Common Fiqh Issues in Forex Trading Platforms

 

Praise be to Allah, the Lord of the worlds, and blessings and peace be upon our master Muhammad, his family, companions, and those who follow him with righteousness until the Day of Judgment.

In recent years, the topic of trading through Forex platforms has become widespread among people, and questions regarding its permissibility have increased. Some traders have taken it upon themselves to issue fatwas without proper knowledge. Therefore, the researcher has gathered relevant Shari'ah material concerning the rules of trading and summarized it in an article in a question-and-answer format, making it easier for people to review.

The researcher has drawn this material from fatwas and decisions issued by the Jordanian Iftaa' Department, the decisions of the Islamic Fiqh Academy of the Organization of Islamic Cooperation, the Fiqh Academy of the International Union of Muslim Scholars, and the Shari'ah standards issued by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) in Bahrain.

First: Trading Foreign Currencies through Forex Platforms:

What are the Shari'ah conditions for trading currencies electronically?

Trading currencies is permissible under four conditions:

1. Immediate settlement (Spot): The sale and payment should happen immediately, meaning the currency is exchanged and the price is paid immediately.

2. Immediate possession: In electronic currency trading, this means that the purchased currency should be transferred directly to the trader's bank account.

3. Avoidance of margin trading. The prohibition will be explained later.

4. Avoidance of swap contracts: This type of contract involves two agreements in one, where two parties exchange a currency immediately, with a stipulation to re-exchange it at a later time. This is prohibited because it involves riba (usury).

 

Is the trading that takes place on Forex platforms nowadays permissible?

The trading of foreign currencies on the widespread Forex platforms nowadays is impermissible due to the lack of legitimate possession, the presence of margin trading, and other prohibitions involved in these transactions.

Is possession in the platform's account considered immediate possession?

Possession in the platform's account is not considered legitimate possession of the currency according to Shari'ah. It is merely a proof of the trader's right with the platform.

Is immediate possession achieved for those who trade currencies on Forex platforms?

Many Forex platforms delay the transfer to the bank account when a customer requests a withdrawal. Some platforms do transfer immediately, but only in the currency the client initially entered (such as USD). If the client purchased amounts in yen, for example, they would not receive the yen itself, but its equivalent value in USD. This does not fulfill the Shari'ah requirement for immediate possession.

If the client receives the amount they purchased in its value in USD, why is immediate possession not achieved?

Legitimate possession according to Sharia means that the buyer must receive the exact currency they purchased, either in hand or via their bank account, immediately. Likewise, the seller must deliver the currency they sold to the buyer immediately. If immediate possession is not achieved, the transaction becomes a form of riba (usury), which is impermissible.

What is the ruling on margin trading?

Margin trading is a tool that allows traders to borrow money from brokers to open larger positions than they could afford with their own funds, increasing the potential for higher returns but also exposing the trader to greater risk of loss. For example, if a client enters the Forex market with 1,000 dinars and chooses to leverage their capital by a factor of ten, they can invest 10,000 dinars. This means their profits would be larger than if they only used the original capital they started with. The leverage also affects the loss if the value of the assets bought with leverage decreases.

In essence, leverage is a loan from the broker to the trader without an increase, and the broker earns a commission on every financial movement made by the trader when they invest with this leveraged amount. This is prohibited in Islamic law because any loan that brings about a benefit is considered riba (usury).

Furthermore, the leverage system used on Forex platforms involves virtual funds given to the trader for speculation on the rise or fall of currency prices. If their prediction is correct, they make a profit; if incorrect, they lose part of the initial margin (capital). This is considered gambling in Islamic jurisprudence because each trader speculates with virtual amounts on price movements, and the winner gains the price difference, while the loser loses part of the capital they invested. This reflects the essence of forbidden gambling.

Is it permissible to trade using an Islamic Forex account?

An Islamic Forex account is one that is free from interest (riba), overnight rollover fees, and swap contracts. However, upon examining its reality, it includes two main issues:

1. The lack of legitimate possession.

2. The use of margin trading.

Therefore, trading through an Islamic Forex account is impermissible.

Second: Trading Crypto currencies:

What is a digital currency?

A digital currency is a virtual currency that has no physical existence in the real world. It is used as a medium of exchange and a tool for speculation in global markets.

