Is Binary Options Halal and compatible with Islamic traditions? This has become an important question for prospective Muslim options traders as the financial industry has become available to everyone through online trading accounts. Here we look at the implications of Sharia Law on binary options trading and whether it is “Halal” or “Haram”. The development of online trading in the financial industry in the last two decades has opened up new horizons for retail traders of all races and creed. With one quarter of the world’s population being Muslim, it is inevitable that more and more Muslim traders will join the online Islamic binary options trading scene. In Islamic economic jurisprudence or Shariah law, charging “Riba” or interest is forbidden and is considered as a major sin. Many brokers in sensing an opportunity that will benefit them as well as their Muslim traders came up with the idea of “Halal”, or Islamic, trading accounts.
Halal Binary Options Brokers
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Is Binary Options Halal or Haram?
The life of a Muslim is guided by Sharia Law. Sharia is actually an old Arabic word meaning “pathway to be followed“. A Muslim is expected to abide by the Islamic principles covering all aspects of their life from social matters to economic matters that were expounded in the holy Koran. In the area of banking and investments, Sharia law strictly forbid the lending of money with interest. Investments in the Muslim world are instead governed by the concept of “risk sharing” through principles such as Bai’ al ‘inah (sale and buy-back agreement), Bai’ bithaman ajil (deferred payment sale), Bai’ muajjal (credit sale), Bai salam, Mudarabah (Profit Sharing), Murabahah and Musawamah.
When Sharia law is applied to Binary options trading, this means interest that is earned or charged for an overnight position is prohibited as well. In the spot financial markets, trading is done on a 24 hours basis. By 5 pm New York time, all open market positions are then rolled over to the next 24 hours cycle. Daily interest is then added to the broker’s account. Regardless of whether the binary broker debits or credits their clients’ accounts with the interest like forex brokers, the fact that interest is earned or payable during a trading transaction makes the trade “haram” to Muslim. This situation puts Muslim traders on a collision course with their religious beliefs.
Islamic Trading Accounts
In order to overcome this dilemma, some innovative binary options brokers have come up with the idea of an Islamic trading account or “Swap Free” account that eliminates Riba of any form during trading. For example, instead of having an open market position rolled over automatically making overnight interest payable, open positions in Islamic trading accounts are closed by 5 pm New York time and then reopen immediately hence avoiding any interest payable for the fresh 24 hour cycle.
For a broker to be able to claim that they offer trading accounts based on Islamic principle, these accounts must satisfy at least the following conditions:
Immediate execution of trades
Immediate settlement of transactional cost
No interest payable on trades
To help traders in their selection of brokers that offer Islamic trading accounts, we have compiled a list of leading binary brokers that offer Islamic trading accounts. It should be noted that the list above is by no means exhaustive but is just a guide.
If someone used a Halal binary options account, but had little or no knowledge of what or how to trade, then they would be using binary options to gamble – and this would certainly be Haram. Only the individual trader can know whether this is the case.
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There is also a view that because each contract or trade must have a ‘winner’ and a ‘loser’, this means that binary options cannot be Halal, as it is not possible for all parties to profit, or extract value, from the trade. While some brokers will offer “Islamic” accounts, and take steps to ensure they are run to islamic principles, there will always be some who view the entire concept of binary options as Haram.
Is Binary Options Halal Or Haram?
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 explicably 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 began 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 operate 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.
Halal Binary Options Trading with Islamic Trading Accounts
by Oscar J. July 28, 2020, 4:07 AM 1.3k Views
Halal Binary Options Trading and Islamic Trading Accounts for Muslim World
What is halal binary options? Is binary options trading is halal according to the law and tradition of Islam? These are the biggest questions for the Muslim binary options traders who can trade binary options through online from anywhere in the world. Here in this post, we are going to discuss the Sharia Law implication on the form of binary options trading. So binary options trading is Halal or Haram?
