Binary Options and Sharia Law

Binary options trading is accessible to everyone around the world. As it grows, the industry and its major players have shown a willingness to adapt trading opportunities for traders with particular needs. Since Muslims make up a large part of the population eager to trade, brokers have had to modify certain trading practices to accommodate Sharia Law rules, since most people of the Islamic faith strictly abide by its principles.

What is Sharia Law?

In Arabic, the word Sharia means a pathway to be followed. As such, Sharia Law is at the heart of the Islamic faith as it dictates how Muslims live their lives across all spheres: social, economic, political, business, and cultural. It is the legal framework, which is comprised of several laws, around which these various spheres are regulated. Sharia Law is based on the Koran, the main religious text of Islam.

When it comes to business dealings and investments more specifically, Sharia Law is very clear: there can be no lending of money with accrued interest (riba), no matter the circumstances as this is considered a major sin. Because of this, any form of traditional forex or binary options investments are strictly forbidden. Instead, Muslims who partake in investments within the Islamic faith are to do so according to a concept of risk sharing.

What are the implications for Muslim binary options traders?

When trading binary options, traders often have positions left open overnight where interest is either earned or charged. The nature of the market dictates this practice; since trading is done on a 24-hour basis, all open positions at 5pm (NY time) are then rolled over to the next 24-hour cycle.

Since this is a common occurrence within the binary options market, it puts Muslim traders at high risk for entering a trading practice that is against their principles, and ultimately, against Sharia Law.

What is the solution?

In recent years, many binary options brokers have come to understand the particular needs of Muslim traders and as such, have created special trading accounts, which eliminate any earned or charged interest (riba). These accounts, often called Islamic trading accounts or Swap Free accounts, eliminate riba by closing a trader’s open positions at 5pm (NY time) and reopening them right away on the new 24-hour cycle. Since there is no rollover, there is no interest involved.

Although certain aspects of Islamic trading accounts may vary according to different brokers, all abide by the same rules in order to comply with Sharia Law: there are no fees, no interest, and traders have the ability to execute immediate trades. Muslims who open an Islamic trading account gain access to binary options on the Saudi Stock Exchange called the Tadawul. Since many Muslim traders are from Saudi Arabia, the ability to trade on this exchange is a great opportunity to capitalize on a familiar market.

At first glance, Sharia Law appears to be prohibiting binary options, but with an increasing number of brokers offering Islamic trading accounts, Muslims around the world are now able to profit from this popular form of trading.