Let’s say, I invest $1,000, the broker invests or lends $99,000 and together we buy the currency like euro worth $100,000. The broker will not charge any interest on the money that he invested or lend, because it will be a Shariah compliant account.
– If the rate of the euro goes up and I decide to sell the euro. The broker will take a small share of the profit and rest is given to me
– If the rate of the euro goes down below a certain margin which is determined by the amount I invest, my broker will close the trade and take his money back and I will lose the money I invested.
Also, another place were interest may be involved is when the buying and selling is not done on the same day, then a rollover occurs which mean that either we have to pay interest or give interest on the currency you have bought, but the brokers is offering a swap free or interest free accounts for Muslims only, in which, even if you do not close the trade on the same day, they will not debit or credit any interest.
I am interested in Spot trading not Future trading. Please let me know if this type of trading is Halal.
Trading in this manner appears to be objectionable from a Sharia perspective and must be avoided. From your explanation, the contribution of the broker appears to be a loan. If this is the case and you make a profit when selling the currency, the broker is not entitled to any amount over and above his capital loan.
Any amount that he takes over this is deemed to be interest. On the other hand, if the contribution of the broker is deemed to be a capital contribution as a partner in the venture, then both partners must share in the loss as well, whereas, apparently, from your explanation, it appears as though the broker does not share in the loss. His capital is guaranteed.
Similarly, conventional forward exchange contracts and purchasing or selling of currencies on the futures market is also prohibited. These regulations are deduced directly from the Ahadith of Rasulullah (Sallallaahu Alaihi Wa Sallam).
A method of trading can be structured on the principles of Musharaka (partnership). I suggest that you refer to the book An Introduction to Islamic Finance and thereafter, should you and your broker require any assistance and advice regarding how to structure such a partnership, you may contact us and we will endeavour to advise to the best of our ability.
Further, the Sharia has laid down certain guidelines and regulations when trading in currencies. It is necessary to uphold and maintain these regulations when trading in currencies. The most important of these regulations is that currencies of different countries can be traded in exchange of each other provided that the transaction is completed on spot (i.e. both counter-values should be exchanged at the same time), irrespective of whether the contract is concluded at above or below the spot rate. In other words both the counter-values are exchanged at one and the same time.
The exchange of both counter values and the subsequent possession acquired by the buyer and seller thereof, could take place through actual possession or constructive possession which is also acceptable. In order to enlighten you further on this, I quote hereunder from the Sharia Standards, prepared by AAOIFI:
“2/6/4. Physical possession takes place by means of simultaneous delivery by hand.
2/6/5 Constructive possession of an asset is deemed to have taken place by the seller enabling the other party to take its delivery and dispose of it, even if there is no physical taking of possession. Among other forms of constructive possession that are approved by both Shari’a and business are the following:
(a) To credit a sum of money to the account of the customer in the following situations:
(1) When the institution deposits to the credit of the customer’s account a sum of money directly or through bank transfer.
(2) When the customer enters into a spot contract of currency exchange between himself and the institution, in the case of the purchase of a currency against another currency already deposited in the account of the customer.
(3) When the institution debits – by the order of the customer – a sum of money to the latter’s account and credits it to another account in a different currency, either in the same institution or another institution, for the benefit of the customer or any other payee. In following such a procedure, the institution shall adhere to the principles of Islamic law regarding currency exchange.
A delay in making the transfer is allowed to the institution, consistent with the practice whereby a payee may obtain actual receipt according to prevailing business practice in currency markets. However, the payee is not entitled to dispose of the currency during the transfer period, unless and until the effect of the bank transfer has taken effect so that the payee is able to make an actual delivery of the currency to a third party.
(b) Receipt of a check constitutes constructive possession, provided the balance payable is available in the account of the issuer in the currency of the check and the institution has blocked such a balance for payment……”
And Allah Ta’ala Knows Best
Shafiq Jakhura (Mufti)