Leverage, or what is known as margin trading, is a financial tool that allows traders to use borrowed funds from a financial broker to increase their investment capacity.
This type of transaction has sparked widespread debate among scholars and legal bodies regarding its compliance with Islamic law.
The prevailing opinion: prohibition
Many legal bodies have agreed to prohibit trading with leverage in its traditional form, for the following reasons:
A loan that yields benefit:
Leverage is considered a loan from the broker to the trader, and the broker benefits from this loan through commissions or fees, making it a usurious loan, which is prohibited by law.
(Source: Jordanian Fatwa House - Islam Question and Answer)
Overnight fees:
In some cases, the broker imposes fees for keeping the transaction open for the next day, and these fees are considered prohibited usurious interests.
(Source: Islam Question and Answer)
Combining borrowing and trading:
Some brokers require traders to execute their transactions through them, leading to a combination of borrowing and trading, which the Prophet, peace be upon him, prohibited.
(Source: Islam Web)
Failure to achieve legal possession:
In some forms of leverage trading, the legal possession of the traded commodity or currency is not achieved, which is a violation of Islamic law.
(Source: Islam Web)
Other opinions: permissibility under conditions
Some scholars see the possibility of allowing leverage in specific cases, provided that:
No interest or additional fees imposed on the loan.
Achieving legal possession of the traded commodity or currency.
Not requiring the broker to execute transactions only through them.
However, these conditions are difficult to achieve in practical reality, making trading with leverage fraught with legal risks.
Summary
Based on the above, trading with leverage in its traditional form is considered prohibited in Islamic law due to its elements of usury and legal violations.
Traders are advised to avoid this type of transaction and seek legal alternatives that comply with Islamic law.
Reliable sources for more information
Jordanian Fatwa House: The ruling on trading with leverage
Islam Web: The ruling on trading on margin or leverage
Islam Question and Answer: Types of trading with leverage and their ruling
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