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As a writer on Islamic finance, I am regularly asked whether particular categories of transaction are religiously permissible. I always take the same approach when asked.

My August 2024 column for the magazine "Islamic Finance News" had another such question. You can read it below.

Is trading contracts for differences halal?

Every email user in the world can write to me via the email address I publish on my website. Accordingly, I regularly receive enquiries asking whether a particular investment is permissible within Islam.

The most recent one was last month, and I have copied a brief extract: “I've been training to trade for 2 years and I'm a little lost. I wanted to know if trading CFDs on forex or commodities was legal in Islam.”

I gave my enquirer the same response that I give everyone who approaches me for religious advice. “Each of us is individually accountable to God on the Day of Judgment, so we have to decide religious questions for ourselves.” With that preliminary disclaimer, I am always willing to share my thoughts to enable others to think about the question asked.

Almost nine years ago, my 11 November 2015 column discussed commodity speculation using futures contracts. I explained that speculators have an essential role in making markets by providing the liquidity without which markets would not function properly.

While buying futures contract entitles (indeed requires) you to take delivery of the commodity on the expiry date, I explained that in practice all speculators, and indeed most commodity users, close out their positions in cash by transacting the opposite contract.

A CFD (“contract for differences”) eliminates the delivery issue by always being cash settled. Also, CFDs are not transacted on an organised market, but with financial firms that offer CFDs to their customers.

Some may wish to religiously prohibit CFDs because they are off-exchange and there are Hadith pronouncing against transactions outside the recognised market.

For example, Sahih Muslim Book 10 Number 3623:

“Ibn 'Umar (Allah be pleased with them) reported Allah's Messenger (may peace be upon him) as saying: Do not go out to meet merchandise in the way, (wait) until it is brought into the market. This hadith has been reported on the authority of Ibn Numair but with a slight change of words.”

When considering any Hadith, you need to take into account why it was given. 1,400 years ago, it would be easy to take advantage of someone away from a market, because they would not know what the market price was.

Today, everyone has instant electronic access to market prices, so I see nothing wrong with transacting off-market unless the off-market contract contains other exploitative terms within it.

My enquirer had a supplemental question: “Could you enlighten me on the leverage granted by brokers offering 'Islamic accounts.' Can I trade with leverage via these accounts?”

I explained how leverage arises, since the CFD will normally be over a much larger value of commodity than the customer is required to deposit as margin.

For example, if the price of copper is $ 9,000 per tonne, then a CFD where the two sides are $ 9,000 and 1 tonne of copper has zero value when it starts. However, the broker will demand a deposit from you, of say $ 1,000. That is leverage of 9:1. (If the value of 1 tonne of copper rises by $100, you need to deposit another $100 of margin, so the broker stays protected against your default.)

While leveraged contracts have more risk than unleveraged contracts, I see this as a normal market price risk, rather than the type of risk (“gharar” in Arabic) that Islam prohibits.

Mohammed Amin is an Islamic finance consultant and former tax partner at PwC in the UK.