Are Futures Halal?

To begin with, it is a well-established Shariah concept that a sale or purchase cannot be delayed. As a result, in Shariah, all Forward and Futures transactions are invalid.

Is it Shariah-compliant to trade futures?

Contract for Futures The Shariah Advisory Council of the Securities Commission (2006) decided that futures contracts are Shariah-compliant.

Why is futures trading permissible?

The essential concept of futures trading and transactions is that they are Halal unless the legislator specifies otherwise. Although the shareholder corporation is not governed by Islamic law, its activities and contracts must be legal and ethical.

Is short-selling permissible?

While Shariah prohibits short-selling, an increasing number of Islamic organizations and hedge funds claim to provide Shariah-compliant shorting solutions. Short-selling in Islamic finance is frequently portrayed as a great innovation or a significant breakthrough. In truth, utilizing modern financial engineering techniques, almost any contract may be ‘Islamised.’ The question is rather how high the transaction costs are, and whether or not such mechanics are Shariah-compliant, or whether they are simply an unwelcome trick that undermines Islamic finance’s goals.

This article goes over the basics of conventional shorting before detailing three approaches based on Salam, Arbun, and Wa’d and evaluating the benefits and drawbacks of each.

• The broker examines his portfolio to see if any of his other clients own the asset in question.
• If this is the case, the broker borrows the asset from the customer and sells it to the investor on the market as usual.
• The investor closes out his short position by purchasing the asset on the market at some unspecified future date.
• The broker deposits the acquired item into the account of the client who borrowed the asset.

There are various concerns and dangers associated with conventionalshorting in practice:

• If the broker runs out of shares to borrow at any point, the investor is required to shut out his short position immediately, even if it means losing money.
• The asset’s lender takes on a credit risk with the borrower, and will require security in the form of the cash obtained by the borrower following the asset’s sale.
• Because the asset’s price is likely to vary, a collateral amount greater than the asset’s worth, known as a “hair-cut,” is frequently requested, implying that the investor may not receive the entire short sale proceeds.
• Typically, assets can only be borrowed for short periods of time, ranging from a few hours to a few weeks, with costs rising rapidly as the borrowing duration lengthens.
• Similarly, when demand for borrowing an item exceeds supply, borrowing costs can skyrocket.

Islamic finance provides a natural way to sell assets for a price to be paid up front for an asset to be delivered later with the Salam contract. Salam, which is sometimes related to advance contracts, differs from short-selling in several ways:

• Salamcontracts do not require the underlying asset to be borrowed from a third party. It’s also not the same as naked shorting, which is often limited to aT+3 delivery.
• A Salam contract’s underlying might be a single asset or a basket of securities.
• Salam is a one-on-one contract between two people that has no bearing on anyone else.
• As a result, the investor will not be’short squeezed’ at any point in the future.
• Salam prices are typically lower than market prices for assets, with the discount factoring for counterparty credit risk.
• When determining the price of the Salam, estimated dividends and interest, as well as trading fees, must be taken into account, just as they must be when short-selling.

Arbun can be used to replicate the economic effects of short-selling in a variety of ways:

• Similar to writing a calloption, the selling party accepts a down payment for an asset. When the down payment is set at a high level, near to the market price, the resemblance to short-selling is heightened, as the buyer is economically driven to exercise the option even if prices are decreasing in order to limit his losses. However, such a large down payment would equate to paying an excessive option premium or a combination of Salamand and a forward contract, making it unattractive to many counterparties.
• Alternatively, the selling party could obtain a down payment from a counterparty, as well as a subsequent contractual promise, or Wa’d, from the counterparty to purchase the asset at maturity, even if the market price is lower than the pre-agreed price. Even though this arrangement is not the same as short-selling, the selling party profits from declining prices.

Wa’d, or binding unilateral commitments, can be utilized to simulate short-selling when combined with Murabaha, or deferred payment agreements. Party A buys an asset from party B through a Murabaha for the Murabaha price X, and then sells it to another party for the spot market price. Furthermore, party B makes a unilateral pledge to party A to buy back the asset at a pre-agreed price Y at a later date. Party A, on the other hand, commits to sell the asset to party B at that time and for that price Y.

A forward position on the asset is comparable to a combination of two unilateral commitments. The total payment of the Murabaha transaction and the forward position atmaturity is now zero if the price Y is set equal to the Murabaha price X. Only the ‘borrowed’ asset is’returned,’ which party A must acquire on the market at some unspecified future date before, or at maturity, making the entire arrangement an identical Islamic copy of short-selling. In fact, the agreed-upon forward price Y would be lower than the Murabaha priceX to provide an incentive to the counterparty and to accurately account for predicted dividend yields, brokerage fees, and other borrowing costs.

