Uncover what leverage trading is. Learn the Islamic perspective about leverage trading and understand whether it is halal or haram in Islam.
Introduction:
Leverage trading is getting popular day by day in this world of marketing and trading. It is a concept of trading in which traders can hold large positions with a comparatively small amount of investment. In the international market leverage trading is gaining dominance but as muslin the question arises is leverage trading halal (permissible) in Islam?
In this article explore with us the details about leverage trading and what’s an Islamic concept about it.
What is Leverage Trading?
Leverage trading, also popular as margin trading, is a business and financial tool that supports traders to invest by borrowing money from a broker or exchange so that they can increase their trading position. It helps them improve their profits, but the risk of major losses is always there. It’s not completely risk-free trading. It’s a game of chance.
For example, if a trader wa
nts to buy a $20,000 amount of stocks, they can use leverage trading and can borrow $15,000 from the broker and pay only $5,000 from their own money. So If the price of the stock market increases by 10%, the trader can sell the stock and earn a handsome profit but if the stock price falls by 10%, the trader will suffer a loss.
Islamic Perspective on Leverage Trading
Trading and investing are halal in Islam. Trading was the profession of many prophets and scholars. However, Muslims have to follow certain rules and regulations in trading. Islam gives us complete guidelines on what is halal and what is haram in business and trading. Nowadays leverage trading is getting hype but as Muslims, our concern raises whether leverage trading is halal or haram in Islam.
Is Leverage trading haram in Islam?
Many Muslim scholars declare that leverage trading is haram in Islam (by giving reference from surah Al-Baqarah) for certain reasons.
“O you who believe! Fear Allah and give up what remains (due to you) from Riba (from now onward) if you are (really) believers. And if you do not do it, then take a notice of war from Allah and His Messenger but if you repent, you shall have your capital sums. Deal not unjustly (by asking more than your capital sums), and you shall not be dealt with unjustly (by receiving less than your capital sums).” [Al-Baqarah 2:278-279
. Let’s discuss the reasons in detail.
- Riba (Interest):
Leverage trading comprises borrowing money from a broker or exchange, so there may be involvement of payments with interest rates. Islam considers interest as a war with ALLAH and Prophet Mohammad (PBUH) and strictly forbids the collection and payment of interest.
- Gharar (Uncertainty):
There is a high level of uncertainty and chance in leverage trading. Traders are at high risk of either losing or getting. Islam rejects transactions that involve extreme uncertainty or assumptions.
- Maisir (Gambling):
Leverage trading can be taken as a form of gambling because traders invest at high risk and hope to get a profit. It develops greed and resentment among people. Islam strictly discourages all types of gambling.
Is leverage trading halal in Islam?
Numerous Islamic scholars and institutions have issued fatwas (Islamic rulings) on leverage trading that is halal in Islam under certain conditions. The arguments given by some muslin scholars in favor of leverage trading are:
- Leverage does not consist of riba (interest (riba) The trader borrows capital and pays fees not paying interest.
“It is permissible to borrow money to do business, because borrowing money with interest is riba (usury), and borrowing money without interest is permissible.” – Source
- You can invest in leverage trading if the uncertainty is not extreme. A low-risk factor is allowed in Islam.
- If the original amount being traded is halal then leverage trading is permissible.
- Leverage can be used responsibly without any involvement of interest and riba.
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Fatwas and Scholarly Opinions about Leverage Trading
There is a difference of opinion among different Islamic scholars on leverage trading being halal or haram.
- The Fiqh Academy of the OIC and the Islamic Fiqh Council have discussed leverage trading but have not taken a clear stand on it.
Institution View on Leverage Trading
AAOIFI Permissible only for hedging
Deobandi scholars Prohibited
Justice Taqi Usmani Permissible within limits
Conclusion
Leverage trading is a high-risk financial trading, it may offer you good profit or huge loss. It deals with great uncertainty. There may be a difference of opinion on whether leverage trading is halal or haram but on one thing all scholars of every sect agree that there shouldn’t be any interest rate or riba in trading.
Muslim traders and investors should be cautious and carefully follow the guidelines and principles of Islam before engaging in leverage trading to keep their earnings halal.
Faqs
. Q: Is leverage trading appropriate for all traders?
A: No, leverage trading is not appropriate for beginners and for those who have limited risk tolerance.
Q: Can Muslims be involved in leverage trading if they do not use interest payments?
A: Muslims can be involved in leverage trading if they strictly follow the guidelines of Islam. Avoid interest rates and high-risk uncertainty.
