Fatwa: # 46239
Category: Business Matters
Country: African Country
Date: 10th October 2020

Title

Forex Trading: Is it permissable?

Question

Respected mufti my question is with regards to forex trading is it permissable? 

Is the profiteering of increase and decrease of currencies permissable via your cell phone permissable? I am not a trader and would like to pursue it if it is sharia compliant. I believe it works on the basis of predictions. 

 I also believe you can trade stocks and gold on there so are there certain aspects of forex to be wary about and what are they? 

Answer

As-salāmu ‘alaykum wa-rahmatullāhi wa-barakātuh.

Forex Trading 

Retail forex practised by private investors is a form of non-deliverable trading agreements, where delivery of the currencies never take place.[1] This is the primary issue with online forex trading.

The following example explains in simplified terms the procedure of forex trading:

Person A feels that the dollar is going to strengthen against the rand. The current rate is $1 = R10. So, he approaches person B and gives him R1000 in order to purchase $100, but person B doesn’t actually go out and purchase the $100. He simply holds the R1000 hoping that the dollar actually weakens against the rand. Person A returns in a few days and wants to cash out the $100 that he supposedly bought. So, if the rate on this day was $1 = R11, person B will give person A his R1000 back plus he will owe him R100 further as the rate is now $1 = R11. However, if the dollar weakened against the rand, for example the rate is now $1 = R9 then person A will only receive R900 back from person B. This will mean that person B would gain R100 at the expense of person A. This situation is similar to what happens in the retail forex market. The broker never goes out and purchases the actual currencies being traded. They simply hold the cash hoping that the clients trade is unsuccessful. This is actually the primary business model of the brokers.

It is clear from the above example that there is no actual trading and exchanging of currencies. One merely takes a position on the movement of a currency pair. This is tantamount to gambling where one will be staking his wealth against the broker. If you speculate correctly, you will profit at the expense of the broker, and if you speculate incorrectly the broker will profit at your expense

This is before considering the issue of leverage. Forex brokers give you access to “leverage” which means that for every R1 you provide, they will let you invest, for example R100. That means that with a very small amount of money you can take very large positions in the forex market. This magnifies both your profits and losses. Generally, in order for one to see any discernible profit in forex trading, you usually need to invest large amounts as the currency market only moves small fractions daily. 

The leverage that the broker offers you will be treated as a loan and you will be charged interest on the margin whilst you have a trade open. Accordingly, that is not permissible. Furthermore, the leverage offered by the broker cannot be regarded as a partnership as the broker will not be sharing in the profits of the trade nor will he be sharing in the losses.

Some brokers offer so called ‘Islamic accounts’ where they waive off all interest charges. That does not make the deal Shariah compliant. Firstly, the primary issue mentioned above still remains and secondly, the broker lends money with the condition and objective that you trade with him. This has been clearly prohibited in the hadith. See the following narration:

حَدَّثَنَا زُهَيْرُ بْنُ حَرْبٍ، حَدَّثَنَا إِسْمَاعِيلُ، عَنْ أَيُّوبَ، حَدَّثَنِي عَمْرُو بْنُ شُعَيْبٍ، حَدَّثَنِي أَبِي، عَنْ أَبِيهِ، عَنْ أَبِيهِ، حَتَّى ذَكَرَ عَبْدَ اللَّهِ بْنَ عَمْرٍو قَالَ قَالَ رَسُولُ اللَّهِ صلى الله عليه وسلم ‏ "‏ لاَ يَحِلُّ سَلَفٌ وَبَيْعٌ وَلاَ شَرْطَانِ فِي بَيْعٍ وَلاَ رِبْحُ مَا لَمْ تَضْمَنْ وَلاَ بَيْعُ مَا لَيْسَ عِنْدَكَ ‏"‏

Translation: Abdullah bin Amr reported the Messenger of Allah (ﷺ) as saying: The proviso of a loan combined with a sale is not allowable, nor two conditions relating to one transaction, nor profit arising from something which is not in one's charge, nor selling what is not in your possession.[2]

Deliverable Forex, which is open to companies and big firms, is different. In deliverable forex, there is actual trading of currencies. Deliverable forex has the potential to be Shariah compliant if other requirements of Shariah are fulfilled

And Allah Ta’ala Knows best

Zaakir Ismail

Student Darul Iftaa
South Africa

Checked and Approved by,
Mufti Ebrahim Desai.

 


[1] A spot forex is an agreement to exchange a set amount of one currency for another at a predetermined exchange rate in two business days (T+2). In speculative trading, nobody actually wants to do the currency exchange, so at the end of each day, to avoid to exchange in two days, they offset their open position, and then re-open to start the new trading day. There is no "liquidating" of positions because there is nothing to actually liquidate.

 

When you do a trade, it's as if you are borrowing the short currency at its overnight rate, exchanging it for the long one, and depositing that at its overnight rate. So, if you go long USD/JPY it's as if you are borrowing yen at the JPY overnight lending rate, converting them to dollars, then depositing the dollars at the USD overnight deposit rate. The carry is the difference between what you pay on the loan and what you receive on the deposit. When you close out your trade you reverse the process. Some brokers handle carry separately, while some incorporate it into the position rollover. (Note the "as if. These actual transactions don't really take place.)

 

Now, if you're wondering why you see the carry on the I to T+1 rollover if the exchange doesn't take place until T+2, it's because your P&L is credited immediately for the overnight carry you will pay/receive going from T+2 to T+3. That's also why you don't see carry the day you close a position.

 

Thus, in retail forex, there is no actual trading of any currency. The entire industry is speculative. (Mufti Faraz Adam)

 

[2] Sunan Abi Dawud 3504

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