Is binary options trading halal for a practising Muslim or does it violate the religious teachings? In this article, we will take a brief look at why standard binary options can be problematic for Muslims who do not wish to break the religious prohibition against riba.
Important: This is a financial site and not a religious one. We will only briefly cover the issue of binary options in relation to the prohibition against charging riba. If this is an important subject for you, we advise that you consult your religious community or an Islamic organization that can offer more precise guidance when it comes to Shariah law and trading/investing. You can, for instance, reach The Islamic Council of Europe – Islamic Finance at firstname.lastname@example.org.
Sharia Law (Islamic jurisprudence) and riba
Ribā or al-ribā is an Arabic word that can be roughly translated into the English word usury or, more broadly, signify “unjust, exploitative gains made in trade or business”.
Riba is condemned in several different verses of the Qur´an, including 2:275-2:280, 3:130, 4:161, and 30:39. It is also mentioned in many hadith texts.
While Muslims tend to agree that riba is prohibited, opinions vary regarding the precise definition of riba and which practices would fall under the prohibition. Not all scholars of Islamic jurisprudence equate riba with all forms of interest, and there are also practises that are considered riba without being the charging of interest.
There are two main forms of riba:
- Riba an-nasiya is the interest or other increase on a cash loan. Interest-charged loans are considered riba by a majority of practising Muslims, forming the basis of the Islamic banking industry. This industry generates profits in other ways than charging standard interest on loans.
- The other form of riba is the simultaneous exchange of unequal quantities or qualities of a given commodity. This is known as riba al-fadl.
It is also worth mentioning that some scholars allege that riba is a discouraged practice (makruh) rather than prohibited as a major sin and violation of Sharia law.
Binary options and riba
In the spot financial markets, trading is carried out around the clock, and by 5 pm New York time, open market positions are rolled over to the next 24 hour cycle. Daily interest is then added to the broker´s account. For followers of Sharia law, this interest that is earned or charged for an overnight position is typically considered riba and thus prohibited. In essence, when a binary broker debits or credits a client account with interest, the practise is considered riba and thus prohibited by mainstream Islamic jurisprudence. This is why many practising Muslims stay away from using standard binary options trading accounts.
Islamic (Muslim) trading account for binary options
Islamic trading accounts are designed to comply with Sharia law, e.g. by being interest-free and swap-free. Sometimes, they are marketed as Halal accounts, as halal is the Arabic word for permissible.
Example of how an Islam account can work:
- Instead of having an open market position rolled over automatically at 5 pm New York time and charging interest, the broker can close all positions automatically and then re-open them immediately as the new 24-hour cycle starts, thereby avoiding the issue of overnight interest.
- Immediate execution of trades.
- Immediate settlement of transaction costs.
- No interest is charged or paid on trades.
In the area of Islamic Banking, the lending or providing of money for investments is typically governed by the concept of risk-sharing through principles such as mudarabah (a profit-sharing agreement), bai’ bithaman ajil (deferred payment sale) and bai´ al ´inah (a sell and buy-back agreement). Istisna and bia salam are customized contracts where immediate payment is made for goods that will be delivered in the future, not yet manufactured, built or harvested.
Binary options and gambling
When binary options are used to gamble rather than for skilled-based trading, they fall under the Islamic gambling prohibition.
While plenty of brokers offer binary options within Islamic/Muslim/Halal trading accounts, some scholars allege that binary options are always haram (prohibited) because they consider them gambling rather than trading or investing, regardless of the skills involved. One way of looking at this is that with a binary options contract, there is always a “winner” and a “loser”. It is not possible for all parties to benefit or extract value from the trade.
Examples of Qur´an verses where you can read more about gambling are 2:219 and 5:90-91.
They ask you about wine and gambling. Say: ‘In them both lies grave sin, though some benefit, to mankind. But their sin is more grave than their benefit.’
— Qur’an 2:219
O believers, wine and gambling, idols and divining arrows are an abhorrence, the work of Satan. So keep away from it, that you may prevail. Satan only desires to arouse discord and hatred among you with wine and gambling, and to deter you from the mention of God and from prayer. Will you desist?
— Qur’an 5:90-91