The question of whether forex trading is acceptable under Islamic law is difficult to address definitively.
While Islamic countries such as Pakistan accept that currency trading is halal (i.e., acceptable under Islamic law) under certain conditions, some disagree about what those conditions are.
In this guide, we are going to break down what sharia says about forex trading, is forex trading halal in Pakistan, and how you can trade in a halal environment.
Sharia and Forex
“Does Forex fall under the category of halal or haram?” In general, Forex traders do not plan to take physical delivery of the currency they are “buying,” and they never actually own 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 speculative behavior acceptable under Islamic law?
This is a tough question to address, and it could be one that you should discuss with your religious leader rather than making a decision based on an internet post. Nonetheless, we have extensively studied the issue and will outline some points to highlight what is haram according to Islamic law:
1. Usury
Usury is, of course, strictly forbidden in Islam and has a broad definition. This means that any transaction involving an aspect of interest (riba) is prohibited by Islamic law.
Retail Forex brokers have long mirrored the market practice of charging the trader the interest difference of any currency pair whose position is open overnight.
Most brokers eventually responded to market forces (and pressure from Islamic traders) by rebranding themselves as Islamic Forex Brokers and offering Muslim Forex Accounts that do not need regular interest payments.
You might wonder how they did it while keeping their operations profitable. This was accomplished by charging higher commissions on spot Forex trades, a trend that has become the trademark of virtually all Islamic Forex brokers. Arguably, this is just a disguised interest component, and if this is the case, it makes Forex trading illegal under Islamic law.
The interest issue also removes the likelihood of trading Forex forwards, as these transactions often include an interest component.
However, “regular” spot Forex trading provided by Forex traders, with no overnight interest payments or charges, may be able to overcome the riba barrier.
2. CFD Trading
Contracts for differences (CFDs) are simply financial instruments that are dependent on the price of an underlying asset. Trading CFDs usually includes some riba, but Islamic brokers provide them without the overnight interest payments or charges.
The core of the Islamic issue with CFDs is that the instrument is normally a leveraged derivative. Of course, no trader is obligated to use leverage. The potential issue with CFDs is that the underlying asset is not directly owned.
However, many have pointed out that if riba and leverage are excluded, and the CFD is simply and predictably suggestive of an Islamically acceptable underlying asset, a CFD can be Sharia-compliant.
3. Gambling
Gambling is strictly prohibited by Islamic law, even as a means of leisure or pleasure when done with small sums of money that the gambler is said to be able to lose.
Is technical analysis halal?
Many say that speculation based on fundamental analysis is acceptable. Technical analysis, on the other hand, is not, and interesting reasoning is given. Trading based on technical analysis is essentially equivalent to betting on the bets of others, and relying on crowd action to influence your speculation is drenched with the essence of gambling, which is prohibited by Islamic law.
This point, however, can be criticized as fictitious in terms of market realities. For example, is a speculator who predicts that the US Dollar will rise against his Euros due to economic fundamentals required to make the trade immediately and barred from taking any action?
A stronger case may be made that a Muslim has no business speculating on currency markets unless he or she has a solid foundation upon which to expect success.
This will imply that trades would include some fundamental analysis or technical analysis element in which the trader has a strong reason to believe.
Trend following patterns with an academically proven track record as a profitable trading method in liquid financial markets and trading these trends using an Islamic FX account is one example.
A trader might claim that a strong technical trend is easier to establish – and is, therefore, more likely to have an underlying fundamental explanation behind it – than a traditional fundamental economic outlook, which skilled investors might deny!
What about short selling?
In Forex, “short selling” applies to a transaction in which the price of a currency pair is expected to fall. There is no key difference between making a short or long trade in Forex, and no essential borrowing factor is needed to complete this transaction. As a result, we can say that Forex short selling is not an issue in Islam.
Trading in a Halal environment
Forex trading should be approached as a business. As an entrepreneur, if you start a company, you will be putting your money at risk in the hope or anticipation of making money later. Essentially, if something goes wrong (as it does in 90% of new businesses), you will lose your money, and your company will fail.
Therefore, you can certainly trade in a halal environment by:
Creating a Muslim Forex Account
There is no doubt that forex trading is acceptable in Islam, given that there is no element of interest, that it is done hand to hand (though this term can be interpreted in several ways), and that the exchanger has a legitimate reason to expect a probable benefit based on an interpretation that does not depend on gambling psychology.
At a bare minimum, Islamic Forex brokers can be used to trade, removing potentially all of the riba challenges. As we have seen, there are some grey areas within this qualification, and anyone looking to begin halal trading with a Muslim Forex account must thoroughly examine it.
If you are looking to open an Islamic account, we suggest XM. The broker has been dealing with Islamic accounts for quite some time and has a good reputation among the trading community.
FAQs
Is forex trade haram in Islam?
Trading is permissible as long as there is:
- No aspect of interest.
- Transactions are performed “hand to hand.”
- The currencies traded do not violate Islamic rules.
What does Islam have to say about Forex trading online?
There is no simple reason why Islam should ban online Forex trading as long as there is no interest factor and trades are concluded immediately with reasonable reasoning to assume a probability of financial benefit.
Is Forex a form of gambling?
The goal of the Forex trader determines if Forex is gambling. It is risky for a trader to use a method of analysis that has proved lucrative in the past, but it is not gambling as the word is commonly known.
Is short selling prohibited?
Traditional short selling, in which stocks or bonds are borrowed at interest and then sold, is commonly considered haram. Fortunately, this is not an issue in Forex trading since currencies are paired, so “going short” in Forex does not always include borrowing any asset or paying any interest.
What if riba is removed?
If the riba (interest) component is removed, it is possible to make a compelling case that online Forex trading is halal, particularly if leverage is not used. Many Forex and CFD brokers have Islamic trading accounts that do not charge or pay overnight interests.
Is Forex trading halal in Pakistan?
Yes, Forex trading is halal in Pakistan, with no laws restricting Pakistani residents from opening trading accounts.
Is leverage trading halal or haram?
Trading with leverage includes borrowing money at interest, which is forbidden. However, just because a Forex broker provides leverage does not imply that you must use it in your trading.