Why we cheat! The Forex trading market and the Ponzi scheme in Somalia

Introduction

In a brief history, the foreign exchange market is not something new in this world, as the word indicates the foreign exchange market is the conversion between two currencies or conversion of one currency to another. Another meaning can be how much one unit of one currency is equivalent to another unit of currency this can be done by physical means that people can manually exchange each other or online means which involves selling and buying within the internet space.

Therefore, the network of buyers and sellers for this market will transfer currencies to each other and have agreed with the price of conversion. The foreign exchange market can do by individuals, Companies, and Central banks which convert one currency to another. The foreign exchange market was started roughly 500 years ago in Amsterdam in time that people mostly were used gold and silver as a means of exchange for goods and services. In the middle ages, the Forex market was boomed where the currency was traded in banks. The quickly widespread in Europe and the Middle East was facilitated the trade between the two continents.

The way of trading in the forex market either manually or online mechanisms was shaped in the Bretton Woods conference in 1944 which was named the world monetary and financial conference and was set up two big financial institutions the World Bank and the International Monetary Fund. This conference plays an important role in all online economic transactions such as the foreign exchange market, stock market and all about the financial system in the world. The foreign exchange market is the largest market in the world which makes an averagely daily trading volume of $5 Trillion and typically works five days per week from Monday to Friday and the rest two days it is none working days.

Islam and Forex trading activities

Is forex trading allowed in Islam?

The question as to whether Forex trading is permissible according to Islamic law is a difficult question to conclusively answer. Although Islamic authorities certainly agree that currency exchange under certain conditions is halal. But mostly it is recommended to made research. (Daily forex, 2019). Islamic economic system is completely different from the conventional financial system or it could say Conventional economics is based on interest rate earnings while an Islamic transaction it is prohibited that means any business activity, deals, and contracts with the concept of interest are forbidden in Islam

While some scholars agree that forex trading which is adjusted to Islamic principles can be considered as Halal and some others forbid it entirely. To absolutely ensure that your Islamic forex trading account is Halal, always choose a forex broker, who performs operations approved and permitted by Shariah Supervisory Boards. Pretty, J. (2020, Feb 7).

What is New in the Case of Forex in Somalia?
Although Somalia was named a fragile nation economically and socially after the collapse of Somalia’s central government in 1991 that caused all the public institutions were destroyed including the central bank of Somalia, Somali development bank, and Somali commercial bank. That situation leads the people to turn to the capitalist system while Somalia was used a socialism economy system which resulted finally the situation of mixed economy and then emerged more privately owned businesses in all economic sectors.

In the financial sector were not more advanced because of the instability, civil wars, low capacity especially the knowledge and historically Somalia has no well-defined capital market where most laymen suppose that the stock market could not be practiced in an Islamic country like Somalia, because most people believe that the stock market is all about interest (Riba) which is forbidden in Islam.

The foreign exchange market is not something new in Somalia, because the business people were used forex in the last 30 years which does not require any specific skills or knowledge just small amount of capital to start up, for example, if someone has 1,000,000 Sh.so and place in the market he/she could run and made forex trading in a physical manner. Most Financial markets in Somalia were used to do this kind of financial transactions among such currencies like Somali shillings, to US dollars, Dirham, and Euro.

The Somali financial services mostly run by business people who used the old method which was hand to hand among these currencies. In the last couple of decays (20 years) Somalia become post-conflict society and people turn more connect the modern world and the emerged new financial institutions like the remittances, private banks, and Telecommunication companies who became the leading of the Somali financial system and fill the financial gap in the country not only sending, receiving, depositing and drawing money but also became multi-functional business activities in the market.

Now in Somalia, the soft infrastructure (Knowledge) becomes wide and high-speed internet service in the hands of private people without active government control, therefore everyone is willing to be a millionaire regardless of others. In recent years view individuals were used to the forex market in the online approach they learn how this market work and then tried to their own way whether they lose or make a profit.

Currently, the forex market became too busy and the Forex trading companies increased the highest number ever before that means everyone gets somewhere in the office and named Mr. X forex trading who pooled fund from the society and telling them a specific profit percentage from 20% up to 70% for their initial capital with some additional fees like registrations then people started to put all the money that they have into the hands of forex traders and waiting their return on investment at a prescribed date which is typically 45 days.

What is the Ponzi scheme?

Historically, the word Ponzi is the name of an Italian guy called Charles Ponzi who Born in 1882 and raised in Italy, he became well-known in the near the beginning 1920s as cheating in North America for his money-making technique. In his trials, he promised to the clients a 50% profit within 45 days or 100% profit within 90 days, by buying discounted. Ponzi scheme is a kind of Fraud or financial tricky used by schemers who take money from investors and pays profits to earlier investors with funds from more recent investors.

The scheme leads victims to believe that profits are coming from product sales or other means, and they remain unaware that other investors are the source of funds. A Ponzi scheme is a fraudulent investing scam promising high rates of return with little risk to investors. The Ponzi scheme generates returns for early investors by acquiring new investors.

