18-Ram-1446
|
18-Mar-2025
The Forex market doesn’t sleep - it's the only financial market in the world to operate 24 hours a day.
The foreign exchange market (more widely known as “Forex”), is where currencies are exchanged. It’s an astronomical force in the global economy, with a colossal total value of $1.93 quadrillion as of 2023. To put this into perspective, it's about 30 times the size of the US stock and bond markets combined.
The market's daily turnover, a measure of its liquidity, soared to $7.5 trillion in April 2022, a significant increase from $6.6 trillion recorded in 2019. This sheer scale provides traders with numerous opportunities, making it a magnet for investors around the globe.1
Forex trading, with its global reach and 24/7 market operations, has drawn participants from all walks of life, all corners of the globe, and all cultural backgrounds, including Muslims. While Forex offers intriguing opportunities, it also presents unique questions for Muslim traders…
Is Forex trading compatible with the Shari’ah? How does Forex trading align with the economic ethics envisioned by the Shari’ah?
These are important questions given the profound emphasis that is placed on ensuring we have a Halal* income gained from permissible transactions.
In this exploration, where faith and finance converge, we will journey through and dissect the structure of Forex trading, ultimately aiming to discern whether this form of trading can be compliant with Allah SWT’s laws.
Forex trading revolves around currency pairs, wherein one currency is traded against another. The most commonly traded currency pairs include EUR/USD, GBP/USD and USD/JPY, among others.
Each currency pair has a base currency and a quote currency. Take the EUR/USD currency pair, where EUR is the base currency and USD is the quote currency. The rate states how many USD you’d get for 1 EUR. If the exchange rate is 1.10, then 1 EUR can be exchanged for 1.10 USD.
The exchange rate represents the value of one currency relative to another. Forex traders speculate on whether a currency will appreciate or depreciate in value against another, and they take positions accordingly.2
The movement in these currency pairs is measured in ‘Pips’. ‘Pip’ is an acronym for percentage in point or price interest point. A pip is the smallest whole unit price move that an exchange rate can make, based on forex market convention. Most currency pairs are priced out to four decimal places, and a single pip is in the last (fourth) decimal place. A pip is thus equivalent to 1/100 of 1%, or one basis point. 3If EUR/USD moves from 1.1050 to 1.1051, that .0001 USD rise in value is one pip.
The Forex market is influenced by a wide range of factors that impact currency values. These factors include economic indicators (such as GDP, inflation, and employment data), central bank policies, geopolitical events, and market sentiment. Traders analyse these factors to make speculative trading decisions and anticipate potential currency movements.
There are various participants in the forex market who play different roles.
This encompasses:
The subsequent sections will thoroughly explore the dissimilarities among these entities.
Forex trading offers several key features for participants.
First, it provides opportunities for both buying (going long) and selling (going short) currencies, allowing traders to profit in rising and falling markets. Additionally, the Forex market operates 24 hours a day, five days a week, enabling traders from different time zones to participate at their convenience.
Furthermore, Forex trading offers leverage (more on this later), allowing traders to control larger positions with smaller amounts of capital, potentially amplifying profits (but also increasing risk).
However, it's important to note that Forex trading carries risks.
The high volatility of currency markets can lead to significant price fluctuations, resulting in both potential profits and losses. Research conducted by the French financial markets regulator shows that nearly 90% of retail forex traders lose money.4
Retail Forex trading and institutional Forex trading are two distinct categories within the Forex market that many misunderstand. Here are the key differences between the two:
Retail Forex trading involves individual traders, small investors, and retail brokerage firms speculating on market movements.5
Institutional Forex trading, on the other hand, involves large financial institutions, such as banks, hedge funds, and multinational corporations, where the primary driver of these trades is necessity rather than speculation.
Although, there is usually a specific division for speculative trading, to make this clearer, we will refer to the former as execution traders, as they only execute trades on the basis of need rather than speculation and the latter as institutional forex traders.
Execution traders may require converting a substantial amount, such as £100 million, into Dollars or Euros to facilitate a transaction. To accomplish this, they engage in institutional Forex trading, utilising the services of the institutional market to execute the currency exchange.
Institutional traders, both execution and speculative, often have direct access to the interbank market, where they can trade with other financial institutions and access competitive pricing and liquidity.
Trading in the actual spot forex market is NOT where retail traders trade though. Retail traders, on the other hand, access the Forex market through retail brokerage platforms, which act as intermediaries between the retail traders and the liquidity providers.
In reality, we can think of the brokerage platforms themselves as the counterparties, as they will always accept retail trade amounts, whereas with institutional trades, a viable counterparty will need to be sought out.6
Institutional forex traders often employ sophisticated trading strategies, including algorithmic trading, high-frequency trading, and other advanced techniques, execution traders do not employ any of these techniques as they trade based on the activity of their customers and make money through commission. They have access to research and analysis teams, proprietary trading systems, and sophisticated trading tools.
Retail traders, on the other hand, may rely on manual trading strategies, technical and fundamental analysis, and may use trading platforms provided by retail brokers.
Institutions typically enjoy lower transaction costs and spreads compared to retail traders. Institutions often negotiate better trading terms and have access to lower commissions and fees due to their larger trading volumes.
Retail traders, on the other hand, may face higher transaction costs and spreads offered by retail brokerage firms and have to front a margin for their trades.
Institutional Forex trading is subject to specific regulations and oversight, often governed by financial regulatory bodies. Institutional traders may need to meet certain requirements, such as capital adequacy, compliance, and risk management standards.
Retail Forex trading also falls under regulatory frameworks but may have different requirements tailored to individual investors.
Institutional Forex trades can have a significant impact on the market due to the larger trading volumes involved. Their trades can influence currency prices and market trends. Retail Forex trades, on the other hand, typically have a smaller impact on the overall market due to the individual nature of retail trading.7
It's important to note that these differences are not absolute and that there can be some overlap. For example, some retail traders may use advanced trading strategies and have access to institutional-grade platforms. Additionally, there are professional retail traders who trade larger volumes and have a more institutional approach to trading.
Understanding the differences between retail and institutional Forex trading can help traders and investors align their strategies and expectations with their respective trading environments.
