Is trading financial certificates, like leveraged bull and bear certificates and mini futures, permissible, especially given the aspects of interest involved in their structure? | Ask A Question | Al-Islam.org

Interest Riba Investment Options trading

Is trading financial certificates, like leveraged bull and bear certificates and mini futures, permissible, especially given the aspects of interest involved in their structure?

Question:

Is it halal or haram to trade financial certificates, such as leveraged certificates (bull and bear certificates, mini futures, etc.), particularly considering the involvement of interest (riba) in their structure?

Details:

Leverage in trading
Leveraged certificates allow traders to gain larger exposure to the price movements of an underlying asset (such as stocks, indices, or commodities) with a smaller initial investment. For example, a "bull certificate" with 3x leverage means that if the price of the underlying asset increases by 1%, the certificate's value increases by 3%. Similarly, "bear certificates" profit from price declines. These instruments can amplify both profits and losses.
Interest (Riba) in Leveraged products
The core concern regarding the permissibility of trading these leveraged certificates lies in the fact that the issuer of these products typically charges daily financing costs (often referred to as "swap fees" or "financing fees") for the leverage they provide. This means that the trader effectively "borrows" capital to increase their exposure, and the issuer charges interest on that borrowed amount.
How interest is involved
- In Bull certificates, when the market is rising, traders need to "borrow" money to take a larger position. In return, the issuer charges interest on this borrowed amount.
- In Bear certificates, traders may short-sell the asset, essentially borrowing it and selling it in hopes of profiting from a decline in its value. Similarly, interest is charged for this borrowing of assets.
Islamic perspective on interest (Riba)
According to Sayed Ali al-sistani, if a company primarily earns its income through interest-bearing activities, such as banks or financial institutions, investing in such companies would not be permissible. However, seeing as I would be trading this daily and not hold it more than a day, the issuers primary income would be the fees that I have to pay. Interest is still involved, but it makes up a very small income of the trade. In this context, interest is used more to keep certificate active, and for a small profit only.
Alternative investment options:
Some alternative investment options that do not involve interest or excessive risk, such as directly trading stocks or cryptocurrencies, may be considered more aligned with halal (permissible) investment practices, especially if they are conducted in a way that avoids engaging in interest-based transactions.
Conclusion:

Given the involvement of interest in leveraged trading products like certificates, is trading these products considered haram according to Islamic finance principles? Would it be better to avoid these products and focus on halal investment options that do not involve any form of riba or interest?

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Sayyed Mohammad Al-Musawi, Sayyed Mohammad al-Musawi is originally from Iraq and heads up the World Ahlul Bayt Islamic League in London. Other than being involved in various humanitarian projects, he frequently responds to... Answered 2 days ago

No doubt, avoiding doubtful transaction and focusing on definitely Halal transactions is more safe according to precaution.

Wassalam.