(F 361) Is trading in the currency market known as the Forex market permissible (ḥalāl) or forbidden (ḥarām)? This market involves buying and selling global currencies, commodities, or metals online through a broker who acts as an intermediary between the trader and global banks. Examples include trading dollars for pounds, dollars for gold, or dollars for oil, among others. This market also relies on analysis and news to predict the movement of currencies, whether upward or downward, and trades are executed based on these predictions, such as using the MetaTrader application.

First: Defining the Forex System and How It Works:

Forex is a market for trading foreign currencies where traders can buy and sell currencies. It is considered the largest financial market in the world in terms of daily trading volume. People trade in the Forex market to profit from the differences in currency prices. The word “FOREX” is an abbreviation for “Foreign Exchange.”

Key characteristics of this system include:

  1. The system allows traders to trade with amounts greater than their initial capital, increasing both potential profits and risks.
  2. The main currencies in this system include the US dollar (USD), Euro (EUR), Japanese yen (JPY), British pound (GBP), among others.
  3. The Forex market operates 24 hours a day, five days a week, making it flexible for investors worldwide.
  4. Traders rely on technical and fundamental analysis to make trading decisions.

Second: The Forex System Has Several Forms:

The Most Common is the Margin Trading Method.

This method involves the client depositing a sum of foreign currency with a broker (the bank or the trading entity) in the account for the transaction they wish to complete. The broker, in turn, adds a sum of currency to increase the amount deposited in the client’s account. The purpose of increasing the deposit is to prevent the total account balance from falling into the negative in a fast-moving and highly volatile market, where the daily trading volume in the Forex market reaches $3 trillion.

Third: Elements of the Trading Process in the Forex System:

  1. The Investor: The person who invests their money with the intention of making a profit.
  2. The Broker: The intermediary who conducts trading on behalf of the investor.
  3. The Seller: The one who sells their currency.
  4. The Financier: The entity that increases the investor’s account balance.

The relationship between the investor and the broker is one of Sleeping Partnership (Muḍārabah), where the broker trades with the investor’s money to make a profit and shares a percentage of that profit. The relationship between the investor and the financier is a complex one, involving elements of both a loan (Qarḍ) and an agency (Wakālah). The relationship between the investor and the broker, on one side, and the seller, on the other, is a sale relationship. Therefore, it is essential to clearly define these relationships to determine the Islamic legal ruling on the matter.

Fourth: Recent scholars Have Differed on the Ruling of Trading in the Forex System, and the Difference Stems from How the Transaction is Perceived and Described.

In summary, some view Forex trading as a form of brokerage (Samsarah) that is more developed than the traditional form. Although it involves several stages, each stage is permissible on its own. These stages include:

  • The brokerage contract, which is permissible under its well-known conditions, falling under the categories of hiring (᾽Ijārah) or remuneration (Ju῾ālah) in sales.
  • The financing process, which is also permissible under certain conditions.
  • The warranty process through pawning.
  • The sleeping partnership process.

When these steps are correctly depicted in terms of Forex trading, it becomes permissible if the conditions of each step are adhered to.

On the other hand, some argue that this segmented depiction is incorrect and that Forex trading, despite its modern appearance, involves known transactions in Islamic jurisprudence that are prohibited. Essentially, it is a combination of a sale and a loan, where the sale involves buying and selling on behalf of the client, and the loan involves increasing the client’s money through lending. This practice is prohibited as the Prophet Muḥammad (peace be upon him) said: “It is not permissible to combine a loan and a sale, nor two conditions in one sale, nor to profit from what you do not guarantee, nor to sell what is not in your possession.”

The summary of our opinion:

There is a difference between the Forex system and the Islamic exchange system. Even if we overlook some points of contention regarding beneficial financing (al-tamwīl bi-al-manfa῾ah), which may not fall under prohibited usury, the Forex system remains forbidden for the following reasons:

  1. The high level of uncertainty (Gharar) due to global market volatility.
  2. The unique form of harm to the investor, as the nature of the sleeping partnership contract exposes the investor to the risk of loss while denying them control over their capital.
  3. The practical resemblance to gambling and excessive risk in such transactions, as Muslims are prohibited from engaging in wasting their money.
  4. The potential harm these transactions pose to the economies of developing countries through manipulation of currency prices to the benefit of major key figures, threatening the local economies of many Muslim nations. The rule here is that “there should be no harm or reciprocating harm,” and “Help one another in righteousness and piety, but do not help one another in sin and transgression.”

At this stage, we do not see the permissibility of Forex trading in its described form. It may suffice to limit transactions to currency exchange alone, which excludes the element of financing and trading in non-existent assets.

Fatwā issued by Dr. Khālid Naṣr