Forex Trading – Halal or Haram
Usury is of course completely prohibited in Islam, and is defined very widely. This implies that any kind of deal or contract which involves an element of interest (riba) is not permissible according to Islamic law. For a long time, retail Forex brokers reflected the market practice of paying or charging to the trader the interest differential between the two components of any currency pair whose position remains open overnight. Eventually, most Forex brokers responded to market forces (and pressure from Islamic traders) by becoming “Islamic Forex Brokers” and offering “Muslim Forex Accounts” which operate without standard interest payments. You might ask how they did so and maintained the profitability of their operations. This was achieved by charging increased commissions in spot Forex trades, and this practice has become the hallmark of nearly all Islamic Forex brokers. Arguably, this in itself is just a camouflaged interest component, and if this view is taken, it makes Forex trading problematic according to Islamic law.
The interest problem also eliminates any possibility of trading Forex forwards, as there is always an interest element involved in these transactions.
However, “regular” spot Forex trading offered by Forex brokers, with no overnight interest payments or charges, could clear the hurdle of riba.
What Islam Says on Online Forex Trading
Having reduced the issue to one of trading spot Forex and assuming there is no interest element deemed to be involved, we move onto the next issue. It would seem to be permissible only “so long as it is hand to hand”. So clearly, the Prophet Mohammed (peace be upon him) had in mind exchanges of different types of commodities that would be made between two parties, recognizing that this was a natural and just aspect of commerce. The question here lies in what is considered to be “hand to hand”. In the olden days, there were of course no computers or telephones, so the aspect of making a deal face to face (or hand to hand) wasn’t much of a question. In fact, one could extrapolate that it was natural and accepted for a deal to made between two different parties. In modern times, it can be argued that in regards to Forex trading, the deal is made between a Forex broker and a trader, so this would qualify under such a definition of two different parties, which would be permissible according to Islamic law.
A further widely recognized stipulation is that the actual exchange must take place during the same “sitting” in which the contract is made- in other words, trades must be concluded more or less immediately. We would seem to be on solid ground here, as when a trade is made with a Forex broker, it takes effect immediately. Interestingly, this could suggest that all non-market trades (i.e. stop or limit orders) are haram!
It is here that we arrive at the biggest hurdle in attempting to answer the question “Is Forex halal or haram?” Generally, Forex traders do not expect to take actual delivery of the currency they are “buying”, and never actually own the currency that they are “selling”. They are simply speculating that the value of one with go up and the value of another will go down. Is such speculation permissible according to Islamic law?
This is an extremely difficult question to answer and it may be one that should be discussed with your own religious leader rather than being decided base on an internet article. Nevertheless, we’ve researched the issue thoroughly and will be outlining some points of thought below.
We can start by saying that Islam recognizes that nearly all adult human beings strive to improve their financial positions, and that life involves a large element of uncertainty. In life we are confronted with many choices, the outcome of which is unclear, and we strive to use intelligence and skill in choosing the available option that will produce the superior outcome. However, we then must go on to say that gambling is strictly forbidden by Islamic law, even as a form of recreation or entertainment when undertaken with small monies which the gambler might be said to be able to afford to lose.
In measuring these two competing elements, it can be said that it is the method of speculation that makes the difference. One author has examined the subject and stated that speculation on the basis of fundamental analysis is permissible, but technical analysis is not, and an interesting reasoning is given: placing trades based on technical analysis is essentially tantamount to betting on the bets of others, and relying upon the behavior of the crowd to influence your speculation is drenched with the essence of gambling, which is forbidden by Islamic law.
However, this argument can certainly be criticized as spurious as related to market realities. For example, is a speculator who believes that the U.S. Dollar will rise against his Euros due to economic fundamentals bound to simply make the trade immediately, and forbidden to take any action to time the trade entry to a psychologically opportune moment?
Once you’ve done your research thoroughly, you can decide whether Islamic Forex is right for you.
A stronger argument could be made that a Muslim has no business speculating on the currency markets unless he or she has a firm basis upon which to anticipate success. This would mean that trades must involve either some element of fundamental analysis or technical analysis which the trader actually has a firm reason to believe in. One example might be trend following trends that have an academically established track record as a profitable trading method in liquid financial markets, and trading these trends using Islamic FX Brokers. A trader could argue that a strong technical trend is easier to establish – and is also likely to have an underlying (if invisible) “fundamental” reason behind it – than a classical fundamental economic outlook which might be disputed by professional economists!
Creating a Muslim Forex Account
There is no question that currency exchange is permissible in Islam, provided that there is no interest element, that it is made hand to hand (though this phrase can be translated in multiple ways), and that the exchanger has a valid reason to anticipate a probable profit based upon an analysis that does not rely upon the psychology of gambling. On a minimal basis, Islamic Forex brokers can be used to trade, which should at least remove arguably all of the riba challenges. As we have seen, there are certain grey areas within this qualification that must be investigated deeply in good faith and conscience by anyone wishing to begin halal Forex trading with a Muslim Forex account.