Investing in futures contract in commodity market
Fatwa No: 158539

Question

i want to aksed can investment in futures contract in commodity market is halal or not. like suppose if i buy 10 barrels of oil in commodity market at $105 on 5 march 2011 and the contract will be expire on 5 april 2011 at which the settlement would be made, if on 5 april 2011 the price closes on $110 , my account will be credited with the surplus rate and if price closes on $100 my account will be debit . so there is no physical holding of the stock and the rates of commodities keeps on changing as in stock exchange

Answer

All perfect praise be to Allaah, The Lord of the Worlds. I testify that there is none worthy of worship except Allaah, and that Muhammad  sallallaahu  `alayhi  wa  sallam ( may  Allaah exalt his mention ) is His slave and Messenger.

In principle, trading in oil and other products through the international stock exchange is permissible if the dealers abide by the Islamic conditions in buying and selling. However, the problem is that most contracts that are concluded at the stock exchange include religious prohibitions, and gambling is the main incentive for most transactions that are carried out there.

It is for this reason that real transactions (at the international stock exchange) are very rare and if there is a real transaction, then it is carried out among tens of imaginary transactions to the extent that it is only gambling and the frenzied broking that appear from it, but not the beneficial economical activity as stated in the magazine of the Islamic Fiqh Committee.

The method that you mentioned in the question is not permissible because the contract is related to a commodity whose qualities and quantities are determined and then it [the commodity] is sold at a given period of time before possessing it in order to take the surplus amount when its price goes up or pay the difference when its price goes down on the settlement day of the cash settlement which constitutes the difference between the price included in the contract and the price that is prevalent on the day of the contract completion.

So, the reality of the contract is that the commodities are not the objective; rather, they are just a means for gambling and pushing the index up. It is for this reason that there is a great expansion in the speculations of the index to the extent that they have included trading on life expenses index which the governments issue in order to calculate the rate of inflation despite the fact that this has nothing to do with commodities or securities, so the whole transaction is nothing but gambling.

The Decision of the Islamic Fiqh Committee (number 63, 1/7) about the international stock exchange reads: “Dealing in commodities and currencies and indexes in organized markets: 1- Dealing in commodities in organized markets is done through one of the four following methods:

A- The first method: The contract includes the right of the buyer to get possession of the commoditiy and pay the price immediately, while the commodity is available or that there are receipts that represent it in the hands and possession of the seller. This contract is Islamically permissible with the known conditions of valid sale.

B- The second method: The contract includes the right to get possession of the sold commodity and paying the price immediately provided that this is possible and guaranteed by the market authority. This contract is Islamically permissible with the known conditions of valid sale.

C- The third method: The contract is related to a commodity whose attributes are determined to be delivered at a delayed time and its price should be paid at the time of delivery and the contract should include a condition that requires that it (the contract) actually ends by receiving the commodity and paying the price. This contract is not permissible due to the delay of paying the price and receiving the commodity. Nevertheless, this contract can be re-adjusted in order to include the known conditions of the Salam contract (i.e. buying in advance), and if it includes the known conditions of Salam, then it becomes permissible. Also, it is not permissible to sell the purchased commodity in a Salam contract before actually possessing it.

D- The fourth method: The contract is related to a commodity whose quality and quantity are defined to be delivered at a delayed time while the price will be paid at the time of delivery without the contract including a condition that requires that it ends by receiving the commodity and paying the price, and it is possible to clear it with a counter contract. This kind of contracts is the most common in commodity markets and it is not permissible in principle.

Allaah Knows best.

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