Fatwa ID: 09409
Answered by Mufti Sakib Shadman
Question:
Assalamu Alaikum,
I would like to ask for your guidance regarding prop firms and how they work. Here is my understanding:
- What is a Prop Firm?
A prop firm is a company that gives traders a demo account for testing trading skills.
The money in the account is not real, and the trades are not executed in the real forex market.
It is basically a simulation.
- How It Works
Step 1 — I pay a fee.
This fee is only for:
- using their platform
- joining their trading challenge
- their evaluation system
- support and services
It is not an investment and not connected to real trading.
Step 2 — They give me a challenge account
This account is:
- a simulation/demo account
- fake money
- fake trades
- no actual currency is bought or sold in the real forex market
Step 3 — If I pass they give me a “funded” account
- Most prop firms still use simulated accounts, even after passing.
- They only measure my performance.
Step 4 — If I make profit, they pay me
If I earn profit on the simulation, they pay me a percentage from:
- the company’s business revenue
- fees from other traders
- NOT from real forex trading
So I am not dealing with real currency exchange
- Two Types of Prop Firms
- Simulated Prop Firms (most common):
- No real trades
- No real forex
- No real buying/selling of EUR, USD, etc.
- These operate like a skill competition using a demo platform.
- Real-flow Prop Firms (rare):
- They send trades to the real market.
- This follows the same ruling as spot forex
- Islamic View
Is it possible for it to be made permissible if:
- There is no swap interest
- No actual forex transaction
- The fee is only for service
- The system is skill-based not gambling
My Question:
Since in prop firms I am not buying or selling real currencies, and all trades are simulated and the payment is from the company’s money, not forex transactions, I want to ask if this is halal or permissible.
JazakAllah khair
In the name of Allah, the Most Gracious, the Most Merciful
Answer:
Prop firm trading involves users paying a fee to gain access to a “demo” trading environment. Users are evaluated on their ability to generate fictitious profit through simulated trading of ‘virtual’ financial instruments.[7] If a user passes the evaluation, they are rewarded financially and continue to trade, hoping for further financial rewards.[5]
Contemporary proprietary trading platforms are NOT Shariah-compliant due to the following reasons:
1) Most platforms require participants to trade in instruments that are impermissible in Shariah, such as:
- Foreign currency pairs (Forex), which often involve interest-based rollover fees for holding positions overnight, and speculative trading.[10]
- Shares of conventional banks and companies involved in haram activities.
- Bonds – interest-yielding loan instruments.
- Contracts for Difference (CFDs) do not confer absolute ownership.
2) Even if the trading is simulated, the firm utilises user trading data to inform its live market trading strategies involving Haram instruments. Thus, your simulated trading constitutes “assisting in sin” [8], which is prohibited in the Qur’an:
“And do not assist one another in sin and transgression.” (Al-Mā’idah: 2)
3) Furthermore, users may be tempted to trade Haram instruments in the live market after learning the skills and strategies of how to trade these instruments in a demo platform.
4) This system exploits participants because:
- The vast majority of participants fail the evaluation.
- Those who pass the evaluation continue to trade, but they are often dismissed quickly by the platform when they incur losses.
- The fee paid is not for a guaranteed service or benefit, but for a chance at financial reward.
5) Participants pay an initial fee with the hope of passing the evaluation and earning financial rewards.[6] Thus, you pay a ‘wager’ for a chance at a prize (a funded account & profit share), and the firm financially benefits from failed evaluation attempts, just as gambling companies profit from losers.[1, 9]
Hence, trading platforms aim to generate a profit through their initial evaluation fees; however, it is highly challenging to pass the evaluation, thereby setting unrealistic expectations for participants, which constitutes deception (Gharar).[4]
E.g. Most firms set a 9% profit target with a 5% drawdown limit (i.e. you cannot lose more than 5% of the ‘virtual’ capital at any stage). Thus, you cannot engage in high-risk trading while still needing to generate a considerable profit margin. Users become psychologically pressured due to these unrealistic targets that leave very little room for error.
