page_title: Islamic banking and finance
section_title: Islamic laws on trading
hierarchical_section_title: Islamic banking and finance / Principles / Islamic laws on trading
caption_attribution_description: English: Islamic Development Bank, Dhaka
context_page_description: Islamic banking or Islamic finance or sharia-compliant finance is banking or financing activity that complies with sharia and its practical application through the development of Islamic economics. Some of the modes of Islamic banking/finance include Mudarabah, Wadiah, Musharaka, Murabahah, and Ijara.
  The Qur'an prohibits riba, which literally means "increase". Technically riba is the increase when liquid or fungible assets are exchanged other than at par value. The most prevalent example in today's economy is lending money at interest, for example an exchange of $100 cash now for $110 payable in a year's time, an increase of $10. Investment in businesses that provide goods or services considered contrary to Islamic principles is also haraam.
  These prohibitions have been applied historically in varying degrees in Muslim countries/communities to prevent un-Islamic practices. In the late 20th century, as part of the revival of Islamic identity, a number of Islamic banks formed to apply these principles to private or semi-private commercial institutions within the Muslim community.
context_section_description: As noted above, the primary focus of Islamic banking is on  financing without interest to avoid riba, while trade is not an issue (per the Quranic statement that "God has permitted trade and forbidden riba [usury]".  However trade transactions that involve gambling (maisir), or excessive risk (bayu al-gharar) are not permitted.  Among the financial instruments and activities common in conventional finance that are considered forbidden (or at least Islamically problematic) by many Islamic scholars and Muslims are: 
  margin trading: This uses borrowed money to buy shares of stock or other financial instruments. It both involves forbidden interest on the borrowed money, and much greater risk than non-margin investing because losses can be greater than the amount borrowed;
  short selling: borrowing/renting shares of stock or some other instruments and selling it, sometimes without possessing it, on the hope that it can be later repurchased  at a lower price for a profit. It is traditionally thought to violate the hadith stating "Do not sell which you do not possess," and has been declared impermissible by numerous sources (Raj Bhala, IslamQA, Taqi Usmani, Humayon Dar.
  day trading: very short term buying and selling of financial instruments) has been called unIslamic because the short period of "ownership" means day traders do not truly own what they trade, and furthermore pay interest. Among the sources calling it unIslamic include Yusuf Talal DeLorenzo, and Focus Business Services of the UAE.
  derivatives: contracts that derive their value from the performance of an underlying asset; (The "notional value" of the world's over-the-counter derivatives at the end of 2007 was $596 trillion and the gross market value of all outstanding derivatives was $14.5 trillion.) Options, futures and "other derivatives" are "generally" not used in Islamic finance "because of the prohibition against maisir",  Sources stating that most derivative or some kinds of derivative are banned by Islamic scholars include Juan Sole and Andreas Jobst, P. S. Mills and J. R. Presley, Taqi Usmani, Investopedia. The most commonly used derivative are:
  forwards: customized contracts to buy or sell an asset at a specified price on a future date. unlike futures contracts forward contracts are not traded on any exchanges;
  futures: a legal agreement to buy or sell a particular commodity or financial instrument at a predetermined price at a specified time in the future;
  options: contracts offering the buyer the right, but not the obligation, to buy (call) or sell (put) a security or other financial asset at an agreed-upon price (the strike price) during a certain period of time or on a specific date (exercise date);
  swaps: contracts through which two parties exchange financial instruments to transfer risk.
  On the other hand, at least one Islamic scholar (Mohammed Hashim Kamali) finds "nothing inherently objectionable" in selling and using options, which like other kinds of trade is mubah (permissible) in fiqh, and "simply an extension of the basic liberty that the Quran has granted". And both Islamic finance practitioners and critics find benefit in at least some uses of derivatives and short selling — managing risk in times of financial trouble, improving market efficiency and employee productivity.
  At least some in the Islamic finance industry use derivatives and make short sales, and permissibility of this is a subject of "heated debate".
  Global standards for trading Islamic profit-rate and currency swap derivatives were set in 2010 with the "Hedging Master Agreement" (see below).
  A "shariah-certified" short-sale  had been created by some Shariah-compliant hedge funds. However both have been criticized as unIslamic.
caption: An Islamic Development Bank branch in Dhaka
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