The landscape Islam paints with its view on trade and money is one of principled financial dealings and ethical transactions. Rooted in a comprehensive economic vision, it encourages wealth generation through legitimate means and upholds the prohibition of certain financial practices, a key one being Riba (Usury), that compromise moral and ethical integrity.8
In this landscape, contrary to how money is treated in forex trading, money is not seen as a commodity to be traded, but as a medium of exchange to facilitate trade of products other than currency.
The Islamic financial ethos promotes the creation of wealth through production, sales, and the trading of goods and services. The emphasis is on real economic activity—producing goods and providing services—as a means to earn profit and foster economic growth and societal development.
In this terrain, a person cannot expect to earn a profit in business without assuming loss or risk in whatever undertakings they undertake. It is a way of life that business is associated with rewards, profits, risk, and uncertainties. To sum up, there shall be no reward by hoarding money without risk-taking.9
Guided by the principle of "everything is permissible unless proven otherwise"10, permissibility is the natural state of all matters and will prevail until there is evidence to warrant a departure from that position.
The principle posits that all forms of trade are considered halal, or permissible unless explicitly declared haram, or forbidden. A learned Islamic scholar would need to substantiate through comprehensive reasoning that a particular form of trade is prohibited by establishing the presence of one or more of the following components:
From this perspective, even if devoid of elements such as riba, gharar, and any oppressive practices, Forex trading might still not be encouraged under the Shariah. This is due to its basis not being in line with value generation but rather treating money as a tradable commodity, which is inconsistent with Islamic economic principles.
Now, this leads us to the question: Can it be substantiated that Forex Trading is Haram?
When we look at retail Forex trading, we can see many impermissible factors from an Islamic perspective associated with it, such as:
Leverage is essentially a loan that is provided to an investor by the broker allowing them to take positions they couldn’t with their own money. For example, a trader could be offered 1:100 leverage which means they can open a £100,000 position with only £1000 of their own capital.
The Brokerage will allow you to borrow the money to trade, and if you lose more than £1000, the brokerage will attempt to close out your position, maximising your loss to £1000. However, in the case where they could not close the position out quickly enough, you would be liable for any loss over your £1000 initial capital, resulting in you being on the hook for returning more money than you initially had in your account.
Without the use of leverage, small Forex traders cannot make sufficient money.
For example, if you bought £1000 worth of American Dollars and held it for one month from 30th May 2023 until 30th Jun 2023, you would see a movement in the value of your money of £30, which in the grand scheme of things is not enough value to have been worth the effort if you are investing for 2 months, taking into account all the research time and resources required.
Many traders adopt a 2% rule, which means they do not use more than 2% of the money in their trading account for a trade, limiting their loss in the event that the market moves against them. Under this rule, you would need a capital of £50,000 to take that £1000 trade with a movement of £30.
One other problem with leveraging is the cost. You can pay borrowing costs on positions that you keep open overnight in addition to paying to open and close each leveraged position. The broker will always make money as you do this and is willing to ‘lend’ you the money for doing so.11 In that sense, overnight financing is essentially an interest payment to cover the cost of your leverage.
A contract for difference (CFD) is a financial derivative. Derivative products track the market price of an underlying asset so that traders can speculate on whether the price will rise or fall. The price of a CFD is “derived” from the underlying asset’s price.
A CFD is a contract, typically between a CFD provider, in our case the retail broker, and a trader, where one party agrees to pay the other the difference in the value of a security, between the opening and closing of the trade.
In other words, a CFD is basically a bet on a particular asset going up or down in value, with the CFD provider and you agree that whoever wins the bet will pay the other the difference between the asset’s price when you enter the trade and its price when you exit the trade.
A forex CFD is an agreement (“contract”) to exchange the difference in the price of a currency pair from when you open your position versus when you close it. A currency pair’s CFD price is “derived” from the currency pair’s price on the spot FX market (or at least it should be. If not, what is the CFD provider basing its price on?).
Trading forex CFDs gives you the opportunity to trade a currency pair in both directions. You can take both long (speculating that the price of the base currency will increase) and short (speculating that the price of the base currency will decrease) positions.
If the price moves in your chosen direction, you would make a profit, and if it moves against you, you would make a loss.
In the EU and UK, regulators decided that “rolling spot FX contracts” are different from the traditional spot FX contract. The main reason is that with rolling spot FX contracts, there is no intention to ever take actual physical delivery (“take ownership”) of a currency, its purpose is to simply speculate on the price movement in the underlying currency.
The objective of trading a rolling spot FX contract is to gain exposure to price fluctuations related to the underlying currency pair without actually owning it. So, to make this differentiation clear, a rolling spot FX contract is ruled as a CFD. (In the US, CFDs are illegal so it’s known as a “retail forex transaction”). Outside the US, retail forex trading is usually done with CFDs or spread bets.
This means that there is no real exchange or ownership of any money taking place, as virtually all retail forex platforms have CFD accounts. For example, if I had bought £1000 worth of dollars and the price moved, I would still have the dollars in hand and could change them back to GBP. However, in retail forex trading, essentially a ‘bet’ is made on the value of a currency pair; if successful, I would make money, and I would lose if I were not. I do not tangibly own any assets in either currency.
In summary, when trading forex, you’re speculating on the value of one currency against another—for example, EUR vs USD, because with Forex, currencies are always traded in pairs. You’re always buying one currency and selling the other in the pair, based on which currency you think is going to appreciate against the other.
This type of speculation would be classified under Islamic Law as ‘gharar, ' representing an unacceptable level of uncertainty in a transaction from a Shariah perspective, as it essentially involves wagering on market fluctuations without possessing any tangible ownership in either of the assets being traded.
There is a false understanding regarding retail forex brokers, in which they are seen as an intermediary who will find two parties who want to trade a certain currency pair at a certain price and will ‘pair’ these two parties together and execute a trade on behalf of its clients. This is not the reality in terms of the topic at hand, because a retail forex broker is more of a giant market counterparty as far as a client with an account is concerned.12
As such, we need to think of the term ‘Forex Broker’ as more of a marketing phrase. This is because a ‘Forex Broker’ is actually a ‘Forex Dealer’ who buys and sells goods on their own portfolio. Accordingly, all retail forex brokers regulated in the U.S. are formally referred to as “Retail Foreign Exchange Dealers” or RFEDs.13
There are 3 main types of forex brokers: ECN brokers, Market Makers, and No Dealing Desks (NDD):
Often known as "A-book brokers," ECN is an acronym for Electronic Communication Network. ECN brokers technically take orders from clients and send them directly to a pool of liquidity providers. Regrettably, this perspective reveals a pervasive misunderstanding of the inner workings of the forex market.
