Forex Trading in Islamic Finance  by Lalit
Since receiving as well as paying of interest is Haram in Islam, Muslims therefore require a special kind of forex trading account. Conventional forex accounts charge (or pay) interest to the account holder, determined by rollover positions held over the weekend - on a currency pair that has a positive/negative interest rate differential between the currencies. Islamic Forex Accounts negates the interest costs receivable (or payable), and in fact can still function as effectively as any other conventional forex accounts. It is important for a Muslim trader to partner with the right broker in order to make your investments as shari’ah compliant as possible. Below, we discuss some of the issues surrounding forex trading within the Islamic Finance domain:
The Trading of Currency with Currency
Fursa FX recognizes that only “spot forex trading” is considered halal as the transaction is done on a spot basis, meaning both price and delivery of the asset are settled at the same moment in time. Currently, we refrain from trading in currency options, swaps, futures, forwards and other derivative contracts as the conditions for which trading of these instruments are permissible depends on a case to case basis (for example, Islamic Scholars and Experts have claimed that swaps are not allowed in the manner they are practiced in the commodity exchange, defined under the AAOIFI Syariah Standard, hlm 358). However, buying and selling of currencies is permissible and is termed Bai Sarf in Islamic banking, and Muslims are allowed to exchange Silver with Gold, buy Gold with US dollars and buy US dollars by selling Euro. The mechanics of Bai Sarf is halal but it has to be done on the spot. We do our best to ensure that all the transactions that we provide or conduct are according to the principles of Halal, or Islamic permissibility.
Leveraged Investments
Current Islamic banking & finance practices do not completely rule out the use of leverage in investments. If we consider the example of Islamic REITs (Real Estate Investment Trusts) in Malaysia, these instruments operate at a maximum leverage of 33 %. Debt ratio below or equal to this level is deemed acceptable by governing authorities in Malaysia. (Muhammad Ayub, 2007 and Jawad Ali, 2007). In addition, Fursa FX does not invest in anywhere that has high excessive leverage of 1:500, as this would promote excessive speculation and incur unnecessary risk for the investor. Our manual trading accounts are thus limited to a 1:100 leverage configuration.
It is worth to note that, at the end of the day, traders should take personal responsibility and not to over-leverage and be exposed to unnecessary risk.
Haram vs Halal
Religion is a personal relationship between self and God and each is responsible for his own choices and decisions. Islamic finance is always evolving and that there are risks and dangers of being trapped in the “I’m right and you’re wrong” mentality. Even among the various recognized Sharia’ah scholars, their opinions may differ in many aspects of Islamic finance, including the topic of forex trading. The beauty of Islam is that it has many different points of view and dynamism, so that we can learn from each other for everyone’s benefit. Diversity is our strength and that Islam is meant to be suitable for everyone in this world. The most important thing is to respect other’s beliefs and not to miss out on the bigger purpose and objective of the laws – to benefit the community and provide an ethical and fair trade for all. Fursa FX does not claim to be the ultimate authority on the permissibility on Islamic Forex trading, but we strive to provide the best Shari’ah-compliant trading platform possible and we are always on the lookout to improve and keep up to date with the latest developments.
About the Author
Explore more about shariah investments | alternative investment | forex trading
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