What is the ruling on forex (online trading of currencies) on the internet? In particular, please give Shar'i guidance about trading with leverage/margin, the fee for keeping a position open overnight, and futures contracts.

Buying and selling currencies (sarf) is in its origin permissible trade, provided that possession takes place from both sides in the very sitting of the contract. It is narrated from 'Ubadah ibn as-Samit, may Allah be pleased with him, that the Messenger of Allah, peace and blessings be upon him, said: "Gold for gold, silver for silver... equal for equal, hand to hand (cash for cash); and when these types differ, sell as you wish provided it is hand to hand" (Sahih Muslim: 1587). Therefore delay or absence of possession in currency exchange enters it into riba an-nasi'ah.

(a) Leverage/margin — the condition of an interest-based loan: In this system the broker gives the customer an amount many times larger than his deposited amount as a "loan", but stipulates that trading will be through that same broker, and charges a fee under the name of "swap" (Rollover) for keeping a position open overnight. This fee is an explicit increase on a loan, i.e. interest — whose prohibition is definitive: ﴿يَا أَيُّهَا الَّذِينَ آمَنُوا اتَّقُوا اللَّهَ وَذَرُوا مَا بَقِيَ مِنَ الرِّبَا إِنْ كُنْتُمْ مُؤْمِنِينَ﴾ (O you who believe, fear Allah and give up what remains of riba, if you are believers) (Surah al-Baqarah: 278). And the broker's making the loan conditional on his own brokerage is also the same form that the scholars have declared to be a "loan that draws benefit".

(b) Absence of possession and sale of a thing not owned: On these platforms real currency neither comes into the buyer's possession nor does he obtain Shar'i control over it; only numbers change in the account and the difference in price is settled. The Prophet, peace and blessings be upon him, had said to Hakim ibn Hizam, may Allah be pleased with him: "Do not sell what is not with you (in your possession)" (Sunan Abi Dawud: 3503). Furthermore, this game based on difference resembles gambling in its reality, because the two parties stake on each other's wealth without a real exchange.

(c) Futures and options: In futures both counter-values are deferred, the fluctuation of price itself becomes the real transaction, and severe gharar is found in it — whereas the Messenger of Allah, peace and blessings be upon him, forbade gharar sale (Sahih Muslim: 1513). The Islamic Fiqh Academy (Jeddah) in Resolution No. 63 declared the prevalent contracts of options and futures impermissible, because their subject is neither wealth nor benefit nor any financial right capable of compensation.

The Islamic Fiqh Council of the Muslim World League, in its eighteenth session (Makkah al-Mukarramah, 1427 AH/2006 CE), examined margin trading and declared it impermissible; the reasons include explicit interest (overnight fees), the combination of loan and brokerage, and in most cases the absence of Shar'i possession. Therefore trading with leverage on prevalent forex platforms is not permissible, and the income obtained from it is not halal earnings. Yes, if a transaction is in pure cash form with real and Shar'i-recognised possession, without leverage, without swap fee and without deferred settlement, then it comes under the origin of currency exchange (bay' as-sarf) — but the general form of retail forex platforms is excluded from this, therefore avoidance is necessary.

Maqasid-based caution: Protection of wealth is among the fundamental objectives of the Shariah, and leverage puts that same wealth into a risk many times greater than its original size; practical experience is that most small investors who enter this market lose their capital. Avoiding a trade whose general outcome is destruction of wealth and consuming others' wealth by false means is exactly in accordance with the objective of the Shariah.

Translated from the original Urdu fatwa.