Many traders are under the mistaken impression that ECN brokers hold superiority because they consistently pair buy orders with corresponding sell orders. However, this belief doesn't align with the actual mechanics of the forex market. In contrast to the stock market, the forex market operates without a centralised exchange. Consequently, achieving a perfect match between all EURUSD buy trades and EURUSD sell trades, for instance, is an unattainable feat.
This misconception, which is widely held within the forex trading community, is fundamentally flawed. Consider a scenario where 80% of traders maintain long positions on EURUSD. In such circumstances, how would these trades be efficiently matched up?
Forex brokers understand that traders prefer brokers with the acronym ECN affixed to their brand name. Therefore, they do whatever it takes to be addressed as a “True ECN” broker, even if it means seeking regulation in less reputable jurisdictions. The brokers regulated in stricter jurisdictions try to navigate the red-tape by using terms like Straight Through Processing (STP) or Direct Market Access (DMA) to suggest that they are ECN brokers.
2. Market Makers
Market Makers, Also known as B-book brokers, do not send your orders to a larger liquidity provider. Rather, they internalise the risk for all opened positions, meaning they pay for all positive trades themselves, and take the opposite side of every trade accordingly.
3. No Dealing Desk
No Dealing Desk (NDD) are the same as most ECN brokers. The acronym NDD is sometimes used by brokers that do not want to fall short of regulatory requirements by claiming ECN status. The bottom line is that such brokers will send all your orders to a pool of liquidity providers instead of internalising them.
It is worth noting that many NDD brokers still run a market-maker model where they keep smaller orders in-house but send larger orders directly to the liquidity providers.14
When you choose ECN/NDD brokers (or similar), your order goes to the liquidity pool created by mostly market makers, unless the combined order from many customers is large enough to warrant forwarding it to the liquidity pool of banks and other institutions, which is very rare. In reality, when you trade, you are still trading with the market makers, albeit through an additional intermediary.
The main point is that if we wanted to be technically accurate, we should be using the phrase ‘Forex dealers’. “Client” and “customer” are words that are often used interchangeably by brokers; however, the implications are different as the broker is not marrying your trades to another party every time you transact a trade.
All orders and trades entered through your broker’s trading platform are NOT executed on an external trading venue but are executed by the broker itself. Your “broker” is taking the opposite side of your trade. This is known as being the counterparty, with you as their customer.
The only way to close out your position is by taking an equal and opposite position with the same broker as you do not own any physical assets and your only exposure is with a specific brokerage. This results in a money-for-money transaction with no ability to have any underlying currency physically delivered. This is the essence of a ribawi transaction.
Each trader trades directly (“bilaterally”) with the broker and only the retail broker, every trade is a bet with this broker. Retail forex traders do not trade with each other. A broker’s trading book will be constantly changing, and their risk will be managed through offsetting risks by trading out their positions in the institutional FX Market, where there are actual counterparties wanting to trade for various reasons. Despite their management of their own risk, it does not impact the origin of their risk which is each trade (or bet) the trader is making with them.
In Islamic contracts, attention is given to the objectives and operational reality of transactions and not to the descriptive words and forms associated with them. The truth of the matter is that every time you speculate on a currency pair and execute a trade on a retail brokerage platform, you are placing a bet against the broker on the price of a CFD. The broker can see market sentiment from all its own clients and can choose to hedge that risk in the institutional FX market if they need to.
This toxic combination of riba, gharar, and a structure that embodies gambling would act as compounded impermissible factors.
As mentioned previously, the reasons Forex is impermissible are as follows:
Therefore, when we refer to retail forex trading of currency pairs, we can see that this form of trading fails to qualify as 'Shariah compliant' and, as such, is an impermissible (forbidden) form of trade or wealth generation according to the Shari’ah.
Islamic forex trading accounts aim to provide a ‘solution’ to the impermissibility of trading in forex by focusing on the riba on overnight leveraged positions. Their solution would be to create ‘swap-free’ accounts where there is no payment or receipt of any interest rates on currency pairs held overnight.
This is implemented in various methods. One of these methods may be to close out all positions before the interest deadline in the evening, for example 10pm, and reopen these positions in the morning, to avoid any interest and subject you to the price change during the night. The brokerage would then take a management fee for this activity. Despite the improvement, this does not eliminate speculation on price fluctuations by using CFDs, which is the fundamental element that makes Forex trading itself impermissible.
Accordingly, even if all the money used to trade was earned in a halal manner and there was no leverage, and therefore no borrowing of money or any margin on positions held overnight, the act of betting on the price of a CFD contract will be impermissible due to the impermissibility of gambling in Islam. This would be akin to someone convincing a Muslim that they will let them borrow money without interest to gamble on a football match while allowing the Muslim to stay true to his faith by not engaging in a riba-bearing transaction.
The exclusion of paying riba on the leverage would only exempt the account from the first point above and it would still be impermissible as points 2 and 3 would still remain true.
Many people equate retail Forex trading with buying currency to use abroad on vacation. When looking at exchanging currencies to use abroad, whether physically at a money exchange or online with a card such as Monzo or Revolut, this is a very different kind of transaction that fulfils the requirements for exchanging money according to the Shari’ah.
The ‘spot’ element of the transaction and the instantaneous transaction from one currency to another currency that you can physically use, whether by debit card or cash, is quite different from taking a speculative trade on a currency pair. Currency exchangers trade underlying physical currencies (even if digital) as a spot transaction, one of the requirements of trading currencies in the Shari’ah. They do not offer futures or derivatives and would for example exchange £1000 for $1280.
Engaging in currency exchanges through platforms like Monzo and Revolut to utilise multi-currency wallets or cards and subsequently using the converted funds to send money internationally is permissible due to it being a spot transaction where ownership of an underlying currency is exchanged without leverage.15
This practice resembles the institutional Forex marketplace, where multinational corporations may need to transfer significant amounts between currencies to fulfil orders or make payments in other countries. These transactions arise from genuine operational needs and are not driven by speculative motives. Furthermore, these transactions involve the physical delivery of currency, as they are not financially settled in the same currency in which they were initiated.
