In this post, we will answer the fundamental question – Can Muslims from the UK trade Forex and CFDs?
Forex trading has to do with buying and selling of foreign currencies. CFD, on the other hand, stands for Contract For Difference and is more like a derivative trade pattern in which traders do not have to own what they trade. CFDs can be traded in a variety of markets including Forex so it can also be seen as one method of Forex trading.
For Muslims, it is a concern whether to engage in Forex and CFD trading or not. If it interests you, read on as we answer the question, whether Muslims from the UK can trade Forex and CFDs or not.
However, it is noteworthy that Islamic rules and laws cover Muslims in all parts of the world. So whether you are in the UK or not, you should abide by the regulations as a Muslim.
First of all, to understand why Forex and CFD trading is a debatable issue in Islam, you need to understand what Riba is all about.
Riba – What Is It?
Riba in Islam is a concept that is related to interests. It does not only center on doing business or investing but increasing, exceeding, and growth instances in general. Based on Islamic teachings, money should be borrowed to relieve the borrower, and they should pay back at an agreed time. If interests are involved, then it might be difficult for the borrower to pay back and the lender could take the little they made with the money they borrowed.
The concept of Riba has been a staunch one in Islam when it comes to money; it is a highly reserved concept in Islamic banking – the very primary principle which the industry was built on. According to Islamic laws, it is wrong to exploit gains when you do business or engage in any trading activity.
Now, when doing business – whether online or offline – there is always the idea of making money via interests. In Islam, it becomes a problem when the interest gained is on a very high side and not equal to the goods or service that is being exchanged. What this means is that as a true Muslim, it is only advised that you engage in businesses or investments in which both parties gain equally – no one is cheated, and no one is exploited.
As a trader or money lender, you not only offer goods and services, you also invest your time of which you should receive compensation. However, there is no standard way to measure if your interest is fair or not. Nevertheless, some Muslims view any form of transaction that involves interest as Riba, and this is what primarily brings up the debate against Forex and CFD trading.
Is Forex And CFD Trading Considered As Riba?
Let’s proceed from CFDs. A Contract For Difference trading can be seen as totally unlawful according to Islamic laws.
First of all, CFD traders do not trade with actual money; they only focus on trade derivatives and speculate. Most Islamic scholars would link this to be the same as gambling. Profit is gained if the price of an asset (foreign currency in this case) goes up or down depending on what the trader predicted. That way, there’s no balance or equality.
On the other hand, you trade Forex with real money – your money which you have total control over. You can decide to withdraw the money you deposited into your Forex trading account at any time and use it for something else if you must. So this makes actual Forex trading and CFD trading though similar, but different.
A decisive trading factor that involves both CFD and Forex trading is the leverages. Leverages are an essential part of CFD and Forex trading that most traders take advantage of because the Forex market has high leverages. With small amounts of money (technically borrowed from the broker) and an initial margin, traders can trade and gain much higher amounts – higher than the borrowed amount.
As a Muslim from the UK or any other part of the world, you cannot trade Forex or CFD using leverages. The reason is that you are using the leverages to trade with the same broker i.e. borrowing money from the broker and also selling back to them.
Brokers offer leverages (borrow you money) with their primary objective of gaining commissions which are interests. The Hadith made it clear that you cannot give out a loan and sell at the same time, and it is impossible to withdraw leverages or transfer them for use with another broker.
Cases of interests, leverages, swaps, fees, and execution have been addressed by most Forex brokers that they meet the Islamic laws. This birthed the Islamic Forex accounts that interested Muslims can trade Forex without going against the laws, one of the most popular brokers in the UK and in Europe (including Germany, Netherlands and the Czech Republic) is Plus500, which features also this account type.
Should UK Muslims Trade Forex And CFDs?
As mentioned earlier, there is no standard way to measure interests to ensure that you do not go against the laws or commit Riba. Besides, while trading Forex or CFDs, some Muslims view all interest-related transactions as Riba. As a Muslim in the UK, it depends on what side you are on, and the insights provided in this article should help you decide.
If you believe interests, in general, are exploitative, then you should avoid trading Forex, CFDs, or any other tradable asset. Conversely, if you agree on a fair interest gain for every business or transaction, then you have to ensure that you do it right.
While CFDs can be considered as Riba since the investor puts nothing in and they make profits, it is different for trading Forex. Several Forex brokers feature Islamic trading accounts that you can use, and these are usually swap-free and void of interest fees. Moreover, swap-free trading and investments are entirely permissible in Islam.
Almost everyone engages in foreign currency trading one way or the other, directly or indirectly. Besides, Currency rates are volatile and change daily, no matter how minor the changes may be.
Take, for instance, you’re travelling from the UK to the US, the rate of EUR to USD might change, and while converting your EURs to USDs, you get a higher amount than the value of the EURs when you first acquired them. In this instance, you have just profited from the foreign exchange, which is the same way that Forex traders make profits.