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Islamic Legality of FOREX business?

On a regular basis, I receive inquiries from visitors of my website asking for the legality of forex business from Islamic point of view, sometimes the hammer is straight – is it halal or haram? It looks these callers had done some Internet research on the subject and still searching for an answer or need to explore other point of views. Even though it is not my jurisdiction to fix on the matter however since I have an explanation that is conceptual instead of focused legal tweaking and is different from other learned Islamic experts’ plus many private callers (in email) seem satisfied with my approach, so it might be helpful for a larger audience to post it here.

A brief summary of these kinds of Q & A as observed is:

What callers seek primarily:
Do forex or money-exchange businesses involve Riba?

How learned experts classify it mostly:
Foreign currency if traded on-spot with full settlement of account – is permissible; if traded with margin or delivery is deferred then impermissible.


All money transactions in Islamic jurisprudence (Fiqh) are covered under the contract of Sarf which is based on a single famous hadith of six commodities articulating two major conditions of “hand to hand” and “equal for equal” exchange. The learned Shariah Board Scholars of IFIs seem highly concerned with “hand to hand” condition and they simply translate it as “spot and full settlement” but they don’t discuss “equal for equal” condition as what it stands for? Have they reached some undisclosed consensus for “not to discuss or explain this condition”? I have no idea. Ironically for today’s IFIs operations, one of the two foreign currencies in transaction is treated as “commodity” by these experts which is simply abusing of Fiqh, why? Just to replicate the practice of treasury’s dealing of conventional banking to their Islamic counterparts.

The neglected “equal for equal” condition of well-known hadith says - there exists no possibility of pricing the exchangeable commodities, it further translates that the conversion exchange-rate between a pair of currencies shall only be one i.e., only official exchange-rate is valid and the lower buy and upper sell rates are invalid. The exchange of foreign currencies shall be carried out this way as hadith demands; it is evident now where currency trading will plunk?

Let me offer few more thoughts to consider in this case:

  1. Currency is not considered as a commodity which is agreed vision of almost all school of thoughts in Islamic economic ideology. Let us however consider it as a commodity even then all paper currencies are ONE commodity principally - PKR, SAR, AED, USD, Euro, PSTG, etc. etc., all are same because they all are fiat currencies only backed by "trust", even if backed by "gold" or any other commodity, the genus is same, only quality may be different.
  2. While treating currency/money as commodity, it is sure that some one in the system is free to set the price of this commodity and if one can price money/currency then what else is riba. If I can price my dollar today for more than a dollar tomorrow, then why it is interest/riba? There are two types of transactions where riba can be involved, one is a loan and the other is exchange (swap). Riba in loan transactions is reasonably understood, but riba in exchange is not yet recognized clearly, we are basically mislead by the term "trading" in currency business, when we don't accept it a commodity (or different commodities) then there is no possibility of trading, it can only be exchanged and exchange must be equal and hand to hand. The bid and offer rates are the front end mechanics required for currency business but does not conform to the above rule stipulated in noble hadith.
  3. One of the main function of the currency/money has remained the unit of account through out history for pricing products, commodities, services etc., we all know the use of gold and silver as currency/money and as a reference for defining prices. Do you not think that we are in an era where the pricing reference is changed on minute by minute basis? We have replaced a real intrinsic value currency with a fiat currency, and the worst thing is that because of changing its value minute by minute, we are changing the reference of pricing accordingly, how much distortion is created in the economy with this artificial behaviour defined for currency/money. In my views, this is very unrealistic and one major cause of economic problems in today’s time since we do not have a universal stable reference for pricing, and if we can solve this issue fairly, we can overcome many economic problems and miseries.
  4. Unfortunately, we all are not observing the devastating results of currency business, you may visit the BIS (Bank for International Settlement) of Basel website to get the statistics on daily forex trade volume, link here, shocking more than 3 trillion dollars daily exceeding several times the physical trade size of the world, calculate the minimum yield of forex trade in PIPs and do your research, how much value in terms of any currency is eroded daily? Who's money is that? Who's bearing the loss of value? You can’t ignore the vital condition of hadith.

