First, a primer on risk:

Risk relates to the possibility of loss. 

Risk is either:

Created. E.g. when a person decides to open a business

Transferred. E.g. when asset ownership changes hands. If I sell you a car I have now transferred the risk associated with that car’s ownership to you.

Reduced. E.g. When a sprinkler system is installed in a property.

As it relates to creating risk, Islam makes a distinction between two types of risk creating activities:

The first type are:

Activities that create risk as an unavoidable byproduct of attempting to create value.

E.g. the risk created when starting a business.

After starting a business, the entrepreneur can lose their money in ways that were previously not a possibility before starting the business.

In their pursuit to create value, the entrepreneur has created risk that didn’t exist previously.

Bear in mind that whenever I use the word “value”, I am referring to usefulness. I am not referring to money. Money is not useful in and of itself, rather, it is a means to facilitate value-producing activities.

When risk is created as an unavoidable byproduct of attempting to create value, this risk creation is permissible in Islam. 

The strong correlation between value creation and risk-taking is implicitly recognized in Islamic jurisprudence with the maxim:

الغنم بالغرم

The right to profit belongs to whosoever bears the risk of loss.

The second type of risk creating activities are:

Activities that create risk without any prospects of creating value.

An example of this type of activity is gambling.

Gamblers expose their money to the possibility of loss without any prospects for creating any value for anyone.

Therefore, the risk creating activity of gambling is Haram [prohibited in Islam] and is known in Islam as Al-Maisir.

About Al-Maisir, Allah SWT says:

They ask you [O’ Muhammad] concerning alcohol and Maisir, Say: they contain great sin and benefit for people, but their sin is greater than their benefit. And they ask you what should they give to charity? Say: that which is more than your need, and so Allah shows you wisdom so that maybe you will think.

The Holy QURAN 2:219

For more on Maisir and to understand what Maisir is, refer to my article (two questions to identify Maisir).

After this primer on risk, let’s talk about Forex trading.

Forex Trading

“Forex” is short for “Foreign Exchange” and represents the global market for currency exchange.

The global foreign exchange market accounts for over $5 trillion U.S. dollars worth of average daily trading volume, making it the largest market in the world.(1)

There are three primary reasons why one may want to transact in the Forex market:

1. Exchange one currency for another.

Example, I have U.S. dollars and I need to make a purchase in Canada. Consequently, I need to exchange some of the U.S. dollars I have for Canadian ones.

This is obviously a totally legitimate need.

The prophet peace be upon him said that if the currencies are different trade as you wish so long as the transaction happens hand-to-hand [the change of possession must happen at the same time in order to avoid loans disguised as trades].

For more on this topic refer to my article: “Bitcoin: Halal or Haram?”

2. To hedge currency risk.

Example, I operate a multinational corporation based in the United States. A Turkish customer is scheduled to pay me 1 million Turkish Liras 3 months from now.

Today, those 1 million Turkish Liras are worth $300,000 U.S. Dollars.

There is a risk that 3 months from now the exchange rate will change unfavorably for me and the 1 million Turkish Liras that I’m paid will be worth a lot less in U.S. Dollars than they are today.

Accordingly, I would like to offload the Turkish Lira’s depreciation risk to another party that is better able and willing to assume this risk.

There are several products that can help me do this in the Forex market.

Without going into the specifics of these products and how they work, the need to hedge against currency risk is a totally legitimate need which I find no objections to in either the Quran or Sunnah.

If you have any substantive objections to currency hedging I’m more than willing to hear them but I have found no credible arguments for why Islam would prevent the Muslim business person from reducing their exposure to currency risk.

3. Speculating on currency prices in hopes of making a profit.

If you buy an asset because you think it is underpriced no one is going to object to this or argue that it is impermissible.

If you think dates are underpriced and you decide to buy dates in hopes their prices eventually correct, this is an entirely legitimate trade.

Similarly, if you buy the Japanese Yen in hopes of making a profit because you think it is underpriced against the U.S. dollar, this is trade and there is nothing wrong with this.

In the aforementioned examples of trade, the seller transferred their risk of ownership to the buyer.

So from an overall market perspective, risk was neither created nor reduced it was transferred from one party to another. This is trade.

This is Halal.

However, the examples described are very different from the case where I say: “Today the U.S. dollar is worth 106 Japanese Yen, if it goes up to 110 Yen I will give you a dollar and if it goes down to 102 Yen you give me a dollar.”

Under this arrangement, I didn’t assume anyone’s risk or transfer any risk from me to someone else, I created risk for myself and my counterparty out of thin air. 

Therefore, this arrangement doesn’t transfer risk, it creates it.

