29th June 2020
السلام عليكم و رحمة الله و بركاته
Question: What is the ruling on Forex trading in your view using the CFD method? Do you agree with those who prohibit it or not?
الجواب حامداً و مصلياً
In the name of Allāh, the Most Gracious, the Most Merciful
Answer
In reference to your query, Forex trading is one of the most prevalent forms of online trading platforms with an estimated trading worth $5 trillion. It is based on a risk model where the trader stakes his money to earn profit. The outcome however is uncertain as to whether he will gain profit or suffer a loss. We have reviewed many fatawas on this topic and most are inclined towards its impermissibility due to it violating many of Islamic precepts. A thorough research into Forex trading, we have also concluded that Forex trading is not permissible for the reasons that will be discussed below.[1]
To first begin with, Forex trading – or sometimes referred to as FX – is a global market wherein traders buy and sell foreign currencies. It is not similar to for instance a person exchanging currency when travelling abroad who then uses the local currency for spending. Contrarily, Foreign exchange are traded in the hope of obtaining profit from a movement in the exchange rate. The entire market is based on speculation as the outcome of return is unknown. All traders are required to go through a broker or a dealer – the middle-man – who facilitates the trade. The currencies one intends to trade are paired e.g. GBP/USD. The currency you ‘go long’ with is the base currency you expect to make profit on. This appears first in the sequence so in this case the GBP. The second currency i.e. USD is the counter. Currency rates change almost every second so the trader observes to wait for a favourable exchange rate to derive profit. For instance, if the exchange rate between £ and $ is £1 = $1.23 and someone exchanges £300 for dollars then he will receive $369. If at a later date the value drops to £1 to $1.20 then when exchanged to pounds (from $369) the trader receives £307.50, with £7.50 profit. But if the value let’s say increases £1=1.24 then (after exchanging from $369) to pounds then the trader receives £297.58 with £2.42 loss. As everything is done through a broker, a small sum us required by the trader to make a trade, known as the margin.
Traditionally trades have been carried out using contracts for difference (CFD’s) which are derivatives contracts where the difference between the opening and closing trades is the cash amount settled. No exchange of physical goods takes place and no real ownership of the asset is established. However, some of the modern platforms allow the ‘direct trading of currencies’ but even in this case, no actual ownership of the currencies take place. The ‘profits’ made from forex trades is based on very small movements in exchange rates as such in order to increase the ‘profit’ made. The trader is required to leverage his margin (the amount he deposited to open a trade). Leverage refers to the ratio of the margin to the credit loaned by the broker i.e. it is a borrowed amount so that the trader can increase his returns. So, let’s assume that if a trader deposited £100 and leveraged that by 10 to make an investment then the amount he would actually have invested would be £1,000 which he would be fully liable for if he lost all in his trade. In addition, the traders are required to pay a commission either through the spread (the difference between the buy price and the sell price) or based on a % of the profit (which in reality is interest).[2]
There are many Sharī῾ah violations which many contemporary fatawas point out that make Forex trading impermissible in Islām.
- Future Sales – Amongst the stipulated conditions for a valid transaction is that the exchange of price and commodity must not take place at a future date. In other words, it is mandatory for exchange to take place on the spot as indicated in the Prophetic narration when he said, hand for hand meaning spot transaction. In the Forex trading, the purpose is not to buy the currency but to accrue profit based on the different values favourable to the person. Future sales moreover result in deferral of debts exchanged on both sides that has been forbidden in a famous Hadeeth, prohibited is the sale of deferred debts with another differed debt (kāli bil Kāli). So no transaction takes into effect immediately.[3]
- Absence of ownership – The paramount of all is the that Forex infringes the fundamental rule of ownership of the commodity. The Messenger of Allāh sallallahu alayhi wasallam said, A man is not permitted to sell that which he does not own.” [4] The trader does not own anything he sells nor takes actual delivery of the currency but silently observes to speculate the movement of the currencies of one ‘going along’ and the other ‘going short’. In the background, the currencies have been transacted multiple times before settling on the final buying and selling price.
- Profiting from Interest – Another key aspect warranting its prohibition is the interest accrued on the leverage amount arranged through the broker. As explained above that the broker loans the trader which he must then repay with interest. The profit earned on the borrowed amount is in reality interest because the profit in of itself is not earned in exchange of any commodity and moreover, the trader has no ownership of that.
- Gharrar and Qimar – This means that in the Sharī῾ah all transactions must be based on certainty and that money is not staked for an uncertain outcome.[5] In Forex trading, the outcome of profit or loss in unknown and contingent on chance. The movement of values are all speculated by the broker.
So to conclude our answer, given the aforementioned Sharī῾ah violations, Forex market using CFD is not permissible.
[Allãh Knows Best]
Written and researched by (Mufti) Abdul Waheed
Answer Attested by Shaykh Mufti Saiful Islam
[1] Amjad Mohammad, (Sept 2017), Is Forex Trading Permissible According to the Sharī῾ah? Markazul Ifta, UK
Mufti Faraz etal, (August 2018), Retail Forex Trading: Views from the front Lines of Islamic Finance, Shariyah Review Bureau, UK
https://www.fxcm.com/au/forex/what-is-forex/ [accessed 24th June 2020]
https://darulfiqh.com/knowledgebase/is-retail-forex-trading-shariah-compliant/ [accessed 24th June 2020]
https://daruliftaa.com/business-trade/trading-in-currencies/ [accessed 24th June 2020]
Mufti Muhammad Taqi Usmani (2007), Is Forex Currency Trading halal? https://www.albalagh.net/qa/Forex_currency_trading.shtml [accessed 24th June 2020]
[2] This detail was included by Maulana Abdul Mothin who has background experience of the Forex trading market.
[3] See Fiqh buyoo vol 1, p. 383-4, 483-4
Bayhaqi,
بابُ ما جاءَ فى النَّهىِ عن بَيعِ الدَّينِ بالدَّينِ
عن ابنِ عُمَرَ، أن النَّبِيَّ -صلي الله عليه وسلم- نَهَى عن بَيعِ الكالِى بالكالِى
[4] Ibn Majah no; 2187
بَابُ النَّهْيِ عَنْ بَيْعِ مَا لَيْسَ عِنْدَكَ، وَعَنْ رِبْحِ مَا لَمْ يُضْمَنْ
عَنْ حَكِيمِ بْنِ حِزَامٍ، قَالَ: قُلْتُ: يَا رَسُولَ اللَّهِ الرَّجُلُ يَسْأَلُنِي الْبَيْعَ وَلَيْسَ عِنْدِي، أَفَأَبِيعُهُ؟ قَالَ: «لَا تَبِعْ مَا لَيْسَ عِنْدَكَ»
Nasai, No: 4611
بَيْعُ مَا لَيْسَ عِنْدَ الْبَائِعِ
عَنْ عَمْرِو بْنِ شُعَيْبٍ، عَنْ أَبِيهِ، عَنْ جَدِّهِ قَالَ: قَالَ رَسُولُ اللَّهِ صَلَّى اللهُ عَلَيْهِ وَسَلَّمَ: «لَيْسَ عَلَى رَجُلٍ بَيْعٌ فِيمَا لَا يَمْلِكُ»
[5] Fiqh buyoo vol 1, p. 339-40, 344-6