Is Futures Trading Halal?

By The Money Farm Team

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

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 crypto futures trading halal?

Because of the ban on maisir, options, futures, and “other derivatives” are “usually” not employed in Islamic finance (according to Thomson Reuters Practical Law). The “majority of Islamic scholars” consider margin trading, day trading, options, and futures to be illegal by sharia (according to Faleel Jamaldeen). Day trading (which involves buying and selling financial instruments within the same trading day) is not concerned with the underlying product or economic activity of what is traded, whereas margin trading (which involves borrowing money to buy what is being traded) involves interest payments in margin accounts. “Gharar is observed in derivative transactions including as forwards, futures, and options, as well as in short selling and speculation,” according to one source (Investopedia).

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.

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 futures trading considered gambling?

Futures trading is frequently compared to playing poker or betting on horses for a living. The prospect of financial loss carries negative overtones, and the high washout rate among newcomers to the market simply adds fuel to the fire. When it comes down to it, many people consider futures to be nothing more than a glorified version of gambling.

There’s no denying that active trading entails risk and the possibility of losing money. The average Joe has a better-than-average probability of going bankrupt without a solid game plan and a business-friendly temperament. Is futures trading, however, just an online trip to Vegas? How you play your cards determines the answer to that question.

Is it haram or halal to trade?

Buying stocks is widely considered as not being haram. This is due to the fact that you are simply a shareholder in a company. You must, however, ensure that the company in question is not conducting business in an un-Islamic manner. Companies such as Guinness (alcohol) and Ladbrokes (gambling) would be prohibited.

So, what do you do if the business sells items and services that are in violation of Islamic law?

You do not make any investments. The simplest way to eliminate any potential conflict is to avoid buying and selling shares in the stock at all. Having said that, there is still some leeway. You may be able to trade while remaining halal in some instances.

Small Percentage

Most scholars think that you can invest even if the company only deals in a small percentage of non-Islamic goods and services. It is recommended that you just give up a percentage of the revenues generated by the haram section of the company. So, if alcohol accounts for 10% of your company’s profits, you’d donate 10% of your profits to charity.

Interest

Another key source of concern is the issue of interest. Because you shouldn’t be dealing in interest, you should swap 25 for exactly 25. This, however, may not always be possible. Because the stock price fluctuates, you will invariably pay more or less than face value for the debt/cash.

You’re paying more than the face value if the company has only 2000 in cash and that makes up the majority of its value, and the stocks trade at 75,000 in total.

Solution

Fortunately, limiting yourself to only halal shares is relatively simple. Most academics believe that you should avoid companies that have a significant portion of their stock value related to big amounts of debt or cash. Instead, choose organizations whose value is derived from their larger operations.

You may even locate Islamic stock screeners that will help you find halal stocks. However, this type of software is quite costly. Alternatively, most platforms allow you to take a screenshot of the company’s debt levels and market capitalization.

Common sense is, for the most part, your most powerful weapon. Avoid companies that are deeply leveraged and involved in the purchase and sale of haram goods and services. In conclusion, whether stock trading is halal or haram is totally dependent on the firms you choose to invest in and the amount of profit you keep.

Is forex trading haram?

Is it permissible to trade forex in a halal or haram manner? Forex trading can be both halal and haram, depending on the investor’s aim and behavior. Trading with an Islamic account and a good strategy is halal, however trading with a standard account and no system is deemed gambling and haram.

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.