And for what? What value creating prospects result from my bet which can justify my creation of risk?

Absolutely nothing.

Big goose egg.

Accordingly, it isn’t trade. It is gambling.

The creation of risk with no justifiable prospects for creating any value is rather dangerous and can potentially lead to the exacerbation of economic crises. 

Let me illustrate why this is with an example:

  • Imagine an island nation consisting of 1000 people.
  • On the Island, there is a single unit of currency called the “Islander”.
  • The rest of the Island’s economic activity is done using other currencies.
  • Today, the Islander is worth 100 U.S. dollars.
  • If no one is betting on the price of the Islander and it falls from being worth 100 U.S. dollars to being worth only 10 U.S. dollars the next day, the only person affected by this depreciation is the person who has possession of the Islander and only if they need to trade their Islander for U.S. dollars.
  • On the other hand, if 100 people on the Island, were betting the price of the Islander was going to go up against the dollar, then the affects of the Islander’s depreciation could be massive.
  • One hundred people on the Island would be poorer because of this change in exchange rates which should have had a rather limited practical impact on their economy. Instead, the economy of the entire island is now in crisis because 1/10th of its population lost money when the exchange rate changed.
  • This is what happens when market participants engage in risk creation that is not tied to any prospect of value creation. This risk creation was made possible because to bet on the price of the Islander you didn’t have to have possession of the Islander.
  • If possession of the Islander was a requirement, then only one person at a time would be able to speculate on its price.

Now, what happens with Forex trading? When you’re trading Forex do you gain ownership or possession of the currency you’re speculating on?

If you’re long the Euro against the dollar, that is, you’re betting that the Euro is going to appreciate in price compared to the U.S. dollar, do you take possession of Euros? Can you withdraw Euro’s from your account?

No, you can’t.

You are like the 100 people on the Island that were betting on the price of the Islander without taking possession of it. You are creating risk in the market with no prospects of creating any value which can justify your risk creation. This is gambling and is absolutely Haram (prohibited in Islam).

Don’t confuse yourself into thinking that gambling has to be an activity with outcomes that are purely based on luck. There is a lot of skill to playing poker but it’s still gambling. There is a lot of skill in dart throwing but if you bet someone money that you’re going to hit the bulls-eye you are gambling.

Gambling has to do with the creation of risk with no prospects of creating value that can justify the risk creation.

Therefore, gambling is the first Haram element of Forex trading.

Riba

Aside from gambling, the other matter that arises when analyzing Forex trading is the issue of Riba.

Any loan which involves a contractual requirement for the lender to benefit from the loan involves riba.  

Riba arises in forex trading in two ways:

First, margin trading, which basically means that you are trading with borrowed money.

Is it haram to borrow money and use it in trade? No, it is not.

However, it is haram to borrow money with the condition that the money is used to purchase something from the lender. This is because the loan in this case will be bringing about a contractually guaranteed benefit to the lender.

Regardless of whether the broker claims they are offering the loan at zero interest.

If you’re only allowed to use the borrowed money on the broker’s platform, this is riba.

This is why the prophet peace be upon him said:

“It is impermissible to lend on the condition of a sale …”

Sunan an-Nasa’i 4611

Summary

In order to speculate on the price of a currency in a Halal way:

  1. You have to have material possession of the currency. This means you have complete control over it; you can withdraw it from your account at will and use it for whatever you want, whenever you want.
  2. You cannot purchase the currency or any part of it with money you borrowed from the broker with the condition that you use the borrowed money to make purchases from the broker. 

I know of no Forex trading platforms where the previous two conditions are met.

Final Thoughts on Forex Trading: Halal or Haram?

I see no material differences between Forex trading for the purposes of speculating on price and gambling.

I know what I’ve said may be hard to hear for someone who has already committed time, money and effort in the way of developing Forex trading knowledge and skills (to the extent that acquiring such skills is even possible). However, I would argue that although painful at first, transitioning to a career with a more worthwhile pursuit will be much more fulfilling and likely more profitable as well. 

Keep in mind 95% of Forex traders are net losers of money. (3) The only people making money reliably in this field are trading platforms that take commissions from the trades you place and people who sell courses in Forex trading.

If it was up to me and I was king of the world I would impose a 100% tax on profits in Forex trading so that all speculators are driven out of the market and all who remain are actors that have practical needs for currency exchange and price hedging.

Sources:

  1. Wikipedia, Foreign Exchange Market, https://en.wikipedia.org/wiki/Foreign_exchange_market
  2. Forex Trading 2020: Beginner’s Guide, Norman Davison, Page 9
  3. Forex Trading 2020: Beginner’s Guide, Norman Davison, Page 61