Currently almost a quarter of the world’s population is Muslim; there is no doubt about the importance of the role that binary options trading can play in the lives of Muslim binary traders. The general consensus seems to be that binary options trading is permissible to Muslim traders. This is largely due to the fact that trading has always been a way of life for Muslims and the religion Islam has always encouraged Muslims to participate in commerce.
So the question we will explore in this article is, “Is binary options halal or is it haram?” These questions concern the legality of binary options based on Islamic Shariah Law.
Shariah Law, The Muslim’s way of Life
The Arabic word “Shariah” in Islam is used to denote God’s divine law which every Muslim has to follow. It is derived from the main tenets of Islam specifically from the Quran and the wise sayings and actions of Prophet Muhammad called the Hadith. Together, Shariah principles dictate the way a Muslim should live his life. They permeate every aspect of a Muslim’s life and regulate the way he should behave in society, in business and with God.
Riba Policy According to Shariah Law
One of the major tenets of Shariah law is the prohibition of “Riba”. Riba is the Arabic term used to describe interest and is considered one of the major sins in Islam. In an Islamic society, it is encouraged that Muslims should practice selflessness and make sacrifices especially towards those who are less fortunate in life. For example, if a poor individual were to approach a wealthy person for a loan, the wealthy individual according to Shariah law is obligated to provide the loan to the poor individual without imposing interest on the loan.
This is in direct contrast with conventional societies where the priority is on personal benefit and self-interest. The differences also apply to the Islamic banking system and to the conventional banking system. With Islamic banking, there is no interest involved. Instead, Islamic banking transactions are based on 2 types of mutually beneficial arrangements called Mudharabah and Musharakah.
In contrast to conventional banking where you have the applicable charges and interest rate explicitly stated, a Mudharabah arrangement does not have any interest involved. Basically, the bank enters into a profit-sharing partnership with the investor (depositor). Because this is a partnership, the investor will also bear a portion of the losses if the investment is a failure.
In essence, it is just like any ordinary partnership deal except that it extends to the relationship between a bank and an investor. In other words, a Mudharabah arrangement allows Muslims to lend out their money in return for a profit just like conventional banks pay out interest to their depositors. The key difference is the Mudharabah arrangement does not have the interest or charges explicitly stated like a normal arrangement. In addition, both parties to the Mudharabah arrangement share the profits and the risk of losses together.
The Musharakah arrangement is similar in concept to the Mudharabah arrangement except that the roles are reversed. With the Mudharabah arrangement, the bank which enters into a joint venture with an individual or company is the investor. The profits under this arrangement are divided in accordance to the amount of capital that is contributed. The so-called “interest” earned by the bank is actually the profits from the enterprise or joint venture between the bank and the second party.
Once the loan amount has been fully paid up, the Musharakah arrangement will end between the bank and the individual. The Musharakah arrangement is usually adopted when an individual wishes to take out a mortgage to buy a property. With mortgages taken out under the Musharakah arrangement, the buyer enters in an arrangement with the bank to buy the property for a share of the rent paid by the occupier of the property which in this case is also the buyer. Just like a normal loan agreement, the term of the partnership will be clearly defined at the start of the partnership arrangement.
The idea of Islamic banking was only introduced into mainstream banking during the last decade when the UK began to adopt the concept of Islamic accounts. The idea behind Islamic accounts was to enable Muslims to comply with Shariah law while they deal with the conventional financial banking system. Given the fact that the growth rate for Islamic accounts is thrice as fast as traditional bank accounts, many financial services providers have also begun to adopt the idea of Islamic accounts to serve their Muslim clientele better.
Binary Options Islamic Trading Account
Given the fact that a substantial number of financial traders are Muslim, Forex and Binary options have also started to offer Islamic trading accounts over the last years. These accounts are tailored specifically for Muslim traders and are interest-free. A Muslim trader trading with an Islamic trading account will have access to all the trading assets that other types of trading accounts have with the difference being no interest charged on overnight positions. There is also no additional penalties or charges which Muslim traders have to pay for trading with the Islamic trading accounts. Typically, these Islamic trading accounts are characterized with all features listed below:
- Ability to trade with all the assets offered by the broker
- All market positions are closed by 23:59:59
- Broker operates on “Hiba” policy meaning the broker will “donate” as a charitable gesture to Muslim traders “loaning” the broker’s money to trade
- No hidden charges
- No interest charged on overnight positions
- No swap commission
- Shariah compliant trading account
Q: Is binary options trading Halal?
Answer: Many traders are Muslim and therefore brokers have come up with a way to make this kind of trading halal. This means they do not charge interest on any positions held open.
Q: If there is no interest involved what is the structure of the trade?
Answer: Instead Islamic banking transactions are based on 2 types of mutually beneficial arrangements called Mudharabah and Musharakah. With Mudharabah the bank enters into a profit-sharing partnership with the trader. As it is a partnership, the investor will also bear a portion of the losses.
With Musharakah the profits under this arrangement are divided in accordance to the amount of capital that is contributed. The so-called “interest” earned by the bank is actually the profits from the enterprise or joint venture between the bank and the second party.