What is Forex Trading?

Is Forex Trading allowed in Islam?

Basic Financing Arrangements.

Islamic forex trading will increasingly be in demand. Before we understand Islamic forex trading we need to acquaint ourselves, albeit briefly, with Islamic finance. Islamic finance. The theory and practice of finance according to Islamic principles is called Islamic finance. In Islamic finance, there is a general consensus among Islamic scholars on the view that currencies of different countries can be exchanged on a spot basis at a rate different from unity, since currencies of different countries are distinct entities with different values or intrinsic worth, and purchasing power.

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An Islamic Finance Assessment of the Modern Retail Forex Industry March 30, / 22 Comments / in IFG, Investment, Islamic Finance / by Ibrahim Khan I’ve been reading around this topic for a few years now and unfortunately I’ve not yet come across a really .

But that takes me back to retail forex. But if you do want to speculate, then the only way you can do so efficiently is by participating in the retail forex market.

The alternative of using Travelex is not viable, as there would be no margin involved and currency movements are tiny from day-to-day. The argument would therefore be, that as a retail trader you can only speculate using retail forex, with a margin account, and as fundamentally currency speculation is halal, trading on a margin account is halal as that is the only way available.

However this is a flawed argument too. Running such a business is halal. So the only thing stopping me from doing the halal business is money. Therefore I can borrow that money. There is also no need for you to speculatively trade forex, which might have otherwise justified things. The only way that I could see would be a government profit-free trust set up to lend to Muslim retail forex traders for the purpose of allowing them to trade forex.

But that seems like a rather frivolous use of government money, and one that no government would ever seriously consider. Please also remember to subscribe to our website if you would like to keep in the loop with more articles like these. This is in part due to the complexity and fast-moving nature of the market, the secrecy of companies about their internal procedures, and in part, I feel, due to the breakdown of contact between Islamic scholars and experts in this industry.

You can find articles from both sides online in e-fatwas or in marketing articles designed to attract the Muslim trader. But while the latter offers a poor grasp of Shariah, the former has a poor grasp of the mechanisms of the market itself. Hopefully below we can start to remedy this dearth of information and start asking the right questions so that Muslim traders are in a much better place to make a decision.

Who buys what and sells what? Who owns what and why? What is a currency pair? An interesting aspect of FX trading through an Exchange is that all transactions are directly with the exchange.

This means that if you have 5 different trades open, some losing and others winning, you can net your overall position and work out how much you owe the exchange or more precisely, your broker can do that. Given that, there is a debt involved which you may or may not be trading at par value — and that raises questions about Shariah compliant hawala of debt.

This is an interesting area that inshAllah we can explore fully in later articles. Well there is a difference. This is in contrast to the big boys of the FX world who trade in large amounts with each other using the interbank market directly. For retail FX users on the other hand, their trades are much smaller and a broker handles them and acts as an intermediary between them and the interbank market.

But it gets more complicated unfortunately. There are actually two kinds of retail FX arrangements. These brokers actually take the other end of your transaction. They do this because they rightly understand that the majority of retail traders are unsophisticated and inexperienced and will end up losing money.

These guys may also use other methods where they match up different retail traders on their system who are trading in the opposite direction. As time has passed, technology has developed, and retail traders have got savvier there has been a rise in Electronic Communication Networks and Straight-Through-Processing model brokers. STP brokers broadly take your trade and pass it onwards to the market and make a cut.

They usually will not show you the current orders and give access to the interbank market. Who they pass your trade on to depends on what arrangement they have going themselves. An important rule in Islamic financial law is that you are not allowed to borrow from someone just to buy something from them. This prohibition is mentioned in the following hadith:.

So if the broker is lending you money for the sole purpose that you trade with him and he makes a cut from the spread and potentially by being counterparty too, in the case of a Market Maker , then this falls foul of the same prohibition. However if the broker is not lending you money and is simply charging you a cost of brokerage then is fine. But is borrowing actually going on? This is called leverage.

Everyone is trading on margin and nets out at the end. The money is to be delivered in 2 days. So, trading on the margins. This picture is muddied slightly by some contrary opinions expressed online, and it may be that at the higher end of the market borrowing actually does take place to enable large trades.

