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Foreign exchange (forex), known in Arabic as bai' al-sarf, refers to currency exchange transactions, whether involving the same currency or different currencies.
Forex trading involves the buying and selling of one country's currency against another and operates within the global money markets on a 24-hour basis.
In today's global era, the forex industry is dominated by large institutions such as banks, investment firms, and multinational corporations.
The forex market is open 24 hours a day, five days a week, and currencies are traded in pairs. It is considered one of the riskiest financial markets in the world, as even small fluctuations in exchange rates can lead to significant gains or losses for traders.
Read more about : Is Forex Trading Halal & Shariah Compliant?
Forex trading, also known as foreign exchange trading or FX trading, is the global market where currencies are bought and sold.
It is conducted with the aim of making a profit from fluctuations in exchange rates. Unlike the stock market, forex trading is decentralized—it operates through a global network of banks, financial institutions, and individual traders rather than a centralized exchange.
The forex market operates through a decentralized global network of banks, brokers, and financial institutions.
In each transaction, traders buy one currency while simultaneously selling another, aiming to profit from fluctuations in exchange rates.
Trading involves placing orders to buy or sell currencies at specified prices or current market rates.
In short, the forex market functions based on currency pairs, exchange rate movements, and a decentralized trading system.
The market where the currencies or the commodity are bought and sold at a market price with the immediate payment and delivery of the assets.
A market where currencies or commodities are bought and sold through standardized contracts at a predetermined price, with delivery set for a future date. These contracts are traded on regulated exchanges.
A market where contracts give the buyer the right, but not the obligation, to buy or sell currencies or commodities at a specific price before a certain date.
For more detail please check our article: Are Financial Derviatives Halal?
- Retail trading: refers to individual traders who use their own funds to trade in the market, typically through brokers or online platforms.
- Institutional trading: involves large entities such as banks and financial institutions that trade in high volumes using advanced strategies and resources.
Islam has outlined some important principles for various transactions, which should be taken into consideration when executing these transactions. The most common among them are:
i- Money is a medium of exchange, not an asset: This core Shariah financial principle distinguishes Islamic financial transactions from conventional ones.
From an Islamic perspective, money is considered a medium of exchange, not a commodity. Therefore, every transaction must be backed by a tangible asset or service.
ii- Islam prohibits the payment of interest: Once money is deemed as a medium of exchange not an intrinsic asset, this principle automatically prohibits the charge on money which is an interest.
iii- Prohibition of excessive gharar: Islam also emphasizes clarity and transparency in transactions. If there is any element of misinformation, the transaction becomes void or invalid.
iv- Rule of Sharing profit and loss: The concept of seeking only profit can lead a transaction toward usury.
According to Islamic principles, in the case of a loss, each party must bear the loss in proportion to their investment—just as profit is distributed based on a pre-agreed ratio.
v- Prohibition of gambling: Any transaction where the outcome is based on chance falls under the category of gambling, which is strictly prohibited from a Shariah perspective.
vi- Prohibition of supporting haram activities: Commercial activities should not support haram practices, such as investing in companies involved in the manufacture of alcohol.
vii- Commercial transaction should benefit a society: The transactions carried out between different parties should be societally beneficial rather than focused solely on self-enrichment.
In Islamic jurisprudence, various principles govern currency trading, as it falls under the category of bai al-sarf.
For more detail please read the article: Bay‘al-Sarf : Shariah Rules and Compliance in Currency Exchange
Therefore, the following conditions should be considered during the execution of forex trading:
i- Spot trading: Currencies should be traded on a spot basis, meaning both currencies must be exchanged with immediate possession at the current market rate. It makes the forex trading permissible from a Shariah perspective.
ii- Standardized and regulated contract: forex contracts are standardized properly regulated in most jurisdictions and have a transparent pricing and trading execution. These are halal and important term for the halal forex trading under the Shariah concept of Gharar.
iii- Risk control through liquidity: Forex is highly liquid, allowing quick entry and exit with minimal slippage. Although it involves leverage and risk, tools like stop-losses help manage that risk. Avoiding excessive risk is a core principle of Islamic finance.
iv- Societal benefit: forex trading is societally beneficial because it adds liquidity to the system. For more detail please refer to AAOIFI governance standard no 7
v- Legitimacy of the currency trading: Forex trading is considered legitimate as it involves legal tender whose value fluctuates over time, distinguishing it from gambling activities.
i- Interest involvement: Forex trading may involve interest, which is the case with non-Islamic forex accounts that include interest-based swap payments on trades.
ii- Lack of physical possession: Forex trading does not involve the underlying exchange of goods or services. In Islamic finance, money is considered a medium of exchange, and halal transactions require the exchange of tangible goods or services.
iii- Pure speculation: Islamic finance principles forbid the speculation. Some prominent scholar argues that forex trading is pure speculation which is haram by itself.
An Islamic forex account, also known as a swap-free account, is designed in line with Shariah principles, eliminating factors that make forex trading impermissible from a Shariah perspective, such as riba (interest), gharar (excessive uncertainty), and maysir (gambling).
The Islamic forex account removes the swap fee and replaces it with alternatives to ensure Shariah compliance.
The best Islamic forex brokers substitute swap fees with alternative charges, such as a fixed fee (which is considered a halal service fee rather than interest) or offer a swap-free period for a limited duration.
Different types of Islamic forex accounts are:
1- Standard Islamic Account.
2- Mini/Micro Islamic Account.
3- VIP/professional Islamic Account.
References:
Ahmad, A. A., & Sobri, N. A. (2022). Individual Forex Trading Online: Shariah Issues. International Journal of Academic Reserach in Economics and Management Sciences, 11(3).
Is Forex Trading Halal or Haram Under Islamic Law in Islam?
Disclamer:
This post is for educational purposes only, and does not constitute investment advice or a solicitation to take any financial action. It should not be relied upon when making investment or financing decisions.
