Islamic Forex Trading 101

Some argue that forex trading is “haram”, while there are also some that view forex trading to be “halal” (which translates into permissible).

Among the activities prohibited by the Holy Qur'an are gambling and riba, also known as interest or usury. Since the last two activities are associated with Forex trading, many Islamic scholars have argued that Forex trading is haram according to Islamic principles.

However, many have pointed out that not all Forex trading accounts involve interest and gambling, such as Muslim Forex accounts. Islamic jurists generally agree that currencies of different countries can be exchanged on a spot basis at a rate other than unity because currencies of different countries are distinct entities with different values or intrinsic worth, and purchasing power. A majority of scholars also appear to agree that currency exchange on a forward basis is not permitted, that is, when both parties' rights and obligations are related to a future date. However, there is a significant difference of opinion among jurists when one of the parties' rights, which is the same as the counterparty's obligation, is deferred to a later date.

Furthermore, Muslim scholars agree that exchanging currencies on the spot could be allowed. This is due to the fact that spot settlement can significantly reduce the usury component of Forex trading. On this basis, Muslim theologians have reached an agreement that Forex trading is halal.

In an effort to make forex trading halal for Islamic traders, an Islamic Forex account is introduced. This is a forex account that operates similarly to a conventional forex trading account except that it is a halal account that complies with the Shari'ah prohibition on Riba or the accumulation of interest. Islamic Forex accounts will not charge interest on open positions held overnight, but because they will not charge interest, some Islamic accounts will charge commission or offer wider spreads than a traditional Forex account.