Is margin trading permissible?

The U.S. Securities and Exchange Commission explain margin as borrowing money from your broker to buy a stock and using your investment as collateral. Margin trading involves buying shares using funds borrowed from a broker, with the purchased assets acting as collateral. Investors initiate this by opening a margin account, wherein they’re required to deposit a percentage of the total trade value, known as the initial margin. This method amplifies potential gains and losses, providing leverage. For instance, if share prices rise, returns are magnified based on the entire value of the shares, not just the investor’s deposit. However, if prices fall, losses can surpass the original amount invested. Furthermore, investors are charged interest on the borrowed sum, adding to the costs.

Margin trading is called “margin” trading because investors are required to deposit a portion of the total value of the trade, known as a “margin”, into their brokerage account. This margin serves as collateral for the loan provided by the broker to purchase the securities.

In essence, the term “margin” refers to the difference between the total value of the securities and the amount borrowed from the broker. It acts as a buffer for the broker, ensuring they have some level of protection if the value of the purchased securities falls. This “margin” requirement is what allows the investor to leverage their investment, potentially amplifying both gains and losses. The name “margin trading” underscores the critical role this deposited amount plays in the trading process.

The leverage qualifying as a valid Qarḍ is also an area of contention. A trader is not permitted to use the leverage except on the platform and in the manner approved. However, for a Qarḍ to be valid, there must be Tamlīk and Yadd– control and the right of disposal in the manner one sees fit. This is non-existent in such liquidity facilities.

In regard to placing shares as security, the Imams of the Madhhab did not permit Rahn in a share of an asset (Mushāʿ). Imam al-Sughdī (d.461 AH) states that the only acceptable Rahn asset is that which is known, in one’s control, free from any encumbrances, clearly divided and separated, regardless of whether it can be divided or not. Imam al-Quduri (d.428 AH) states that the security must be such a thing that is not shared between people and is under the sole ownership of one person.

Imam al-Sarakhsī (d.483 AH) states that among the reasons that Rahn in Mushāʿ is not permitted is that the purpose of Rahn is having the ability to settle the outstanding debt if required, and with a Mushāʿ, Istīfā’ cannot take place. Typically, in jointly owned assets, one cannot settle or liquidate independently. The entire asset needs to be liquidated or impacted to be able to exercise one’s right over the security. When multiple individuals co-own an item, each possesses a vested interest in it and seeks to derive benefits from its use. Consequently, as each person naturally asserts their claim to the item, it can create conflicts that hinder its availability for use as a replacement or result in its absence from the lender, negating it being withheld as leverage.

The second reason why the Hanafi Fuqahā’ did not permit the Rahn of a Mushā’is that the Rahn should remain in the possession of the mortgagee perpetually, as discussed by Imam al-Marghīnānī (d.593 AH). This cannot happen in a Mushāʿ,as multiple parties own the asset and they would want access via Muhāya’ah.

However, shares that are traded on the markets, even though they are ‘shares’ of a company, are treated as independent assets and rights, in and of themselves. They are almost given the ruling of individual assets, and deemed as an individual’s exclusive property, even though they are a part of a larger whole. In this scenario, the stock remains readily accessible to the broker, to the extent that they can even sell it off during a margin call, fulfilling the primary requirement of a Rahn arrangement.

Mufti Radha al-Haq Sahib Hafizhahullah permits the gifting of a share, which follows the same basis, due to the existence of convention today that recognises, and permits gifting shares. Mufti Taqi Sahib Hafizhahullahwrites on the matter of the Rahn of shares, and comments that it is now possible to deal with one part of a commodity without affecting the rest. He then mentions that it is on this basis that the AAOIFI Standards have accepted and approved the Rahn of listed equity and shares.

Nevertheless, margin trading on conventional markets and the use of collateral in interest-based transactions is not permitted. Both are not Sharīʿah compliant.