Islamic jurists generally agree that the currencies of different countries can be exchanged with those of different countries on a spot basis at a rate that is different from units. This is because currencies of different countries are unique and have different intrinsic values and purchasing power. There is also an agreement that the currency exchange is not permissible on a forward basis, this means that when the rights of both of the parties relate to an upcoming date.
There is a difference of opinion, however, when the rights of either of the party is deferred to a different date. The difference in opinion is due to the varying interpretation of Figh by the different schools of thoughts. Despite these differences the forex trading has been used by many people in the Middle East for years. For many of these Muslims the forex exchange market has been their biggest investment. This is mostly because stock trading has not been easy for persons living in the Middle East.
Forex trading is quite similar to stock trading. Forex trading involves one investing their money in a particular currency and the selling it when the prices are positive. This can be simply illustrated with the use of the Iraqi Dinar and the Iranian Riyal. A few years back there was a very small margin between the exchange rate of the Iraqi Dinar and the Iranian Riyal where one Iraqi Dinar was equivalent to four Iranian Riyals while today one Iraqi Dinar is almost equivalent to 8 Iraqi Dinar so if you had bought Iraqi Dinars at that particular time you could have doubled your money by now.
Forex exchange markets are the largest in the world involving transactions worth US$1.5 trillion each day. The forex exchange market doesn’t have a central foreign exchange market like the stock market instead its trades are done in the “interbank” markets. In foreign exchange the trading is basically between two counterparties and does not involve middle men. Forex trading is the only 24 hour trading system and covers the entire world. The “spot market” is where trades are settled immediately and it is the largest of the forex market.
To start a forex exchange transaction, one needs to purchase a certain currency while at the same time selling another. The foreign exchange transaction involves the ‘long” currency which you purchase and the “short” currency that you sell. In this trading system there are no commissions charged as the dealers make the profit on the difference between the currencies that they buy and that which they sell.
The forex market is a good market to invest because it is instant, open 24 hrs a day, has no middlemen and no fixed trading size. The use of the internet has enabled it to become even cheaper and an economical way to invest. The downside of it is that not many of the currencies are traded on the forex exchange market and most of them are the strong currencies like the Dollar, Egyptian pound, Yen, Kuwait Dinar, UAE Dirham, etc.