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The two haram transactions in the above economic transaction-pattern are the two interest-bearing loan agreements. Under such an account, you are gaining exposure directly to holding the money not to the interest of holding the currencies.
Therefore you are in effect achieving the above economic transaction pattern but without the interest elements. One could therefore argue that such accounts are Sharia compliant. However the problem with this analysis is that the broker is the one who is extending that liquidity and also brokering the exchange. Islamically, you are not allowed such a contract where what is actually happening is you have two contracts in one. Ask yourself this: would the broker give you the interest-free loan if you were not going to use that broker for your trade?
But that is trying have your cake and eating it. Either a we say a currency pair is a synthetic product not analogous to any real-life economic activity, or b it is analogous to real-life economic activity. If it is a synthetic product not related to real-life economic activity then it is best characterised as just like any other zero-sum derivative e. The second approach to finding a solution is to take a purposive approach. That is, to provide instant access to the currency market in a cheap and efficient way. Under this analysis, if forex is just a modern, better, way of going to Travelex, then we should overlook any modern developments as wrinkles, rather than anything that fundamentally changes the nature of the activity.
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Thus the fact that the broker is often the counterparty to the trade and that the trade is on margin, should be overlooked. However, this could arguably be a quirk of the international financial plumbing we have in place today as well as an increasingly globalised world. The institutional forex market is made up of large financial institutions, where trades are between such financial institutions as opposed to the broker and you , where margin is not used most of the time , and where the primary driver of these trades is necessity rather than speculation.
Yet other companies will need to hedge their currency risk though these are separate topics in themselves. Under this characterisation of the industry, institutional forex trading looks Sharia compliant to me for three primary reasons:.
Understanding The Theory and Practice of Islamic Forex Trading | Finance Magnates
In Islamic law, currency trading should be hand-to-hand, and on-spot, and therefore should not be delayed for 1 or 2 days as is standard in the industry. Banks have established debtor-creditor agreements between themselves, rather like margin accounts that retail traders will have with their broker, so one could argue that this is a form of margin. However, this need not concern the institutional participant for two reasons. But the fact that actual currency goes from one person to another supports the idea that institutions are trading in currency because of a genuine need, as opposed to pure speculation.
But pure speculation is not in my view wrong either. But that takes me back to retail forex. But if you do want to speculate, then the only way you can do so efficiently is by participating in the retail forex market. The alternative of using Travelex is not viable, as there would be no margin involved and currency movements are tiny from day-to-day.
Islamic Position of Foreign Exchange Transactions
The argument would therefore be, that as a retail trader you can only speculate using retail forex, with a margin account, and as fundamentally currency speculation is halal, trading on a margin account is halal as that is the only way available. However this is a flawed argument too.
Running such a business is halal.
So the only thing stopping me from doing the halal business is money. Therefore I can borrow that money. There is also no need for you to speculatively trade forex, which might have otherwise justified things.
The principles of Halal Forex Trading
The only way that I could see would be a government profit-free trust set up to lend to Muslim retail forex traders for the purpose of allowing them to trade forex. But that seems like a rather frivolous use of government currency, and one that no government would ever seriously consider.
Please also remember to subscribe to our website if you would like to keep in the loop with more articles like these. Two excellent resources I stumbled across:. Thank you for this very in-depth analysis, probably one of the very few islamically contextualised pieces on trading. I can see that there are multiple areas in the market which make trading forex haram. Some of the ones you have picked up on are: interest-baring accounts; trading on margin and the idea of speculation. Secondly, the concept of margin.
For instance, we see this in the Islamic mortgage industry — banks will lend you hundreds of thousands, so long that it is used to purchase a house often with further conditions on what kind of house. Similarly, banks offer professional development loans which are only to be used for educational purposes which they need to verify first to be legitimate cause. These are tactics used to increase sales. With margin, why would there be a need for someone to apply for margin from an organisation which would then supply leverage via the prefered broker, vs the broker themselves offering the margin on their own platform.
Much like the car dealer offering additional services to facilitate selling a vehicle on its forecourt, the broker is facilitating trading by offering margin as part of its trading facilities. For CFDs an issue of ownership also arises not sure if you have covered this already in another article — still getting through them.
Not the more complicated forms of interest i. CFDs — equitable ownership by another party is fine as opposed to legal ownership , but in CFDs no one owns the legal ownership. Assalaamu alaykum. If so could you kindly shed some light on whether it would be permissable to invest with them? They seem to be a forex education platform? Jazakallaahu Khairan Hifdi. Brother Ibrahim and Mohsin, earnestly request you to review vantagefx, and share your views whether in fits within the boundaries of Islamic Shariah.
I would like you to cover islamic loan system. I am not expert but it seems to me extremely fishy, because, suppose i want to buy a car that cost 30k they will say if you want to buy a year you will buy 33k and when you agree they go the car owner buy them selves and than sell you 33k. In my mind, the first reason islam prohabited interest is not to burden the loan taker and here its what happening. I have one question regarding the swap free accounts.
How can they call it as such when the rollover Swap is embedded in to the algorithm used to calculate the interest rate defferential between the two currencies? Are the brokers figuring the interest rate differentials out ahead of time and calling it a commision or a fee? Or is there a diffrent method of calculation specifically designed for muslim traders? Hi, what if I open a Leverage account and obviously I will opt for a swaps free account. I will only trade with my own money. I am not aware of any truly leverage account on the internet.
Even then, you will be using derivatives so best to avoid. I have a question. Jazak a Allah. I would still avoid. I have not ever seen a truly leverage forex account. And even if it is, it is still using derivatives so is impermissible. Brothers, please make a decision, what Al Azhar University Says about this? Unfortunately currency pairs are also a form of derivative. Assalamu alaikum is trading cryptocurrency on Binance using spot account permissible in Islam? Please I would like to get the answer on my email too since I might not be online when the answer would be posted Jazakallahu khair.
Jazakallahu khair. Depending on whether the trader believes a currency pair will increase or decrease, the trader will either buy lots or sell lots of the pair and try to make a profit from market movement. So I asked them for an account which does not have any relationship with Interest either in dealing with it or in consumption. They told me that they do provide accounts for Muslims. If you wish to trade interest-free you will incur an additional charge of 3 dollars per lot traded round-turn on the regular account. Thank you for your.
All perfect praise be to Allaah, The Lord of the Worlds. We have already clarified in previous Fataawa, among which is Fatwa , that it is not permissible to transact in accordance with the money leverage system, and that it amounts to a loan that brings benefit for the broker because he gets profits as a result of being a mediator through whom the debtor takes loans, and therefore it consists in Riba. The fact that the mediator receives the same commission whether or not the investor transacts in the money leverage system does not legitimize transacting in it as we have clarified in Fatwa It should be noted that doing business with the Forex system involves many violations of the Islamic law, like Riba, but if the company provides a system that is free from such violations and the condition of exchanging hand-to-hand is met during the conclusion of the transaction, then it is permissible to trade currencies, gold and silver; otherwise, it is not.
Allaah Knows best. Using the leverage system in Forex transactions Fatwa No: