This is an independent working paper of asatizah and Islamic finance practitioners in Singapore. Views in this article are solely from the authors. No responsibility should be attributed to any non-individual entity.
In today’s context, we note the following Shariah issues where retail FOREX trading is concerned:
Transactions generally do not fully meet the Shariah parameters of Foreign Currency Exchange (bai`al-sarf) as per Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) standards.
FOREX trading for retail is a speculative, hence there is an element of qimar (i.e. gambling) prohibited in Shariah. There is no real exchange (i.e. non-deliverable) as traders will offset their open positions and then start a new trading without liquidating the positions.
Transactions rely on margin, rollover interest and leveraging, hence there is riba considering that the loan entails benefits which contravenes Shariah.
In futures trading (more applicable for non-individual FOREX traders), both counter values are absent at the the time of contract (i.e. there is merely exchange of promises). This leads to sale of 2 deferred counter exchanges which is not Shariah compliant.
The words “trading” or “exchange” are misnomers as the FOREX transactions neither meet the Shariah concept of business nor contracts of exchange. This also applies to individual FOREX accounts that promote themselves as aligned to Shariah, although their products, unlike conventional ones, do not have overnight, rollover or swap fees. This is because there is no actual trading and conversion.
Furthermore, we note that FOREX dealings with the objective of speculation is one of the contributing factors of economic crisis of a nation (darar fi iqtisadul balad) along with other risky products such as Contracts for Differences (“CFDs”), FX Futures, spread betting with FX Forwards and FX Options. Speculative trading not only threatens national currency devaluation and financial crises but disrupts the ability of nations to establish equitable and just economic policies. Speculative practices and excessive leveraging were both identified as the root causes of the recent global financial crisis in 2008 . Speculation or speculative investments such as FOREX trading are generally not recommended by financial advisors for the general public; as trading in foreign exchange markets require extensive knowledge of the interest rates, the country’s economic stability, international trade, government debt status, in-country regulations, market sentiments, government reports and global news that may have a profound effect in moving the respective countries’ currencies (even then, there is no guarantee that a high returns can be expected and the risk of losing all the capital invested is never eliminated). In addition, foreign exchange markets are amongst the most volatile markets in the world, especially when it is traded on a margin basis.
Majelis Ulama Indonesia (MUI) issued a fatwa (28/DSN-MUI/III/2002) stating that FOREX transactions on the basis for speculation (i.e. for making money) are impermissible. However, FOREX transactions pertaining to exchange of currencies for a genuine need (i.e. convert earnings to local currencies purposes such as financial reporting) or to hedge against currency exchange fluctuations (whether actual or perceived) or to protect loss are permissible. This is the practice of many companies who deal with multiple currencies due to cross-border transactions, including financial institutions doing Shariah-compliant transactions in global markets. In this case, there is actual trading and actual delivery of currencies.
The Islamic Religious Council of Singapore (MUIS) clarified that there are FOREX transactions which are “permitted as long as it is done on the spot, and there is no delay of time in exchanging the currencies”. We would like to highlight that such FOREX transactions with the correct underlying purpose is permissible based on the following scenarios:
Money changers in which individuals exchange currencies to later fulfil other commercial or personal necessities – not to profit directly from the exchange. For example, a Singaporean businessman may exchange Singapore dollars (“SGD”) for Malaysian Ringgit (“MYR”) as he needs MYR to inject additional working capital for his overseas business located in Kuala Lumpur.
Islamic financial institutions or big corporates which need specific currencies to transact interbank deals (e.g. swap from SGD to USD to place a wakalah deposit denominated in USD) or hedge against loss via Shariah compliant instruments (e.g. cross currency rate swap, profit rate swap, FX Spot). Earnings from such corporates transactions are usually derived from fees for services provided based on ujrah (i.e. commission).
Therefore, in order for any FOREX transaction to be deemed Shariah compliant, both its price and delivery needed to be on spot basis. However, when either price or delivery of the FOREX transaction is deferred, contemporary scholars view that the application of unilateral promise to buy foreign currency that will be received or delivered at a future date is permissible, as long as its purpose is for hedging, not for earning income. The same notion is also espoused by Imam Ghazali when describing function of money in Islamic economics, where at that time, gold and silver were used as money:
“One who practices interest on dirhams [silver coins] and dinars [gold coins] is denying the bounty of Allah and is a transgressor, for these coins are created for other purposes and not needed for themselves. When someone is trading in dirhams and dinars [i.e. money] themselves, he is making them as his goal, which is contrary to their objectives. Money is not created to earn money, and doing so, is a transgression… The two kinds of money are means to acquire other things; they are not meant for themselves.” – Ihya’ Ulūm al-Dīn, (Chapter on Patience & Gratefulness)
A contemporary scholar, Mufti Taqi Usmani, mentioned that diverting “money” from its function as a medium of exchange and making it as an object to trade (i.e. making money out of money) is one of the main root causes causing global financial crisis. He also stated the following:
To make them [i.e. currencies] a tradable commodity only for earning a profit is also against the basic philosophy of Islamic economics.
1. [2/6/4] Physical possession takes place by means of simultaneous delivery by hand. [2/6/5] Constructive possession of an asset is deemed to have taken place by the seller enabling the other party to take its delivery and dispose of it, even if there is no physical taking of possession. Among other forms of constructive possession that are approved by both Shariah and business are the following:
(a) To credit a sum of money to the account of the customer in the following situations:
(1) When the institution deposits to the credit of the customer’s account a sum of money directly or through bank transfer. (2) When the customer enters into a spot contract of currency exchange between himself and the institution, in the case of the purchase of a currency against another currency already deposited in the account of the customer. (3) When the institution debits – by the order of the customer – a sum of money to the latter’s account and credits it to another account in a different currency, either in the same institution or another institution, for the benefit of the customer or any other payee. In following such a procedure, the institution shall adhere to the principles of Islamic law regarding currency exchange.A delay in making the transfer is allowed to the institution, consistent with the practice whereby a payee may obtain actual receipt according to prevailing business practice in currency markets. However, the payee is not entitled to dispose of the currency during the transfer period, unless and until the effect of the bank transfer has taken effect so that the payee is able to make an actual delivery of the currency to a third party.
(b) Receipt of a check constitutes constructive possession, provided the balance payable is available in the account of the issuer in the currency of the check and the institution has blocked such a balance for payment……” Abu Huraira (Allah be pleased with him) reported that Allah’s Messenger ( صلى الله عليه وسلم) forbade a transaction determined by throwing stones, and the type which involves some uncertainty. (Sahih Muslim Hadith No. 1513)
2. Based on sayings of sahabah Fudhalah bin Ubaid (r.a.) narrated by al-Baihaqi and mentioned in Majmu’ Fatawa Ibnu Taimiyyah, 29/ كل قرض جر نفعا فهو ربا” : 334 ” (All loans that entails prohibited benefits is deemed as Riba)
3. Ibn Abbas (Allah be pleased with him) reported that Allah’s Messenger ( صلى الله عليه وسلم) forbade a transaction where both of the price and good are delayed (Baihaki, Sunan Al-Kabir, Hadith No. 10411)
4. A riskier product is binary options. MoneySense (under Monetary Authority of Singapore and Ministry of Manpower) defines binary options as financial options that references an underlying asset which could include shares, commodities, currencies or interest rates. Option buyers will place bets on whether an underlying asset will be above a certain price at a specific time. Option buyers will either win or lose. Winning trade will involve a pre-determined sum while the loser may loss 100% of the capital. Majelis Ulama Indonesia rule this as haram due to its speculative elements. Other exotic and dangerous products include credit derivatives, such as credit default swaps which contributed to the collapse of the global financial services firm, Lehman Brothers, in 2008.
