Forex is the trading of one currency for another, such as Dollars for Euros, Pounds or Rands. According to the latest data from the Triennial Central Bank Survey of the Bank for International Settlements, trading in foreign exchange averaged well over six trillion dollars per day. This leads to the question: is it halal?

Currency transfer has extremely specific rules within the Islamic paradigm to ensure that it is within the bounds of Islamic ethics and stays clear of any iota of riba. One of the most prominent narrations on currency exchange is found in the compilation of Imam Muslim. It states that:

“Gold is to be paid for by gold, silver for silver, wheat for wheat, barley for barley, dates for dates, and salt for salt, like for like and equal for equal, payment being made hand to hand. If these classes differ, then sell as you wish if payment is made hand to hand.”

In the narration above the following points stand out in relation to currency transactions:

1.      Currency exchange is explicitly allowed.

2.      Transactions must happen on the spot.

3.      No delay in exchange of ownership.

4.      No prohibition in making a profit via currency exchange is mentioned.

However, a distinction should be made between merely exchanging one currency for another and the current practices surrounding for-profit forex trading. In practice, forex may contain one or more problematic elements. Among them are the following:

1.      Interest. Leverage is often employed in forex to increase the return on your investment. A fixed return based on a loan is not permissible as the loan which brings a benefit is riba. The 278th ayah of the 2nd chapter in the Qur’an makes it clear that Muslims are not from those who indulge in riba.

2.      Actual ownership does not take place. Often there is no actual transferral of ownership in forex trading. Merely speculating on changes in the currency pairs is not allowed.

3.      Deferred ownership. Transactions between different currencies needs to be “hand to hand”. In other words, a currency transaction that is not immediate is not allowed.

4.      Combination of transactions. Two transactions in one needs to be avoided as The Beloved ﷺ forbade two transactions in one.

From the above it is clear that while currency exchange may be halal, the general for-profit forex industry that seeks to develop a business from currency transfers generally is not. And Allah knows best.

Allah knows best