Is Forex Trading Halal?

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Is forex trading halal?

Forex, also known as foreign exchange, FX or currency trading, is a decentralized global market where all the world’s currencies trade. The forex market is the largest, most liquid market in the world with an average daily trading volume exceeding $5 trillion. All the world’s combined stock markets don’t even come close to this.

The question as to whether Forex trading is permissible according to Islamic law is a difficult question to conclusively answer. Although Islamic authorities certainly agree that currency exchange under certain conditions is halal,there is some dispute regarding under exactly what conditions. In order to reach a general consensus, various ordinances and fatwa’s (Islamic rulings which are issued by a universally recognized religious authority of Islam) have been issued on the matter. Based on the following hadith, the majority of scholars agree that trade in currency is permissible in the domain of Islam and has been practiced for years ,

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 then sell however you like, so long as it is hand to hand.”

However, this permissibility is only valid under the fulfillment of a few conditions, which are as follows: (according to islamicfinder.org)

  1. There should be no interest involved.
  2. The trade/exchange must take place in the same sitting in which the business contract is formulated.
  3. The trade/exchange needs to be hand-to-hand: immediate and without delay.

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 [the exchange] 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. 

Is forex trading halal?

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, 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! 

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