Is CFD Trading Allowed in Islam?
CFD trading is about gaining access to trading real markets, by proxy financial instruments. There are CFD market maker brokers, and CFD direct market access brokers, but deep down they are all connected to the real markets.
Muslims are actually divided on this question, as to whether it is allowed to trade CFDs or not. One side argues that CFDs operate on daily interest, and are somehow a zero sum game. Which is similar to profiting from interest rates, and from gambling like activities, therefore it is not allowed in Islam. The other side argues that interest works both ways, on some trades you pay interest, and on others you get paid interest, which is really what happens in CFD trading. They also argue that CFDs are all about following the real underlying market, and it is not as simple a zero sum game.
Best Islamic CFD Brokers
Deep down the side that supports CFD trading is right, however both sides agree that the most important thing is one’s personal motives, for trading. If the motive is to make money at other traders’ expense, then it’s not right at all. But if the motive is to use CFDs as a way to invest in real assets, such as gold or crude oil, this serves a purpose beyond just profiting.
The question is why does one want to trade CFDs. And moral justification can be found, as long as one understands the markets themselves. Consider for example a jewel merchant, who trades gold and silver jewels. This person will be at market risk right away, as soon as they buy merchandise for their shop. They are not trading CFDs or any other derivatives, and yet they are fully exposed to daily market fluctuations and risks. If the price of gold and silver fall too much, they will be losing money. Now this risk can be at least in part offset, by CFD trading. And the whole market of precious metals is not a zero sum game, therefore it’s not right to be seen as a form of gambling. These precious metals have all kinds of uses and applications, from industrial applications to jewel making, and through to inflation hedge, for investors.
It is therefore okay to trade CFDs in precious metals, as long as the motive is to limit business risk, business related losses, and to smooth out day to day cash flow. As far as impacting the market itself, it really makes no difference if you buy $100,000 worth of gold, or $100,000 worth of long CFDs on gold. Either way you are putting $100K into the market, and you are pushing prices higher. This means that you can trade physical gold and still have bad motives, such as quick unethical profit, and be in violation of Sharia law. The method of trading does not matter, the motive is what really matters.
The Problem with Interest Rates
Profiting from interest rate charges is unethical in many cultures. It is blamed for modern slavery in many parts of the world, so Islam is right to ban such profiting. CFD trading however operates on interest that works both ways, and its magnitude depends on the leverage used. Traders can use any amount of leverage they want, or no leverage at all if they choose so. Some CFDs brokers offer accounts with no leverage at all. Generally, there are brokers out there who specifically offer accounts compatible with Sharia law, exactly because they know of these dilemmas that Islamic traders face. Etoro for example is one such broker, and has been used by many Islamic traders who trade upon honest motives.
Motives are everything in Islam. And as long as these motives are within Sharia law, then trading CFD according to these motives, is allowed. But Islamic traders are not allowed to deviate from their true beliefs, and to ever change these motives into purely personal motives. All CFD trading activity has to lead to social benefits somehow. And this can be either through a business activity or goal, that uses CFD trading to make things better. Or through any other method where CFD trading is used, and the end goal is to make the world a better place.
Other Uses of CFD Trading
Apart from business and local community investing, CFD trading can go a long way. CFD trading can also be used to implement affordable trading and investing strategies, where the objective is to fund real life projects in impoverished areas. This is can be either direct involvement in the real markets, for the purpose of making a profit. Or hedging commodity risk through the real markets. Or even protecting business profitability against a temporary domestic currency devaluation. For each one of these cases, I believe you should contact an expert in Sharia law, to offer you more specific advice. As always, you have to state your role and personal motives clearly, in order to get a clear answer.
Domestic currency devaluation is an indirect form of interest rate charge, and the IMF and other global banks often do this. They devalue a indebted country’s currency, and the debt gets paid off this way. Islamic countries also make use of these international banks, and they too can have their currencies devalued, regardless of what interest rate the lending was based on.
But when the domestic currency goes down in value, people suffer and poverty becomes more mainstream. As more and more people feel the burden of rising living costs. So the question now becomes is CFD trading allowed in this case? And if so, in what form? Are Muslims allowed to hedge against such risk through CFDs? If they are, CFD trading can make it possible to hedge such risk, so that the cost of a currency devaluation is less profound, for a small business or an individual.
The people who suffer from wide spread poverty are the working class people, as well as the people above them, to a lesser extent. This is why there is so much economic damage when a national currency is devalued too much. And there’s no much people can do about it in those countries. CFD trading is complicated in this case, and only few traders would be able to do it. So as to keep their businesses running normally and to keep on paying out normal wages to their workers.
In my opinion CFD hedging of extreme currency risk can work, very well in some cases. it can be done either through Carry Trade CFD trading, where interest rates are involved. Or through simple buy and sell trades in the forex market. Whether it is right or not, and how exactly it should be done, it’s a matter of personal motives and specific Sharia advice should be sought on the matter.
In any case, CFD trading itself is part of the real underlying markets. It’s not a form of gambling, and the trades themselves are not settled on a one on one basis. Moreover CFD trading has made the markets more democratic, more accessible and affordable for the average small investor and trader. And while it is true that many traders lose money trading the markets, CFD trading is not to blame. CFD prices simply follow the real markets, which they are supposed to be there, regardless of the CFD industry. CFD regulation is such that trading has to reach the real market, at the end of the pipe.
It’s also a fact, that the derivatives markets, that is CFDs, Futures and Options all combined, have made the markets more stable. That means less volatile and easier to do business in. If the derivatives didn’t exist, crude oil and gold prices would be swing up and down by enormous magnitudes, on a daily basis. Putting many businesses, even large ones, at risk. For example an airline could risk go out of business in a matter of few months. Just because jet fuel prices rose too much within a week, and it caused huge damages to the company’s bottom line.
The derivatives markets offer enormous price stability from which we all benefit, that is a social benefit and is not limited to any single person. Speculators trade for a profit, that is against Islam, but many of them lose money. These people trade at their own motives and risks. However their trading activity provides liquidity to the broader market.
One can keep on asking many questions on what is right and what is not. Sharia law can help clarify things and help you set your own honest motives for trading the markets. It is true however that everybody benefits, when economies expand, and stock markets go up. There’s a distinct difference between someone who is largely long on the stock market, and someone who is short all the time. The net short seller is definitely not a moral trader, because something bad has to happen all the time for their trading to be profitable. But the long trader does participate in the underlying economic expansion.