Shariah Ruling on Forex Trading

NOTE: It should be noted that the below answer is the English translation of the Fatwa issued by Jamia Uloom Islamia Allama Yusuf Banuri Town, Karachi, Pakistan.

Translated By: Mufti Umar Anwar Badakhshani

NOTE: It should be noted that the following answer is the English translation of the Fatwa issued by Jamia Uloom Islamia Allama Banuri Town, Karachi, Pakistan.

Question

There is an application called Forex Trading, in which online earning is done and profit or loss depends on the market. The bid is given online on which profit or loss is determined. I want to know what is the Shari’ah ruling regarding this? Is it permissible or forbidden to earn money like this?

Answer

Prior to the answer, it is important to give a brief introduction of Forex trading. The link of the websites is given below in the footnote from which this information is derived.

Short introduction about Forex trading

There are several types of Forex trading, some of which are as follows:

(1) Carry Trade

In short, it is to borrow currency at a lower interest rate and buy a higher interest rate currency instead. The buyer’s profit in this business is the difference between the rate of two currencies. This method is similar to the business of the banks and other financial institutions in which they take loans at low-interest rates and provide them to the people at higher rates and the difference between the two is their profit.

There are three types of participants in this business:

• (a) Different banks: Banks often do big deals, their transactions are heavily involved in currency fluctuations.

• (b) Various organizations: That invest people’s money and make profit for them.

• (c) Individual buyers: Who exchange currency for their consumption needs.

(2) Forex commodity trading

One form of trading on the Internet is that oil, various metals such as copper, iron, etc., and various commodities such as wheat, rice, etc. are also bought and sold on the same forum, usually with the same rules and regulations as that of forex currency. In exchange, a consumer can buy a large bulk of commodities with a small amount of capital. All these purchases are made through brokers or dealer, In this business, there is both spot and future trading. for example, a person opens his account with ten thousand rupees and buys a lot of crude oil or wheat for one lakh rupees with only ten thousand rupees as collateral.

After buying the lot, if the price of the oil or wheat goes up, the person gains, and sometimes he sells the lot before the due date, and if the price of the oil or wheat starts falling, the person will lose his money. This way the amount deposited by the person is deficient the broker will ask him to either deposit more or he will cancel his transaction. If he does not deposit more amount, the broker cancels the entire transaction. However, the transaction which is shown to be the property of the user is in fact against it and the ownership of the person is limited only to the amount deposited by him.

Jurisprudential ruling about Forex trading

• (1) The buying and selling of currency is called “Bay‘ as-sarf” (sale of money for money), in which the physical exchange must take place in one meeting whereas borrowing from one or both sides is illegal. Therefore, whether it is on spot or future trade, all such transactions in which the sale and purchase of currency is borrowed or in cash are invalid and neither or one of the parties occupies any right. The result is that such deals will be invalid and profits will not be Halal due to non-possession.

• (2) It is a well-established rule that a sale becomes void due to an erroneous condition. In the case of “Forex” trading, erroneous conditions are imposed, for example, in swaps (sale with the condition of Impeachment) the condition that after a certain period of time. The sale will be terminated, although it becomes mandatory after the sale is completed and the parties have no right to terminate the sale.

• (3) The options also give the buyer the right to terminate his sale without the consent of the other party. This is also an invalid condition because “Iqalah” (Impeachment) requires the consent of both the parties.

• (4) The future sale described above is illegal; As the sale must be immediate, buying, and selling at a future date is illegal.

• (5) One of the drawbacks of this business is “Selling before possession,” because seventy, eighty percent of people buy in this market only to make a profit by fluctuating the currency rate, not to acquire or possess the currency. So most buyers do not take possession of the currency and sell it further.

In addition to currency, the sale of metals and commodities, although not “Bay‘ as-sarf” (sale of money for money), and therefore does not require immediate possession, but it also includes selling before possession or buying and selling on a future date and other irregular conditions mentioned above.
Also, in this case, there is a deception on the part of the broker in the sale that the consumer considers the property as his property only by giving a pledge and also earns a profit from the increase in its price. There is a power to terminate the transaction, whereas according to Shari’a, the broker has no right or authority in the transaction after receiving the wages for his action, and if a person has bought something, he is now responsible for his profit and loss. He cannot cancel the transaction without the consent of the other party.

فإن باع فضةً بفضة أو ذهبًا بذهب لا یجوز إلا مثلاً بمثل (إلی قوله) ولابد من قبض العوضین قبل الافتراق”. (هدایة، کتاب الصرف)۔

Information about Forex is taken from the websites below:

• https://en.wikipedia.org/wiki/Foreign_exchange_market

• https://www.forex.com/uk/forex-video-tutorials.html

• https://www.learntotradethemarket.com/forex-university/introduction-what-is-forex-trading