Question
Salam aleykum w rahmatullah taala barakatuh
Bismillahi rahmani rahim.
Salat w salam ala ashrafil mursalin sayidina w mawlana w habibina Muhammed salallahu alayhi w salam.
I would like to know what is going on with Forex trading via the FTMO propfirm. They have recently changed their liquidity provision and are directly linked to the financial market. A confirmation email was sent by me and they claim to have DMA (Direct Market Access), so a direct hand to hand exchange.
I find it difficult to discern the hukm regarding the trading ban, as there is a grey area for me and perhaps my nafs also plays a part in this misunderstanding.
I understand that it is forbidden to trade commodities in CFDs as we do not have ownership of the asset. However, with Forex, we do not actually own the paper money, but its value. We buy and sell the value of the asset at a defined price. When I buy something online it is not the paper money that I am trading, but the value of that money. I live in France so my local currency is the Euro. When I buy on a foreign site, it is the value of the Euro against the current value of the currency of the site on which I buy my item. Why is it permissible for me to exchange on the internet the value of money and not the money itself, but forbidden to exchange the value of one currency for another (e.g. GBP/USD) with a buyer in front when I am selling or a seller when I am looking to buy, wa Allahu aalem.
I hope I have been clear in what I have said, may Allah enlighten you and make your work easier.
BarakAllahufikum
Salam aleykum w rahmatullahi w barakatuh
Answer
In Islam exchanging currencies is permissible whereas engaging in interest-based transactions (riba) is not. When exchanging currencies there is a very high chance of falling into an interest-based transaction or other shar῾i prohibition if the exchange of currencies is not done correctly. For this reason, exchange of currencies is tightly regulated by shari῾ah.
In order for Forex to be permissible, there are certain conditions that need to be met. There are trading platforms which claim to run according to these conditions, and therefore be shari῾ah compliant, however, upon investigation many times these platforms do not meet all the necessary requirements. Hence, one must be careful in this regard and not take every company which claims to be shari῾ah compliant as shari῾ah compliant.
Delivery and possession
One common issue with forex is that it is necessary for at least one of the currencies to be delivered on spot. Being delivered on spot does not mean that the amount just has to be recorded in one’s account, rather, there must be actual possession whereby the traders can withdraw the currency which they have exchanged. Usually, it is not possible to withdraw the traded currency immediately, which indicates that the exchange is not in reality on spot according to shari῾ah.[1]
At times, a trader cannot withdraw the purchased currency at all, rather, if they wish to withdraw, they are required to exchange the purchased currency, with the currency deposited into the account. Again, this indicates that complete possession of the purchased currency does not take place as the trader cannot take physical possession of that currency.
Some non-shari῾ah compliant methods of trade
Below are methods of trade which have been deemed impermissible:
Contract for differences (CFD)
Contract for differences is not allowed. In CFD’s the trader and broker make an agreement to pay out according to how the value of a particular currency will move. If it moves in favour of the trader, the broker will have to pay out and if vice versa then the trader will have to pay out. No currency is actually bought, sold or delivered. This transaction is based purely on speculation. As there is no shari῾ah compliant commodity being traded, it will not be permissible.
Futures
A currency futures contract is an agreement to buy or sell a currency at a specified price on a future date. As it is prohibited to engage in a transaction where both counter exchanges are deferred such as is the case with future contracts then the transaction will not be permissible. Possession on at least one side must take place at the time of contract for the transaction to be valid.
Spread betting
In spread betting the investor bets according to how they think the price of an instrument will move. For example, the investor may bet that the price of an instrument is going to fall. The profit and loss will be determined according to how the price moved and whether it was according to the chosen direction of the investor. Spread betting is also impermissible as there is no shari῾ah compliant commodity being traded, rather it is a speculative trade and therefore a form of gambling similar to CFD’s.
Options
An option is where the holder of the option is given the right but not obliged to engage in a specific transaction. For example, a trader will pay to have the right to purchase a particular currency at a specified price on a specified date. On the arrival of that date the holder may either purchase the currency according to the terms agreed or may choose not to purchase. Options are also not permissible as essentially the holder is purchasing a ‘choice’ which is not a shari῾ah compliant subject of sale.
Speculative spot forex
This is an agreement to exchange one currency for another, however, delivery of the currency does not actually take place. Again, as it is mere speculation and there is no actual trading of real currency it is not permissible.
[1] الدر المختار وحاشية ابن عابدين (رد المحتار) (5/ 147)
(لَا) يَصِحُّ اتِّفَاقًا كَكِتَابَةٍ وَإِجَارَةٍ وَ (بَيْعِ مَنْقُولٍ) قَبْلَ قَبْضِهِ وَلَوْ مِنْ بَائِعِهِ كَمَا سَيَجِيءُ (بِخِلَافِ) عِتْقِهِ وَتَدْبِيرِهِ وَ (هِبَتِهِ وَالتَّصَدُّقِ بِهِ وَإِقْرَاضِهِ) وَرَهْنِهِ وَإِعَارَتِهِ (مِنْ غَيْرِ بَائِعِهِ) فَإِنَّهُ صَحِيحٌ (عَلَى) قَوْلِ مُحَمَّدٍ وَهُوَ (الْأَصَحُّ) وَالْأَصْلُ أَنَّ كُلَّ عِوَضٍ مُلِكَ بِعَقْدٍ يَنْفَسِخُ بِهَلَاكِهِ قَبْلَ قَبْضِهِ فَالتَّصَرُّفُ فِيهِ غَيْرُ جَائِزٍ وَمَا لَا فَجَائِزٌ عَيْنِيٌّ
This is according to the understanding advocated by Mufti Taqī Usmānī in Fiqh al-Buyū’ (Vol 2 Pg. 733), Buḥūth fī Qaḍāyā Fiqhiyyah Mu῾āsarah 1:163. According to AAOIFI’s Shariah Standard (1): Trading in Currencies, possession on both sides must take place. This is based on AAOIFI considering the trading of fiat currencies to be the same as trading in gold and silver.
الدر المختار وحاشية ابن عابدين (رد المحتار) (5/ 179)
(بَاعَ فُلُوسًا بِمِثْلِهَا أَوْ بِدَرَاهِمَ أَوْ بِدَنَانِيرَ فَإِنْ نَقَدَ أَحَدُهُمَا جَازَ) وَإِنْ تَفَرَّقَا بِلَا قَبْضِ أَحَدِهِمَا لَمْ يَجُزْ لِمَا مَرَّ (كَمَا جَازَ بَيْعُ لَحْمٍ بِحَيَوَانٍ وَلَوْ مِنْ جِنْسِهِ) لِأَنَّهُ بَيْعُ الْمَوْزُونِ بِمَا لَيْسَ بِمَوْزُونٍ
For the shar‘ī status of modern forms of Forex trading, you may refer to the following external research paper:
https://shariyah.com/wp-content/uploads/2018/12/Forex-Paper-with-Changes-1.pdf
Answered by:
Ifta Research Fellow
Checked & Approved by:
Mufti Abdul Rahman Mangera
Mufti Zubair Patel