Forex Trading

If by Forex exchange trading, you mean selling the currency of one country in lieu of the currencyof another country, such as when a person wishes to travel, he purchases dollars from the Bank in lieu of Rands and an actual physical exchange of the two currencies takes place, then this is permissible. However, in this transaction, one of the two currencies (for example the Rands) must be handed over to the other party before the two transacting parties part from each other. 

If on the other hand, by Forex Trading you are referring to the Forex Trading that is in vogue nowadays, where trading of currencies occurs online over the internet without actual physical possession of the currencies taking place, then this is not permissible. The impermissibility of this type of Forex Trading is primarily due to the following reasons:

a) In Forex trading, only the value of the currency being traded with is transferred to the buying party; i.e. actual and physical transfer of funds and monetary notes does not occur. In essence, the buyer and seller become indebted to each other of the value of each other’s respective currencies. No physical transfer of monetary notes into each other’s banking accounts takes place. The transaction thus involves a debt from the part of both the buyer and seller. Such a transaction is unanimously forbidden in Shari’ah. It comes in a narration that Ibn Umar Radhiallahu anhu has said:

“Nabi Sallallahu alaihi wasallam has prohibited a transaction which involves a debt in exchange of a debt.” (Musannaf Abdur Razzaaq, Vol.8, pg.90)

It is a condition for at least one party (either the buyer or the seller) to take physical possession of one of the currencies if the currencies are not gold and/or silver. When one understands how the commercial houses operate, one will realize that this fundamental condition is not attained when doing currency/forex trading over the internet.

b) One dimension of Forex trading is the transaction of Wakaalah (agency). The Wakeel (agent) is the Forex Company, who acts on the instructions of the trader to buy and sell currency. The Forex Company is thus a Wakeel to buy and sell. The Forex broker makes a profit on the deal via spreads, that is, the difference between bid and buy prices. That means the difference between the rate a trader is prepared to pay for currency, and the rate that is being asked for that currency in the Forex market. In real terms, it means that a Forex Company acts as a broker for the trader who has ordered a certain currency pair. It then looks at the price the trader wants to pay, and the price that the same currency is offered on the market. The company then acquires the currency pair from a seller on the market at a lower rate than what the trader is prepared to pay. It then pockets the difference. That difference is the Company’s profit on the deal.  

While it is allowed in Shari’ah to pay a Wakeel for his services, such payment has to be pre-arranged and pre-determined. The spreads will differ from one transaction to another, and is totally unspecified and unknown to the trader. In fact, even the Forex Company will not know in advance how much profit it will make out of the deal. Hence, if such spreads are to be considered the payment of the Wakeel, the deal will be rendered Faasid (invalid) because of uncertainty and lack of specification.

c) It is agreed that the trader owns none of the commodities or currencies he buys and sells. In fact, not even the Forex Company owns these currencies. This Company only facilitates the movement of these currencies between two parties, be those parties’ individuals or companies. When buying the currency, the lot of currency or the amount purchased is credited to the account of the trader. However, unlike other normal electronic transfers or bank deposits, the funds are not freely and randomly accessible to the account holder. This signifies that possession is not complete. 

In a normal bank transfer, which happens daily between companies and their clients, the funds transferred are accessible to the account holder either the same day or a day or two thereafter. The account holder may then do what he wishes with those funds. They are truly and legally his, for possession is complete and total. When this happens, the deal has been validly concluded. However, in Forex Trading, the currency one purchases is never accessible to the trader, and consequently, never becomes his to keep. The lot of currency purchased is sold again before the seller has actually taken possession. This is not permissible in Shari’ah. It is a law of Shari’ah that one must possess movable property before re-selling or executing any transaction related to it.

d) One is selling an item that has not been owned. Although the trader’s account reflects a credit of 100,000 dollars, it does not mean that he owns that money. When he sells those dollars, he is selling a commodity that he does not own. It is clear that selling an asset that one does not own, or that one will own in the near future is neither permissible nor valid.