Forex Trading in Islam – Halal or Haram?
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Is Forex Trading Allowed in Islam?
Sharia law states that only physical trading is permissible and that traders are not allowed to profit from interest rate differentials. This means that Carry forex trading is not allowed in Islam, neither is speculative trading in the form of gambling. There are many grey areas around these restrictions, nonetheless, Muslims are allowed to do spot forex trading for the purpose of hedging business risks, and for speculative market objectives which are also meant to hedge market risk, which if not implemented it will allow someone else to profit at their expense.
Generally Muslims are not allowed to do Carry forex trading, to trade forward and futures markets, or anything to do with profiting from interest rates or transactions which have to do with the future. Transactions must be spot type, and in a broader sense must serve a good purpose.
It is possible to use Islamic forex brokers which strongly comply with Sharia law. The interest rate issue has been solved, there are already brokers, even non Islamic brokers which do not pay or charge overnight interest rate on trades held, this is offset by larger margin requirements or possibly higher commission charges. But there are brokers today which actually require larger margins to allow you to trade, charge normal, low commissions, and no interest rate credits or charges are applied. This is often favored even by non Muslim forex traders.
The Big Picture.
Things are not simple when it comes to world finance, and many people, Muslims and non Muslims debate various issues regarding the benefits and the negative effects that market speculators bring to the real economies of various countries. These speculators have made markets much more liquid, resulting in more stable commodity and currency prices, but are also blamed for the poverty that exists in heavily indebted countries, where the local currency may have fallen too much. And Sharia law is about doing the right thing, and prohibits making a profit at the expense of the poor, even if it is against open market principles. That’s why Muslim traders want to act morally, in every trade and investment they make.
The problem arises when various small businesses in Muslim countries, such as import-export businesses are faced with adverse forex rates, in this case Muslims are allowed to offset forex risk and market adversity. In other cases, such as when a Muslim country has borrowed money from the IMF, it pays back the debt, and with interest. So the citizens of that country feel the effects of interest charges. The IMF and other lending organizations will either charge interest, or they will devalue that country’s currency, which is another way for paying off its national debt.
These are complicated cases, and Muslim traders and business owners should seek the specific advice of Islamic scholars, on how forex trading can be used in such cases to offset the negative effects coming from the outside market, while not breaching Sharia law. And there are ways to do it.
Where Investment Banks Stand.
There is a myth that investment banks make a lot of money in the forex market, without taking risks, that is absolutely not true! Investment banks, no matter how big they are, do take the same risks as other traders take. They are only slightly more wiser than most forex traders and often not wiser than individual private, more experienced traders. And when a risk event hits them, they can fail and go bankrupt just a fast as a small retail trader can lose all their money.
We have seen examples of Barings Bank, Long Term Capital Management, which went bust trading the financial markets, as well as the massive losing trades of other large banks that are still around today. So the markets are definitely not forgiving of mistakes and bad guesses, anyone can lose money. It’s just that most of these banks have different views on global finance and morality, compared to Sharia law. There are grey areas, with issues that have not been fully decided as being legal or not legal, by Sharia law, but on the big picture Sharia law prohibits profiting out of the misery of other problems, while it allows you to profit when your investment will help create something physical in the end, something that will benefit society and mankind.
So in that regard, today’s non Islamic investment banks, fall somewhere in between, they don’t fully obey Sharia law, but they are not in complete breach of it either. They do all kinds of investments, both beneficial and damaging to some local economies. For example, they provide liquidity, which is good, all liquidity from speculators makes markets smoother, and food commodity prices are not allowed, by the market itself, to skyrocket, this makes these commodities more affordable around the world, while also providing an incentive for more people to invest in the production of these commodities. One bad thing speculators can do, is accelerate the decline of a local currency, profiting in the process, and making life even more miserable for the people of that country. And speculators are simply the number of people, small traders, big traders, and banks, which take part in those trades. The trades are still risky for these traders, as the market could go either way, but when they are right they do make money at someone else’s expense, and when that someone else is already poor, Sharia law sees the injustice and wants to prevent it from happening. Other religions also have similar views, though there’s no actual law to discourage and prevent traders from specific types of forex trades.
What Muslim Forex Traders Should Do.
Muslim traders around the world are allowed to trade spot forex, for the purpose of making a direct profit or for hedging against a loss. All trades must be related to some physical transaction which suffers as the result of outside market forces. But in any case no Carry trades are allowed. Muslims do physical transactions and business deals, which may suffer because of the change in the US dollar for example, in such cases they are allowed to protect themselves against such risks, through the forex market. Forex trading is fully justified in such cases, because it may even help stop a small business from going bankrupt and having to fire its workers. It is cases such as these where forex trading is not only allowed, but it is the moral thing to do. Sharia law is still very relevant today, one just has to consult an Islamic scholar to clear the grey areas, and get more problem-specific answers. Why specifically you need to trade forex, and what your goals really are.