5. See Eichengreen, B., Rose, A. K., & Wyplosz, C. (1995). Exchange market mayhem: the antecedents and aftermath of speculative attacks. Economic policy, 10(21), 249-312.
6. See Kotz, D. M. (2009). The financial and economic crisis of 2008: A systemic crisis of neoliberal capitalism. Review of radical political economics, 41(3), 305-317.
7. See Razin, A., & Rosefielde, S. (2011). Currency and Financial Crises of the 1990s and 2000s. CESifo Economic Studies, 57(3), 499-530.
8. See Nienhaus, V. (2011). Islamic finance ethics and Shari’ah law in the aftermath of the crisis: Concept and practice of Shari’ah compliant finance. Ethical Perspectives, 18(4), 591-623.
9. See Eservices.muis.gov.sg. (2019). MUIS – FAQs. [online] Available at: https://eservices.muis.gov.sg/ifaq/apps/fcd_faqmain.aspx#FAQ_156341 [Accessed 28 March 2019].
10. The margins earned by the money changers themselves in this instance are is permissible as there is an underlying economic service rendered to customers who visits the shop to exchange currencies. The income earned is akin to service fee.
11. Transaction between the currencies must be ‘Yadan bi Yad’ and in one other narration of the hadith ‘Ha’a bi Ha’ that means that delivery of both currencies must be immediate at the time of the contract. However, scholars understand unique cases of international sales and banking transfers which normally take some time for “delivery” to take place. The Shariah Advisory Council (SAC) of Bank Negara Malaysia (BNM) in its 179th meeting dated 22 August 2017 resolved that the practice of the delivery of money (prevailing international settlement process) on day two after transaction date (T+2) is permissible. This is also the view adopted by the Fiqh Academy and Organisation of Islamic Countries (OIC). Therefore the delay of two days in the case spot trading is permissible. However, extension of the grace period may be allowed due to established customary business practice arising from operational constraints (e.g. Markets in America opens for trading in morning but it may be night time in your country when counter has closed). In addition, the delivery of money beyond the contract session may also be allowed in the event of unexpected disruptions. For example, if USD or either currency of a pair has a holiday on T+2, then the spot date could be T+3. Delay may be acceptable when Latin American currencies, Canadian and New Zealand currencies are used or when the trade date is converted to local time zone from GMT/UTC involving a pair of foreign currency in a country that does not use any of those monies as home currencies. Some FOREX exchange markets in China may not be working during Chinese New Year.
12. Money needs public confidence, backing and support for its function as a medium of exchange and for its buying power. Generally, many scholars clarified that the backing can be done either via gold/silver, commodities or the government. The Singapore dollars is issued by the Singapore government. Based on majority of scholars, value of such monies is extrinsic as they are issued under authoritative decree of a country (i.e. made legal tender) and the value is based on supply and demand and affected by monetary/fiscal national policies. Paper money has been a matter of practical consensus in Islam and is generally accepted by society as Al-Thaman al-‘urfī. This is in line with views of Imam Malik and Ibn Taymiyyah in which usage of monies should also, among other things, be based on customary practice.
13. Dinar and dirham are based on gold and silver, also known as Al-Thaman al-Khilqī. In the kitab Ihya Ulumiddin, Imam Ghazali (r.h.) refers to gold and silver, both of which have all the qualities of money as mentioned in Quran and Sunnah.
14. Mufti Muhammad Taqi Usmani, Causes & Remedies of The Present Financial Crisis from Islamic Perspective, Maktaba Ma’rifatul Quran (Quranic Studies Publishers), Karachi. http://muftitaqiusmani.com/en/books/PDF/Present%20Financial%20Crisis%20Causes%20&%20Remedies/Present%20Financial%20Crisis%20Causes%20&%20Remedies.pdf, accessed 01 April 2019.
15. Albalagh, Forex Currency Trading, 22 Nov 07, https://www.albalagh.net/qa/Forex_currency_tradings.html, accessed 31 March 2019.