At the risk of stating the obvious, below is my opinion on: “Forex Trading: Halal or Haram?” 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
As far as what is permissible vs. what is prohibited in Islam, there are two types of risk:
The first type is the risk that arises as an unavoidable byproduct of attempting to create value.
E.g. The risk associated with starting a business.
Let’s say I have money sitting at home. I decide rather than have this money sitting at home doing nothing, I’m going to use this money to start a business.
By starting a business, I’ve exposed my money to risks that it previously was not exposed to; I can now lose my money in ways that were previously not a possibility when my money was sitting at home.
In my pursuit to create value, I 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.
Using your wealth for the purpose of producing value for others exposes it to risks that it would otherwise not be exposed to.
When risk creation happens as a necessary byproduct of attempting to create and deliver value, this risk creation is Halal. Accordingly, it is Halal to assume and transact in this type of risk.
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 bore the risk of loss.
The second type of risk is the risk that is created without any chance of creating value.
This is the type of risk that is created when gambling.
Going back to our example, let’s say instead of opening a business I decided to go to a casino to gamble with my money. I bet the money I have at the roulette wheel. Like when I opened a business, I have now exposed my money to risk that it was previously unexposed to. However, unlike opening a business, when I’m gambling in the casino, I have zero prospects of creating any value for anyone; there is zero usefulness in the act of gambling which I have decided to engage in.
Accordingly, the risk I subjected my wealth to while in the casino cannot be justified by an amount of value I am attempting to create. Therefore, this risk is Haram [prohibited in Islam] to assume or to transact in.
Placing wealth at risk in hopes of gain in an activity with no value-producing prospects is known in Islam as Al-Maisir.
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.[Quran 2:219]
For more on Maisir and to understand what Maisir is, refer to my article (two questions to identify Maisir).
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.
There are three primary reasons why one may want to make a transaction in the Forex market:
1. Exchange one currency for another for practical needs.
Example, I have U.S. dollars and I need to make a purchase in Canada where they only accept Canadian dollars. Accordingly, 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 on Bitcoin.
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 will buy $300,000 U.S. Dollars. There is a risk that 3 months from now the exchange rate will have changed 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.
So I would like to offload this risk that I have 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 their permissibility, 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.
I’m assuming most of those searching for the answer to whether Forex trading is Halal or Haram? fall into this category.
The commentary I found related to this matter seemed to focus on technical issues such as how long it takes for a currency transaction to settle, whether interest was being charged, swap fees and the like.
I really don’t think there is much need to go into that type of detail with regards to answering whether speculating on price in forex markets in Halal or Haram.
I think there is a much larger issue at play here that needs to be addressed before one gets caught up in the details.
If I’m at a restaurant and I have a hunch that the meat I am being served is Pork, I would focus on figuring out whether or not it was in fact Pork before I bothered with asking how the animal was slaughtered and whether or not it was slaughtered in a Halal way.
The value of Forex speculation
Recall what I mentioned earlier regarding the two types of risk.
Halal risk which is created in the natural course of attempting to create value.
Haram risk wherein wealth is subjected to the danger of loss with no prospects of creating any needed value.
In the case of Forex, when you are placing your money in the forex market, which of the two types of risks are you subjecting your money to?
Are you producing any value for anyone? Are you producing a product or a service with any practical usefulness?
To me, the answer is quite clear, and it is plainly, no.
You may argue that by speculating in the Forex market one can enhance the market’s liquidity for others who may have legitimate reasons to be in the Forex market. While it’s hard to tell how much of the Forex market trading volume is due to speculation vs. how much comes from hedging and currency exchange, in a market with a 5 Trillion-dollar daily average trading volume, I am confident that if every speculator in the Forex market ceased to speculate and pulled their money out of the market entirely it would still be liquid enough for all practical purposes.
Frankly, I would be hard-pressed to come up with any meaningful differences between trading Forex and betting your money at a roulette wheel that is controlled by currency prices.
Now one may argue that they have a trading system that reduces their risk substantially and that their Forex trading system has taken most of the risk out of their trading.
My first reaction to this claim is skepticism.
The vast majority of Forex traders are net losers of money. If there was such a system, it’s unlikely that the statistics related to trading Forex would be so bleak.
Second, I would point out that nowhere in my argument against speculating in Forex did I refer to the amount of risk that was being taken. Rather, I focused on the type of risk that was being taken, namely, a risk that was not necessary to create any needed value.
Subjecting your wealth to any amount of risk in a valueless activity in the hopes of earning a profit is the very definition of gambling (Arabic: Maisir).
So, for instance, if a roulette wheel had a 90% chance of stopping on red, it would still be Haram to gamble at that roulette wheel because ultimately this is a zero-sum game. If someone wins a certain amount, there must be a counterparty that has lost that much.
In fact, I would argue that from the evidence and the avalanche of Forex training ads I received while researching this topic, there are only two ways to earn money reliably from Forex trading: Either become a Forex broker or sell Forex training courses to others!
Final Thoughts on Forex Trading: Halal or Haram?
To summarize my position, I can see very little difference between Forex trading for the purpose of speculating on currency prices and outright gambling. Accordingly, my advice is to stay away.
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.
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.