As part of Sharia Law, there are a number of practices that are forbidden or “haram” for all Muslims. Similarly, there are many that are permitted, provided that they are “halal”.
One that is particularly well known is the fact that believers are unable to participate in activities that involve the earning or paying of interest. However, in order not to exclude the world’s 1.8 followers of Islam, a number of financial products have been developed which comply with Sharia Law.
For example, using a mortgage to buy property is generally forbidden. But to get around this problem, a number of alternative financing methods have been introduced and which have allowed millions of Muslims to own their homes.
Another area that is, strictly speaking, forbidden is the practice of trading in foreign currencies. However, just as with property purchases, a number of accounts have now been introduced that may make this possible.
Before we take a look at these, and how they relate to Sharia Law, it’s worth taking a quick look at the two principles that may forbid forex trading.
- Riba. The literal meaning of this is that it’s an increase in financial interest. It’s regarded as being a form of usury that is strictly forbidden. This is because it goes against the Islamic ideal of community and fellowship.
- Gharar. This refers to anything that involves an element of risk such as gambling or, in the case of forex trading, trying to predict whether exchange rates will fall or rise. It. too, is strictly forbidden.
One of the prime hurdles to overcome is the fact that most forex brokers work by both paying and charging the difference in interest between two currencies when a position is being held overnight. Known as “swap commission” and a form of interest under Sharia Law, this is definitely not permitted.
Then there is the question of dealings being conducted in a “hand to hand” manner. This wasn’t an issue in the olden days when all communication was face to face, not via computers or phones. All exchanges were made face to face. It was also stipulated that all exchanges must be made in the “same sitting”. In other words, there and then with no delay between them. Therefore, instructing a broker to carry out a trade that they then execute at a later time could well be “haram” if the delay is too great.
But perhaps the biggest issue is whether the speculation aspect of forex trading can ever be considered to be halal. After all, no forex trader ever actually receives the currencies in which they are trading, just profits made from that trade.
It is a very difficult issue to resolve under Sharia Law and different religious scholars will have different answers to this question.
Underpinning the argument for allowing forex trading is the long-established principle that all adult Muslims are entitled to strive in order to improve the financial security for themselves, their families, and the wider community. It is also acknowledged that life includes a great deal of uncertainty. And, while gambling and guessing are strictly forbidden, using knowledge and skill to better ourselves is definitely permitted.
Therefore it can be argued that using solid knowledge of the financial world and economics may well be permitted as a way to make forex trading decisions
Short selling is one specific area that is always the subject of much debate in the context of whether it can ever be considered to be halal.
In the stock market, this is a practice that involves speculating that the price of a share will go down and is purely conducted to generate profits. The actual mechanics of the process involve stock traders “borrowing” shares of a stock they think will decline in value, selling them to a buyer, and paying interest to the person who lent them the shares.
This is obviously haram within the strict framework of riba.
However, in forex trading, it’s a rather different scenario. In this case, short selling just involves opening a position in the hope that the market goes down in value. If it does, the trader can sell the assets and make a profit, but not one driven by interest earned. Therefore this is permissible as it doesn’t fall foul of riba.
The very good news for Muslim would-be forex traders is that all of the religious and ethical issues have been resolved by a number of halal forex brokers.
That’s because there are now many Islamic accounts available which are also sometimes referred to as swap-free accounts as they simply don’t allow the possibility of profiting through a swap.
They also ensure that trades are made without any delay and that currencies are traded in the same setting as they forbid any future or forward transactions. And, in place of making their margin through the charging of interest, brokers charge fixed fees for their services.
Naturally, there are other aspects to consider that may affect whether forex trading activities are halal or haram and one of these is the amount of leverage being used. Too much and it might be considered to be gambling.
But with a sensible approach, and possibly some advice from a religious leader, it should be more than possible, and profitable, to conduct forex trading within Sharia Law.