This is an excerpt from the video made by Sheikh Hacene Chebbani on FOREX Trading.
Sheikh Hacene Chebbani was born in Algeria and he is graduated in Shariah from the Islamic University of Madinah in 1993 and also completed a Master’s in Islamic Finance (2012) from UK. These are the summary of points I got from his presentation for my understanding and yours.
1. FOREX Trading, which is used to make money out of the fluctuating economy, is not morally acceptable as you are taking advantage of the currency situation of a country and making profit/loss, causing the currency to fall further. Here there is no physical delivery for these ‘bloated’ transactions but a gambling of leveraged money in the assumption of making profit.
2. Margin trading involves borrowing of money from a financial company, technically, only to trade on their platform, on the assumption of making profit/loss on the transactions, within the stipulated instructions and timeline. This contradicts with the rules of Islam where you are not allowed to sell something which you don’t have or you don’t own. Also, there is no total freedom for the traders on the money they leveraged from banks, but only allowed to use it on their platform abiding their rules.
3. Link between Financial leverage and misallocation of economic resources: FOREX is causing Economic Oppression by trading $5.3 Trillion per day (according to the Bank for International Settlements in April 2013 and increasing at a rate 20% per year from 2010), out of which only half a trillion is used for real (physical) economic activities. The remaining amount which is raised by Banks is in turn the money of public which can be used to serve the needs of the society, not of the speculators and traders. It is a fact that 95% of the FOREX traders are losing their money, so does the Banks that facilitates them.
4. Money cannot be considered as a commodity to be traded and profited upon but can be used only as a medium of exchange. Exchanging gold with gold, silver with silver (considering these as the currencies of earlier ages) is a usurious transaction unless it takes place with immediately delivery. Some scholars gave room for Spot Txns even though its settlement is done after 2 business days and its profit delivery. Delayed delivery of profit for 2 days is considered not acceptable by some scholars as you have to make the transaction hand to hand and settled on the same day. Possession of currencies has to take place within the trading session not later. Forward and Future Contracts has to have a commodity involved to enrich an economy.
5. Charging of interest overnight, also called the Roll-over charges, to the margin accounts if the trader holds the account open overnight. This is considered as usury as it falls under “payment of fine in case of delays”. This issue has been ‘solved’ by some ‘Islamic FOREX’ companies where they don’t charge this interest by taking in to consideration that only “Interest is Haram”.
6. Condition of a loan combined with a sale is not allowed. For eg, giving a loan only under the condition of buying a car from us. This is not allowed as you are making profit by expecting a sale with this loan. It is morally not acceptable to demand a sale for your loan. In FOREX trading, the leveraged loan (which is a multiplication of your invested amount like 1:1000) is only for the purpose of making profit/loss on the transactions that you make. The financial company has the right to close your account if the loss crosses a limit and goes below minimum margin balance and puts their money at risk. Also implies that you are not the owner of this money.
You can also find a different answer on this subject here – where it adds, apart from the above points – “Hence it comes under the heading of consuming people’s wealth unlawfully, in addition to diverting wealth in society from real, fruitful economic activity to this type of risk that has no economic advantage, and it may lead to severe economic turmoil that will cause great loss and harm in society.”
Allah knows best.