Before entering into forex (FX) trading, every Muslim should ask themselves whether this activity is acceptable within Islamic law (halal) or forbidden (haram).

It is easy to see why forex trading might be thought to be haram. The Holy Qur’an prohibits gambling and riba, also known as the charging of interest or usury. Both activities, it has been argued by some Islamic scholars, are involved in forex trading.

However, other scholars contend that forex trading is not the same as gambling. That is because when a trader undertakes fundamental research or technical analysis to try to make an informed decision on the future direction of a currency, it is not the same as gambling, i.e. simply making a bet on which way the market will move based on a whim.

The question of usury is more complex. It has been argued, for example, that Muslims are not allowed to engage in trading activities where the exchange of goods is delayed (i.e. it does not take place physically between two people), as that might involve the charging of interest. However, the consensus among Muslim scholars is that it is acceptable to exchange currencies on a spot basis. That is because spot settlement can significantly reduce the usury aspect of forex trading.

In addition, any delay in the transfer in the spot market will be for genuine reasons, such as significant differences in the law, regulatory requirements, technologies and settlement practices in the countries where the currencies originate. Indeed, interbank settlement in two different banking systems often involves a delay simply because many of these payment systems are designed so that final settlement of all payments takes place at the end of the system’s operating day, rather than at numerous times during that day.

Moreover, if you open an Islamic forex account, you won’t be charged interest on overnight positions, which would overcome the problem of usury. Finally, scholars have argued that currency exchange and profiting from currency exchange is allowed under Sharia law because any Muslim has the right to pursue activities that allow them to improve their financial condition.

Forex trading and Islam

There are other specific areas of concern to Muslims within forex trading. These include the following:

CFD forex trading, it is argued by the likes of the Shariyah Review Bureau, is not Sharia-compliant principally because it involves gambling on the movement of a currency pair using a derivative, rather than the currencies themselves.

FX futures are not Sharia-compliant because they involve contracts to buy or sell a specified amount of a particular currency at a set price and date in the future. It is a deferred transaction, rather than involving the immediate exchange of goods, and is therefore haram.

Forex spread betting is also considered haram by many scholars because it is based on derivatives, i.e. it does not involve the immediate exchange of physical goods. It also involves gambling since you are betting on whether you expect the price of a product to go up or down.

FX options may also be considered haram because the exercising of the option is unknown and uncertain and involves an element of risk. This is described as gharar and is not allowed under Sharia law.

There is an argument that short selling does not comply with Sharia law. That again reflects the element of gharar and gambling – the activity is about speculating on future price movements and does not include any purchase or sale of real currency, since short-selling is usually done via derivative instruments such as CFDs.

Whether or not to trade cryptocurrencies is another challenging area for Muslims. That is because they involve financial engineering and it is hard to argue that they are based on physical assets, unlike established currencies, which were traditionally based on gold. Some cryptocurrency companies have sought to overcome this problem by launching instruments based on physical assets such as gold and certified as valid by Islamic advisors.

Conclusion

The issue of whether forex trading is acceptable for Muslims is highly complex and open to interpretation. As you might expect, many FX companies argue that Islamic FX accounts overcome problems such as usury. However, the views of Muslim scholars differ widely on the subject. Take cryptocurrencies. The Indonesian Ulema Council is the authority on Sharia compliance in the country with the world’s largest Muslim population and is consulted by the Indonesian finance ministry and central bank. In November 2021, the Council ruled that the use of crypto assets as a currency is forbidden for Muslims because it involves elements of “uncertainty, wagering and harm”. However, the Council added that if cryptos as a commodity or digital asset can abide by Sharia tenets and show a clear benefit, then they can be traded.

By contrast, the United Arab Emirates allows crypto trading in Dubai’s free zone, while Bahrain has backed crypto assets since 2019. Five years earlier, in 2014, the California-based academic Monzer Kahf, a prominent author of Islamic finance textbooks, said that bitcoin was a legitimate medium of exchange, although it was vulnerable to manipulation. Islamic jurists in South Africa have subsequently ruled in favour of cryptocurrencies, arguing that they have become socially acceptable and commonly used.

There are also differences of opinion on FX trading itself. The National Fatwa Council in Malaysia said the activity was contrary to Sharia law in February 2012, while states such as Perlis (2016), Negri Sembilan (2018) and Sabah (2012) have agreed not to allow online forex trading. That is also the view of the Indonesian Ulema Council (2002) and the International Islamic Fiqh Academy (IIFA), an international institution for the advanced study of Islamic jurisprudence and law based in Jeddah, Saudi Arabia, which made the decision in 2006.

Forex trading is legal in Malaysia and Indonesia, although fatwas against forex trading in individual states and by the National Fatwa Council are binding on every Muslim. Forex trading is also legal in highly conservative Islamic states in the Middle East such as Saudi Arabia. In the end, the decision on whether to trade or not rests with the individual. Perhaps the best way forward is for individuals to discuss the matter with religious leaders they respect and come to their own conclusion.