6) The simulation model is particularly problematic because it is not based on a Mudarabah model. Even after passing the evaluation, you are still trading on a demo platform. If you make a ‘virtual’ profit, you earn monetary prizes sourced from the fees of losing participants. This model is tantamount to gambling and is completely Haram because the company risks nothing, and the participants bear all the risk.
Both you and the firm earn money from other participants’ losses, and not from trading. The fees are akin to a wagering pool; hence, it is Haram for the firm to charge this fee. Likewise, it is Haram for you to earn from this wagering pool.[2, 3] Unfortunately, the vast majority of Prop trading firms operate using this simulated model; hence, prop trading is entirely Haram and must be avoided.
Real-flow prop firms have the potential to be Shariah-compliant if certain conditions are met. Conditions regarding trading activities include:
- Margin trading, in which one borrows with interest, is impermissible. If one practices leverage trading, it must be Shariah-compliant; for example, the risk must not be excessively high, and no interest must be involved.
- The currency is deliverable, i.e. there is actual trading of currencies in which both parties take actual possession and ownership of the currencies traded prior to conducting subsequent trades. i.e. there should be an underlying asset that is physically traded between parties.
- Trades should be settled immediately and simultaneously, without deferred delivery/payment; i.e., retail spot trading is prohibited.
- No speculative trading or gambling (Maysir) is permitted; for example, holding overnight positions is considered a form of speculative trading. Trading should be skill-based and involve analysis, rather than simply betting on price movements.
- Derivative trading, including forwards, futures contracts, and options, is considered impermissible and speculative.
- No trading of other Haram financial instruments is permitted.
- No interest swap fees or rollover interest fees. Swap-free accounts, which are Shariah-compliant, are permissible.
Finally, the demo trading platform must:
- Charge a fee for a real service, like training, platform access, or evaluation, and not as a wager. This fee should only be used to cover the costs of offering the platform and training. Otherwise, no fee should be charged by the firm.
- The contract should resemble Mudarabah, in which the firm provides real capital for the trader to trade with and both parties share profits. The profit-sharing ratio must be agreed upon upfront, and the firm must bear any losses.
After researching numerous prop firm trading platforms, I was unable to find one that fully meets the above conditions. Hence, you must not engage in prop firm trading as this business model is Haram.
Only Allah ﷻ knows best.
Written by Mufti Sakib Shadman
Checked and approved by Mufti Mohammed Tosir Miah
Darul Ifta Birmingham
References:
[1]
قَوْلُهُ مِنْ الْجَانِبَيْنِ) بِأَنْ يَقُولَ إنْ سَبَقَ فَرَسُك فَلَكَ عَلَيَّ كَذَا، وَإِنْ سَبَقَ فَرَسِي فَلِي عَلَيْك كَذَا زَيْلَعِيٌّ وَكَذَا إنْ قَالَ إنْ سَبَقَ إبِلُك أَوْ سَهْمُك إلَخْ تَتَارْخَانِيَّةٌ (قَوْلُهُ لِأَنَّهُ يَصِيرُ قِمَارًا) لِأَنَّ الْقِمَارَ مِنْ الْقَمَرِ الَّذِي يَزْدَادُ تَارَةً وَيَنْقُصُ أُخْرَى، وَسُمِّيَ الْقِمَارُ قِمَارًا لِأَنَّ كُلَّ وَاحِدٍ مِنْ الْمُقَامِرَيْنِ مِمَّنْ يَجُوزُ أَنْ يَذْهَبَ مَالُهُ إلَى صَاحِبِهِ، وَيَجُوزُ أَنْ يَسْتَفِيدَ مَالَ صَاحِبِهِ وَهُوَ حَرَامٌ بِالنَّصِ
Radd Al-Muhtaar, Halabi ed., Daar Al-Fikr, 1966. Vol.6 p.403.
[2]
١) الجِعَالة: هي التزامُ عوضٍ معلوم على عمل معيّن بقطع النظر عن فاعله
Kitab Fatḥ Bāb al-ʿInāyah bi-Sharḥ al-Niqāyah, Dar Al-Arqam ibn Abi Al-Arqam, 1st ed., 1997. Vol.2 p.436.
