Futures: Halal or Haram?

feathers flying out of an open box

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?

  1. Buy and sell what exists. Make sure that, whatever the commodity is, be it stocks, or currency, it already exists in the world.
  2. 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.
  3. 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.
  4. 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:

  1. Don’t deal in futures. It’s a fickle thing. Especially if you don’t understand the fiqh.
  2. Consult your local (knowledgeable) imam. They can tell you what to do.
  3. You can initiate futures contracts, provided the commodity exists and the seller possesses it.
  4. Give or pay a down payment, to avoid a debt-for-debt transaction.

Wallahu ta’ala ‘alam.

References

Shaykh Tawfique Chaudhry. The Real Deal. University of Toronto, Toronto. 08 Jan. 2009.

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26 Responses

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  1. Khyber Nazari

    Salam Alaikum brother in islam!!

    buying a contract is not like a buying the actuall share, its just you are buiyng the right to buy the shares at recent price,

    so when you are reselling the contract you are not actually selling the share, cause you dont have have the share to sell in first place, you just have the right to buy them at the certain price. so its not exactly that you are selling what you dont have (shares) you are selling what you have (the right to buy share at specific price), you are just selling that right that you have, whih makes futures halal, just like buying/stock only if the actual product is hallah or company’s main business is non-haram. (like buying share in comanies like willam hills or other similer type of company whos main income is from gambeling, or other companies like producessors of alcholl or weapons that are used against mulsim would be harram.)

    i dont know if i explained the situation properly, but i hope you understood what i meant.

    please let me know if im wrong.

  2. Wa’alikum as-salaam,

    You’re still buying/selling the commodity on a promise — a promise that you can buy/sell at that price in the future. There’s no actual product involved; so it’s still buying/selling what you don’t own :)

  3. @Hussein, @Anonymous, I hope you’re not implying that zoo tickets are impermissible! These are allowed, because the prohibition on futures is based on the uncertainty of the provider in being able to provide the required commodity or service at the time requested. In the case of the zoo, airline, etc. the service providers are well-capable of doing so; so this would be a permissible case of futures.

    There are cases where futures are allowed; I’ll update the article to mention those. Those are very important..

  4. @Hussein, I’m not sure what you’re getting at. If there’s something you don’t understand, you should talk to a qualified expert in Islamic finance (definitely not Ilm Fruits), since these are just beginners notes taken from a Islamic-Finance-101 class.

    And we don’t debate fiqh!

  5. umar siddiqui

    assalawalekum
    intraday trading in future commodities like silver, gold, crude oil
    and agricultural commodities is halal or haram ?
    and can i be the broker for these commodites is this halal or haram?
    please give me solution

  6. Wa’alikum as-salaam,

    We don’t give fatwa. Best thing to do is talk to a shaykh who knows about Islamic finance. This post is merely materials from shaykh Tawfique’s Islamic Finance 101 class.

  7. As-salamualikum. Is IPO share is halal or haram.

  8. Wa’alikum as-salaam, allahu a’lam. If IPO is “initial public offering,” then based on what I know, it would depend on the company and the primary business and etc, just like any share-buying.

  9. As-salamualikum. In Bangladesh when a new company come into stock market it entered by IPO . This process is a lottery system .But here if you don’t win lottery they give your money back. But their system is lottery process . And if you win the lottery they always give you more then original mount. So my question ” Is it halal or haram “.

  10. As-salamualikum. In Bangladesh when a new company come into stock market it entered by IPO . This process is a lottery system .But here if you don’t win lottery they give your money back. But their system is lottery process . And if you win the lottery they always give you more then original mount. So my question ” Is it halal or haram “.

  11. md kaleem

    hi friends

    please answer me,i need help

    i want to earn halaal.in the past i have earned haraam which i came to know now.i was not aware in the past.however i want to stop that business and wants to open a general store.

    my question is can i invest my past earning in the store and start business and will it be halaal.will that be allowed in islam.as i want to improve myself and wants to be on islam path.please answer me as i am very much confused please…

  12. Abdallah Ibrahim

    As Salam Alaikum..
    I trade commodities,can i purchase CRUDEOIL? I mean is it Halal or Haram?..&
    Other than this what are the other halal shares according to Isalm??
    Allah Hafiz

    Please reply as soon as possible..

  13. Mohammad Naiyer Azam

    I want to invest around Rs. 50,000 thousands and earn some money in Islamic ways only i.e it should be halal only.
    Can you please suggest me the best way to do the same.

  14. Minhaj

    Asslamualykum !
    @mohammad naiyer azam n other brothers.

    I think shaykh taufiq has Clear concept of fUTUR & OP. AND daily Trading.

    i Think there are 70% companies in India comes in Halah Portfolio. u can use Islamicequity.co.in and Refer what Other Code n conduct.

    There r some reason as u cant invest in Wine company, loan and housing finance company and some more also. please go and check

    Asslamualykum

  15. [...] [mage lang="en|es|en" source="flickr"]futures trading in islam[/mage] Islamic Economic and Finance S…="480" height="295"> [...]

  16. jannat03

    assalamualaikum,

    I purchase commodity like gold,silver ,copper etc through share market is it halaal.
    They provide me commodity even if i dont have enough money.like even if i have 25000 they give me a product of 1,00,000 . can i purchase such products.

  17. mohd kashif sami

    assalawalekum
    intraday trading in future commodities like silver, gold, crude oil
    and agricultural commodities is halal or haram ?

