Margin is a financial mechanism used in trading that allows a trader to borrow money from a broker to increase the size of his investments. The broker provides a loan against the trader’s capital or a portion of it, allowing him to enter into trades larger than his actual capital. This process is known as leveraged trading, as margin multiplies the trader’s purchasing power.
How to make margin:
1. The trader deposits an amount as a guarantee (initial margin).
2. The broker allows a larger amount to trade based on the leverage ratio (such as 1:10 or 1:100).
3. If the trader makes a profit, he gets double the return. If he loses, the loss is deducted from the margin, and if the losses exceed the deposited amount, the trader may be forced to cover the shortfall.
Margin rule in Islam:
The use of margin in trading raises legal issues related to several matters:
1. Usury (interest):
The broker often requires interest on the loan used in the margin, which falls within the scope of usury, which is forbidden by the texts of the Qur’an and Sunnah.
2. Sell what you don’t own:
In many cases, contracts are traded without actual ownership of the assets (such as currencies or stocks), which falls under the prohibition on selling what one does not own.
3. Deception and risk:
Trading on margin involves a great risk that may lead to the loss of the entire capital, which is considered a form of uncertainty that is forbidden by Sharia.
Jurists' opinion:
Prohibition: Most contemporary scholars agree that margin in its traditional form is not permissible according to Islamic law due to the usurious conditions and high risks.
Permissible alternatives: It is recommended to use investment and trading methods that are free from usury and uncertainty, such as trading with personal capital or through platforms that comply with Islamic Sharia regulations.
This and God knows best
Trading using traditional margin is forbidden in Islam because it contains usury and uncertainty. It is advisable to stay away from it and look for legitimate trading methods that comply with the provisions of Sharia.