But in the case of the small level retail fx trader, as far as I can glean, there is no such borrowing going on and the case is similar to the futures market and dissimilar to the share market. According to this conception of the trade then, the hadith does not apply and there is no issue with there being a loan and a sale going on in one transaction.

Please remember to subscribe to our email list box on the top right , and follow us on Facebook and Twitter. We have also since written an update to this article here. Read our guide on how to screen for sharia-compliant shares. But when you start looking the whole thing is a minefield. For a start its hard to pick through where you should be investing, what assets, for how long, with the cheapest brokers, and at what risk, and on top of all these usual concerns you also want your investment to be halal.

Shares are okay per se to invest in as they are simply seen as owning a percentage in a business. Bank purchases asset on behalf of client and allows usage of asset for a fixed rental payment. Ownership of the asset remains with the financier but may gradually transfer to the client who eventually becomes the owner ijara wa iqtina. One party contributes capital while the other contributes effort or expertise.

Profits are shared according to a predetermined ratio and the investor is not guaranteed a return and bears any financial loss. Different parties contribute capital and profits are shared according to a pre-determined ratio, not necessarily in relation to contributions, but losses are shared in proportion to capital contributions.

The equity partners share and control how the investment is managed and each partner is liable for the actions of the others. In a deferred-payment sale, delivery of the product is taken on the spot, but delivery of the payment is delayed for an agreed period. Payment can be made in a lump sum or in installments, provided there is no extra charge for the delay. A deferred-delivery sale is similar to a forward contract where delivery of the product is in the future in exchange for payment on the spot market.

Sukuk are certificates of equal value representing undivided shares in ownership of tangible assets, usufruct and services, or in the ownership of the assets of particular projects. The returns on the certificates are directly linked to the returns generated by the underlying assets.

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Islamic Finance March 31, Tweet Share Share LinkedIn. I have a question. When your broker is giving you access to leverage are they also not charging interest?

Are you in effect gaining access to huge sums of money with small amounts for free? The counterparty is the broker, and he can set whatever terms we likes to trade with you. I appreciate that is probably not going to make full sense but bear with me until the new article! Yet again, another brilliant article targeting the matters that are not really spoken about enough.

Since this article is about currencies in particular, I wish to pose a few questions. From my brief look, it appears that usually commodities are often traded via CFDs. If that is the case then that is straightforwardly impermissible. If, however you are actually buying a commodity, and the leverage is being provided by a 3rd party i.

Margin also allows the broker to close out a trade on margin calls. Therefore, who owns the instrument? If it is not you, then are you trading something you do not own. We do now have a more up-to-date article on the topic: Your email address will not be published. Notify me of follow-up comments by email. Notify me of new posts by email. This site uses Akismet to reduce spam.

Learn how your comment data is processed. Enter your email address to subscribe to this blog and receive notifications of new posts by email. How does it work? Firstly, I wanted to know the difference between retail fx and mainstream fx. Market Maker These brokers actually take the other end of your transaction. Why is this x-ray look into the industry important from a Shariah perspective? This prohibition is mentioned in the following hadith: So hang on, where did all this borrowing business come from?

I will be dealing with these in future blogs in this FX series — so make sure you subscribe. These include issues like: How does the Shariah deal with the interest-related carry-trade issues? Is the current market custom of actual completion taking place two days after the spot transaction a problem given the hadith that buying and selling of currencies should be hand to hand and on the spot?

What about the issue that the whole industry is essentially a zero-sum game with a winner somewhere matching up with a loser somewhere else. Does the industry add value and is that important for the Shariah? When brokerage firms offer bonuses to use their services, is this acceptable?

Some interesting articles for further reading: You might also like ACN: What is the Islamic position?

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According to this conception of the trade then, the hadith does not apply and there is no issue with there being a loan and a sale going on in one transaction. The only way that I could see would be a government profit-free trust set up to lend to Muslim retail forex traders for the purpose of allowing them to trade forex.

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Firstly, I wanted to know the difference between retail fx and mainstream fx.

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