For business purposes, such easy and powerful money earning mechanics is appealing and practiced all around including Islamic Banks, but I can assure you that if we keep on justifying such activities, we are about to see "Islamic Capitalism".

Conclusions:
In my understanding, Islamically foreign currencies can only be exchanged on official declared rates and can’t be traded on different buy/sell rates.

I have tried to explore this particular noble tradition from a different perspective in my paper titled as “Riba and Hadith of Six Commodities”, you can download it from ssrn.com at http://ssrn.com/abstract=1790222

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Artical must be Appericiated

Nice and i am happy some talk about forex & islam

Jazakallah Khair for the post

Forex and Islam

Sorry, may be I am not the best person to judge( not even judge, but discuss), but why does forex had been placed in same niche as gambling ? As people mentioned above it is risky, but any 'buy-sell' activity is risky and if there will be no interest - there will be no innovative products and no progress, because there will be no purpose to compete. To my mind it is so natural for all of us.
It is sad to say, but nowadays some religious people trying to prove something by shouting, but they are talking about the things that didn't even exist in a time of Mohammed(may god bless him), and there is no equvalent in that days to current situation.
From all Souras and all what I 've heard from wise people of Islam, I can conclude, that Islam is not going against logic. Everythinhg has an idea and everything has an explonation, all the things that Muslims have to do , are for their own health and welness.
The only issue in fores, that I have to admit as a serious problem is irresponsible trading, when people create their tactics and trying to earn easy money without analyzing or any other preparation. They just want easy money - and in this way I see dark side of persons soul. But if person studying this subject, count the risks, always browsing latest news, knows the rates etc I think you can consider it as a profession and cold calculation.
Somebody told me before(when I was trying to explain our subject logically) that in this way we can excuse prfessional assasin(killer) as an profession - but it is not the same at all. I hope no need to explain why.
The problem is that forex brokers dont care about knowledge level of the people who want to trade.
And that's why I guess "gold diggers" must think first about their preparation for the serious actions - like trading. Sorry , if I hurt someone but this is my oppinion.

My thoughts about Forex Business

Irfan, your expression about Forex business is very fair. I really enjoyed reading your sensible views. However, I think Forex is a place where no one can guarantee a satisfying profit after an investment. It sounds like gambling to me. Although if anyone starts a business & does some hard work to juice out best result, they can surely expect a satisfying benefit from that investment. An earning which has come from physical and mental knowledge mixed contribution, I believe, is safe, rather than investing in some place, wait for raising its value and earn benefit.

Nice

hi Qazi, i totally agree with your conclusion.

losing machine

Forex trading is 1000 % a gambling game with over 95% lost probability

Forex companies shall be banned as all companies especially those located in Cyprus are thieves and liars. They offer you a gambling machine called ""TRADING PLATFORM"" they will play against you whatever method they offer you ( Hedging, ECN, STP etc.).

The fact is that at the end of the day your entire money and not only the spread will go straightforward to their bank accounts.

I know people loosing 100 of thousands EUR in couple of days.

Forex Brokers Reviews

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Great Site here..
It’s hard to find quality writing like yours these days. I really appreciate people like you.

useful islamic websites

Many thanks for making the effort to discuss this specific, I feel highly about it and really like studying more about this subject matter. Whenever possible, as you gain knowledge, would you mind changing your blog with more information? It is rather ideal for us.

I am muslim

Nice and i am happy some talk about forex & islam

thanks for post

Brokers are not charities - of course there is a spread

quoting from above "your objection to the buy/sell spreads is preposterous. the whole idea about spreads is that there are matchmakers who bring foreign exchange market to life. these people who match sellers with buyers need to be paid for their services. without them how would you find a counterparty to sell or buy currency overnight?" Precicely!!

Brokers often take on the other side of a trade, or bring a buyer and a seller together at a price they agree upon. They can't do this for free though, they are a business. How would they operate as a business and provide a service without the spread?

Thanks,

Gabby

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