Forex trading refers to foreign exchange trading where one currency is traded into another, and currencies are bought and sold. Forex trading is an active global form of investment and enables individuals, banks, and companies to invest in forex transactions. As with any financial activity, the question of whether forex trading is haram or halal is Islam is a complex one. In this article we will explore the considerations relating to forex trading.
An example of forex trading is where a trader sells their British pound for US dollars. They could then go on to use their dollars to purchase Turkish lira.
Many businesses trade currencies for corporate purposes, however, many forex investors trade currencies in order to earn money.
As with many other modern forms of investment and trading, forex trading has been under the glare of leading Muslim scholars and investors for some time.
There have been various opinions on the permissibility of forex trading, and the general consensus is that as long as the trading does not breach Islamic finance and Sharia principles (we will go into this below), then forex trading is halal.
As long as all parties to the transaction abide by the rules of Islamic finance and undertake all the relevant due diligence, then the trading of currencies is deemed to be halal.
With the development of computer technology and online platforms, it is easier than ever to be involved in forex trading.
HOW DOES THE FOREX MARKET WORK?
The forex trading market is one of the most active trading markets in the world. The forex market operates 24 hours a day in various individual exchanges in different parts of the world.
There are a variety of reasons why forex trading takes place. For investors, it offers them the opportunity to benefit from the differences in the value of different currencies. For major companies, forex trading allows them to hedge against international currencies. This is especially useful for multinational companies that have subsidiaries across the world and who want to strengthen their financial position.
Forex trading takes place in what is known as 'over the counter' exchanges. There is no real physical exchange of assets or currencies. Instead, a global network of financial organisations and banks oversee the trading and the market generally.
Traders and forex customers can use various website and trading computing platforms.
The aim of forex trading is to try and predict the value of currencies. Various socio-political factors can affect the value of currencies almost immediately, for example the situation in Ukraine hugely impacted their currency and also the currencies of some other European countries.
FOREX CURRENCIES AND FOREX PAIRS
Every country in the world has a currency, and each currency has a three letter code. These codes are used on the stock exchange. The currency that is most traded in the world is the US dollar (USD). The second most traded currency is the euro (EUR). This is followed by the JPY - the Japanese Yen, followed by the British pound (GBP).
When forex trading you will see that currencies are traded in what is known as 'currency pairs'. What this means is that when you purchase one currency, you are also automatically selling the other.
HOW TO TRADE CURRENCIES
The three main ways in which you trade forex include:
- Forward market: this is when the forex trader enters into a binding contract with another party. At the point the contract is entered into, the exchange rate for the currency is locked in.
- Spot market: this is considered to be the main forex market. In a spot market the currency pairs are exchanged or swapped. The exchange rates are evaluated in real time and are based on supply and demand.
- Futures market: this refers to traders entering into a standard contract to buy and sell an agreed amount of currency at a specific exchange on a future date.
A contract for difference is a contract made between a seller and a buyer that sets out what the buyer pays to the seller. It should also set out the difference between the value of an asset as at the time the contract is entered into, and the current value of the asset.
What CFDs do is they provide traders and investors the opportunity to understand and benefit from price movements without owning the actual asset.
The CFD contract essentially is a form of agreement between the buyer and seller to exchange what is deemed to be the difference in the value of an asset between the time the contract is opened and closed.
The investor in a CFD contract does not own the asset, but receives the revenue generated based on the change in the value of the underlying asset.
IS FOREX TRADING HALAL?
According to Islamic laws, something is deemed to be haram if it is specifically forbidden. Some common prohibitions in Islam when it comes to financial transactions include the following:
- Interest or riba
In order to forex trade, investors do not need to borrow money from lenders.