Offsetting Market Risk through Forex Trading.
In many cases around the world, citizens are heavily burdened when their domestic currency is devalued. Such as Venezuela’s currency recently was, this makes it impossible for farmers and manufacturers to sustain their businesses, because the raw materials they import have become way too expensive. You would think that a lower domestic currency would make things better, by making exports more competitive, and it actually can happen. But all imported products can become way more expensive than people can afford to pay. And this can cripple the entire economy.
In such cases, Sharia law allows you to implement various economic plans, such as the use of a different currency, or a physical currency such as gold, or other non physical currencies that are backed by gold. Investors and small businesses can in such cases, save their businesses and stop losing their hard earned money. As in the case of Venezuela, there are things people and small business can do, which are fully compatible with Islamic finance, to help rebuild their economy, reduce poverty and to reward foreign investors in the end. It is perfectly moral to profit out of Venezuela but only after your investment helps the people of Venezuela get out of poverty. And even though in Sharia law there’s no interest involved, there are other forms of rewards, which are basically financial rewards, but without the slave-master mentality that interest-bound investments are associated with.
Muslim traders are allowed to use forex in ways not related to interest rates, to make a profit, in order to offset a loss elsewhere. They can trade market volatility on a currency pair, they can trade commodities. But it has to be on the spot market. In other cases, Muslim traders and investors in an oil exporting country, can offset the loss of national income, when crude oil prices fall and keep in falling, by going long USDCAD, or by making direct trades on crude oil that are compatible with Islamic law. There’s nothing immoral about protecting your income. Because if you don’t protect it, then someone else will unfairly benefit at your expense, and at poor people’s expense.
Immoral finance practices are blamed not only by Islamic scholars, but also by other groups, of non Muslim people, who simply see the injustice. That’s why even in non Islamic countries there are some rules which help write off debts of people who have incurred too much debt because of interest rate charges, or rules that limit the amount of interest a bank can gain on a loan. Sharia law goes further, by arguing that you should also have financial goals which should end up benefiting society. And this is a requirement in other religions also, though in a less rigorous way.
The forex market today is neither evil nor good, it can be both, and profits made from it can have different kinds of impacts on the world. All traders, and especially Muslim traders should know that there’s a place for them in the forex market, this market is part of all people’s lives, and it matters, because it affects the cost of an investment, the profitability of a family business, and how import – export is done. Forex affects so many things and helps facilitate and smooth out trading of physical goods, around the world.
The Carry trade strategy is the main strategy that is not allowed in Islamic forex trading, and even that comes with massive risks, risks that even investment banks cannot evaluate. Critics will argue that this strategy should be allowed, even for Muslims, in cases where their own country pays interest rates to some foreign lender, or that the national currency may fall as a result of that debt. Sharia law is against this strategy and against using forex brokers that work with interest rates. Nonetheless, even Muslim traders in heavily indebted countries, can still make Sharia-compatible forex trades that will offset the effects of such national debts, at a personal level. Muslim forex traders are allowed to trade the volatility of the spot forex market, and from that alone, one can offset the negative effects the global markets have on them. Market liquidity is there, it’s the same pool liquidity that contains all effects, both bad and good.
In commodity markets such as gold, crude oil or grains, when priced in USD, the impact of the USD is directly seen in the commodity prices. So if one trades for example gold, even physical gold, they are already, also, a forex trader who trades the USD. So the forex market can be used to offset risks in these commodities and to stabilize a business which depends on the price of these commodities. You can find your way to morality and justified forex trading from these trades, and then learn more about Sharia law and how it specifically may or may not permit your new forex trading strategy. In most cases it will permit it.

First Question: What is Haram?
Common answer Haram is something that the God and the Prophet have completely and specifically forbidden as that act or matter would be considered as unclean and indecent.
Second common answer was an act which is evil or sinful.
Is Forex Haram?
Since I got the definition of Haram, my main aim was based on why Forex is considered Haram by so many people out there, while so many people consider Forex Halal and make a living on Forex as an industry.
Plato once said “Human behavior flows from three main sources: desire, emotion and knowledge”
The biggest and most straight answer I got from Forex objectors who think that Forex is Haram was Forex is Gambling and Gabling is Haram in Islam.
After so much of discussions with those Imams, Prayers and active religious people we came to the following common agreement.
Forex is Halal IF.
Forex is Halal if you are not gambling and have your end goals clearly distinguished.
1- As a Forex trader you need to have a reason to take that action (sell or buy)
2- Not gamble on the trend direction but analyze the market.