[3]
الْبَابُ الثَّانِي عَشَرَ فِي الْهَدَايَا وَالضِّيَافَاتِ) أَهْدَى إلَى رَجُلٍ شَيْئًا أَوْ أَضَافَهُ إنْ كَانَ غَالِبُ مَالِهِ مِنْ الْحَلَالِ فَلَا بَأْسَ إلَّا أَنْ يَعْلَمَ بِأَنَّهُ حَرَامٌ، فَإِنْ كَانَ الْغَالِبُ هُوَ الْحَرَامَ يَنْبَغِي أَنْ لَا يَقْبَلَ الْهَدِيَّةَ، وَلَا يَأْكُلَ الطَّعَامَ إلَّا أَنْ يُخْبِرَهُ بِأَنَّهُ حَلَالٌ وَرِثْتُهُ أَوْ اسْتَقْرَضْتُهُ مِنْ رَجُلٍ، كَذَا فِي الْيَنَابِيعِ
Al-Fataawa Al-Hindiyyah, Daar Al-Fikr, 1892. Vol.5 p.342.
[4]
ويدل عليه نهيه عليه الصلاة والسلام عن بيع العبد الآبق، وعن بيع الغرر، وسائر البياعات التي يتعذر فيها التسليم
Kitab Sharh Mukhtasar al-Tahawi li al-Jassaas, Dār al-Bashair al-Islamiyyah, 1st ed., 2010. Vol.3 p.53.
[5]
هِيَ) لُغَةً مُفَاعَلَةٌ مِنْ الضَّرْبِ فِي الْأَرْضِ وَهُوَ السَّيْرُ فِيهَا وَشَرْعًا (عَقْدُ شَرِكَةٍ فِي الرِّبْحِ بِمَالٍ مِنْ جَانِبِ) رَبِّ الْمَالِ (وَعَمَلٍ مِنْ جَانِبِ) الْمُضَارِبِ
Radd Al-Muhtaar, Halabi ed., Daar Al-Fikr, 1966. Vol.5 p.645.
[6]
وَشَرْطُهَا كَوْنُ الْأُجْرَةِ وَالْمَنْفَعَةِ مَعْلُومَتَيْنِ؛ لِأَنَّ جَهَالَتَهُمَا تُفْضِي إلَى الْمُنَازَعَةِ
Radd Al-Muhtaar, Halabi ed., Daar Al-Fikr, 1966. Vol.6 p.5.
[7]
https://www.axi.com/au/blog/education/proprietary-trading-guide
[8]
لأن حرمة الإعانة على المعصية مطلقة في قوله تعالى: {ولا تعاونوا على الإثم والعدوان
…
حرمت الوسيلة إليه سدًا للذريعة لأن الدافع أسهل من الرفع
Kitab al-Tanbih ‘ala Mushkilat al-Hidayah, Maktabah al-Rushd Nashirun, 1st ed., 2003. Vol.5 p.799.
[9]
العبرة في العقود للمقاصد والمعاني لا للألفاظ والمباني
Kitab Murshid al-Hayran, al-Matba’ah al-Kubra al-Amiriyyah, 2nd ed., 1891. p.36.
[10]
وَأَمَّا الشَّرَائِطُ (فَمِنْهَا) قَبْضُ الْبَدَلَيْنِ قَبْلَ الِافْتِرَاقِ لِقَوْلِهِ: ﵊ فِي الْحَدِيثِ الْمَشْهُورِ «وَالذَّهَبُ بِالذَّهَبِ مِثْلًا بِمِثْلٍ يَدًا بِيَدٍ وَالْفِضَّةُ بِالْفِضَّةِ مِثْلًا بِمِثْلٍ يَدًا بِيَدٍ
Badaai’ Al-Sanaai’, Daar Al-Kutub Al-‘Ilmiyyah, 1910. Vol.5 p.215.