One commonly asked question about forex trading is whether it’s permissible according to Islamic law. The answer is complex, following the theory and practice of finance according to Islamic principles.
The bottom line is that Islamic authorities agree that currency exchange is halal, as long as it follows certain conditions. However, there’s still some dispute on what those conditions are, and when forex trading is considered as haram.
In this article, Fair Forex explains the intricacies of currency trading from an Islamic perspective.
Why is Forex Trading Considered Haram?
Haram is an Arabic word that means “forbidden”. Activities are considered forbidden based on the teachings of the Holy Qur’an. Some haram activities include drinking alcohol and eating certain food items, gambling, and earning interest, among others.
The last two – gambling and earning interest – are sometimes associated with forex trading. This is why some people consider currency trading as haram.
Forex Trading as a Usury
According to Islamic law, usury is any business deal or contract that involves charging interest or riba. The Qur’an clearly condemns these types of transactions, considering interest as unjust and demeaning for the person who pays the riba. This is why Islam allows only one kind of loan: Qardh al-Hasan or interest-free loan.
In a typical forex trade, brokers charge a swap commission when an investor holds open positions overnight. The commission is basically an interest rate. This fee schedule isn’t permissible in Islam.
To abide by these laws of interest, the marketplace now offers swap-free forex trading accounts. These allow investors to hold open positions in any currency pair for indefinite long periods. They can carry the position overnight without paying interest or forex swap.
Spot trades, or transactions that are for immediate buying and selling, that have no overnight interest charges also clear the hurdle of riba.
Forex Trading as Gambling
The other contention to forex trading is that it has excessive risk or gharar, which is prohibited in Islamic business and financial contracts. High levels of uncertainty and risk are related to activities relying on speculation, such as gambling.
In forex trading, investors attempt to anticipate the changing values of currencies between the two countries. They can do this without buying, selling, or owning the currency. Some people consider the activity as speculation or gambling, making currency trading haram.
However, forex trading isn’t purely speculative. Forex traders combine research, historical data, and market analysis to determine the best strategy, reducing their risk.
Most forex traders also have a trading plan. This is an organized approach to executing trades, based on market analysis and forecasts. The trading plan sets realistic profit goals and establishes the investor’s risk level. It helps prevent the trader from making rash, unwise decisions, protecting their equity.
Since forex trades are technically investments, they do come with some degree of risk. Islam understands that everyone works to make a profit, and that every opportunity to earn more money comes with a certain level of unpredictability.
As such, forex trading won’t be considered as gambling as long as you take on a reasonable level of risk and don’t rely on guesswork.
To make sure that you’re participating in halal forex trading, you can open an Islamic forex account that is Shariah-compliant.
Islamic Forex Accounts
Also called swap-free accounts, Islamic forex accounts are halal trading accounts that prohibit the accumulation, collection, and payment of interest fees. Also, transactions made by Islamic forex accounts must be carried out without delay. Currencies must be transferred immediately from one account to another, along with the transaction costs.
To abide by this requirement, Islamic forex accounts don’t allow futures and forwards contracts.
Islamic forex accounts observe the following principles of halal currency trading to be Shariah-compliant:
- Prohibition of payment and receipt of riba or interest charges
- Prohibition of gambling or mere speculation
- Immediate transactions that eliminate the need for overnight interest rates or swap fees
- Reduced financial risk and uncertainty or gharar
Ultimately, forex trading is a Shariah law-compatible opportunity to invest in an asset and gain profit as the value increases.
Work with a Fair Forex Broker
Fair Forex understands the complexity of currency trading for followers of Islam. As such, we modify our brokerage services to match your needs. We have trade accounts that follow Islamic finance principles, making sure that your trading activities are halal.
Keep in mind that halal forex trading is a collaborative effort between you and your broker. Trust us to look after your account and practice halal methods of investment.
Contact us today to learn more about halal forex trading.