Is Forex Trading Halal?

Is Forex Trading Haram or Halal?

Forex trading is both halal and haram, depending on the intent and behaviour of the individual investor. Trading with a proper strategy and Islamic account is halal, whereas with a regular interest charging account and no system, it’s considered gambling and haram.

Learn how Muslims can ethically trade forex, the difference between halal and haram, and the best type of trading account to use.

Table of Contents

• Forex Trading Halal Meaning

• Forex Trading Halal Explained with Examples

• Pros and Cons of Forex Trading Halal

• What It Means for Retail Investors

Forex Trading Halal Meaning

Forex trading halal is exchanging currencies for-profit that abides by Islamic law and beliefs. Halal is the Arabic word for what permits as acceptable within Islamic law.[1] If something is not halal, it is forbidden and is haram.[2]

In most cases, Forex trading takes place through derivative contracts, where investors do not own the currencies but rather are speculating on price fluctuations with arrangements (a bit like betting on a football team or race car, but for currencies). This type of forex trading creates a grey area on its suitability within Islamic law.

Within Islam, gambling is forbidden. Therefore, derivatives trading, where investors do not own the underlying asset, may be against a Mulsim’s religious belief due to the nature of speculation.

Forex Trading Halal Explained with Examples

Within Islam, the risk or ‘Gharar’ is one of the main benchmarks to whether an activity is gambling (Maisir) or not. As gambling is a non-halal activity, the question of whether forex trading is halal depends on:

1. It’s gambling or an investment

2. There is interest charged

3. It’s productive to society

Is Forex Trading Gambling?

Interestingly, the prophet (PBUH) allowed certain forms of gambling, provided that the individual was participating in the activity. For example, horse riders were allowed to place bets on their skill against other horse riders in a race. But, on-lookers, we’re not allowed to place bets on the rider they think would win. Participation, to a degree, seems to hold weight to whether Islam views it as gambling or otherwise.[3]

Overcoming Interest Charges

Investors can use an Islamic forex account or a No riba forex account. Islamic forex accounts allow Islamic traders to trade, without interest, keeping their activity halal.

Brokers utilise the Musharakah (to share) Arrangement in Islam, meaning both parties will benefit from earnings and losses in trades. This way, each financial party will earn without going against the rule of ‘riba’.

No-riba forex accounts make interest-free trading possible. Therefore, things such as Margin trading, Day trading, Short selling, Derivatives, Forwards, Futures, Options and Swaps will all not be permitted.

Overnight rollovers mentioned before will not be allowed, but instead, an Islamic trader pays a fixed commission per trade. Commissions will vary greatly and be much larger than traditional forex trading accounts to compensate brokers for the loss of revenue on interest rate differentials.

Is Forex Trading Productive?

Sharia law states an activity that creates wealth from a non-productive activity may be seen as gambling and forbidden.[4] The notion of ‘non-productive activity’ leaves a lot to interpretation. A horse rider, who was allowed to wager on himself, was considered acceptable by the prophet (PBUH), as it was a productive skill necessary for war. For forex trading, this can also hold.

One belief is that forex trading is halal because it requires a skill level to compete against other traders, like a sport. The strategy, risk management (like stop losses) and approach are important factors to an individuals success and profitability. Due to the significant influence of skill, investors can reduce the risk (Gharar).

Alternatively, forex trading derivatives allow international businesses to hedge out their risk on imports and exports. Hedging is a productive activity that both support businesses and helps growth.

Pros and Cons of Forex Trading Halal

Forex trading in a halal way can have benefits and drawbacks for Muslims, depending on how they interpret their religious beliefs.

Pros Explained:

• Allows Muslim business owners to hedge out currency risk: Muslim business owners exposed to foreign currencies on their importing and exporting activity may suffer tremendous losses unless they hedge their currency risk using forex derivatives.

• Offers skilled investors an opportunity to capitalise on market movements: Investors who can predict market movements can use forex trading to monetise their skills.

Cons Explained:

• Potentially a form of gambling and a grey area in Sharia Law: Depending on the skill level of the investor, the risk attached to forex trading may sway it to a haram activity.

What It Means for Retail Investors

Islamic trading accounts allow investors to stick to the laws of their religion whilst simultaneously investing. In addition to this, following Sharia law provides the principle of economic justice. Therefore forex trading is halal, in certain circumstances.

To avoid excess risk, Muslim Investors should have a profitable forex trading strategy, like global macro trading, to ensure they’re always halal with their activity. Risk without any form of control once money has been invested, or has no value to society may fall into a haram activity.

Article Sources

1. Surianom Miskam, Norziah Othman, Dr. Nor’Adha Ab. Hamid, Syaripah Nazirah Syed Ager, Marliana Abdullah, Farah Mohd. Shahwahid, Norazla Abdul Wahab, Wawarah Saidpudin. "WAR 11 AN ANALYSIS OF THE DEFINITION OF HALAL: SHARI’AH VS STATUTES," Page 111. Accessed July 29, 2021

2. NADER AL JALLAD. "The concepts of al-halal and al-haram in the Arab-Muslim culture: a translational and lexicographical study," Page 77-86. Accessed July 29, 2021.

3. Al-Kafi, vol 1, page 391, Hadeeth # 06; “Al-Wafi” - Imam Ja’far as-Sadiq.

4. Hunt Janin and Andre Kahlmeyer. "Islamic Law: The Sharia from Muhammad's Time to the Present,". McFarlan & Company, Inc. 2007.