3- Not trade for the sake of excitement but trade for the potential income and to make a living.
4- Not to approach it as a game but as a job.
5- Have a mindset to win or to protect your equity rather than telling yourself “if I win I win, if not next time”
6- You learn from your losses and move on with the decision taken by yourself rather than blaming the market or blaming the situation.
7- You have a SWAP free account or trade avoiding SWAP.
Forex is Halal or Haram?
There is a thin line between trading and gambling, we all must admit it. But the good news is that you can avoid being a gambler.
1- Only take trades with a high probability of making profit based on your analysis.
2- Exiting a trade is as just important as entering one, have a trade plan.
3- Define your stop levels.
4- Choose the right entry size, if you are risking all to double it its is called gambling.
5- Know what you are trading.
6- Understand the time frames, do not be addicted it is a sign of gambling.
7- Back test your strategy and aim to develop it.
8- Constantly review your historical performance and try to understand why you made loss and profit.
9- Be disciplined, trading is a job not a game.
Note: The above is a part of my 1 week research with 3 Islamic scholars from Azerbaijan, 1 from Irag, 1 from UAE, 1 from Indonesia and 1 from Egypt. Since this subject is debatable please feel free to comment your thoughts below in the comments section.

Is forex trading haram

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Is buying or selling forex, commodities and stock indices halal in Islam?
Websites like eToro offer services where you can buy and sell currencies , commodities (gold, silver, oil, etc.) and indices (SPX500, NSDQ100, DJ30, UK100, FRA40, GER30, etc).
It's basically an online trading platform. The way it works is that, for example, you buy gold or euro at a price from the current market and later sell it for a higher price(if the price goes up). Now, you predict the market and think that euro may rise against dollar or vice versa, which may or may not happen.
I don't know much about Interest or Riba and I wonder if the above trading is Halal in Islam? Detailed answers with authentic references are appreciated.
The comments to this question convinced me that it was Halal, until I read the following on eToro.
Both FX and commodities are traded in the spot market for 24 hours. At 5:00 pm New York time, all open positions are rolled over for the next 24 hours and the daily interest is added to the company’s accounts every 24 hours. The company can then either pay the interest or charge the client’s account to cover the fees.
With an Islamic account we make sure that there is no Riba in any form throughout the duration of the contract. In the FX market, if you don't close the trade before 5:00 pm New York time, all open trades will be automatically rolled over, which normally poses a problem for those following Islamic law, due to the possibly usurious interest charged for the rollover. However with an eToro Islamic account, all your positions will be closed at 5:00 pm (10:00 pm UST) and you can then reopen them immediately in order to avoid all interest problems and trade according to Islamic Sharia law. If the client chooses to reopen a trade immediately, the client will not pay any usurious interest.
There's no doubt that currency trading is one of the most difficult dilemmas in Islamic jurisprudence (Faqih). On the one hand, it requires the simultaneous exchange of currencies, which makes it a kind of hand to hand exchange. On the other hand, contemporary scholars consider the record of money transferred to or from a bank account as delivery. To resolve the issue, several decisions and fatwas have been issued. According to these decrees, the conditions for trading currency are:
Immediate buying and selling without delay.
The currencies needs to be transferred from the account of the seller to that of the buyer and vice versa.
The cost of the trade should be paid without delay.
No interest on trades. In the case that there is any usurious interest, the contract will be invalid, void and Haram.
As you know already interest is haraam, I probably don't need to provide any hadith or quranic verse to prove that. If I do need to prove this first, please let me know as it won't take long.
Based on your research, I can clearly see that you think the stock market is very difficult for muslims, and you're right, it is!
Based on my own research, here are the problems:
The company must not have a product which is forbidden in islam, alcohol, interest based loans etc etc.
The company must not be in debt, i. e. it must not be paying interest on a loan.
The company must not be using money from shareholders and sticking that money into an interest based account and earning interest on it.
These 3 points rule out most of the stock market.
However, you can still find companies through which you can still get into the stock market in a halaal manner. For example, HSBC Amanah Freedom Plus accounts, let you do just that. For example, they have scholars who monitor the funds and make sure they are halaal. As soon as they are found to be haraam, a particular stock from a fund is removed. Plus anything related to interest is automatically removed from the funds and given to charity.
I don't know how many of these types of companies there are around the world, this is the only one I have found with a little research.
Assuming the definition of riba is not derived from ra-ba-wa (to grow) as hinted by Allah SWT at 30:39, where by there is no notion of growing in riba, but rather riba would have something to do with ra-ya-ba or uncertainties such as futures, hedging, etc. The abuse of ra-ya-ba to the point of harming others is what i define as riba.