A note should be taken about using platforms like Monzo and Revolut to invest in precious metals. When buying Gold or Silver, these are classified as currencies in the Shari’ah and would need to be able to be either physically delivered with the delivery being spot or instantly without delay.
Or a regulated certificate from the platform will need to be given at the time of the transaction, proving the liability of the gold that is to be transferred to you has actually been transferred. It is not sufficient to have representational value in a digital wallet for these commodities without actual spot delivery or a transfer of liability having taken place.
There is a prolific rise in Muslims taking an interest in and asking about the permissibility of Forex Trading. Forex trading’s appeal to a broad spectrum of investors, including Muslims, can be attributed to a multitude of factors.
The primary allure comes from clever marketing strategies that frame it as an avenue for easy wealth accumulation. Advertisements and promotional content (especially through a vast majority of social media influencers) often paint an enticing picture of quick, substantial returns that inevitably attract aspiring traders.
Another significant factor is the promise of getting rich quickly. Forex trading, with its volatile market fluctuations, appears to offer a path to significant financial gains in a relatively short time. This potential for rapid profit, though often overstated, can be a powerful motivator.
Moreover, the concept of trading on margin, or leverage, which allows people to trade large amounts of currency with relatively little of their own money, is another key feature that attracts individuals. It gives the perception that trading is accessible to everyone, regardless of their initial capital.
However, it's crucial to remember that from an Islamic perspective, there are more genuine and acceptable routes to trading. Instead of speculating on CFD currency fluctuations, Muslims should invest directly in non-controversial assets like commodities and halal stocks.
This kind of investment should be undertaken without the use of leverage, which is essentially borrowing money to trade and can lead to debt. This is a concept frowned upon in Islam as debt is an instrument of necessity as per the collective guidance of the Qur’an and Sunnah. It should also steer clear of futures or options, which are considered forms of gambling under the directives of the Shari’ah due to their speculative nature.
Investors are advised to adopt a 'long-only' strategy, meaning they invest strategically with a view to holding onto their investments for a longer term. This kind of investment is more in line with the Islamic principles of patience, risk-sharing, and promoting real economic activity.
And Allah knows best.
References:
12023 Forex Trading Statistics + Industry Guide [Fact Checked]
2What Is Forex Trading? – Forbes Advisor UK
3What Are Pips in Forex Trading and What Is Their Value?
4 https://www.forex.academy/what-percentage-of-retail-forex-traders-make-money/
5What is Retail foreign exchange trading | Capital.com
6Institutional Trading |Finance Magnates
7What is Institutional Trading? The all you need to know guide
8Read more about riba in our article surrounding it. Does modern day interest still qualify as Riba? Part I
9based on the The legal maxim Al-ghurm bi al-ghunm, meaning “Reward begets Risk”.
10The legal maxim Al-Asl fil-ashya’ al-ibahah, meaning "Everything is permissible unless proven otherwise".
11What Is Leverage? | How Leverage Works | FOREX.com
12How Forex Brokers Manage Their Risk and Make Money - BabyPips.com
13Retail Foreign Exchange Dealer (RFED) Registration | NFA
14There is often the argument that the nature of the trade is research-backed, trend-based, calculated, or strategic and not a speculation or a gamble. This does not change make the act of betting on the price movements of a contract permissible despite the calculations.Read more about riba in our article surrounding it. Does modern day interest still qualify as Riba? Part I
15Read more about riba in our article surrounding it. Does modern day interest still qualify as Riba? Part I
*The term 'Halal' denotes that it is permitted and follows Islamic law
The UK insurance market is one of the largest in the world, with London being a global hub for insurance and reinsurance business. This industry not only contributes significantly to the UK economy but also plays a role in managing risks, thus providing stability and security to other sectors. As of 2020, it led Europe in terms of total domestic insurance premiums, making it the largest insurance market on the continent. Globally, the UK ranked fourth in terms of life and non-life direct premiums, railing only behind the U.S., China, and Japan. 1
In terms of structure, the UK's insurance industry bifurcates into life and non-life insurance segments. Life insurance in the UK covers a range of significant life events, extending beyond death to include scenarios like disability or terminal illness. The expenditure on life insurance by UK households reached its highest in 2006, maintaining a steady level from 2019 to 2021. On the other hand, non-life insurance encompasses protection against property damage, business-related risks,
and, in most cases, private health insurance. The UK recorded non-life insurance premiums of 116 billion euros, positioning it second in Europe for the highest value of premiums written. 2
Focusing on market leadership within the UK, the country boasts several key players in Europe's insurance landscape. Prominently, three of the top ten life and health insurance companies in Europe, as of May 2023, are based in the UK. Aon, Prudential, and Willis Tower Watson stand out in this group, with a combined market valuation surpassing 130 billion U.S. dollars. These leaders are accompanied by other major European insurers from countries such as Germany, Switzerland,
France, Italy, and Belgium, based on gross written premiums. 3
The origins of the UK insurance industry can be traced back to the Elizabethan era. During the 16th century, as British maritime trade expanded, the need for marine insurance grew. Merchants and shipowners sought ways to mitigate the financial risk of sea voyages. This period marked the preliminary stages of formalized insurance practices in the UK, primarily focused on maritime risks. 4
One of the most significant developments in the history of UK insurance was the establishment of Lloyd's of London in the late 17th century. Originally a coffee house owned by Edward Lloyd, it became a meeting place for merchants, shipowners, and those willing to underwrite (insure) ships and cargo. This informal gathering laid the groundwork for what would become one of the world's leading insurance markets. 5
By the 18th century, the scope of insurance in the UK began to expand beyond marine risks. This period saw the emergence of fire and life insurance. The infamous Great Fire of London in 1666, which resulted in massive property damage, highlighted the need for fire insurance. This led to the formation of the first fire insurance companies. 6
In the 20th century the two World Wars had a significant impact on the UK insurance industry. The wars brought about unprecedented levels of destruction, death, and injury, leading to huge insurance claims. These events evaluated the resilience of the industry and led to the development of new forms of insurance, including various liability and war risk covers. 7
In the post-World War II era, the UK insurance industry underwent significant expansion and diversification. The economic boom and the rise in consumerism led to an increased demand for various types of insurance, including motor, travel, and health insurance. This period also saw the growth of reinsurance.