Ponzi scheme in Somalia

As we acknowledged previous points there are a lot of companies that practice the forex trading market in Somalia and these entities can be classified into such different parts. Those who have been in the market for a long time and meet most of the financial rules and requirements in forex market Traders. They also learned how this market works and often taught the people how to work in the forex market. These kinds of companies are a small number in Somalia compared to all the people currently involved in the online Foreign exchange market in Somalia.

Lately, everyone has started to open up a place to raise money and telling them that they will make a lot of profit in the short term. But the Somali community has not been asking where this benefit will come from because our society is largely uneducated. Those parts practice pure Ponzi scheme and they made a collection of money to deposit such bank account and then withdrawal as payment of profits that is the main function of some Somali forex traders.

This has also been helped by senior political figures that have made it possible for anyone to obtain a license to collect money for which they have no reserve deposits in the central bank of Somalia in case something went wrong to pay it back the initial money to the investors. There is no anyone of the country’s financial legal bodies who aware of their financial activity of the market and most economists have the same opinion that this is inconsistent with the global market system and may result in significant and indirect loss of wealth. At the beginning of 2020, there have been disputes between companies and individuals operating in the single market and the central bank in Somalia.

While the Forex trading market has clear starting and ending points, why Somali Shariah scholars differ?

So, some questions have arisen like the forex trading is Halal or Haram in Islamic transactions? The answer of this question is not only yes/no but also it depends they way of the Shariah scholars were introduced by the people accomplished and in result, there were so many different feedback from the Somali Shariah scholars which based on the previous clarifications made by the individuals who involved the Forex trading market because everyone wants to be the best religious reference on the Forex trading to continue his/her trading activities.

Characteristics of the Ponzi scheme

There are so many features that you can realize the existence of this kind of fraud in the forex trading system. Therefore, here we will summarize the most characters.

High investment returns with little or no risk: Those who involve the Ponzi scheme activities will promises to the investors with a high percentage of the return for their initial capital which is not acceptable in a rational manner.

Unlicensed sellers: Mostly they operate under what so-called black market because while they are trying to escape legal financial authorizes for any nation for any reason like their monetary guilty. Also, they work with blank paper and show the investor with a fake license.

Difficulty receiving payments: Typically Ponzi schemers have such folded strategies for their financial tricky and after while reached the payment date they made another profit payment date for just solve for their internal issue. They use some current news headlines like politics and bad economic conditions and tell the investors to wait for that date again.

Who could work forex market?

Everyone cannot work under the forex market and made a profit because there are some conditions that required in order to be forex traders. First, the person who wants to go forex market must have enough knowledge to analyze the world financial situations and basic concepts related to economics and finance. Second, Technical experience on how to read the volatility index in the forex market works such as safety matters and best broker's windows. Finally, not to be only profit-oriented who when he/she gets loss stops whole the market function because all business is in between profit and loss.

Consequences

Here below are the summary of some shortcomings or drawbacks that may result in the existence of the Ponzi scheme practice in Somalia.

Increasing hard currency outflow: In the case of Somalia, there is no broker in the country all schemers sent money out and this leads to a domestic shortage of hard currency. Also, capital flight results in undesirable economic movement of the country which equals selling capital to another nation because the hard currency of the country is the hands of people in another country.

Low saving: while the people hear forex company that opens such kind of investment they automatically made a withdrawal from their domestic bank accounts at the same time saving will go down as a result. Saving is one of the country’s important economic variables that contributes a huge number to the GDP, therefore this will damage the economic outlook of the country as a whole.

Future bankruptcy: As a result of the people’s actions of domestic bank withdrawal will cause an imbalance between bank cash deposits and withdrawal. While back cash shortage occurs bank starts to become lower in its financial position and would not meet to pay all mandatory payments and finally will face bankruptcy without insurance.

High unemployment rate: Although Somalia has original high unemployment rate and now the presence of Ponzi scheme in Somalia will lead worst rate because everyone tries to put his/her small amount of money in the hands of such traders and wait to take profit so no one goes to work or make innovation.

Increase Ponzi scheme: Now we are suffering a small number of schemers for their initial phase. In the next future, this will transform new financial Mafia in Somalia who have a strong root in every segment of the society and the Ponzi scheme become normal in Somalia.

Financial insecurity: In the last 30 years Somalia was out of the international financial system including the banking sector and in this couple of years Somalia tried to get the right way. Therefore, the increase of the underground economy will lead again financial insecurity and corruption practice so the reliability of Somalia’s financial system will go further lower than now. The financial insecurity also stops foreign direct investment to our country and it becomes another black dot period.

The contradiction of Shariah law: Shariah principles prohibited taking any type of asset in an illegal manner so the Ponzi scheme is like looting people's capital and it is the contrast of Shariah law and also the moral norms of the Somali people.

Conclusion

In conclusion firstly; the central bank of Somalia must come up with clear new financial regulation on all forex trading matters which is a reachable and implementable policy that serves all parts including government. Secondly; Traders have to try to unite together and become a small number of companies in order to turn into manageable and in the coming future be able to bring broker to our country. Thirdly; Society must take care before where they put their capital and look for both legally and economically. Finally; All together we have to work on the right path because looting has nothing both now and hereafter.

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Best regards

Bashir Mohamed Abdulle