Some other reasons why forex is considered to be halal include the following:
- forex transactions can be monitored at all times (online)
- there is a low risk of scams and theft
- no riba is involved
- you are exposed to different services and economies and trade in real time
- forex is accessible to all and enables individual investors to trade (this is seen as positive in Islam which focuses on social and ethical responsibility)
Of course, there are some important considerations to bear in mind if you want to take part in forex trading that is halal.Always make sure of the following:
- the exchange of currency must be made hand-in-hand and without undue delay
- the exchange should be made in the same setting that the contract took place in
- there is zero interest charged or payable, this includes zero swap fees transactions and spot forex accounts
- all delays are avoided
- no overnight interest rates or fees are paid or charged
- trade using Islamic accounts
- ensure that you are not trading a gamble and that you have followed the risk management rules set out by your Islamic forex account
- Abide by any regulations and rules
Halal forex accounts are those that operate within the parameters of Islamic finance. That is, they do not charge or accrue interest, they are not related to gambling or haram industries, and they are not speculative.
In addition, no form of swap commissioning is charged to the investors.
Ensuring that the swaps of currencies take place without delay also circumvents the need to charge interest, and therefore makes the trade halal.
Trading currencies in the same setting as the contract eliminates what are known as future and forward transactions.
For anyone considering forex trading, you must ensure that your provider is aware of, and complies with, Sharia and Islamic finance regulations, and question whether they are registered with the financial watchdog in the UK, the Financial Conduct Authority (FCA formerly the Financial Services Authority). Make all the relevant inquiries before you open a forex account and pay your deposit.
Muslim investors should always ensure they use Islamic platforms when trading. This ensures that the forex accounts are non-riba accounts with no interest element. Halal forex accounts also ensure that there is no short selling, derivates, swaps, and other activities that are not permitted in Islam.
SWAP COMMISSIONING IN FOREX TRADING
Swap commissioning is the amount a forex broker will charge an investor for holding a position overnight. In many cases, the swap commission is deemed to be interest, or an interest fee. This makes it impermissible (haram) for Muslim investors.
By having a swap free commission, halal forex accounts ensure that there are no breaches of Islamic rules and regulations relating to trading.
IS FOREX TRADING USURY?
Usury, also referred to as riba in Islam, refers to transactions that include an element of interest. The Quran makes it clear that any financial transaction that includes interest is not permissible and is deemed to be haram.
It was the prohibition on the use of interest that led to the development and emergence of the Islamic finance and banking system we see today.
Normally, many forex brokers do pay or charge interest when trading. The interest is usually applied to the differential between the two pairs of currency being traded. However, forex brokers who operate within Islamic finance principles of trading ensure that interest is not paid or charged. Instead, forex investors are permitted to hold their relative positions overnight without the payment of interest.
FOREX TRADING AND SHORT SELLING
Short selling is another issue to consider when entering forex trading. Short selling refers to an investment strategy that investors use to speculate on declining stock markets and prices.
How short selling normally works is that traders will borrow the shares of those stocks that they think will fall in value. They then sell these stocks to willing buyers. Short selling involves interest payments that are made to the stock lender by the buyer. Therefore, short selling in general investment terms is not halal and must be avoided.
Short selling in forex terms happens when an investor opens a position with the hope that the market quickly declines. Then when the position is closed, the trader can sell his assets on for a profit. As there is no element of interest in this forex transaction, is it halal and permissible under Islamic rulings.
PRODUCTIVE FOREX TRADING
According to Sharia law, activities that generate wealth from non-productive means can be seen as gambling. The general opinion is that forex trading is seen as productive as it involves the trader strategizing and understanding the market. Forex trading requires skill and attention to detail.
This article has explored some of the reasons why leading Muslim scholars deem forex trading to be halal. As long as you trade using Islamic platforms then you should stay within the realms of Sharia law.
As we have explained above, forex trading is a financial practice that involves exchanging one currency for another in an effort to make a profit. The practice has been the subject of much debate and controversy, but as long as the trading is not associated with excessive risk and speculation, then it should be compliant with Islamic finance rules.
Forex trading can be conducted in a responsible and ethical manner. For example, if a trader is using well-developed strategies and means of accounting for the trades and not engaging in speculative trading then this is permissible in Islam.
In Islamic finance, gambling and excessive risk-taking are not allowed, as they are considered to be forms of corruption and exploitation. Any forex trader needs to ensure that they follow the Sharia rules relating to financial transactions.
Additionally, some scholars argue that forex trading is halal if it is used to facilitate legitimate business transactions and is not simply done for the sake of making a profit. For example, if a trader is using forex trading to exchange currencies in order to import goods from another country, then their activities can be considered halal.