There are two main types of digital currencies:

1. Centralized digital currencies: These are issued by central banks or governments and are subject to their regulation. They are treated similarly to the paper currency issued by governments and countries.

2. Crypto currencies: These are not subject to any central authority. Either they may be decentralized, like Bitcoin, or private companies may issue them, as is the case with other crypto currencies.

 

What is the ruling on trading crypto currencies through trading platforms?

No fatwa has been issued by the Jordanian General Iftaa' Department regarding this matter, but collective fatwas have been issued by the Egyptian, Palestinian, and Turkish fatwa authorities, as well as the International Union of Muslim Scholars, declaring the trading of crypto currencies to be impermissible. The reasons include that crypto currencies are issued without the approval of a central authority, their high risks leading to potential public harm, and the fact that they do not represent stable, real value. Their value fluctuates significantly and irrationally within short periods, which could lead to potential economic disasters due to this unpredictable volatility. Additionally, speculative trading that destabilizes the value of money is rejected in Islam because it undermines the lawful ownership of people’s wealth, fails to protect their assets, and wastes opportunities for genuine investment. This contradicts the Islamic principle of protecting wealth.

It is also worth noting that the Central Bank of Jordan has issued a warning against dealing in crypto currencies.

Some believe that trading crypto currencies through spot contracts solves the issue of the currency's value volatility and instability.

Trading crypto currencies through spot contracts may address one of the issues of crypto currency trading, but it does not resolve all the problems associated with it.

If we look at what actually happens in the crypto currency market, spot contracts do not fulfill the conditions of real ownership and possession as required on block chain platforms, because block chain wallets are the true storage for crypto currencies.

Instead, the trading is limited to recording numbers on traders' accounts on trading platforms. The problem with these accounts is that they facilitate rapid speculation on price differences without regard to actual ownership and possession of the crypto currencies.

Thus, trading crypto currencies through trading platforms is based on profiting from the price differences of currencies rising or falling, without true ownership, similar to what happens in Forex markets. This is essentially gambling, which is prohibited in Islamic law.

Third: Oil Trading

What is the Islamic ruling on trading oil through electronic platforms?

Investing in oil is conducted through the following methods:

1. Contracts for Difference (CFD): This is a tool that allows speculation on price movements (up or down) without owning the asset. It is prohibited because it constitutes gambling.

2. Futures Contracts: This type of contract gives the holder the right to buy or sell financial securities at a specific price, with delivery and settlement on a future date. It is prohibited due to involving the prohibited practice of "bayʿ al-kāliʾ bil-kāliʾ" (selling debt for debt) and gambling.

3. Oil Company Stocks: Investing in these is permissible if the conditions for trading stocks are met.

Experts in trading argue that gambling occurs if speculation is done without study or analysis, while speculation with study and analysis is not considered gambling.

Gambling from a technical perspective differs from gambling from an Islamic perspective. It is important for those issuing fatwas on stock markets and forex to understand the technical terms before issuing judgments. Additionally, traders should not hastily object to fatwas without understanding the terms and conditions in light of Islamic law.

From a technical perspective, gambling refers to speculation done without study or analysis. However, from an Islamic perspective, gambling refers to speculation on price movements (up or down) without actual ownership of the asset, and this is prohibited.

Fourth: Trading Gold and Silver

What is the ruling on trading gold and silver?

Investment in gold and silver can occur through the following methods:

1. Contracts for Difference (CFD): This tool allows speculation on price movements (up or down) without ownership of the asset. It is prohibited because it is considered gambling.

2. Futures Contracts: This type of contract gives the holder the right to buy or sell financial securities at a specific price, with delivery and settlement on a future date. It is prohibited due to involving the prohibited practice of "bayʿ al-kāliʾ bil-kāliʾ" (selling debt for debt) and gambling.

3. Options (Option): This contract grants the right to buy or sell certain financial instruments at a specified price within a certain period. It is prohibited because the subject of the contract is neither money nor benefit, but rather a right to buy or sell. These rights cannot be traded for value, and the transaction is considered gambling.

4. Direct Investment: This involves buying gold or silver and taking possession of it (i.e., physically receiving it) or appointing someone to buy and take possession on the investor's behalf, relying on stock exchange prices. This method is permissible as long as immediate possession of both the price and the gold or silver is achieved during the contract session.

