Is Trading in Margins Permissible?
It is permissible to deal in currencies if the deal is done hand to hand and the transaction is free of conditions that stipulate riba, such as stipulating fees for delaying the deal, which is interest charged on the investor if he does not make a decision concerning the deal on the same day.
As for paying fees for delaying the deal and trading in margins, a statement has been issued by the Islamic Fiqh Academy concerning this issue, which reads:
Praise be to Allah alone and blessings and peace be upon the one after whom there is no Prophet, our master Muhammad, and upon his family and his Companions.
The Islamic Fiqh Academy of the Muslim World League, in its eighteenth session that was held in Makkah al-Mukarramah from 10 to 14/3/1427 AH (April 8-12, 2006 CE), has examined the issue of trading in margins, which means that the customer pays a small amount of the value of what he wants to buy, which is called a “margin”, and the agent (the bank or otherwise) pays the rest as a loan, provided that the purchase contract remains with the agent as a security for the money loaned.
After studying and discussing the researches that have been submitted on this topic, the opinion of the Academy is that this transaction involves the following:
1 – Dealing in buying and selling for the purpose of profit and this dealing is usually done in major currencies or shares and bonds, or some types of products. It may include trading in options, futures and the indexes of major markets.
2 – A loan, which refers to the money given by the agent directly to the customer if the agent is a bank, or via a third party if the agent is not a bank.
3 – Riba, which occurs in this transaction is in form of fees for delaying the deal. This is interest that is charged on the purchaser if he does not make a decision concerning the deal on the same day, and which may be a percentage of the loan or a set amount.
4 – Commission, which is the money that the agent receives as a result of the investor’s (customer’s) dealing through him, and it is an agreed-upon percentage of the value of the sale or purchase.
5 – A mortgage, which is a commitment signed by the customer agreeing to leave the contracts with the agent as a mortgage for a loan. This gives him the right to sell these contracts and take back the loan if the customer’s losses reach a specific percentage of the margin, unless the customer increases the mortgage to compensate for the drop in the price of the product.
The Committee believes that this transaction is not permissible according to Sharia for the following reasons:
First, it involves obvious riba, which is represented by the addition to the amount of the loan which is called “paying fees for delaying the deal”. This is a kind of prohibited riba. Almighty Allah says: (O you who believe! Fear Allah and give up what remains (due to you) from riba (from now onward) if you are (really) believers. And if you do not do it, then take a notice of war from Allah and His Messenger but if you repent, you shall have your capital sums. Deal not unjustly (by asking more than your capital sums), and you shall not be dealt with unjustly (by receiving less than your capital sums)) (Al-Baqarah 2: 278-279).
Second, the agent stipulates that the customer must deal through him, which leads to a combination between giving a loan and having something in return (a commission), which is akin to combining the giving of a loan and selling at the same time. This is forbidden in Sharia because the Messenger (peace and blessings be upon him) said: “It is not permissible to give a loan and sell at the same time…” [narrated by Abu Dawud and At-Tirmidhi, who said it is a hasan sahih hadith.] In this case, he has benefited from his loan and Islamic jurisprudents unanimously agree that every loan that brings a benefit is haram riba.
Third, dealings that are done in this manner in the global markets usually involve many contracts that are haram according to the Shariah, such as:
1- Dealing in bonds, which comes under the heading of riba, which is haram. This was stated in a resolution of the Islamic Fiqh Academy in Jeddah, no. 60, in its sixth session.
2- Dealing indiscriminately in company shares. The fourth statement of the Islamic Fiqh Academy of the Muslim World League in its fourteenth session in 1415 AH stated that it is haram to deal in the shares of companies whose main purposes are haram, or if some of their dealings involve riba.
3- Selling and buying currencies are usually done without the hand to hand exchange stipulated by the Shari`ah.
4- Dealing in options and future contracts. A resolution of the Islamic Fiqh Academy in Jeddah no. (63), in its sixth session, stated that options are not permissible according to the Sharia because the object of dealing in these contracts is not money, services or a financial obligation which are permissible to exchange. The same applies to futures and trading in indexes.
5- In some cases, the agent sells something that he does not possess, and selling what one does not possess is forbidden in Islam.
Fourth, this transaction involves economic harm to the parties involved, especially the customer (investor), as well as to the economy of the society in general, because it is based on excessive borrowing and risk taking. Such matters usually involve cheating, misleading people, spreading rumors, hoarding, artificially inflating prices and rapid and strong price fluctuation, with the aim of getting rich quickly and acquiring the savings of others in unlawful ways. 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.
The Academy advises financial institutions to follow the ways of finance that are prescribed by the Sharia that do not involve riba and the like, and that do not have harmful economic effects on their customers or on the economy in general, like partnerships that are made in accordance with Islamic law. Almighty Allah is the Source of strength.
May Allah send blessings and peace upon our Prophet Muhammad and all his family and companions. (Quoted from Majallat al-Majma` al-Fiqh al-Islami, issue no. 22, p. 229.)