Is futures trading halal or haram? Futures trading isn’t just for investors–even day-to-day transactions like buying and selling fruit, furniture, or funky gadgets can take the same ruling!
So is it halal? Or haram?
What exactly are futures? Futures trading generally apply to stocks, indexes, etc. Say you’re trading currencies (such as the Japanese Yen). Normal trading is buying high and selling low; futures trading is “I’ll sell you 1000 Yen at this price, two months from today, and you pay me then.” An option to buy later at a specific price guaranteed now, which you pay for later.
For the sake of simplification, you can consider it as a contract to buy furniture from your aunt, who buys and sells antique furniture. She tells you “I’ll sell you an antique wooden chest next week for $350. Pay me next week.” That’s what futures is.
How does it measure up, Islamically?
- Selling what you don’t have possession of: Futures is generally a debt-inducing contract; the buyer sells you something they don’t have (but intend to buy at a cheap price). Sometimes, the commodity being sold doesn’t exist, and it may exist later on (at the date of the contract). In either case, the buyer is selling something that they don’t own! And that’s not permissible in Islam!
- Debt for debt: Even if you own the commodity in the exchange that you’re selling (or buying) in a futures contract, it becomes a debt for a debt. You owe some money, and the seller owes some commodity. Again, not permissible.
So how can we make a futures contract halal? How can we tackle these issues?
- Buy and sell what exists. Make sure that, whatever the commodity is, be it stocks, or currency, it already exists in the world.
- Make it a promise, not a transaction. If you consider the deal a legally binding transaction, then it’s haram; but if it’s just a promise to buy at a later date (spiritually, but not legally, binding) then it becomes permissible. Practically, this means you CAN (but shouldn’t) back out of the deal when the time comes; and that you cannot take to court, in an Islamic system, the other party.
- Pay a deposit. Another solution to the debt-for-debt transaction is to pay a down-payment up-front; at least then, something has exchanged hands, and it’s not a debt-for-debt transaction anymore, but a proper, legally-binding transaction.
- No reselling. If you bought a futures contract and paid money, that contract entitles you to some commodity. Can you resell that commodity? No! Because you don’t physically have possession of it!
However, why are futures haram? One of the goals of shari’ah is to prevent thulm; and with futures, the wisdom of prohibition may be around not being able to provide what you sell — if you promise someone you’ll sell them something, and you can’t deliver, then what?
There’s a relevant hadith about a man who came to rasulullah (salallahu alayhi wa sallam) and said: “People ask me to sell them things I don’t have. Should I say yes, and go buy them?” and the messenger of Allah (salallahu alayhi wa sallam) said, “No, go buy them first, and then sell them.”
On the other hand, he (salallahu alayhi wa sallam) permitted farmers to sell their future crops before they were planted! You might say, “What the?!”
Look again at the wisdom of prohibition — not being able to provide what you don’t have. In the case of farmers, they are capable of providing it (albeit at a somewhat uncertain quality or quantity), and the money would help them now to generate crops — so they are exempted from the prohibition of futures.
And from this hadith, scholars derive a rule: if you are a primary producer or manufacturer of an item, you can sell it before it’s manufactured or produced. So the issue of house builders selling houses based on blueprints? It would be permissible insha’Allah.
But you can’t resell that!–Because you’re not the primary manufacturer!
And that’s futures contracts, in a nutshell. To summarize:
- Don’t deal in futures. It’s a fickle thing. Especially if you don’t understand the fiqh.
- Consult your local (knowledgeable) imam. They can tell you what to do.
- You can initiate futures contracts, provided the commodity exists and the seller possesses it.
- Give or pay a down payment, to avoid a debt-for-debt transaction.
Wallahu ta’ala ‘alam.
Shaykh Tawfique Chaudhry. The Real Deal. University of Toronto, Toronto. 08 Jan. 2009.