For the last two decades after the rise of online trading, it creates a new era for the retail traders of the financial industry. No matter what are the races and creeds of the traders. Muslims are the one-quarter of the total population of the world. It is expected that if binary options trading is Halal then so many Muslim traders will join to the Islamic binary options trading.
According to the Islamic law known as the Sharia Law, the Riba or Interest is forbidden for the Muslims. It is considered committing a major sin. Many binary options broker take this fact into the count. They established a new trading system which Halal binary options trading. They also put a different trading account for the Muslims and names it Islamic Trading Account. Some brokers sensing it as an opportunity which can benefit them as well as it will be ideal for the Muslim traders.
Halal Binary Options Brokers List
Is Binary Options Halal or Haram for Muslims?
Muslims life is guided by the Islamic law known as Sharia Law. Sharia a very old Arabic word actually meaning “the path of life to be followed”. The Muslims are abode to follow the Islamic rules in their whole life in every sector of their life. It can be anything, social matters, economic matters or political matters, anything. All the rules are found in the Holy Quran.
In the case of investment and banking lending money with interest or taking interest in a fixed rate from invested money is strictly forbidden by the Sharia Law. Risk sharing is not the principle of investment in the Muslim world. The investment principles in the Sharia Law are “Bai’ al ‘inah” or the agreement of buy and sell back, the “Bai’ bithaman ajil” means the deferred payment of sale, the “Bai muajjal” means the credit sales, and the “Mudarabah” means profit sharing. There are few more options for investment like Bai Salam, Musawamah, and Murabahah.
So it is clear that the interests of binary options trading of overnight positions are prohibited for Muslims by the Sharia Law. In the financial market, online trading runs 24 hours. New York time 5 pm all the positions of open market rolled over every day for the next 24 hours trading cycle. Then the daily interest added to the accounts of the brokers.
It is done regardlessly whether the brokers of binary options credits or debits the accounts of their customers with their interest, unlike the forex brokers. In this case, the interest which is earned or payable during the transaction of trading makes the binary options trading Haram for the Muslims. This fact makes a collision with the religious beliefs of the Muslims.
What is Islamic Trading Account?
In order to solve the conflict with the Muslims religious beliefs, some innovative brokers of binary options industry came forward and established the idea of Islamic Trading Account or the “Swap Free” trading account. During the trading, this account eliminates the Riba or interest. As the example, to make overnight payable interest the automatic rollover of the open market is not happening in this account. That means there is no opening at 5 pm in this account.
Instead of this at 5 pm New York time all the open positions of Islamic Trading Accounts closed and immediately reopen to avoid the payable interest for the next 24 hours trading cycle. The brokers who claim they are proving Islamic accounts according to the Sharia Law must fulfill the following conditions.
Trades immediate execution
Transactional cost’s immediate settlement
On trades, there is no payable interest
To help the traders to find out the best binary options brokers who are providing Islamic Trading Account we add a list above. You should note that we are not pushing you to these brokers, it’s just a recommendation from Legit Binary Options Review.
Other Facts to be Considered
If some of you already used Islamic Trading Account without any knowledge or a little knowledge that how to trade with this account, then it would be gambling rather than binary options trading. It is certainly Haram for the Muslims. What is the case the individual trader can know only.
There is another fact that every trade should have a winner or loser and this is not Halal for Muslims because this trade is not able to profit all parties or all parties are not bearing the loss. So take this point into consideration and be sure that the Islamic Trading Account providers really follow the principles of Sharia Law.
Please note that Legitbinaryreview.com is not taking any position whether the binary options trading is Halal or Haram. On this subject, we are not any religious authority. It depends on the skills of the individual trader and it is impossible for us to give you any kind of advice in this matter. For the further details and certifications, you can see the below references.
References for Further Reading
Question and answer considering Halal binary options trading on the Islamqa.org
Question and answer considering call and put binary options on the alqalam.org.uk
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