So in the case of futures, as long as it's for the good of others it's ok. Cases like anticipating a hardship season to come, would be an example of a good for others. Cases like insider trading would be bad for others and be categorized as riba.

Is forex trading haram

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.
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.
With regard to hand to hand exchange, this has been discussed in the answer to question no. 72210.
With regard to the fees for delaying the deal and trading in margins, a statement has been issued by the Islamic Fiqh Council concerning this, which says the following:
Praise be to Allaah alone and blessings and peace be upon the one after whom there is no Prophet, our master and Prophet Muhammad, and upon his family and companions. To proceed:
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.
After listening to the research that has been submitted and the detailed discussion on this topic, the opinion of the council is that this transaction involves the following:
1 – Dealing in buying and selling for the purpose of profit, and this dealing is usually done in major currencies or financial certificates (shares and bonds) or some types of products, and it may include trade in options, futures and the indexes of major markets.
2 – Loans, which refers to the money given by the agent to the customer directly if the agent is a bank, or via a third party if the agent is not a bank.
3 – Riba, which occurs in this transaction in the form of fees for delaying the deal. This is interest that is charged to the purchaser if he does not make a decision on the same day, and which may be a percentage of the loan or a set amount.
4 – Commission, which is the money that the agent gets as a result of the investor’s (customer’s) dealing through him, and it is an agreed-upon percentage of the value of the sale or purchase.
5 – The pledge, which is a commitment signed by the customer agreeing to leave the contract with the agent as a pledge for a loan, giving him the right to sell these contracts and take back the loan if the customer’s losses reach a specific percentage of the margin, unless the customer increases the pledge in order to compensate for a drop in the price of the product.
The Committee believes that this transaction is not permissible according to sharee’ah for the following reasons:
Firstly: It involves obvious riba, which is represented by the addition to the amount of the loan which is called “paying fees for delaying the deal”. This is a kind of haraam riba. Allaah says (interpretation of the meaning):
“O you who believe! Fear Allaah and give up what remains (due to you) from Ribaa (from now onward) if you are (really) believers.
279. And if you do not do it, then take a notice of war from Allaah 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)”
Secondly: The agent stipulates that the customer must deal through him, which leads to combining both giving a loan for something in return and paying commission, which is akin to combining giving a loan and selling at the same time, which is forbidden in sharee’ah because the Messenger (peace and blessings of Allaah be upon him) said: “It is not permissible to give a loan and sell at the same time…” The hadeeth was narrated by Abu Dawood (3/384) and al-Tirmidhi (3/526), who said it is a hasan saheeh hadeeth. In this case he has benefited from his loan, and the fuqaha’ are unanimously agreed that every loan that brings a benefit is haraam riba.
Thirdly: Dealings that are done in this manner in the global markets usually involve many contracts that are haraam according to sharee’ah, such as:
1- Dealing in bonds, which comes under the heading of riba which is haraam. This was stated in a resolution of the Islamic Fiqh Council in Jeddah, no. 60, in its sixth session.
2- Dealing indiscriminately in company shares. The fourth statement of the Islamic Fiqh Council of the Muslim World League in its fourteenth session in 1415 AH stated that it is haraam to deal in the shares of companies whose main purposes are haraam, or some of their dealings involve riba.
3- Selling currencies is usually done without the hand to hand exchange which makes them permissible according to sharee’ah.
4- Dealing in options and futures. A resolution of the Islamic Fiqh Council in Jeddah no. (63), in its sixth session, stated that options are not permissible according to sharee’ah, because the object of dealing in these contracts is not money or services or a financial obligation which it is permissible to exchange. The same applies to futures and trading in indexes.
5- In some cases the agent is selling something that he does not possess, and selling what one does not possess is forbidden in sharee’ah.
Fourthly: This transaction involves economic harm to the parties involved, especially the customer (investor), and to the economy of the society in general, because it is based on borrowing to excess and taking risks. Such matters usually involve cheating, misleading people, rumours, hoarding, artificial inflation of prices and rapid and strong fluctuation of prices, with the aim of getting rich quickly and acquiring the savings of others in unlawful ways. Hence it comes under the heading of consuming people’s wealth unlawfully, in addition to diverting wealth in society from real, fruitful economic activity to this type of risk that has no economic advantage, and it may lead to severe economic turmoil that will cause great loss and harm in society.
The Council advises financial institutions to follow the ways of finance that are prescribed in sharee’ah and that do not involve riba and the like, and do not have harmful economic effects on their customers or on the economy in general, like shar’i partnerships and the like. And Allaah is the Source of strength.
May Allaah send blessings and peace upon our Prophet Muhammad and all his family and companions. End quote from Majallat al-Majma’ al-Fiqh al-Islami , issue no. 22, p. 229.
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