Business and Investing Question: Halal to use margin/leverage?

Everyday Islamic Finance Business and Career Questions
#1

I use a broker call degiro to trade stocks and shares they provide a margin/leverage facility which is usually 2.5 times your initial deposit. so if I deposit £5,000 they provide a margin of £12500 this gives me a total liquidity of £17500 to trade with, they charge a very tiny interest per month to use this margin - is roughly less than (0.04%) per month - based on the purchase price of the equity/trade. You are charged once the trade read been made using the margin, so therfore if I never used my leverage/margin but only used my principle deposit of £5000 to trade with, I won’t get charged for as I didn’t use the available margin, the charge kicks in only when I’ve used it to make a trade– furthermore using the margin as intraday trading and closing the position before the end of the same trading day there’s no interest charged, so basically you can use the margin to day trade for free. The interest is only charged once position is held overnight or longer periods. This broker usually charges commission per trade - about £1.75. However they are introducing a new feature in which all traders will be charged as a monthly subscription basis, therefore I would thought this would disconnect or divorce the combination between a sale and a loan at the same time and they’ll become separated.

I have 3 questions…

  1. The charge for borrowing/interest appears to be equity for cash, not cash for cash, as they only charge once your trade has executed and you begin to hold the equity. Does this make this loan permissible as its not cash for cash?

  2. Is the day trading permissible? As the commission is not present with each trade anymore as its done monthly on subscription basis and their is no interest charge or using margin if it is returned the same day.

  3. If the brokers charges monthly, not per trade, does this separate/divorce the combination of loan with a sale scenario and make swing trading permissible (holding an equity for several days or months) – the sale with loan scenario has been the main obstacles why Muslims can’t use margin trading.

Your guidance is much appreciated.

Jazakallah khair

#2

Wasalam

May Allah bless you.

  1. Brokers usually charge a fee to carry your purchase or sale order. This service is known as ‘execution only’ or ‘dealing only’. It is permissible to pay such fee to a broker.

  2. The fee that is charged for margin trading is equivalent to interest. Therefore it will not be permissible to use the margin provided.

  3. If the broker will charge a flat membership fee for the services provided, then we need to know what is the breakdown of this fee. For example, with some brokers you are charged a fee even when you are not trading. The justification for this fee is that it covers the cost of distributing dividends and issuing statements. So in another word, even if it’s a flat fee, there is a possibility they are also factoring in interest charges.

  4. Day trading is not permissible whether you are using a free interest margin or not. The issue with day trading is that you are selling shares that have not come into your ownership yet. In developed countries, it usually takes a couple a days for clearance of the shares and only then, settlement takes place. There is a clear prohibition in Islam to not trade what you do not own.

And Allah knows best!