Singapore (25 Feb 2020) – Singapore is one of the most expensive cities in Asia. Hence, many people may resort to earn extra income via various ways. These can include foreign exchange (Forex) trading, multi-level marketing (MLM), pyramid schemes and crypto-currency investments.
There have been public queries as to whether it is permissible for Muslims to earn income from such businesses. In this paper, I will be addressing Forex Trading and Crypto Currencies.
This paper is prepared with views consolidated from Islamic finance industry players and asatizah.
Fundamentals of Money
Money needs public confidence, backing and support as a medium of exchange and for its buying power. Many Shariah scholars clarified that the backing can be done either via gold/silver, commodities or the government. Many should be based on wealth (mal) that is corporeal (‘ayn), not something that only exists in the virtual world. They can be of two types:
- Gold and silver – these are known as Al-Thaman al-Khilqi. In Ihya Ulumiddin, Imam Ghazali (r.h.) refers to gold and silver, both of which have all the qualities of money as mentioned in the Qur’an and Sunnah (the traditions of Prophet Muhammad S.A.W).
- Currencies issued by governments are known as Al-Thaman al-‘urfi. Based on majority of scholars, value of such monies is extrinsic as they are issued under authoritative decree of a country (i.e. made legal tender) and the value is based on supply and demand and affected by monetary/fiscal national policies.
The Singapore dollars issued by the Singapore government use paper money which has been a matter of practical consensus in Islam and is generally accepted by society as Al-Thaman al-‘urfi. This is in line with views of Imam Malik and Ibn Taymiyyah in which usage of monies should also, among other things, be based on customary practice.
Forex
Forex as a transaction are of two types:
- Genuine business transactions
- Speculative zero-sum game (Forex Trading)
Forex trading is under item 2 involving buying and selling of currencies based on their price movements, with intention of making profit.
Currency traders use currencies to “make money” usually via electronic trading platforms. The rise and fall of currency pair thus creates margin differences giving rise to potential income. The income potential will commensurate with the amount being invested.
Cryptocurrency
Cryptocurrency is a blockchain initiative to devise a new cashless global monetary system, based on system of mathematics with series of complex equations where its full implications are still not established.
It can be used either as money (to make payments) or as assets (to make profits). There are countries that have banned such virtual monies as regulators have raised concerns over its unstable nature, which could be detrimental to public interest.
The Monetary Authority of Singapore (MAS) and Bank Negara Malaysia (BNM) are still watching cyptocurrency developments.
- MAS warned there is no regulatory safeguard if people trade on unregulated digital token exchanges or invest in digital tokens that fall outside the remit of MAS rules, but encourages experiments in the blockchain space that may involve the use of cryptocurrencies, because some of these innovations could be economically or socially useful.
- BNM said that such digital currencies are not legal tender in Malaysia as they are not regulated by prudential and market conduct standards.
Shariah Assessment – Forex
The ruling of Foreign Currency Exchange (bai ‘al-sarf) is from major corpus of ahadith, example as mentioned by Prophet Muhammad S.A.W:
“Gold for gold, kind for kind; silver for silver, kind for kind…Whoever increases or seeks an increase, then he dealt with Riba. Sell gold for silver as you wish, hand to hand…” – Jami’ at-Tirmidhi Book 14 Hadith 1240
However, individual Forex trading has Shariah issues:
- It is a speculative trading prohibited in Shariah; there is no real exchange as traders will offset their open positions and then re-opening to start new trading without liquidating the positions.
- Transactions do not meet the Shariah parameters of bay-sarf per standards set by Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI).
- Transactions rely on margin, rollover interest and leveraging, hence there is riba considering that the loan entails benefits, which contravenes Shariah.
Speculative forex trading is a contributing factor to economic crises of a nation (darar fi iqtisadul balad) along with other risky products such as binary options, Contracts for Differences (CFDs), FX futures, spread betting with FX Forwards and FX Options. Speculative trading not only threatens national currency devaluation and financial crises but disrupts the ability of nations to establish equitable and just economic policies.
