What is an Islamic Forex Account?

An Islamic Forex Account is a Forex trading account that abides by Islamic law, known as the Sharia. Those who follow this law are guided by the Quran, the sacred book of Islam, and they must obey certain standards and practices to maintain lawfulness.

What makes a Forex Islamic account halal? Forex brokers wishing to attract Islamic clients have are a few basic principles they must apply to at least a segment of their offering, thus creating the Islamic account. 

These concepts are a bit different from what the western world might understand as traditional banking or trading. Below, we explain three of the key concepts of Islamic law most relevant to the question of an Islamic Forex account.

How to Choose an Islamic Forex Account?

— Riba
“Riba” means increase, excess or addition and it refers to financial interest. It is seen as a type of usury and selfishness that can lead to hoarding. The charging of usurious interest as a business practice is deemed to have an adverse effect upon the Islamic ideal of fellowship in the community and is therefore prohibited under Sharia law.

— Gharar

“Gharar” refers to risk, more precisely defined as “the sale of what is not present” and is a haram (forbidden) practice in Islam, forbidden by Sharia law. Those who abide by the Sharia may not gamble, sell short (in the traditional sense commonly referred to in stock trading), or conclude agreements which might involve uncertainty or chance.

— The Mudharabah Arrangement 


A “Mudharabah arrangement” is an arrangement or partnership between two parts: the financial role and the management of the funds. The financial role will invest, and the other will control the money.
However, in Sharia law, the Mudarabah Agreement can be restricted. This means the investor will only allow the one who manages the funds to administer them in a certain type of business or location. If it is unrestricted, it indicates that the management of the funds has no constraint.

— Musharakah Arrangement 

“Musharakah” means “to share”, and it is another type of partnership permitted by the Sharia law where both parties will benefit from earnings in a trade. In this way, the financial part will earn without having to go against the rule against Riba.


Losses must also be shared by those in a Musharakah Arrangement, but the amount of such will depend upon the amount of invested capital. On the other hand, the divided profit is previously set according to the agreement on the contract.

How to Choose an Islamic Forex Account?

If you would like to choose one of the best Islamic Forex accounts, there are some important elements to keep in mind. We have added below some of the essentials to consider.


Regulations

Regulations are important for all traders when choosing from a list of the best Islamic Forex brokers. Regulations will guide, restrict, and instruct brokers on how to administer accounts.


The relevant regulatory bodies will protect traders from fraud or any other illegal misconduct. It is common that the top Islamic Forex brokers are compliant with more than one regulatory body. Islamic banks emit a guarantee to confirm the liability of the client’s financial position and religious faith. Also, there are certifications for Forex Islamic accounts in Halal.


What is a Swap-Free Islamic Account in Forex? How do Commissions on Islamic Trading Accounts Work?

A swap is a fee that is charged to those who leave a position open for more than 24 hours. It is a type of interest and therefore, it is not allowed for those who comply with Sharia. The solution for most brokers is to apply fixed fees or commissions on Islamic trading accounts that maintain longer-term overnight positions.


No-Swap Period

Some brokers will only allow you a limited amount of time in which you can trade swap-free. This is known as no-swap or swap-free periods. Only the better Islamic Forex brokers will allow unlimited swap free trading.

Terms & Conditions

It is always important to read the terms and conditions published by any Islamic Forex broker because that is where the small print is. For example, the broker may not charge an interest rate, but there will most likely be a commission instead, so it is important to be sure of all such terms as these will probably affect your cost of trading when you open an Islamic trading account.

Islamic Prohibitions

According to Sharia law, there are a number of prohibitions applicable to Islamic traders. These reflect Islamic guidelines aimed at ensuring a prosperous and peaceful community. The major prohibitions are outlined below:


Overnight Rollovers

The overnight rollover is the interest that a trader is charged (or sometimes paid) for holding a position overnight. As an Islamic trader, you will probably be charged a fixed commission per trade instead to make up for not being charged a commission. It is important to note that in most cases, each currency will have a different interest rate and therefore most likely differential commission rates, so it might be a good idea to look at the applicable fee before opening a position in a particular Forex currency pair or cross.


Interest in Margin Deposits

A margin deposit is an interest based on the cash deposit made with a Forex broker, which a few brokers offer to larger clients. Since margin trading involves a higher risk, the trader must present an initial amount before opening a leveraged position. Interest on margin deposits is not permitted in an Islamic Forex account since it goes against the “no Riba” principle.


Loans

Those who are compliant with Sharia law may not receive or give loans with interest.


Margin Trading

The Riba principle is broken by any trading on the margin because margin involves the loan of money at interest given out by a lender who seeks benefit. Even if it has 0% interest, it still arguably maybe a loan where the broker seeks benefit (an end profit made by the exchange).


Short Sales

Short sales (in the sense of shorting equity) go against the Gharar principle because a true short seller is selling something they do not own. The Gharar principle is against “the sale of what is not present”.


Forward Sales  

A forward sale is an agreement between two parties to buy or sell an asset at a specified price at a future date. Again, it is contrary to the Gharar principle. 

How to Open an Islamic Trading Account? 

In order to open an Islamic Forex account, you might be asked by the broker to present a few documents, such as your ID and a document as proof of your faith.


Who is an Islamic Trading Account for? 

An Islamic trading account attempts to apply Islamic Sharia law to online Forex trading. Therefore, it is for Muslims; those who wish to follow the teachings of the Holy Quran. The Quran prescribes a religious law known as the Sharia that has certain rules on how humans should live in society. It includes principles of behavior on finance, family matters, nutrition, and more.


Is it Halal or Haram for Muslims to Trade Forex?

Both Halal and Haram are terms that are applied by Islamic doctrine to all aspects of life. Haram means anything that is forbidden by Islamic law. Halal, on the other hand, are all the practices that are allowed by the Sharia. We have examined this question elsewhere in detail.


What Can I Trade with an Islamic Account?

Islamic accounts can offer any markets for trading if the asset itself is compliant with Sharia law, as long as the basic principles against Riba, etc. are honored. However, some assets are not. For example, an Islamic account could not offer trading in the shares of a company that manufactures alcoholic beverages as such beverages are forbidden in Sharia and no Muslim should profit from them.


Advantages & Disadvantages of Islamic Accounts

One of the best advantages of Islamic accounts is that those who are Sharia-compliant can trade without going against their beliefs. Also, without any swap fees, traders can go a long time without being required to make any interest payment. Another benefit is the Mudarabah Agreement where both parts will share profit and loss.

A potential disadvantage of an Islamic account is that you may sometimes need to pay quite a lot in commission in place of overnight swap fees.

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