Many online forex brokers offer Islamic Accounts for their Muslim clients. However, the question always arises of whether forex trading can be considered fully halal (permissible in Islamic law) or haram (not permissible). So is forex trading halal?
It’s generally a very hard question to answer decisively, and whilst there are elements of forex trading that could be seen as halal, this only under certain exchange conditions. It is these special conditions which have caused online brokers to create special Islamic accounts based on these settings.
In this article we will be looking at each of these conditions and seeing how they are viewed in Islamic law.
Before we start though, we would like to point out that this is post is just a brief guide to the question if forex is halal, we’re not trying to replace the guidance of religious scholars. We would always recommend going to an Islamic religious scholar for further guidance and discussion on the topic.
To get started let’s look at one saying on the matter of trading made by the Prophet Mohammed (may peace be upon him). ‘Same for same, hand to hand.’ This saying highlights how trade should be made, ideally with the same item to exchange.
So with forex this would include currency on currency even if it may be another national currency type. If the types of items for sale are also different, then you can sell them how you like – just so long as the sale is hand to hand.’ This saying is very important because it makes clear that any trade, even if it’s a different type, must be made directly between two people.
In forex trading, (which deals with currency pairs and the foreign exchange market), it could be considered permissible if the trade takes place at the same time the deal/trade is made. This would be viewed as halal if the trade has been made hand to hand between two parties and that the trade has been completed in the same sitting.
For example, let’s say a person makes a trade buying $ USD for € EUR. This could be considered halal but only if that person buys $ USD for € EUR hand to hand and that the trade is completed in one sitting. However, if there is a delay then this would not be allowed and the situation would be haram because the trade has not been made directly in the same sitting.
To fulfil the ‘same sitting’ stipulation, most forex trades when made with a broker are completed immediately without delay. This could mean as well that any non-market trades such as stop orders are haram because they take place at a later date and not right away.
Of course when applied to online trading and considering the ‘hand to hand’ element, there is no actual physical contact between the trader and the broker. However, the deal is still made between 2 separate parties of a trader and a forex broker with not intermediary. So defined like this, the transaction could be viewed as hand to hand and permissible under Islamic law.
Another important condition under Islamic law, is that usury remains completely forbidden. This means that any exchange or deal that involves any type of interest, (which is riba), is considered haram and is not permissible. That’s why many brokers that offer Islamic Accounts will not add any interest payments to these accounts for their Muslim clients.
Instead to maintain profitability, brokers will charge a higher commission on spot Forex trades instead. Generally this is the practice that all Islamic Forex brokers follow now in order to keep up profits by not charging interest.
Of course, it can be argued that this increased commission is just a disguised form of interest, which is why we’d recommend seeking further guidance on the topic of riba from religious scholars.
However, if a person with an Islamic trade account, made ‘standard’ forex spot trades that involved no overnight fees or charges, then this could be permissible as it bypasses the riba element.
One key topic that we must look at to answer the question is forex halal or haram, is the topic of ownership. Forex traders generally never actually own the currency that they are selling online, neither do they take ‘delivery’ of the currency they are planning to buy.
Instead forex traders are just speculating on the value of a currency. For instance, they ‘sell’ if they believe a currency’s value will decrease, and they ‘buy’ if they believe a currency’s price will rise.
There is no physical buying or selling, just price speculation, but how is price speculation viewed under Islamic law? Well the issue that arises with speculation is that it’s a thing line between speculating and gambling.
Under Islamic law gambling remains strictly haram, whether gambling for entertainment or for sport. Gambling of course is pure speculation, as it’s about placing a financial bet without any good reasoning or basis.
This is why forex trading could be viewed as comparable to gambling because many people make trades without a firm basis of reason behind it. There are arguments that no Muslim should be speculating on the forex market, even with an Islamic account, unless they have a strong basis on which to calculate potential success.
This would mean that each trade to qualify as having a strong basis, should have some form of technical or fundamental analysis behind it. Any gathered analyses that support a trade which gives the trader a good reason to be convinced of its success could avoid this speculation topic.
For instance, a trader that looks at established trend analysis and then makes a trade based on these trends with an Islamic broker, could argue that they have not speculated. Instead they have made a well-thought-out trade based on actual analysis and historical records.
Of course these are just some of the arguments present, but in no way does this article fully answer whether Forex trading is halal? It’s a topic that requires much discussion and thought from the person involved.
There are many people that use Islamic trading accounts who feel that in the right settings, forex trading is permissible under Islamic law. On the other side there may be others who believe that the workarounds offered by Islamic forex brokers are not satisfactory enough to be considered halal. That’s why we’d recommend to anyone interested in researching the topic further to seek out guidance from Islamic scholars first. Lastly, another option should you be interested in finding out more about Islamic acccounts could be to ask any questions you may have to a regulated Islamic forex broker. A good Islamic broker will be happy to answer any questions about how their Islamic accounts work for forex traders.