- DSN-MUI (Dewan Syariah Nasional – Majelis Ulama Indonesia) issued a fatwa (28/DSN-MUI/III/2002) stating that Forex transactions on the basis of speculation (i.e. for making money) are impermissible. However, Forex transactions pertaining to exchange of currencies for a genuine need (i.e. convert earnings to local currencies with purposes such as financial reporting) or to hedge against currency exchange fluctuations (whether actual or perceived) or to protect loss are allowed.
- The Islamic Religious Council of Singapore (MUIS) clarified that there are Forex transactions which are “permitted as long as it is done on the spot, and there is no delay of time in exchanging currencies.” A Singaporean businessman may exchange Singapore dollars (SGD) for Malaysian Ringgit (MYR) as he needs MYR to inject additional working capital for his business in Kuala Lumpur. The margins earned by the money changers themselves in this instance are permissible as there is an underlying economic service rendered to customers who visit the shop to exchange currencies. The income earned is akin to service fee (i.e. ujrah). Nevertheless, Forex to make profits are still impermissible.
- Imam Ghazali in Ihya’ Ulum al-Din describes in detail the function of money in Islamic economics, stating that monies are means to acquire other things, not meant for themselves.
While there are websites inviting Muslims to do “halal” Forex day trading (with immediate trade execution and settlement, no rollover and no interests or leverage), many scholars do not agree it is a way to earn money primarily because of short-selling. Shariah also outlines that earnings should be directly connected to economic activity and production therefore, profits derived from exchanging of foreign currency with speculation does not constitute an economic actitvity or wealth creation.
Shariah Assessment – Cryptocurrency
MUIS has not provided a written statement to-date, but the majority of Muslim scholars in Pakistan, Bangladesh and Sri Lanka are not inclined to cryptocurrency. Similar religious opinions have been issued by institutions e.g. Al-Azhar University (Egypt), Dar al Mustafa (Yemen), Darul Uloom Deoband (India), Wifaqul Ulama (UK), Islamic Economic Forum, etc.
The Mufti of the Federal Territory of Malaysia has provided an explanation on 15 Nov 2018 that Bitcoin does not fulfill the criteria as money and it can potentially endanger the well-being of the community and financial system of a country. However, such religious opinion may change, especially if the future generations of cryptocurrencies have safeguards in place in mining and to counter against price fluctuations and money laundering.
After considering both the benefits and negative externalities such virtual currencies may entail, I took the wara’ and ihtiyat approach based on Sadd al-dhara’i to advise the Muslim community to avoid all forms of cryptocurrencies (including its related activity i.e. initial coin offerings) for now until there comes a time where it predominantly replaces the traditional currencies (i.e. new cashless global monetary system) and is generally acceptable by the international community as Al-Thaman al-urfi’.
Where cryptocurrencies have either been pegged or backed by gold, I took the stand that such matter requires further examination before a ruling becomes definitive (i.e. qat’i) or accepted by jumhur ulama (i.e. majority scholars). -/-
Mr Fazrihan Duriat is responsible for Shariah Risk Management with one of Malaysia’s largest banks. A banker with 10 years experience, he’s also held managerial positions on Shariah advisory.
Fazrihan graduated with a BSc in Finance (1st Class Hons) from University College Dublin and Master of Laws in Islamic Law & Finance (LL.M) with Dean’s List from the Singapore Management University (SMU). He is a Chartered Professional in Islamic Finance (CPIF) and previously studied Islamic banking and Shariah from the International Islamic University Malaysia (IIUM).
Fazrihan is currently an honorary advisor in the Shariah support team of PIH & Co (an affiliate of PERGAS, the Singapore Islamic Scholars and Religious Teachers Association) assisting the Shariah Committee in their evaluation and endorsement of projects as Shariah-compliant.
He is also a faculty member of Pôle Universitaire Euclide reviewing students’ thesis on Islamic finance.