The late 20th and early 21st centuries have been characterized by technological advancements and globalization. The UK insurance market has not only grown domestically but has also expanded its global footprint, dealing with international insurance and reinsurance. The advent of the internet and digital technology has transformed the way insurance products are marketed, sold, and managed.
This traditional form of insurance, evolving through centuries, became a cornerstone in managing financial risks associated with life, property, and businesses. The concept revolved around pooling resources to protect against losses, a principle that resonated across various cultures and economies evolved into the conventional insurance we have today based on the transfer of risk from the insured to the insurer for a premium.
However, as this traditional insurance model spread globally, it encountered diverse cultural and religious perspectives, leading to unique adaptations and alternatives.
A modern conventional insurance contract consists of the following noticeable elements:
As stated earlier, conventional insurance contracts as they exist today are a modern phenomenon from the perspective of Islamic Jurisprudence. Accordingly, there is no specific evidence from the era of revelation dealing with it specifically. That said, Islam's legal framework which includes controlled Scholarly Legal Reasoning (Ijtihaad) is inherently capable of providing adequate rulings to suffice all occasions until the Day of Judgement. With Ijtihaad, the differences between the jurists in aligning the insurance contract and its conditioning from an Islamic jurisprudence perspective will naturally lead to a difference in ruling. Those who view insurance as
akin to contracts connected to cooperation for good deeds have issued fatwas permitting it. In contrast, those equating it to a contract of exchange have flagged key necessary factors, such as gambling, usury (interest), or an ambiguity regarding it, and accordingly have issued fatwas declaring it prohibited. Additionally, some jurists have explored a middle ground, treating insurance as a conventional contract of exchange while ensuring the counter-value is concluded to be something tangible in order to negate or reduce the contracts associations with gambling, usury, and ambiguity.
Islamic Scholarship has predominantly differed on the topic of conventional insurance based on two views:
The First View: conventional Insurance is Forbidden in Islam from the outset 8 : This view is shared by the vast majority of contemporary Islamic Scholarship across the
spectrum of the four major schools of Islamic Jurisprudence (Mathaahib). 9 The foundations for their collective verdicts are encapsulated as follows:
Using the framework for impermissibility in the Shari’ah that we discussed earlier, we can now see that the default ruling entails conventional insurance being forbidden from the outset.
However, if the prohibition stems from the presence of excessive Gharar (uncertainty), and if a person is forced to take out insurance, for example someone who needs to drive in the UK and is unable to lawfully without a valid car insurance, as an exception due to the law of the land and not having a choice in the matter and no permissible alternative, insurance in this scenario would become permissible as an exception, due to the legal requirements of the country and a person not having a choice in the matter, as there are no permissible alternatives. This is supported by the rule regarding that which the Shariah makes prohibited ‘as a means’, such as the prohibition of ambiguity in contracts which is classified by Islamic Jurisprudence as 'impermissible as a means to an end' 12 , rather than being 'inherently impermissible'. 13 Consequently, the criterion set by the law of the country invokes the principle of 'need', rather than 'necessity' coming into scholarly consideration by virtue of Islamic Law, and Islamic Jurisprudence permits as an exception matters that are impermissible 'as a means' but not 'as an end' due to ‘need’ being realized. 14 Should a situation arise where the aforementioned 'need' is resolved, either through a modification in legal regulations, changes in conventional insurance practices, or, more feasibly, via the introduction of a Shari’ah-compliant alternative, then the provisional allowance granted by Islamic jurisprudence would accordingly come to an end, and default ruling of prohibition will be defaulted to.
The Second View: Conventional Insurance is a permissible contract:
The foundations for their collective verdicts are encapsulated as follows:
d. Niẓām al-aʿwāqil - This is the framework of those who are ‘Aqilah and their responsibilities. This phenomenon entails that in instances of involuntary
manslaughter resulting in a financial obligation like diyah (blood money), this liability is distributed among the 'Aqilah of the offender. These 'Aqilah are typically the male family members and relatives who are bāliġh (mature). 18 The aim of this system is to prevent bankruptcy from inflicting the offender, while ensuring the victim's party receives compensation, as the financial load is more manageable when dispersed. 19
Some scholars note the resemblance between the legal responsibility shouldered by mature male family members, as per the principles of 'Aqilah, and the liability an insurer assumes when providing coverage for particular risks. They point out that just as the insurer manages a pool of insured individuals and disperses costs across this collective group, the 'Aqilah distribute the financial burden among themselves to mitigate the impact on any single member.
e. Security Services Contract - This is a contract in which an individual would hire a guard for one’s premises., in order for the presence of the guard to serve as a deterrent and provide security. Some scholars argue that this is akin to an insurance contract as a person is paying for a contract to safeguard themself in the event of certain risks being realized.. 20
c. The response to the “Al-waʿd al-Mulzim” analogy: This analogy is not precise, as the motivations behind the actions are fundamentally different. An insurer's objective is once again profit-making, whereas a binding promise stems from a desire to benefit someone else. Consider examples like offering to pay for someone's dowry in marriage or saying “Sell your broken car and I will help you with what you are less in buying another one for your family”. These are acts of kindness, motivated by benevolence, without any expectation of personal financial gain. The legal obligation assumed in these cases is born out of altruism, aiming to help one another, unlike an insurance contract where the underlying intent is financial gain.
d. The response to the “Niẓām al-aʿwāqil” analogy: The idea of family and relatives coming to your aid is part of is based on the principle of maintaining bonds of kinship and Silat ar-rahim, meaning the idea of caring for kin, visiting them, and helping them in any way possible, with the intention of seeking reward and recompense from Allah. This is emphasized by the Qur’an itself:
وَٱتَّقُواْ ٱللَّهَ ٱلَّذِي تَسَآءَلُونَ بِهِۦ وَٱلۡأَرۡحَامَۚ
(And be mindful of Allah—in Whose Name you appeal to one another—and ˹honour˺ family ties.)
