Any Muslim engaging in financial dealings or transactions must comply with the rules and principles of Islamic finance. One of the key principles of Islamic finance is refraining from taking part in any interest-based financial transaction in any situation. Interest is, basically, the cost of borrowing money in general finance so that the lender earns some profits from the deal. However, this is seen as a form of financial exploitation in Islam, so Muslims must stay away from any such activity. Forex trading also involves elements that make it ‘Haram’ or forbidden for Muslim traders. However, Islamic Forex accounts are a simple solution that makes the lucrative Forex market accessible to Muslim traders.
Today, you will learn every detail about Islamic forex accounts and their functioning so that you can tap into the opportunities of Halal forex trading with ease.
What is an Islamic Forex Account, and how does it conform to the rules of Islamic finance?
An Islamic forex account is a type of forex trading account designed to incorporate the essence of Islamic finance into the trading conditions, making it a safe place for Muslim traders to trade without deviating from their religious beliefs and morality. The Islamic forex account is often referred to as a swap-free or even an interest-free account, and quite a few forex brokers tend to offer these account types as an attractive option to the Muslim traders signing up on their platform. As we said earlier, eliminating interest from all types of financial activities is a must for Muslims. Because of this, many banks started offering Islamic bank accounts where you won’t be earning any interest on your deposit as both paying and earning interest are considered a sin per the Sharia law.
Hence, Muslims opt for Islamic bank accounts to make their transactions Halal or permissible under Islamic finance principles. The field of Islamic banking and finance is expanding and growing to a level where Muslims can even apply for interest-free loans, and such flexibility is essential for freely engaging in various financial transactions. The Islamic forex account was also founded with a similar mission and purpose since many Muslims could not use the profitable opportunities in the forex world due to the interest component and some other aspects that went against their beliefs.
Forex brokers were aware that many Muslims are interested in currency trading, but applying interest in the name of swap rates on overnight trade positions was making things difficult for them. Muslim traders had only 2 options to trade the forex market: either they had to close all their positions on the same day to avoid the overnight swap or not engage in any type of trading if they were not interested in day trading. However, they were adamant about finding a solution that could help Muslim forex traders get equal amounts of opportunities in the currency market, and their efforts led to the launch of Islamic forex accounts.
When a Muslim trader enters the forex world by opening an Islamic forex account, they not only get to trade without any involvement with interest, but the Shariah-compliant accounts also function as a perfect platform to place trades in the most Halal way while respecting all beliefs and rules that make you a true follower of Islam. The concept of Halal trading was brought to the attention of Muslims worldwide, allowing them to enter the realm of forex trading without worrying about committing any sinful deed. The trading conditions offered to an Islamic forex account user are exclusively designed for Halal trading, where no Islamic finance rules are broken in the trading process.
How do Islamic Forex Accounts function?
The functioning of Islamic forex accounts is profoundly based on Islamic finance and Halal trading principles, as I mentioned above. The Islamic forex account should have the 4 key characteristics to comply with Shariah law. This includes the absence of riba (interest) in trading activity, spot trading without delay, refraining from gambling, and fair sharing of profits and losses between the parties involved in the trading process. When a forex broker provides an account type with these features and halal trading conditions, it would be called an Islamic forex account in the true sense.
Opening an Islamic forex account for the first time is a simple process for a Muslim trader. You just have to reach out to a reputed forex broker offering this type of account and check if they meet your requirements for halal trading practices. After that, you can proceed with the registration process by providing the required personal details, and your account will be activated after completing the online verification and KYC procedure. Sometimes, the broker may ask you to open a regular account first, and later, they will convert it into an Islamic forex account if you meet the criteria for trading on such an account.
What makes an Islamic Forex Account Different From a Regular Trading Account?
An Islamic forex account and a regular trading account tend to share many common features, and both account types are designed for trading in general. However, the trading conditions that you get with each account are vastly different from one another. In the case of a regular trading account, your overnight trade positions will be subject to swap rate application, which will either be debited or credited to your trading account balance based on the currency pair chosen for trading and the type of position opened.
Swap rates are essentially the difference between the interest rates of currencies traded as a pair in the forex market. When a trader holds a currency pair for more than a day, it results in the rollover, which happens at night, and this is what we refer to as a swap in forex. To calculate swap fees, traders use trading calculators to accurately calculate the swap charges or other values in seconds.
In the case of a normal or traditional trading account, the impact of a swap is unavoidable unless you are a day trader or scalper. But in the case of an Islamic forex account, the swap will never be applied to your trades, irrespective of the duration of trades. This allows you to open trade positions for an extended period without swap charges. If this all sounds confusing to you, then it is suggested that you trade a demo account to find out how an Islamic account works.
Apart from this, a regular trading account will be suitable for all types of traders, and they may also get further options from a normal trading account. These days, brokers offer several account types like zero spread accounts, commission-free accounts, raw spread accounts, micro accounts, etc., and all of them fall under the category of a normal trading account. But the Islamic forex account is a swap-free account, and it will be designed to support halal trading in the best possible way. An Islamic forex account may limit the usage of leverage to avoid excess risk, as engaging in financial transactions with an element of uncertainty is strictly prohibited in Islam.
What will you pay instead of the Swap Fee?
Even though the Islamic forex accounts do not charge you a swap fee for the overnight positions, the cost of keeping a trade running will be something your broker must take care of. Hence, brokers tend to charge a flat rate admin fee for trades kept open for more than 2 or 3 days on this account type. This fee changes based on the chosen currency pair, and each broker has terms and conditions for the fees that are added for a swap-free account. This can also result in higher spreads and commissions based on how the broker fixes it.
Which Instruments Can Be Traded In An Islamic Account?
You can trade all standard trading instruments except forex futures, as it goes against the rule of spot trading. The broker may also remove some currency pairs if they are risky or simply result in higher swap charges, making it hard for them to make these currency pairs available under swap-free conditions. Because of this, exotic pairs are often unavailable in an Islamic forex account.
In a nutshell, Muslim traders who wish to participate in the forex market without parting ways with their identity as a believer of Islam should take some time to research Halal forex brokers offering Shariah-compliant Islamic forex accounts as it is the ideal account type for religious traders. Just choosing to trade on a swap-free account may not be enough to ensure halal trading, as you may need to consult with an Islamic scholar and make conscious efforts not to engage in any activity forbidden under Sharia law.
