Wednesday, September 01, 2010

Guest Post: Is foreign-exchange trading halal?

There has been much debate in Islam concerning whether trading in the spot foreign-exchange market is halal or haram. Islamic law is fairly straight forward concerning what is acceptable in regards to economic activity and what is not, but still many Shari’ah scholars have built formidable cases on both sides of this topic. Unfortunately, there is no crystal clear conclusion on this heated topic. In this article, we will break down each side of the debate and discuss where the concerns are on both sides.

First of all, Islamic law forbids a person to sell that which he does not possess. Many scholars believe that trading in the FX Market is not permissible under Islamic law because it involves buying or selling a currency which one does not actually own. In the spot FX Market a trader generally trades on leverage, meaning he may control a $100,000 position in the market with just $1,000 in his account. Thus, he is essentially making transactions with money that is not his, and according to the strict letter of the Islamic law, many scholars believe it is not right.

However, other scholars argue that the scriptural context of this law is referring to physical goods such as livestock. Thus, if a person were to find a lost camel, and he tried to sell it without notifying the owner, this would be haram, or against Islamic law. But these scholars argue that dealing with currencies is not the same. They argue that a trader is not really selling something they do not have as in the case of the lost camel.

Second of all, Islamic law forbids entering into an agreement in which an additional amount is added to a loan, which is called “paying fees for delaying the deal.” Unfortunately, this is exactly what happens when an FX trader holds a trade overnight. He is charged a small fee by the broker, which essentially involves paying fees for delaying the deal. Scholars believe this aspect of spot FX trading makes FX trading haram, but many retail brokers have adapted to Islamic law and instead of charging traders an overnight swap fee, they are simply adding an additional “administration fee” on to each contract a traders trades. Scholars who believe FX trading is halal believe that this move by forex brokers breaks down the haram argument surrounding this specific issue.

Third of all, Islamic law forbids usury and taking advantage of another person in economic dealings. Many scholars are concerned that spot FX trading in a forex account can be labeled as such due to the fact it is a zero-sum game. This means that when a trader closes out for a winning trade, the only way he has profit is by another trader having a loss. In Islamic law this is seen as immoral and not to be done; therefore, many scholars see this point as haram. However, the other side of the argument is that not every trader on the other side of your trade is losing money. For example, if you a trader is in a long position and needs to close it out by executing a short position, the trader that is short may be in a lot of profit as well, but he may just have a longer-term or shorter-term position he is managing. Thus, it is not necessarily true that an FX trader only makes money when another trader is losing money. Thus, many scholars argue that this point is further evidence that FX trading is in fact halal.

As you can see, the debate whether FX trading is halal or haram is very debatable. Very respected scholars in Islam are pitted on both sides of this argument.

This guest post was contributed by Bryan Sayers. He is the editor of Forex Fraud, a site is designed to help protect investors from forex scam, commodity fraud, and other investment scams.

Ed. Note: The views expressed in this post are the author's own and not those of Sharing Risk.


Anonymous said...

The example of the lost camel shows a misunderstanding of what is actually prohibited under Sharia regarding the sale of something you don't own - which is not exactly the same as selling something that is not yours. Selling a lost camel, or selling something that was stolen, is selling something you own, even if the ownership is not legal. Selling something you don't own is selling something that is not available and under your control, like selling fish in the water, selling next year's crop, or selling something you intend to look for but you haven't found yet.

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Ed said...

As far as my understanding of what Sharia law goes, Forex as generally offered by most brokers is not halal. This is due to the fact that brokers charge overnight financing costs which is a form of interest, thus making FX not strictly compatible with Sharia law. But there are a number of ways around this, so it can be brought into line with what is required from Sharia.