An-Nisa 1
وَبِٱلۡوَٰلِدَيۡنِ إِحۡسَٰنٗا وَبِذِي ٱلۡقُرۡبَىٰ وَٱلۡيَتَٰمَىٰ
(And to parents do good, and to relatives, orphans,)
An-Nisa 36
In stark contrast, an insurance company is not connected to the insured through blood relations or a bond of brotherhood. Nor does the insurer provide assistance out of a desire to obey Allah or from a place of mercy. This is evident in the fact that the insurer requires payment upfront, before the occurrence of the event against which the insured seeks protection, as a precondition for their support when needed. This analogy is fundamentally flawed because relatives assisting family members do so without any expectation of personal gain. They don't require upfront payment for their support, offering assistance only if and when it's needed. If they were to demand advance payment as a condition for help in the future if it was required, it would also be considered a form of gambling, much like the scenario with insurance. This starkly contrasts with the nature of familial assistance, which is typically unconditional and not driven by profit motives.
e. The response to the “Security Services Contract” analogy: The contract with a security company significantly differs from a conventional insurance contract, as it is essentially a contract of Ijarah, which involves hiring the services of a person or a company. In this arrangement, the security company is tasked with providing a guard whose duty is to watch over the property, effectively acting as a deterrent. The payment made in this scenario is specifically for the service of guarding, not for compensation in case of any incident. In contrast, an insurance contract operates on a different premise. Here, the payment is not for a service rendered, like guarding, as the fundamental nature of this contract is not service-based (as in Ijarah) but rather financial protection-based. If, despite the presence of security, the premises were to be broken into, the responsibility for the damages does not typically fall on the security company. Instead, they are only accountable for providing the agreed-upon guarding services.
Drawing an analogy between these two types of contracts, simply because both offer a form of "peace of mind," is not accurate and goes against the framework of Jurisprudence methodology for Qiyās. In addition, even if it could successfully be argued that ‘peace of mind’ is an acceptable counter-product for this transaction, The nature of the peace of mind offered in each case is fundamentally different: one is service-based, focusing on prevention, while the other is protection-based, focusing on financial compensation after an event has occurred. This distinction makes it misleading to equate the two under the same premise of providing reassurance or security.
The International Islamic Fiqh Academy (IIFA) which is a universal scholarly organization recognised worldwide studied the topic of conventional insurance in the 1980s and concluded as per an almost unanimous the impermissibility of conventional insurance as a default rule. 22
The following text is a translation from their resulting bulletin:
International Islamic Fiqh Academy: Decision no. 9 regarding insurance and reinsurance:
To proceed, the International Islamic Fiqh Academy, as an entity of the Organization of the Islamic Conference, in its second council held in Jeddah from 10-16 of Rabī` al-Thānī 1406 AH, 22-28
December 1985 CE, states:
Having analyzed the proposals made by the scholars contributing to the council regarding insurance and reinsurance insurance, and having rigorously examined its various types and forms, as well the principles upon which it is founded and the goals it aims to realize, apropos other fiqh councils ' and scholarly bodies ' discussion thereto--the council has decided:
The Islamic Finance Advisory is Shura based non-profit community orientated program based in London offering a range of services dedicated to Islamic finance and Economics to an International audience.
The Panel of Scholars at the IFA have concluded the same view as that of the International Fiqh Council, and recognizes that at a fatwa level, exceptions are applicable as per the mandates of Islamic Jurisprudence, and the IFA scholarly panel is dedicated to being a reference for the study of an individual's specific circumstances and generating the necessary Islamic guidance. 23
Contrary to common belief, the Shari’ah is not opposed to mitigating risk, rather one of its objectives is to protect the wealth of the people. For example, it is not uncommon to request collateral when giving a loan and this is substantiated by the Qur’an itself:
وَإِن كُنتُمْ عَلَىٰ سَفَرٍ وَلَمْ تَجِدُوا كَاتِبًا فَرِهَانٌ مَّقْبُوضَةٌ
(If you are on a journey and a scribe cannot be found, then a security can be taken.) Al-Baqarah 283
One such adaptation from the traditional form of insurance mentioned earlier emerged in the Islamic world with the development of Takaful, an insurance model adhering to the principles of Shari’ah. The concept of Takaful presents a stark contrast to conventional insurance in several key aspects, particularly in its approach to risk sharing and investment. Takaful operates on a cooperative model where participants mutually ‘guarantee’ each other against loss or damage. This fundamental difference from conventional insurance stems from the need to align financial practices with Islamic values, which emphasize mutual assistance, shared responsibility, and ethical investing without delving into transactions involving Ribā (interest), Gharar (Uncertainty), and Maysir (Gambling). These are prohibited components that we will delve into shortly.
The globally recognised and vibrant insurance market of Takaful, compliant with Islamic principles, has a rich history that dates back till before the advent of Islam. After Islam, the Messenger (pbuh) recognised this practice in a praiseworthy light captured by the following authentic narration:
Abu Mūsa al-Ash‘ari (may Allah be pleased with him) reported that the Messenger of Allah (may Allah's peace and blessings be upon him) said: "The Ash‘aris, if they ran short of provisions while on a military expedition, or if their children were short of food in Madīnah, they would gather everything they had in one piece of cloth then they would divide them evenly among themselves. Thus they are from me and I am from them." 24
Takaful, which means 'shared responsibility' in Arabic, roots itself in the concept of cooperative risk-sharing. This foundational principle of Takaful highlights its long-standing tradition of mutual support and collective risk management. 25
Accordingly, Takaful is a system based on mutual assistance which originates from ancient Arab tribes as a source of pooled liability which allowed compensation to be paid for any offences committed to another tribe. This principle later extended to many fields and is present in many modern Islamic countries in the form of car and home insurance.
In terms of this article, it is notable to note that It wasn't until 1979 in Sudan that the first modern takaful company was established. Then, in 1985, the Grand Council of Islamic Scholars within the Organization of the Islamic Conference officially sanctioned takaful as an Islamically acceptable alternative to conventional insurance, given that conventional insurance practices were considered to be in conflict with the Shari’ah. Takaful is commonly referred to as Islamic insurance; this is due to the apparent similarity between the contract of kafalah (guarantee) and that of insurance. Unlike conventional insurance, members in a takaful contract are both the insurers and the insured. Each member of the takaful group agrees to make regular contributions or premiums. This takaful can be pooled into a fund and managed and distributed on behalf of the participants by an operator who acts as a mudarib – a manager or an entrepreneurial agent for the policy holders, who charges a fee to cover costs such as claims management and underwriting.
Any claims made by members are paid out of the takaful fund and any remaining surpluses, after making provisions for the likely cost of future claims and other reserves, belong to the participants in the fund—not the mudarib. Those funds may be distributed to the participants as cash dividends or otherwise.