  18. Muslim

    Assalamoalekum Warehmatullah, I believe I owe this to all my Muslim brothers and sisters and that is why I am writing on this thread. I want to reveal here that I worked for 20 months day and night (as much as an individual can work (24 X 7) on U.S. futures market as an independent trader. I was introduced by someone I knew and I trusted him enough to believe that there is profit and loss in this market, so with equal risk it is indeed Halal contrary to the popular view of the Islamic scholars. I entered this market with a hope and urge that I would make an earning initially and later thought that I would make big money from it. Days, weeks and months of testing and reasonably huge monetary losses took me to a position where I understand this market inside out today and can make as much money for myself and probably anyone who I bring and follows my model but you know what-there started a real fight within myself and I could easily feel that something was not right. My model had reached the position where I wanted to be but my heart, brain and if I can say soul were not in sync at all. All sorts of thoughts started pouring in and the strong reason that I found for it was that there is a very clear manipulation in this market on a day to day, hour to hour or minute to minute basis and it has been designed in such a way that an individual trader like myself who comes in assuming it is honest is bound to end up in losses and that is the reason there is proven data that 90 percent of people lose in this market. Let us assume that you are very smart like I thought I was, you will learn/find/explore the tricks but when you will gain someone has to lose (he/she would be like you and me who enter with little know how). A question was raised within and I share with all of you that if you and me are practicing Muslims and we find that there is a street where people are robbing or trying to rob anyone on that street-will we go and join the robbers or will we go and support and save who is being robbed. Also picture that the robbers have power and may be you can’t overcome them but you can join them-would you and me join them still or at least make Dua or whatever we can to the best of our ability to save the innocent. I think if we claim ourselves to be Muslims and believe in the Day of Judgment the answer is very obvious that we will not participate in anything that is remotely wrong. As this is just a reply on a thread I am concluding it here and I hope Inshallah that this would be an eye opener for anyone who is thinking of entering futures market or has entered it or has made a successful model. Please remember that it is only our Aamaal that will go with us, everything else that we created here-we will leave so only create what is beneficial for the mankind and not anything that brings more harm and evil. May Allahtala allow us to implement more than we say and May we be protected from the evils of Shaitan-Aameen. If anyone of you has any more questions Inshallah I will answer them very honestly-you can email me at ottawakitchen@gmail.com

  19. Iqbal

    Assalaamu Alaikum,

    I found your explanation very clear on futures trading as you gave examples from the hadith of our beloved Prophet Muhammad (Peace be unto him). Can you please clarify if spread betting is similar (I know the word betting would imply haram), but can you please see another website I came across and comment on their explanation (I am not trying to criticse this site, but am trying to understand). JazakAllah

  20. Iqbal

    Assalaamu Alaikum,
    I found your explanation very clear on futures trading as you gave examples from the hadith of our beloved Prophet Muhammad (Peace be unto him). Can you please clarify if spread betting is similar (I know the word betting would imply haram), but can you please see another website I came across and comment on their explanation (I am not trying to criticse this site, but am trying to understand). http://www.yanabi.com/index.php?/topic/348000-is-spreadbetting-halal/

    JazakAllah

  21. tareq

    Dear brother ,

    in islamic finance there is contract called buy al Salam contract , which allow you to do short selling ,
    there are certain rule you must follow to be qualified,
    as we know in margin trading , there are certain rule for short selling ,
    and you can not sell in the market , get your profit and exit the market , so you must buy to close the transaction

    during the age of Prophet (salallahu alayhi wa sallam) , there was uncertainty about future, and there were no guarantee to obtain the product as agreed in future.
    that’s why our prophet (salallahu alayhi wa sallam) released the hadith ,
    However in online market , this uncertainty does not exist , you can buy & sell anytime.
    I think the decision that our prophet (salallahu alayhi wa sallam) made was based on situation that happened during that time, these days we are integrated with technology and electronic translations , and there are rules govern on our transactions. what i want to say is that the decision was made from your prophet (salallahu alayhi wa sallam) is not related to current trading situation.

    http://www.islamic-finance.com/item_salam_f.htm

    meanwhile,
    The broker give us leverage or debt , at zero interest, its not bank loan,
    when we close the transaction, the debt will return to broker itself , and no fee charges ,
    in addition, when we loss in transaction, our loss limited to amount money that we deposited , so the broker may not face any loss, when traders got margin call.
    this loan is controlled and monitored by broker, however, when we trade on loan which obtained from bank, if we lost all the money , we are responsible to return total debt, and of course , there will be a interest to pay back.

    The Situation in electronic translation and other market are different , in electronic system , there are always rules , and everything is controlled and monitored.

  22. tareq

    this is new clip from one of scholars who studied islamic finance ,

    he talk about margin trading in details ,

    but i do not agree with some of his points

    http://www.youtube.com/watch?v=F_WQUX5ynGs

  23. Muslim

    Assalamoalekum Warehmatullah Tareq,

    Just to inform you and anyone who reads your comment, anyone who has spent time long enough in this electronic transactions of stock market, can tell you that short term trading is the most manipulative and that includes all types of futures/currency. I will give you a very simple example of trading as our Prophet Muhammad (S.A.W.) asked his companions, and is well known that if there is a deformity in a product inform about it and then sell it. In essence there should be no treachery involved. A thief masters his craft, but that does not mean that business becomes lawful. All brothers/sisters should remember that this life is temporary, and getting into grey areas for rizq is only asking for trouble, Allah-u-alam. See this video, answer given by Dr. Zakir Naik on futures market:
    http://www.youtube.com/watch?v=1lVhMQsmY8w

  24. Md balayet hossen

    ipo income ki halal or haram

  25. tareq

    Dear brother ,

    there are certain brokers which do not have official license and registered names under central banks are manupolative .

    however, there are many broker exist nowadays that have all type of legal license and non of them have done any manipulative activities .
    All transactions are monitored and controlled .
    like
    http://www.avafx.com
    http://www.avafx.com/License/

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