Online Forex Trading

Shari’ah has placed certain restrictions on currency trading to avoid interest-based transactions. Exchanging different currencies is permissible even with excess on one side as long as one party takes possession of his currency at the time of the transaction. However, when trading with deferment from one party, the market value on the day of trading should be considered. Deferment from both parties will render the transaction impermissible.

In Forex trading, only the value of the currency being traded with is transferred to the buying party; i.e. actual and physical transfer of funds and monetary notes does not occur. In essence, the buyer and seller become indebted to each other of the value of each other’s respective currencies.

No physical transfer of monetary notes into each other’s banking accounts takes place. The transaction thus involves a debt from the part of both the buyer and seller. Such a transaction is unanimously forbidden in Shari’ah. It comes in a narration that Ibn Umar Radhiallahu anhu has said:

نهى رسول الله – صلى الله عليه وسلم – عن بيع الكالئ بالكالئ ‌وهو ‌بيع ‌الدين بالدين

“Nabi Sallallahu alaihi wasallam has prohibited a transaction which involves a debt in exchange of a debt.”

(Musannaf Abdur Razzaaq, Vol.8, pg.90)

It is a condition for at least one party (either the buyer or the seller) to take physical possession of one of the currencies if the currencies are not gold and/or silver. When one understands how this specific area of forex trading works, one will realize that this fundamental condition is not upheld when doing currency/forex trading over the internet.