In the name of Allah, the Most Merciful, the Most Compassionate
Dear respected scholar,
As-salāmu ʿalaykum wa raḥmatullāhi wa barakātuh,
I hope you are doing well. I am writing to ask a question regarding the Islamic ruling on trading financial instruments called leveraged certificates (specifically bull and bear certificates) in light of the rulings of Grand Ayatollah Sayyid Ali al-Sistani (may Allah prolong his life).
I would like to explain clearly what these certificates are and how they work, so that you can kindly give me an accurate answer, inshā’Allāh.
What are leveraged bull and bear certificates?
These are financial products that allow traders to make profits when a stock index goes up or down, but with leverage. Leverage means that the daily profit or loss is multiplied. For example:
A bull certificate (2x) goes up 2% if the market goes up 1%.
A bear certificate (2x) goes up 2% if the market goes down 1%.
These certificates are usually issued by banks or financial companies, and people like me can buy or sell them through the stock exchange.
How do these certificates create leverage?
To offer this leveraged movement, the issuer (usually a bank) needs to create leverage behind the scenes.
The issuer either borrows money (which involves interest) or uses derivative contracts that also have interest-related components.
So, in order to create this 2x or 3x movement, the issuer often takes a loan, and that loan involves interest.
What about the role of the investor?
As the trader/investor:
I do not sign any contract involving interest.
I do not directly receive or pay interest.
I simply buy and sell the price of the certificate on the stock market.
However, the value of the certificate is adjusted daily, and part of that adjustment includes:
Subtracting the cost of the leverage, which includes the interest the issuer pays.
So, the interest cost is built into the price. It’s not charged as a separate fee, but it affects the certificate's performance.
This means:
If the market stands still (no movement), the certificate's value slowly decreases over time because of this built-in cost.
That cost comes partly from interest used by the issuer to fund the leverage.
What if the issuer is a bank?
Sometimes, the issuer of these certificates is a bank itself. In that case:
The bank may "lend money to itself" using internal financial structures.
Even then, the bank usually applies an internal interest rate (known as a “cost of capital”) to account for the resources used.
So, whether the bank borrows from itself or others, interest is involved behind the scenes in almost all cases.
Additional clarification
The interest involved in these products is not something that is paid to the public or to investors. Instead:
It is the interest the issuer must pay to finance the leverage.
The investor never receives or pays this interest directly.
Instead, the value of the certificate is reduced over time, as the issuer builds this cost into the certificate’s price.
Even if I hold the certificate for just one day (for example, buying and selling it within 30 minutes), the leverage is still based on interest-funded mechanisms in the background.
Summary
I do not pay or receive interest directly.
The issuer uses interest-bearing methods (like loans or swaps) to build the leverage.
The cost of that interest is passed indirectly to me through daily changes in the price of the certificate.
If I hold the certificate for more than a day, the cost becomes more noticeable.
Even for short-term trades, it is not fully clear whether I am entirely removed from the effects of the interest-based structure.
The interest is not a direct payment, but a hidden cost embedded in the price of the instrument.
My question:
Given this structure, and based on the rulings of Sayyid al-Sistani (may Allah protect him), is it permissible to trade these types of leveraged certificates?
Does the indirect involvement of interest in the background (used by the issuer) make the trade haram, or is it permissible since the investor is not entering into any interest-based agreement directly?
I sincerely want to avoid doubtful matters and follow what is allowed in Islam.
May Allah reward you for your time, your service, and your knowledge.
Jazākum Allāhu khayran.
As-salāmu ʿalaykum wa raḥmatullāhi wa barakātuh
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