In terms of modern implementation, a takaful operator, the mudarib, would be able to invest the pooled money and the policyholders would become joint investors in order to not diminish the value of their money over time. A positive return on policies is not legally guaranteed, as any fixed profit guarantee would be akin to receiving interest and contradict the prohibition against Ribā.
For a more comprehensive exploration of takaful, including its various applications, we plan to delve deeper into this topic in a forthcoming article inShaAllah.
1 https://www.statista.com/topics/4511/insurance-industry-uk/#topicOverview
2 ibid.
3 ibid.
4 KINGSTON, C. (2014). Governance and institutional change in marine insurance, 1350-1850.
5 https://www.lloyds.com/about-lloyds/history/coffee-and-commerce#:~:text=Lloyd's%20coffee%20house%20specialised%20in,their%20ship%20did%20not%20return.
6 https://www.museumoflondon.org.uk/discover/how-great-fire-london-created-insurance
7 https://www.atlas-mag.net/en/article/history-of-war-risks-insurance
8 The added phrase “from the outset” is mentioned to denote that Islamic Jurisprudence allows for exceptions to the rule of prohibitions in exceptional circumstances.
9 Dr. Issa Abdo: التأمين بين الحلِّ والحُرمة(ص: 166)1 [Insurance Between Solution And Prohibition] Professor Mustafa Al-Zarqa: نظام التأمين: حقيقته والرأي الشرعي فيه (ص: 25)1l [The insurance system: its reality and the legal opinion] Dr. Wahba al-Zuhayli:(4/442) الفقه الإسلامي وأدلته [Islamic jurisprudence and its evidence].
10 Sunan Ibn Majah 2195.
11 https://www.wahed.com/mme/is-the-riba-of-today-the-same-riba-that-was-prohibited-2
12 i.e Impermissible due to it being a means to an end which is inherently impermissible in Islamic Law.
13 For example, Ribā (usury) is considered forbidden 'in and of itself' in Islamic law, illustrating a prohibition that is inherent rather than due to being a means to something else.
14 Ibn Taymiyyah - https://www.islamweb.net/ar/library/content/22/2435/%D8%AF%D9%84%D8%A7%D8%A6%D9%84-%D8%AA%D8%AD%D8%B1%D9%8A%D9%85-%D8%A7%D9%84%D8%AD%D9%8A%D9%84?idfrom=3786&idto=3792&start=0
15 The legal maxim, الأصل في الأشياء الإباحة (Al-Asl fil-ashya’ al-ibahah), meaning “The origin of things is permissibility”
16 The word ‘Aqilah’ is the plural of ‘Aqil’, which is the one who pays blood money, or compensation in the event of an offence that carries financial consequences.
17 نظام التأمين للشيخ مصطفى الزرقا p29
18 Radd al-Muhtaar ala as-dur al-Mukhtaar, ibn Aabideen (3/345)
19 نظام التأمين للشيخ مصطفى الزرقا p60
عقد التأمين ومدى مشروعيته في الفقه الإسلامي p279 onwards
20 نظام التأمين للشيخ مصطفى الزرقا p51
21 https://www.theguardian.com/business/2022/dec/02/insurers-breaking-fca-rules-by-undervaluing-written-
off-vehicles
https://www.insurancetimes.co.uk/news/insurers-must-work-together-to-improve-consumer-trust-if-they-are-to-avoid-outside-regulation-acso/1443813.article
22 https://iifa-aifi.org/ar/1596.html
23 More on the Islamic Finance Advisory and its services can be queried here: [email protected]
24 Bukahri and Muslim
25 https://www.pwc.com/bm/en/services/assets/takaful_growth_opportunities.pdf
The Islamic Council of Europe (ICE) this week embarks on expanding its Knowledge-share and collaboration portfolio as it supports and participates in a ‘Week of Knowledge & Development’ series in Perth Australia, courtesy of Islamic Centre of West Australia.
Sh. Dr. Sajid Umar, a senior scholar & adjudicator with ICE, and the Chair of the Scholars’ Panel of the Islamic Finance Advisory (IFA), a division of ICE, will be representing ICE in this collaboration and conducting lectures, seminars and workshops covering the topics of faith, family, community & finance development from an Islamic perspective.
May Allah Almighty bless this effort and make it count in both this life and the next for organisers, attendees and everyone involved. Ameen.
For further information regarding collaboration with ICE, please email [email protected]
Understanding the dynamics of living with in-laws
Many couples have difficulty balancing the relationship between their spouse and their extended family. This webinar is vital in understanding how we make the best of our situations.
Delivered by Shaykh Farid Haibatan, a senior advisor at the Islamic Council of Europe with years of experience in dealing with domestic issues within the Muslim community.
Here’s what you’ll discover in this live webinar:
#1:Adopting a Pragmatic Approach
#2:How to Achieve Win-Win Solutions
#3: Rising above Reciprocity and Mediocrity
Improve your relationship with your in-laws!
All praise belongs to Allah and may Allah’s peace and blessings be upon His messenger, his family, companions and followers until the last day.
Since the Islamic Council was set up, it has supported over 1,000 cases of marriage reconciliation, and has empowered couples with approaches rooted in safe & secure marriages.
We have dealt with over 800 cases in the last two years. Our reach across the UK has widened and over 7000 people have directly engaged and benefitted with our webinars and workshops.
We now support a growing international base of clients, and have begun expansion into the USA and as well as into Germany.
We now support so many more businesses and charities. Last year we officially launched the Islamic Finance Advisory and towards the end of the year we published our Zakat framework.
Our advisors and judges are helping train others in how to apply Islamic Guidance into everyday solutions. In 2022 we achieved a new milestone by moving into the international training sector with our first training programme for lawyers in Malaysia.
الحمد لله والصلاة والسلام على رسول الله وعلى آله وصحبه ومن تبعهم بإحسان إلى يوم الدين
All praise belongs to Allāh and may Allāh’s peace and blessings be upon His messenger, his family, companions and followers until the last day.
Standing members of the committee:
In this document The Islamic Council is presenting a set of principles, practices, and procedures that a charity organisation will need to follow and adhere to in the collection, allocation and distribution of Zakāh funds. Due to the diversity of Zakāh donors, the multiple locations a charity organisation may operate projects in, and the modern nature of finance and poverty, this policy is designed to be as encompassing and accommodating as possible from a Muslim legal perspective. This policy seeks to adopt scholarly positions that would be readily accepted by the majority of Islamic scholarship in most scenarios and circumstances.
