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Islamic or Sharia-compliant trading and gambling is growing in popularity daily. Popularity is also bringing out public concerns about the many regulations governing this trading system. For Muslims, the first issue to be exampied before investing is whether the preferred trading method or online casino platform is permitted under Islamic law. Kazem Masalma from a7labet, a trusted online casino and sports betting site, wrote an extremely helpful article for those who are questioning this practice, especially the question: Is betting haram? However, in this article, we will address several frequently asked questions about Islamic trading from a religious point of view. Even if you are not a Muslim, this article will come in handy when you are designing financial products for Islamic countries or assessing the market attitude of a stock with a majority of Muslim shareholders.
Fundamental Restrictions in Islamic Trading
In Islam, interest payments and investments with an interest component are banned. Interest is not seen as Sharia compatible since it is considered an exploitative behavior.
When it comes to Islamic financial concepts, riba is a crucial component. Riba is a vital piece of Sharia-compliant financial investment and saving for Muslim investors. Riba refers to the notion of interest or usury and unjust profits gained in investment, commerce, and business in Islamic finance. Riba is forbidden in the Quran and Sunnah. In terms of linguistics, riba refers to any 'increase' or growth. Still, the concept is based on the idea that riba distorts wealth by allowing money lenders to exploit others and enhance their riches without making a significant contribution to society.
One of the most prevalent forms of riba is riba al-nasiah, which refers to a growth in wealth over time. Bonds fall under this category, and as a result, Muslim investors are prohibited from purchasing them. One of the reasons Muslim investors in the financial markets favor stock trading over other types of investments is the ban of riba.
GHARAR (Risk and Uncertainty)
The term 'gharar' refers to insecurity, danger, or risk. Gharar is forbidden in Islamic finance because it contradicts the concept of certainty and transparency in economic operations. For example, Gharar might occur when an owner's claim is ambiguous or questionable. Sharia prohibits participation in transactions that involve undue uncertainty or risk. For example, investing in or participating in any short-selling or uncertain contracts is forbidden under Islamic financial guidelines.
Scholars distinguish between small and significant gharar. Although most derivative goods are outlawed owing to excessive uncertainty, some behaviors classified as gharar, such as commercial insurance, are necessary components of economic life. Additionally, a seller may short-sell fungible assets such as wheat and other commodities that will be supplied to a buyer later.
Meanwhile, although a transaction without actual ownership is not always a violation, neither party's promise of delivery without credibility is. Additionally, transactions and contracts are deemed gharar when extreme risks or uncertainties are mixed with one party abusing the property of the other or when one party profits only from the other party's loss. As a result, Islamic finance strongly bans the extension of interest-bearing loans, which it deems usury.
Investment In Prohibited Industries
Any halal investment must adhere to the Sharia standards outlined above and be conducted ethically and with a sense of social justice. Businesses whose primary purpose is to violate Islam's core precepts are widely regarded as unsuitable investment prospects.
Certain businesses are judged immoral or potentially harmful to society therefore, Muslims should shun opportunities in these sectors:
Industries engaged in the manufacture, promotion, advertising, or sale of drugs and cigarettes
Interest-bearing banking products or financial transactions (riba)
Enterprises involved in the manufacture, promotion, advertising, or sale of alcoholic beverages
Any industry that is associated with gambling
Prostitution and pornographic industries
Sharia law forbids investors from investing in sectors and enterprises that get at least 5% of their revenue from immoral sources (known as the 5 percent rule). Therefore, before investing in any firm, Muslims should review the company's financial statements and position and research the company's sources of revenue and profit and how they are generated.
3 Frequently Asked Questions and Answers
Is Stock Trading Halal?
Scholars widely acknowledge that purchasing stocks is permissible while maintaining certain criteria. Here you are only purchasing a portion of a firm. However, you must ensure that the issue business is not doing business un-Islamic. For example, companies like Diageo(alcohol) and DraftKings (gambling) would be prohibited.
Companies may be classified into three categories from an Islamic perspective:
rofits from legally permitted activities
To mention a few, transportation, production, apparel, hospital instruments, property investment, hardware, furniture, and commodities are all free of haram practices and transactions, such as deception and riba borrowing (unjustified lending). Therefore, these businesses are also referred to as 'green' businesses.
Shares in firms engaged in forbidden activities
There are strict restrictions on investments in liquor, bars, tourist industry, resorts, pornographic content, interest-based banking, and commercial insurance firms. Under these circumstances, the stock market is haram.
Partially haram activities
While the bulk of work is allowed, some practices are haram. Transportation businesses, for example, have interest-bearing bank accounts and are often funded via riba-based loans or through private stock ownership. These businesses are referred to as 'mixed' businesses.
Now, if you want to remain on the safe side, the straightforward solution of halal trading is not to invest in the second and third kinds of industries.
Is Forex Halal?
Forex trading is becoming more popular day by day, and the prospect of rapid money attracts a rising number of traders each day. At first glance, this seems to be a halal investing opportunity since you are only purchasing and selling money. However, if you delve a little further, you may ask if Islam indeed prohibits forex trading.
If you acquire 7500 Saudi Riyal for $2000 and sell it when the Riyal rises against the dollar, the transaction is Halal (permissible). However, some concerns persist in reality.
To earn large intraday earnings on minute price swings, you must spend huge money as an initial investment. As a result, forex brokers provide leverage to relieve this issue.
However, this is a loan in effect. In Islam, borrowing money from someone to invest and subsequently repay the creditor interest-free is permitted. However, forex brokers lend you money just to earn a fee. They will effectively make a profit on each deal. Numerous scholars see this as a type of interest, rendering forex trading haram.
Fortunately, many brokers still encourage halal trading and avoid taking an interest. To maintain profitability, they impose higher charges on spot Forex deals.
Is Day Trading Haram?
Islamic values influence the life of a Muslim in various ways. All of these are defined in the Holy Quran and Hadith, as ‘Sharia’, which literally means 'course to be followed' in Arabic. However, black and white boundaries may soon blur when it comes to day trading. One of the major points of disagreement is the risk-sharing component.
There will almost certainly always be disagreements about whether day trading is halal or haram. Additionally, despite extensive study into multiple sources, this article is not intended to provide readers with religious guidance. Rather than that, it seeks to aggregate perspectives and present them in an easily digestible style.
While a substantial part of Islamic scholars believe that day trading is halal, perhaps the most important activities you can do are to carefully select the most suitable broker and to examine your trade decisions using the halal criteria mentioned earlier.
That was all for today. The post is written according to the writer's knowledge of Islamic Trading and Sharia law. However, no one except a scholar is confidently knowledgeable regarding every aspect of religious finance. Therefore, always consult with your nearby Alim-E-Deen (Islamic Scholar) if you ever face any confusion. Certainly, Allah (Glorified and Exalted) and His Prophet (Blessings of Allah be upon him as well as peace) know the best.