At the risk of stating the obvious, below is my opinion on: “Islamic Forex Accounts: Are they really Halal?” I try to provide an educated opinion on this matter but it’s up to you to determine what makes sense for you and what doesn’t. Ultimately, Allah knows best.
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 from me 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.
When starting a business, the entrepreneur exposes their money to risks that it previously was not exposed to; they can now lose their money in ways that were previously not a possibility before starting their business.
In their pursuit to create value, they have 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 creation happens as a necessary byproduct of attempting to create and deliver value, this risk creating activity is permissible in Islam.
The strong correlation between value creation and risk-taking is implicitly recognized in Islamic jurisprudence with the maxim:
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.
In other words, gambling creates risk that cannot be justified by any prospects of creating value.
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 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 where they only accept Canadian dollars. 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 noone is going to object to this or argue that it is impermissible.
If you think that dates are underpriced and you decide to buy a bunch of dates in hopes that you are right and their prices eventually rise then you are engaged in entirely legitimate trade.
Similarly, if you buy the Japanese Yen because you think it is underpriced against the U.S. dollar, and you plan on holding the Japanese Yen until it appreciates against the dollar so you can make a profit, this is trade and there is nothing wrong with this.
In the aforementioned examples of trade, the seller of dates transferred their risk of date ownership to the buyer of their dates.
Similarly, the seller of Japanese Yen for U.S. dollars transferred their risk of Yen ownership to the buyer and assumed the risk of U.S. dollar ownership instead.
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.
Keep in mind this is 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 will give me a dollar.”
In this later case I am not transferring risk, I am creating risk.
Everyone who owned U.S. dollars still owns the same amount of dollars and bears the same risks of ownership, everyone who owned Japanese Yen still owns the same amount of Yen and bears the same risks of ownership.
When I made the bet on the U.S. dollar/Japanese Yen exchange rate, 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.
And for what? What value creating prospects result from my bet which can justify my creation of risk?
Big goose egg.
This creation of risk with no justifiable prospects of 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 noone 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, then 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.
- Everyone else on the Island would experience zero affect from this change in exchange rates.
- However, 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 potentially be massive.
- One hundred people on the Island are now 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.
So that’s the first Haram element of Forex trading; the fact that you are creating risk whenever you speculate on price without taking material possession of the currency you are speculating on.
Aside from the matter of taking material possession of the currency, 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 money that you borrowed.
Is it haram to borrow money and use it in trade? No, it is not. However, it is haram to borrow money and pay the lender any type of contractually required benefit. This is Riba.
Even if the broker claims that they are offering you the loan with zero interest, they are still benefitting from that loan they are offering you. This is evidenced in the fact that they will not allow you to take the borrowed money and use it as you please. You’re only allowed to use the money they lend you to trade in currencies on their platform because they earn commissions from your trading and other hidden fees. 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
When the Forex broker lends you money they are doing so with the condition that you use it to place trades on their platform. This is categorically Haram because it involves implicit riba.
In order to speculate on the price of a currency in a Halal way:
- 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.
- You cannot purchase the currency or any part of it with money that you borrowed with the condition that you use the borrowed money for currency trading.
Accordingly, I find that all Forex accounts today, “Islamic” or not, are completely unIslamic and Haram and should be avoided by the observing Muslim.
Especially since it is now reported that less than 5% of all foreign exchange transactions facilitate a real business transaction.(2)
Final Thoughts on Forex Trading: Halal or Haram?
To summarize my position, I see no material differences between modern Forex trading 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.
- Wikipedia, Foreign Exchange Market, https://en.wikipedia.org/wiki/Foreign_exchange_market
- Forex Trading 2020: Beginner’s Guide, Norman Davison, Page 9
- Forex Trading 2020: Beginner’s Guide, Norman Davison, Page 61