Halal Trading: A Useful Guide
Ramadan is a time when sinful activities are not to be undertaken. It is a time of peace and prayer and Muslims the world over avoid certain foods, activities, and habits during this holy occasion.
For those traders who wish to comply with Ramadan, we are going to talk about Halal Trading. While this is something that traders may follow during the month of Ramadan, some traders may practice Halal trading even during other months of the year.
Whichever side you are on, or if you are a non-Muslim but just curious to know what Halal trading is all about, this article is for all of you.
What exactly is Halal Trading?
Halal Trading is a way of trading that complies with Islamic values and principles.
Trading is not an unethical or harmful activity in Islamic finance. However, if one does trade, certain guidelines may be followed to ensure that the activity complies with Islamic values.
Islamic finance is based on pillars like transparency, ethical behavior, and general fairness in all dealings. Concepts like interest, gambling, and usury are considered exploitative and unethical in Islamic finance.
So, if you are going to trade while practicing Islam, it is a good idea to do your research and have a strategy in place. Otherwise, you would just be relying on luck and that might be similar to gambling.
It is a good idea to make well-informed trades even if you don’t want to do halal trading.
What Kind Of Assets Are Involved In Halal Trading
Halal trading can involve a variety of assets like stocks, commodities, forex, and cryptocurrencies. The key principle is that the asset should not be involved in something contrary to the teachings of Islam.
So, if you are planning to trade a stock or an instrument that involves a stock, it may be a good idea to first research the company and find out if it is engaged in any activity that is not considered halal.
If the business simply earns income from interest, then that would not be Halal. If the company runs casinos, sells alcohol or is involved in making or selling pork products then all of those activities would not be halal.
If the company makes technology products, then there may be nothing wrong in trading its stock. If a company deals in real estate, that would be halal.
(source: cerusmarkets.com ADOBE daily chart)
Speaking of real estate, it is an asset that is included in halal trading. However, real estate should not be used for adult entertainment, gambling, or the sale/consumption of alcohol.
Commodities can also be halal traded as long as the traded commodity is not used for any prohibited activity.
(source: cerusmarkets.com Gold daily chart)
You might be wondering if bonds can be halal traded, especially since bonds involve interest. There is something known as a sukuk bond that complies with the principles of Islam. If you can find such bonds, then they can be compliant with halal trading.
The foreign currency (forex) market is one of the oldest and most liquid in the world. Forex has been traded for centuries. It is considered to be halal if there is no interest being charged to either the buyer or seller.
If forex can be bought (or sold) through a commission or a fee instead of interest, then that would be halal. A forward contract that involves transacting on a currency at a future date would also be halal.
If there is any asset where the profit and loss arising out of a trading transaction is shared by the investor and business owner, then such an asset is also halal. In Islamic finance, this concept of sharing profit and loss is known as Mudarabah.
If you are ever in doubt about whether an asset is halal or not, it is a good idea to refer to an Islamic scholar or conduct your research before trading it.
How Can I Start Halal Trading?
The first thing you will want to do to start halal trading is to find a broker or a platform to work with. This broker/platform should be able to offer you assets and instruments that are halal-compliant.
In order to check whether such assets are on offer, you will first have to do some research to find out if the stocks/real estate/commodities are compatible with the values of Islam.
If you are new to Islamic finance, then it may be a good idea to first educate yourself about the principles of Islamic finance, usury, interest, and ethical behavior in trading.
As with any trading activity, it is important to choose a broker/platform that is reputable and well-established. You don’t want someone shutting down operations overnight and running away with your hard-earned money.
Once you find a reputed platform/broker, make sure that the instrument you wish to trade does not attach any interest payment to a trade or transaction. Commissions and fees would usually be ok, but if in doubt, check with an Islamic scholar.
As with any trade, you must understand what the risk is for the intended reward. Getting your risk-reward ratio right is as critical in halal trading as it is in all other types of trading.
If you are planning to deploy algorithms to automate your trading, you may want to make sure that it is reviewed by an Islamic financial commissioner.
Algorithmic trading is done in some Islamic countries. However, not all computer programs are halal and, therefore, you want to be sure before deployment.
Halal Trading can be complex. It involves complying with some conditions and ensuring that no asset or trade activity is contrary to the teachings is Islam.
However, there are plenty of traders engaged in Halal trading and it is being done every day.
Researching the right asset and partnering with the right platform/broker is important if you wish to do halal trading.
We wish you all the best for the upcoming month of Ramadan and hope that you become a successful trader.