Under AAOIFI’s standard on shares, buying and selling shares of Shariah-compliant companies within the same day is permitted, because ownership passes once the trade is executed. What the standard prohibits is how most day trading is done: buying on interest-bearing margin, short selling and trading futures or options. Many scholars also warn that trading that resembles betting falls under the ban on gambling.
This article was first published in March 2024. It has been rewritten around the clauses of AAOIFI Shariah Standard No. 21, the OIC Fiqh Academy’s resolution on financial markets, U.S. settlement rules, research on day traders’ results and the original Arabic of the relevant Quran verse with its full reference.
Reviewed by Hafiz Maqsood Ahmed.
The question has become more pressing as trading apps have made intraday trading cheap and easy. It also carries financial risk: in a study of Taiwan Stock Exchange data from 1992 to 2006, Brad Barber, Terrance Odean and colleagues found that fewer than 3 percent of day traders on an average day were predictably profitable after fees, and that more than three-quarters quit within two years, according to their working paper. The U.S. Securities and Exchange Commission warns that “day traders typically suffer severe financial losses in their first months of trading,” in its investor guide. The rulings below are those of the named standard setters; The Halal Times does not issue fatwas.
What AAOIFI’s standard permits
AAOIFI, the Accounting and Auditing Organization for Islamic Financial Institutions, sets the Shariah standards used by Islamic banks and many funds. Its Shariah Standard No. 21, issued in 2004, addresses share trading directly:
- Clause 3/2: buying and selling shares of companies with permissible activities is allowed.
- Clause 3/7: a buyer may resell shares “once the sale formalities are complete and liability has passed to the buyer, even though the final settlement in his favour has not been made.”
Clause 3/7 answers the most common objection to day trading, that a trader sells shares before owning them because settlement takes time. Under AAOIFI’s standard, the trade itself transfers liability. U.S. markets have also shortened settlement to one business day after the trade, effective May 28, 2024, under rules adopted by the SEC.
What the standard prohibits
| Practice | AAOIFI Standard No. 21 | Why it matters for day traders |
|---|---|---|
| Buying on margin with an interest-bearing loan | Not permitted (clause 3/5) | Standard margin accounts charge interest on borrowed funds |
| Short selling shares not owned | Not permitted (clause 3/6) | A broker’s promise to lend the shares “is of no consequence” |
| Lending shares | Not permitted (clause 3/9) | Many brokers lend customers’ shares by default |
| Futures on shares | Not permitted (clause 3/12) | Includes index and single-stock futures |
| Options on shares | Not permitted (clause 3/13) | Common in short-term trading strategies |
| Swaps on shares | Not permitted (clause 3/14) | Includes many contracts for difference |
| Spot buying and selling of compliant shares | Permitted (clauses 3/2, 3/7) | Allowed if the company passes Shariah screens |
The International Islamic Fiqh Academy of the Organization of Islamic Cooperation addressed financial markets in Resolution No. 63 (1/7), adopted in Jeddah in May 1992, which is included in the Academy’s collected resolutions.
The gambling question
Even when every trade is technically permitted, scholars debate whether rapid trading with no interest in the underlying business becomes a form of maysir, or gambling. The prohibition is in this verse (Saheeh International translation, via Quran.com):
يَـٰٓأَيُّهَا ٱلَّذِينَ ءَامَنُوٓا۟ إِنَّمَا ٱلْخَمْرُ وَٱلْمَيْسِرُ وَٱلْأَنصَابُ وَٱلْأَزْلَـٰمُ رِجْسٌ مِّنْ عَمَلِ ٱلشَّيْطَـٰنِ فَٱجْتَنِبُوهُ لَعَلَّكُمْ تُفْلِحُونَ
“O you who have believed, indeed, intoxicants, gambling, [sacrificing on] stone alters [to other than Allāh], and divining arrows are but defilement from the work of Satan, so avoid it that you may be successful.”
Surah Al-Ma’idah (5), Verse 90
AAOIFI’s standard does not ban speculation as such, but its appendix describes cash-settled futures as gambling where that is built into the contract. Scholars who are more cautious about day trading focus on the trader’s intent and on strategies that depend on short-term price swings rather than on ownership of a business.
Conditions for day trading under the standard
Taken together, AAOIFI’s clauses point to a set of conditions that investors and their advisers apply:
- Trade only compliant shares. The company must pass business and financial screens; our guide explains how to tell if a stock is halal.
- Use a cash account, not interest-bearing margin.
- Do not short sell, and opt out of share lending where the broker allows it.
- Avoid futures, options, swaps and contracts for difference.
- Purify impure income from dividends received while holding shares.
- Check intent and risk. Trading money one cannot afford to lose, or trading as a bet on price moves, is where many scholars draw the line.
U.S. brokerage rules add a practical constraint. Customers classed as pattern day traders face a minimum equity requirement under FINRA rules, which apply to margin accounts.
How day trading compares with halal investing
Most Shariah investment guidance favors long-term ownership of screened businesses. The five essentials of halal investing stress avoiding interest, excessive uncertainty and gambling, all of which are easier to manage with a long holding period.
Short-term trading in digital assets raises further questions, covered in our analysis of whether cryptocurrencies are compatible with Islamic finance.
For an overview of Islamic banks, funds and digital platforms, see our guide to Islamic finance and fintech.
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