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Is Forex Trading allowed in Islam?

Amna Anwaar  .  Tuesday November 07, 2017
 . Knowledge

What is Forex Trading?

Forex trading is, in the simplest of terms, currency trading. It is a globally decentralized market where businesses, investors, banks, governments and traders come to exchange currencies. Being the largest and the most liquid market in today’s world, forex trading has reached stupendous levels of popularity, resulting in an average daily turnover exceeding approximately $5 trillion.

What is the ruling on Forex Trading in Islam?

Forex trading is one of the most debated topics under Islamic jurisprudence. In order to reach a general consensus, various ordinances and fatwa’s (Islamic rulings which are issued by a universally recognized religious authority of Islam) have been issued on the matter. Based on the following hadith, the majority of scholars agree that trade in currency is permissible in the domain of Islam and has been practiced for years:

Narrated by ‘Ubaadah ibn al-Saamit (may Allah be pleased with him) who said: The Messenger of Allah (peace be upon him) said: “Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, salt for salt, like for like, same for same, hand to hand. If the types are different then sell however you like, so long as it is hand to hand.” (Muslim 1587)

However, this permissibility is only valid under the fulfillment of a few conditions, which are as follows:

1. There should be no interest (riba) involved.

Taking interest is strictly forbidden in Islam and there is no room for a ‘grey’ area in the matter. Hence, any currency trade transaction that involves ANY type of usury, is not allowed in Islam. For example, when you are dealing with the same kind of currency (e.g. dollar for dollar), the exchange needs to be of equal amounts (e.g. 1 dollar for 1 dollar). You cannot trade the same currency for different values (e.g. 1 dollar for 3 dollars) because that falls in the domain of riba.

2. The trade/exchange must take place in the same sitting in which the business contract is formulated.

You may trade one type of currency for another (e.g. dollars for rupees), as long as you make sure that the exchange is made in the same meeting as when the contract is signed.

3. The trade/exchange needs to be hand-to-hand: immediate and without delay.

Buying and selling in the currency market are allowed but the exchange must be carried out at the earliest and any sort of delays should be avoided. If there is a delay, the transaction may fall under the umbrella of riba, which is prohibited. Moreover, according to the Islamic Fiqh Council, under the ‘hand-to-hand’ clause, the exchange in currencies which happen over the phone or the internet are only permissible if the exchange results in immediate transfer of funds from the seller’s account to the buyer’s account or if the buyer or his agent takes immediate possession of the respective cheque payment.

Alas, these are the common rulings on the matter of forex trading and we can only do our best to live our life in accordance with the Islamic teachings. In the end, Allah (SWT) knows best.

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