Answered by:Mufti Mohammed Tosir Miah
Is spread betting permissible?
In the name of Allah, the Most Gracious, the Most Merciful
I will first explain the definition of spread betting or spread trading.
Spread betting is a fast-moving, flexible way to trade the financial markets without holding the underlying investments directly. Regardless of the direction that markets move, you can take a position to gain exposure to this movement for a fraction of the capital outlay required to trade the market directly. If you go long on the price, your profits will rise in line with any increase in that price. If you go short, your profits will rise in line with any fall. Similarly, if you go long on the price and the underlying stock price falls, you will incur losses.
Placing a spread bet gives you instant access to the price movements of financial markets around the world. Spread betting offers you the opportunity to trade equities, indices, currencies, and commodities in Europe, the US, and the Far East from a single account.
As a margined product, spread betting only requires you to deposit a small percentage of the full value of your position. This means that the potential for profits, or losses, from an initial capital outlay, is significantly higher than in traditional trading. The margin required is typically between 10 and 20 percent of the total value of your position, depending on the market. ( http://www.iii.co.uk/)
There are two reasons why the aforementioned investment will be impermissible.
Firstly, one of the conditions for investment is that the price or distribution of the profit or loss has to be certain. However, in this transaction the profit and loss are not certain, hence, the deal will not be Shariah-compliant. (An Introduction to Islamic Finance, Mufti Taqi Uthmani (DB) p.36 – p.37)
Secondly, the Shariah has told us to avoid gharar (excessive risk-taking), and unfortunately, spread betting entails risk-taking of a substantiation proportion, hence, making it impermissible.
It is narrated by Saaiduna Abu Hurairah Radiallahu Anhu that the Prophet of Allah Sallallahu Alahi Waalam prohibited the pebble sale and the Gharar sale. (Sahih Muslim, Sunan Abu Dawud, Sunan Tirmizi)
Professor Mustafa Al Zarqa defined Gharar as follows: “Gharar is the sale of probable items whose existence or characteristics are not certain, due to the risky nature which makes the trade similar to gambling.” (Financial Transactions in Islamic Jurisprudence p.83 v.1)
The conclusion we can come to is that spread betting is impermissible as the distribution of the profit and loss is unknown and also it entails excessive risk-taking.
Only Allah Knows Best
Written by Mufti Mohammed Tosir Miah
Darul Ifta Birmingham