Is Forex Trading Halal or Haram?
Before we can intelligently address the issue of whether or not Forex trading is halal or haram we must preface this article with the following message: Although we have researched the issue of Islamic Forex at length, we do not intend this article to replace the opinion of your local or long-term spiritual leader. If you are interested in doing further research on the issues touched upon within this article, we suggest that you take a look at our list of top Islamic brokers and then reach out to the broker (or brokers) directly to determine how they handle the issue of Islamic Forex, and whether their approach meets your spiritual and financial needs. This article is, in no way or form, intended to serve as a religious ruling.
Before we can intelligently address the issue of whether or not Forex trading is halal or haram we must preface this article with the following message: Although we have researched the issue of Islamic Forex at length, we do not intend this article to replace the opinion of your local or long-term spiritual leader. If you are interested in doing further research on the issues touched upon within this article, we suggest that you take a look at our list of top Islamic brokers and then reach out to the broker (or brokers) directly to determine how they handle the issue of Islamic Forex, and whether their approach meets your spiritual and financial needs. This article is, in no way or form, intended to serve as a religious ruling.
There are many different opinions on the issue of Islamic Forex trading and therefore it is hard to give a definitive answer whether it is permissible or not. The Prophet Mohammed said, “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.” Based on this passage, many Islamic authorities do allow for currency exchange, though there is much discussion under what circumstances such exchange is allowed, and when it is forbidden.
According to Islamic law, usury, or any contract or business dealing that involves charging interest (riba) is strictly forbidden. In standard Forex trading, online brokers tend to charge or pay the interest differential between the two sides of any currency pair whose position is held overnight. However, this fee schedule is not permissible in Islam due to the laws of interest, which prompted many Forex brokers to offer “Islamic or Shariah Forex Accounts” that do not charge or pay standard interest. These brokers maintain profitability by increasing their commission on spot Forex trades, so they can recover the losses of not having commission on other positions. (Some might say this is also considered charging interest, and if you believe this to be true, you may think that Forex trading is still prohibited, or, at the very least questionable, for those who adhere strictly to Shariah law.)
Additionally, since there is an element of interest involved in trading Forex forwards, this type of trading is also forbidden. But the restriction of riba may be overcome when no overnight interest is charged or paid, such as in a “regular” spot Forex trade.
The next challenge for Muslims who want to trade Forex is that of “Hand to Hand.” The Prophet Mohammed (peace be upon him) understood that an exchange of different types of commodities between two parties was a natural and normal part of commerce. With regards to Forex trading, we can argue that a deal is made between two parties, the trader and the broker, and that this type of exchange is permitted within Islamic law. Forex trades take effect immediately which is necessary for Islamic trading as any exchange must occur within the same “sitting.”
In Forex trading, traders predict that the value of one currency will increase and the value of another currency will decrease. There is no actual buying or selling or owning of the currency. And so, we still have to ask: Is this type of speculation permitted for those who follow Islamic law?
Islam understands that everyone strives to earn more money and that every opportunity to enhance your financial standing comes with a certain level of unpredictability. When faced with multiple opportunities, we aim to combine research with past experience to choose the path that will lead to the most favorable results. However, according to Islamic law clearly prohibits gambling. So, what makes Forex trading okay and permissible according to Shariah law? One author suggests that is the method of research used for the currency speculation that makes Forex trading either permissible or banned. On the simplest level, one could argue that using fundamental analysis is allowed but using technical (chart-based) analysis is not. With technical analysis one speculates on the bets of others, relying on others to influence his or her position, which connects trading closely to gambling, a pursuit that is clearly prohibited by Islamic law. Critics of this reasoning challenge: is a trader who thinks that one currency will strengthen against another due to fundamental analysis required to place the trade immediately, and forbidden to time the trade to gain the best results?
Perhaps it can be argued that a Muslim cannot speculate on the currency markets unless he or she has strong basis upon which to expect a positive outcome. Accordingly, all trades must then involve either fundamental analysis or chart-based analysis that the trader has a strong belief in. It is easier to establish a probable technical trend, (and it will probably have underlying fundamental reason) than using a fundamental outlook. In this case, Forex trading could theoretically be permissible according to Islamic law.
Creating a Muslim Forex Account
Based on our findings, it would seem that as long as there is no question of riba, the trade is made hand to hand (the exact definition of this phrase is still open to interpretation for many Muslims), and the person doing the exchange has a valid reason upon which to expect profit, currency exchange is permitted according to Islamic law. There are many Islamic Forex brokers who ensure all of this is taken into account when a Muslim would like to open Forex account and trade. We recommend that you take a look at our list of top Islamic brokers and discuss any questions or concerns with them.
