While leverage is a big piece of the puzzle in the world of Forex today – a valuable trading tool and powerful mechanism, particularly relied on by smaller retail investors – a lot of people are hesitant to unleash leverage in their trades.
Leverage is a particularly sensitive subject for Muslims that do not want to go against their faith.
Islam says that riba (interest based lending) is haram and to be avoided at all times, but leverage (especially in the Forex space) certainly operates like a loan – even if there is no specific “interest” involved, confusing a lot of Muslims that would otherwise like to jump into the Forex world.
Truth be told, “is leverage in Forex haram” is a little more challenging to answer than most people think.
Forex leverage is both haram and allowed depending on your views. Leverage is a loan for a broker, which would not class as Riba, meaning the leverage from your forex broker is halal. However, if the leverage allows for a gambling mentality, this is considered haram.
Is Leverage in Forex Haram?
When you receive leverage from a broker you are essentially getting a “loan” from the brokerage you are working with, with the express purpose of investing that money – and there is no interest attached.
In that sense, the “loan” you are getting from your broker would not be considered riba. And that means that it wouldn’t be considered haram.
On the flip side of things, though, if you are to take advantage of the leverage you’ve been provided and lose a certain amount of liquidity from your positions your Forex account will become locked down and you’ll have to pay more money to gain access to your account again.
This is traditionally called a margin call in the Forex and financial investing world, but it can be viewed as an interest payment or a fee for investing with leverage in Forex. And that would certainly make it haram. This is a huge issue – the fact that leverage can put you in debt with your forex broker.
As a general rule of thumb it’s advisable for serious and devout followers of the Islamic faith to avoid leverage in Forex whenever possible.
Is leverage in Forex haram?
Maybe. But maybe not.
Is that gray area something you are comfortable operating in when it comes to something as serious as your faith, though?
That’s for you to decide. The whole question of whether forex trading itself is halal or haram is a debate that has been raging in the industry for many years now.
Is It Possible to Avoid Leverage in Forex?
Luckily, though, it is possible to invest and trade in Forex without capitalizing on any leverage whatsoever.
This is (understandably) going to limit the ability for retail investors to make the kind of money that they would have been able to make capitalizing on leverage, though.
For example, with a 50:1 margin on a $200 investment you really gain access to $10,000 worth of cash that can be traded in Forex.
If you make the correct decision with your Forex trades you would have made considerably more money investing your $200 levered to $10,000 worth of capital as opposed to just the $200 you put into your account.
You lose a tremendous amount of power when you avoid leverage trades in the Forex world.
At the same time, though, a lot of Muslims are comfortable with that “drawback” if it means that they do not have to go against their faith.
Once more, it really all comes down to you, your personal thoughts and beliefs on Islamic law, and whether or not leverage a really is considered riba.
It may be something that you want to speak to Islamic faith leaders in your community about before you jump right in.
How Much Leverage Should You Be Using to Stay Haram?
Another interesting perspective on “is leverage in Forex haram or not” is that leverage itself is perfectly fine to use as long as the investment instrument itself is Sharia compliant.
You would, obviously, have to avoid trading that involved any swap fees whatsoever. And that means almost exclusively using Forex brokerage accounts that have been set up with the Islamic faith in mind.
Thankfully, these kinds of accounts are really easy to find.
All of the top brokers offer an “Islamic account”, making it easy for investors to jump in to the Forex world without ever having to worry about paying swap fees that would have otherwise made this investing haram straightaway.
As a general rule of thumb, it’s best to leave any leverage you end up taking to a small an amount as possible.
It’s also important to capitalize on this leverage through Islamic accounts only – the kinds of accounts that do not have standard interest payments attached. These accounts usually charge slightly higher commissions for spot Forex trades (which is perfectly halal), allowing you to avoid any conflicts with haram leverage quantities.
Those serious about their Muslim faith are also going to want to be sure that they trade “hand-in-hand”.
This kind of trading is fully in line with the teachings of the prophet Mohammed, so long as the trades are executed through a singular broker and trading platform and are entered into and exited out of as quickly as possible.
Stop and limit orders may be haram and interfere with the “hand-to-hand” trades, but again that’s something that Muslims are going to want to speak to Islamic faith leaders in their community about for more clarification.
At the end of the day, the answer to “is leverage in Forex haram” is a little more complex than it appears on the surface.
This is something to seriously consider. It’s something to deeply research.
We mentioned earlier that there are a lot of conflicting voices in the Islamic community about leverage, about the hand-to-hand exchange nature of Forex in general, and about whether or not Forex itself is halal or haram.
These are not things to take lightly, not if you are passionate and serious about your faith.
Think on them.
Speak to local leaders and financial experts in the Muslim community that have deeply researched this topic themselves. They’ll be able to help you navigate your personal views on whether or not leverage and Forex in general are haram.
In Conclusion – Is Leverage Halal In Forex?
In summary, forex leverage is both considered halal and haram, in different situations.
For a Muslim forex trader, it’s never about the amount of leverage that you use in your account. It is always about what type of instrument you are trading and how compliant that instrument is with Islamic law.
There are a number of different things to consider when it comes to Forex trading and Islamic law. It’s not as simple as just saying that leverage is always halal or always haram.
Traders should always speak with their local Islamic faith leaders to get a better understanding of what is and isn’t allowed under Sharia law.