Salaam 'alaykum Professor Abou El Fadl,
Hope all is well with you and familly.
Thank you very much for giving me the opportunity to seek your help regarding Islamic law on leverage, and the use of it in trading financial instruments, particularly in commodity and currency markets at retail level.
Frankly, I've been feeling helpless for a very long time, as someone who's striving to be a practicing Muslim consistently. I used to work in a Foreign Currency & Futures brokerage firm and have internal conflict as Muslim, because I couldn't find solid and satisfactory information in English language. Meanwhile I have an undying passion to actively trade commodity and currency.
The only excellent, comprehensive, and still relevant information that I had come across is an old book titled 'Islamic Commercial Law: Analysis of Futures and Options' by Mohammad Hashim Kamali. However, I've a question regarding a point in Prof. Kamali's book that I felt is exclusionary: why is it halal for people who are rich or have a lot of money, but haram for retail investor/trader.
Many other information that I've read and watched on the internet, e.g., AMJA's fatwas, Monzer Kahf's fatwas, etc., or Islamic 'imams' lectures on YouTube, are not comprehensive. Sometimes, I thought of it as somewhat irrelevant due to "off" premise, for a 'haram' judgement, based on professional experience. Or it is labelled haram based on their personal opinion on what should happen in real world, instead of Qur'anic verses or authentic Hadeeth. Other times, the info are nuanced with marketing Islamic financial products by labeling non-Islamic products as categorically haram.
I am writing this e-mail in hope for some enlightenment about trading, leverage, and the use of it, from Islamic law.
If I'm not mistaken, I remembered you mentioned about 'levels of speculation'. Would you kindly enlighten me regarding it as well please ?
Looking forward for your reply.
Jazakallah Khayr Prof. Abou El Fadl.
I apologize it has taken me so long to get back with you. I have often thought about your queries regarding Islamic finance and trading in commodities. Unfortunately, I don’t know if I will have a very satisfying response for you.
The most comprehensive source I know of in English is the textbook by Nethercott and Eisenberg published by Oxford. I also respect the scholarship of Mahmoud El Gamal, a professor at Rice (I believe).
I must say that after reading what I could in this field I have become very skeptical of what is called Islamic finance. In Shari’a studies we differentiate between riba al-nasi’a and riba al-fadl, and the critical issue of gharar (speculation). You will find all three terms mentioned and defined in a number of the secondary sources in English, such as the books by Mahmoud El Gamal and Yahia Abdul Rahman. The reason for my skepticism is that much of these rulings on usury were premised on the ethical impulse to avoid exploitative financial transactions and preying on the disempowerment of the weak. Much of what I have read either completely loses sight of this ethical impulse and moral objective or appears to be financially naïve and unsophisticated. Part of the problem is that many of the sources written on Islamic finance were written by people who do not have a specialized knowledge of finance or economics. There is a professor at Pepperdine School of law, Ahmad Taha, who does have the requisite sophistication and he has been studying Islamic banking and instruments for a while. I believe he is skeptical as well but you might want to contact him for feedback.
In short, I am hardly a specialist in the field but I know enough about Shari'ah law to say that the rules do not exist for their own sake. The purpose of the usury laws was to avoid exploitation and speculative transactions that are a form of gambling because of the social harms involved. I should mention that Azhar has issued a number of fatwas over the decades allowing for commodity and currency trading and these fatawa have often been inconsistent with fatwas issued by Saudi religious authorities. If this matter continues to burden you perhaps you should contact Ahmad Taha at Pepperdine and/or Mahmoud El Gamal at Rice.
For whatever it is worth, I hope this message has been of some use to you. Finally, I should mention that I read a book a couple of years ago entitled, Risk Sharing in Finance the Islamic Perspective, that I found useful at certain levels, but you would be much better positioned to evaluate its arguments.
I pray that your search is ultimately successful. And Allah knows best.
Al-salamu ‘alaykum and with warm regards,
Dr. Abou El Fadl