 

Forex companies claim that the gold being bought or sold is held by foreign Forex companies. Is it permissible to trade gold based on this claim?

Gold is considered a commodity that requires immediate possession (Qabdh) at the time of the contract. The possession can either be through direct physical receipt by the buyer or their agent. It is not permissible to purchase gold with deferred possession, as this constitutes riba (usury).

When trading gold through Forex platforms, there is no actual possession of the gold. Instead, it is speculation on the price movements of gold (up or down). This type of trading involves riba (due to the lack of immediate possession) and Maysir (gambling), as there is no actual ownership of the gold being bought. Therefore, it is considered impermissible according to Islamic principles.

Fifth: Trading Indices

What is meant by an index?

An index is a tool used to measure the performance of financial assets in the stock market, such as stocks and bonds. It is a number that tracks the changes in the prices of these assets. Some well-known indices include the Dow Jones and NASDAQ indices.

Is trading indices permissible?

Trading indices is prohibited in Islam because they do not represent tangible assets that can be bought or sold. Instead, they are speculative instruments that bet on the movement of prices (up or down), which makes them a form of gambling (Maysir) and thus impermissible.

Sixth: Trading Stocks

What is the ruling on trading stocks?

Trading stocks is subject to five conditions:

1. The legitimacy of the company's purpose: It is not permissible to trade shares in companies that engage in prohibited activities, such as usury-based banks or alcohol companies.

2. The legitimacy of the company’s financial activities: The company must not engage in prohibited financial practices. However, if the company’s forbidden investments are minimal, it is permissible, but any unlawful earnings must be purified (by donating them to charity). This type of company is known as a "mixed company."

3. The trade must be done via spot contracts.

4. Avoid contracts for differences (CFDs).

5. Avoid using leverage.

6. Avoid short selling: Short selling involves borrowing stocks from a broker, selling them, and later repurchasing and returning them. This practice is forbidden because it involves selling something one does not own and includes an interest-based loan (usury).

 

Is stock trading on forex platforms permissible?

Stock trading must adhere to the five Islamic principles mentioned earlier. It is important to note that most forex platforms involve trading stocks through contracts for differences (CFDs), which is prohibited.

For stock trading to be permissible, it must involve actual ownership of the shares. This means the trader must acquire the stocks directly and take full ownership, rather than engaging in speculative trading through CFDs.

What does "mixed stocks" mean, and is it permissible to trade them?

Mixed stocks refer to shares of companies whose primary purpose is permissible (halal), but their financial activities involve some impermissible (haram) elements, such as investing in bonds or depositing money in conventional banks in exchange for interest.

Ruling of Islamic law on mixed stocks:

Contemporary scholars have differed on the ruling regarding mixed stocks. Many Islamic juristic bodies have ruled that trading in mixed stocks is prohibited. However, the Islamic Fiqh Council and some Shariah boards have allowed it under certain conditions, provided that the haram portion is purified (donated to charity) at the end of the financial period when profits are distributed.

Fiqh Council's decision on trading mixed stocks:

1. The total amount of borrowed or interest-bearing deposits should not exceed 25% of the company's book value.

2. Revenues or expenses arising from haram elements should not exceed 5% of the company's total revenue.

• Book value refers to the value of a company’s assets and liabilities in its financial books.

Shariah Standards (AAOIFI) ruling on mixed stocks:

1. The total amount of borrowed funds or interest-bearing deposits should not exceed 30% of the market value of the company's total shares.

2. The income derived from haram sources should not exceed 5% of the total company revenues.

• Market value is the value of a company in the stock market based on supply and demand.

Purification of profits from mixed stocks: If someone buys or sells mixed stocks before the end of the financial period and has not received any profits, there is no need to purify any income, as stated in the Shariah standards.

How to identify mixed stocks that are permissible for trading or investment:

1. Amman Stock Exchange: Companies such as Misak and Sanabel.

2. US Stocks: Companies like Al-Rajhi Financial, and platforms like Yaqeen and Filterna.

It is also important to avoid companies that support the Zionist entity, as they should be boycotted in solidarity with oppressed Palestinians. And all praise is due to Allah, The Lord of The worlds.