ICE – Zakat Policy v1 (Mar 2022)Download
Charities wishing to review their current policies and/or adopt this policy are requested to book a consultation with one of our Shari’ah advisers to discuss further. Please book a consultation for ‘Fatwa Related to Project’:
It’s our pleasure to announce that the Islamic Finance Advisory (IFA), a division of the Islamic Council, have certified ‘Waseeya’ services as Shariah Compliant.
Based on the official documentation covering the projects processes and procedures; a complete peer-to-peer review was conducted by the Islamic Finance Advisory, concluding the following articles of Waseeya to conform with the general related principles of the Shari’ah regarding the Laws of Inheritance and Transactions.
1. Waseeya’s Inheritance Calculator.
2. Waseeya’s Islamic Will.
3. Waseeya’s Gift Deed.
4. Waseeya’s peer-to-peer interest-free loan agreement.
Waseeya is also working with the Islamic Finance Advisory to ensure all the Islamic products offered on Waseeya platform are in compliance with Islamic Laws.
The importance of wills in Islam:
An Islamic will (called Waseeya in Arabic) is a document that sets out how the deceased’s assets should be distributed in accordance with Islamic principles after they pass away. Our beloved Prophet Muhammad (PBUH) has stated: “It is the duty of a Muslim who has something which is to be given as a bequest not to have it for two nights without having his will written down regarding it.” (Muslim)
The Prophet Muhammad (PBUH) also stated: “A man may do good deeds for seventy years but if he acts unjustly when he leaves his last testament, the wickedness of his deed will be sealed upon him, and he will enter the Fire. If, (on the other hand), a man acts wickedly for seventy years but is just in his last will and testament, the goodness of his deed will be sealed upon him, and he will enter the Garden.” (Ahmad and Ibn Majah)
An Islamic will is key for Muslims as it handles your inheritance and final wishes, whilst keeping your Islamic religious beliefs in mind. Such a will allows you to distribute your inheritance to your family using the correct calculations under Shari’ah law, and as instructed by Allah (SWT) in the Holy Qur’an in the verses of Surah An-Nisa.
Waseeya is an exciting new, online Islamic inheritance planning platform. It helps Muslims organise, plan, secure their assets, and store and share their cherished memories. The platform is available on iOS, Android, and the web.
Waseeya offers 256 bit encryption, hosts an easy-to-use interface where you can create Islamic wills, securely store important documents, and share recorded naseehah (advice) or memories with your loved ones.
With Waseeya’s user-friendly step-by-step format, you can create your Islamic will quickly and efficiently, and revise or amend without solicitorial visits.
Waseeya uniquely boasts the ability of users choosing between different schools of Jurisprudence (Madha’hib) when using the platform. They also boast a Time Capsule feature that can be shared with your loved ones at a time of your choosing, determining what is shared, with whom and when.
The IFA encourages Muslim communities to explore Waseeya and the important possibilities with their platform which helps us take care of an important aspect of our deen.
All praise belongs to Allah and may Allah’s peace and blessings be upon His messenger, his family, companions and followers until the last day.
It’s our pleasure to announce that The Islamic Finance Advisory (IFA), a department of the Islamic Council, have certified ‘Little Hearts & Eye Cataracts’, ‘Feed The Forgotten’ and ‘Livelihood Program’ delivered by ‘Muntada Aid (Charity Number: 1157117)’ as Zakah-compliant, based on their conformance to the general Zakah-related principles of the Shari’ah and the mandates of the widely accepted Islamic Zakah Standards released by the IFA.
As you may be aware the IFA’s scholarly board had published its Zakah Policy in March 2022. The policy was welcomed across the UK Islamic charity sector, setting a precedence as being encompassing and accommodating of modern Islamic legal practice.
We welcome all charities to connect with the IFA and book a consultation with one of our Shari’ah advisers:
All praise belongs to Allah and may Allah’s peace and blessings be upon His messenger, his family, companions and followers until the last day.
It’s our pleasure to announce that The Islamic Finance Advisory (IFA), a department of the Islamic Council, have certified ‘Food Packs, Baby Milk, Orphans Sponsorship, Clothing and Heating’, ‘Cash Distribution’, ‘Home Construction’ and ‘Provision of Cows’ delivered by ‘Human Aid & Advocacy (Charity Number: 1138111)’ as Zakah-compliant, based on their conformance to the general Zakah-related principles of the Shari’ah and the mandates of the widely accepted Islamic Zakah Standards released by the IFA.
As you may be aware the IFA’s scholarly board had published its Zakah Policy in March 2022. The policy was welcomed across the UK Islamic charity sector, setting a precedence as being encompassing and accommodating of modern Islamic legal practice.
We welcome all charities to connect with the IFA and book a consultation with one of our Shari’ah advisers:
All praise belongs to Allah and may Allah’s peace and blessings be upon His messenger, his family, companions and followers until the last day.
It’s our pleasure to announce that The Islamic Finance Advisory (IFA), a department of the Islamic Council, have certified ‘The Gaza Zakat Fund’ delivered by ‘Save One Life (Charity Number: 1187075)’ as Zakah-compliant, based on their conformance to the general Zakah-related principles of the Shari’ah and the mandates of the widely accepted Islamic Zakah Standards released by the IFA.
As you may be aware the IFA’s scholarly board had published its Zakah Policy in March 2022. The policy was welcomed across the UK Islamic charity sector, setting a precedence as being encompassing and accommodating of modern Islamic legal practice.
The IFA was extremely appreciative of its inaugural client ‘Save One Life’ requesting a review and certification of their project ‘The Gaza Zakat Fund’. The assessment began in October 2022, and with great effort and collaboration between the IFA and Save One Life, certification was achieved and granted in January 2023.
We welcome all charities to connect with the IFA and book a consultation with one of our Shari’ah advisers:
A team of experienced scholars and qualified professionals at hand to provide comprehensive advisory services on all matters related to Islamic Finance, impacting personal finance, businesses, charities, and fintech & DeFi in an ethical and transformative manner.
Our expertise spans across various domains including Shariah compliance, IF product design & development, IF liquidity management, IF financial risk management strategies, Zakah, Awqaaf (Endowments) and financial dispute resolutions & adjudications.
EN 
EN_US 
