trader may sell his assets for a profit. In contrast to stock markets, no riba is involved in short selling.
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Furthermore, forex trading is halal for some below reasons:
A swap-free account known as an Islamic trading account complies with Islamic rulings on foreign trade trading by forbidding the accumulation and payment of interest rates. The main issue with forex trading is the possibility of earning income via swaps.
These accounts have thus banned the possibility of earning money during a swap.
These accounts ensure that the trades made by the traders are completed instantly. By eliminating future and forward transactions, currencies are traded in the same setting as the contract.
Brokers often charge additional fees for their swap-free accounts, however.
By observing the following Islamic laws, Islamic forex accounts further ensure that the transactions are Islamic:
Here, we’ll apply a brief guide on the status of requesting that your account be designated as Islamic. Take any broker as an example. Opening a trading account is the first thing you must do.
That broker must then validate your account by logging into the members. You may ask for your account to be converted into an Islamic trading account after you’ve opened it. Your account will be changed to a swap-free status as soon as the broker receives your request.
The broker won’t be able to switch your account to swap-free mode, and you will be charged interest if you trade before your account is converted into an Islamic account.
In Muslims, there are sun-divided sects, which major are the Shia school of thought and the Sunni school of thought. The mindset of investment in forex varies from sect to sect. To get rid of this, one can invest in the following way:
Many Muslims ensure that their long-term investments comply with Islamic law by only making investments in funds that may rightfully refer to themselves as sharia law investments, particularly if they are based in nations without an Islamic legal framework.
Nowadays, it is simple to do this in most western nations.
When a forex or CFD broker offers to trade in individual stocks or stock market indices, and the legal structure is set up such that the trader becomes the legal owner of the stock, the trades are obviously in violation of Islamic law if the stocks are non-sharia law investments.
The trader often merely decides whether the share price will increase or decrease rather than owning any of the shares. Is this an acceptable loophole? The majority of Islamic scholars would disagree.
It is evident that the key issue in Islamic law regarding the trading of stocks or shares is whether owning a stake in the company is haram. Fortunately, this is sometimes easy to determine by consulting approved Islamic listings of stocks and shares deemed halal or haram stocks.
On the stock exchanges of developed countries, most forex/CFD brokers that provide trading in stocks and shares often only offer trading in the biggest, most recognisable publicly traded companies.
This implies that if you wish to trade in such well-known shares, it is usually extremely easy to determine if the company is generally agreed to be haram or halal since many easily accessible Islamic assessments are easily searchable online.
The situation of lesser-known companies leaves, which may not have assessed much consideration from Islamic authorities. If the broker is unhelpful and there is nothing online, the trader may need to apply the laws governing which stocks are halal themself in this situation.
The fact that CFDs (contract for difference) are typically leveraged derivatives is what causes the Islamic problem with them. Of course, using leverage is not a must for each trader. A potential problem with CFDs is that one does not own the underlying asset directly.
However, many have noted that if riba and leverage are eliminated, the CFD is obviously and predictably representative of an underlying asset permitted under Islamic law. A CFD may comply with the definition of Sharia law.
For this argument to be valid, the underlying asset must be halal. Remember that CFD is only a legal cloak and not genuinely an asset class. The S&P 500 stock market index contains multiple stocks representing businesses whose operations are haram; thus, a CFD based on that index could never be halal.
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It should be made clear that, despite our extensive research on Islamic forex and its legality under Islamic law, we are not attempting to provide advice on religion to the readers of this article or their friends.
There are undoubtedly a lot of individuals who think that Islamic forex trading is legal under the right circumstances, as shown by the research we’ve presented here. Although this is a valid approach, some people may not feel comfortable adopting these workarounds.
We advise you to evaluate our top Islamic forex brokers and get in touch with their teams if you have any questions or concerns about how their practices relate to Islamic law; if you’re interested in learning more about the subject or thinking about how each forex broker implements their Islamic forex system.
A trustworthy and reliable forex broker would have specific responses and put you at ease rather than making you feel uneasy.
Islamic swap-free trading is a modified version of forex trading that is completely permissible and halal for Muslims to invest in, even if conventional forex trading is prohibited by sharia law.