When it comes to traditional short-selling, there are a few things to keep in mind:

• If the Murabaha and forward repurchase through Wa’d are done directly with the asset owner, it is necessary that this party has a sufficient amount of the needed asset on hand, and that it does not want to retain flexibility in terms of when it sells its assets in the future, because the transaction is fixed-term for the borrower. In this situation, the shorting party would be responsible for paying Wakala fees to its broker, who negotiated the transactions on their behalf.
• If, on the other hand, the Murabaha and the forwardrepurchase through Wa’d are conducted with the shorting party’s prime-broker, who does not possess the asset, the broker must engage in transactions with one of his other clients who does own a sufficient amount of the required asset. In that situation, the broker’s pay would rise and would only be the difference between price X and price Y. In order for the broker to avoid unfavorable market risks, such a strategy necessitates exceedingly cautious structure.
• If all aspects of the structure, including the Murabahatransaction and the Wa’d commitments, are carried out with just one counterparty, the entire process can be viewed as establishing a dummytransaction with the sole goal of allowing Shariah non-compliantshort-selling.

When opposed to traditional short-selling mechanisms, the fact that this type of Wa’d-based short-selling solution is fixed-term for the lending party may increase transaction costs and shorten transaction length.

One of the key advantages of this strategy is that the prime broker handles the procedural complexity, while fund managers don’t have to worry about formal requirements. This allows skilled conventional fund managers to be easily mandated to manage Islamic funds, even if they are unfamiliar with the nuances of Salam or Arbun contracts, for example.

Is it permissible to invest in stocks?

According to Islamic finance principles, investing in or participating in any short-selling or doubtful contracts is prohibited. Investment in any business that engages in banned activities, such as gambling or selling alcohol, is prohibited for Muslim investors.

Is it permissible to trade online in Islam?

Forex trading is becoming more accessible, and the possibility of making rapid money attracts new traders every day. Because you’re merely buying and selling money, this appears to be a halal investment opportunity on the surface. However, if you dig a little deeper, you could find yourself wondering if forex trading is indeed haram.

This is a halal transaction if you acquire 4,000 for $2,5000 and sell it six months later when the pound increases against the dollar. However, there are still a number of concerns to be resolved.

Leverage

You’ll need to invest tens of thousands, if not hundreds of thousands, of pounds to make significant intraday returns from little price movements. As a result, forex brokers provide leverage to help you solve this difficulty. As a result, you’ll be able to invest 50 or 75 for every 1 you put up. You may now take much bigger positions and make a lot more money.

This is, however, essentially a loan. In Islam, it is permitted to borrow money from someone for the purpose of making a profit and subsequently repaying the debtor interest-free.

Forex brokers, on the other hand, are lending you money solely for the goal of earning a commission. They will effectively make a profit on each trade. Many academics consider this to be a type of interest, making forex trading haram.

Solution

Fortunately, Islamic forex brokers have responded by offering a viable alternative to day traders. You can now open an FX account that does not charge you any interest. Instead, they charge higher commissions in spot forex deals to stay profitable.

While some argue that this is just a veiled interest component, many academics are pleased with this new approach of facilitating exchanges. Any’regular’ spot forex trading offered by brokers without overnight fees might easily circumvent the riba barrier.

Hand To Hand Exchange

The next issue is the exchange itself, now that the interest factor is out of the way. Trading is allowed “as long as it (exchanges) is done hand to hand.” This demonstrates that the prophet Mohammed clearly envisaged commodities being transferred between two parties as a normal aspect of trade.

Most transactions used to be done face to face, but with the rise of e-commerce, what exactly qualifies as “hand to hand”?

Many claim that the contract is made between the broker and the trader, making it halal under the notion of two separate parties.

Scholars have gone so far as to claim that the contract must be made in the same’sitting’ as the actual exchange. As a result, deals must be entered and exited fairly instantly, which is frequently the case with forex traders. However, this could imply that non-market trades, such as stop and limit orders, are haram.

Ownership

Part of the response to the question, “Is FX trading legal in Islam?” revolves around the concept of ownership. Is it permissible to speculate on whether the value of a currency will increase or decrease?

This is a difficult question to address definitively, and you may wish to get specialized religious advice on it.

Many people agree on a number of elements related to forex that could provide an answer to the topic. Humans have a natural desire to improve their lives, including their financial condition, which Islam recognizes. When faced with a choice, we must all think about the consequences and respond with intelligence.

While we all know that gambling is severely prohibited, there are halal forex brokers who have taken every effort to keep all of their activities within the bounds of Islamic law.

Is Bitcoin considered a sin in Islam?

The national council of Islamic experts in Indonesia has declared cryptocurrency trading, such as Bitcoin, to be prohibited for Muslims, as the popularity of digital currencies surges in the world’s largest Muslim-majority country.

Is it permissible to day trade cryptocurrency?

Day trading, as we stated at the outset of this post, is a highly Halal activity if it is done under the appropriate conditions, which include avoiding all forms of interest.

Is Forex permissible or prohibited?

Islamic forex accounts, also known as swap-free accounts, are halal trading accounts that do not allow the accrual, collection, or payment of interest fees. In addition, transactions involving Islamic FX accounts must be completed quickly.