The forex market is the most liquid and dynamic trading market in the world. Hence, the market has become an attractive trading spot for everyone who wishes to profit from exchange rate fluctuations. But Muslims who are keen to join the forex world are often in a dilemma due to some trading conditions that they have to deal with in the volatile currency market. Those who follow the rules of Islamic finance will often wonder about the ethicality of forex trading and will doubt if it is actually something permissible for Muslims.
With this article, you will understand the perception of Islam on forex trading and how you can be a part of the forex space without breaking Islamic laws.
Introduction to Islamic forex accounts
As we said before, certain trading conditions in the forex market can make it haram for Muslim traders. The incidence of interest rates getting applied to forex currency pairs makes trading difficult for believers of Muslim. Because as per the Sharia law, any financial activity which results in paying or receiving interest is a sin, as the application of interest is considered to be a type of financial exploitation.
Any overnight trade position opened in the forex market will ultimately result in swap rates being applied to your trading account, another name for the interest charges. It is also referred to as a rollover fee, which is applied at the end of a trading day. Your Forex broker will state the swap rates of each currency pair on the website itself, as it is a part of the trading cost or gains that get reflected in your account.
Earlier, Muslim traders could only scalp in the forex market as that was the only way to escape the swap charges. Because in scalping, all trades will close within a few minutes, and you can trade without holding any position overnight. But scalping is only an ideal trading style for some. Muslim traders who wanted to try other strategies like swing or positional trading could not do so, as the swap would be automatically applied to any overnight positions open in your account. Muslim traders can trade on the same
So, the forex brokers introduced this solution called Islamic forex accounts or Islamic trading accounts, where all trades will be executed in a swap-free mode. When you carry out trading through an Islamic account, no trade will result in interest charges, irrespective of the duration for which a position is held. This account type is apt for any Muslim trader interested in halal forex trading without breaking religious rules. As for the trading platforms, there is no restriction, so traders can use MT4, MT5 or any other platform to trade in an Islamic account. Most traders prefer MT4 due to its intuitive UI, wide array of technical analysis tools and customisable indicators, etc.
The Difference Between Islamic Accounts and Conventional Trading Accounts
Conventional trading accounts are just normal trading accounts offered by all forex brokers. No special rules or restrictions exist regarding operating and trading on such accounts.
In the case of Islamic accounts, they are given a swap-free status to make them work in line with the rules of Islamic finance, and they are designed to comply with Sharia law.
In the case of conventional or regular trading accounts, all overnight trade positions will be subject to swap rates which will be reflected in your account right after the roller time fixed by the broker.
Islamic forex accounts are specifically designed to meet the requirements of religious traders as they can freely open trade positions for a longer duration without worrying about interest charges or swap fees.
On conventional trading accounts, you can freely trade any currency pair.
The broker may restrict the currency pairs you can trade with for Islamic trading accounts. Most brokers don’t allow trading with exotic currency pairs on Islamic accounts as the element of risk or uncertainty can make the activity haram for Muslim traders.
In conventional trading accounts, the trading conditions consist of spreads, commission and swap rates charged, and leverage offered. There won’t be any other added fees in most situations.
In the case of Islamic trading accounts, swap rates will be removed and will be replaced by administration fees which is the cost of running a trade position. This fee is mostly fixed and will vary depending on the currency pair and trade duration. The mass leverage offered on Islamic accounts is often lesser than on regular accounts, as halal trading minimises the risk.
What Does Islam Say About Online Forex Trading?
The general rule of Islam considers trading to be an ethical activity when done hand-in-hand, which means the trades need to be executed immediately. This is the case with most forex transactions, as most trading happens in the spot market. This also means you cannot trade instruments like binary options as they break this rule of hand-in-hand trading.
So, forex trading without the element of interest is considered to be Halal by most scholars, but at the same time, it is also a matter of perception and what a scholar thinks about trading in general. But generally, you are considered to be engaging in halal trading practices when you trade on a swap-free, Islamic forex account. Just ensure you don’t get caught up in speculative trading or gambling, as they are totally Haram, as per Quran.
How to Open an Islamic Account?
Opening an Islamic account is pretty simple once you find a suitable halal forex broker who offers Islamic accounts. Not all forex brokers provide this type of account, but you can still find some top brokers who offer solid halal trading conditions. Certain brokers may restrict who can open this type of account as sometimes the swap-free accounts are unavailable for certain regions. So, you need to find a broker with whom you can register for a swap-free account without any restrictions.
Then you will have to provide some basic personal details, and the broker will also ask you to verify your identity with a valid ID proof. The broker can also ask you to submit additional documents to verify your eligibility for the Islamic trading account. Some brokers also ask you to open a regular account first, and they will grant you a swap-free status later on after funding the account and submitting your request for the same. You can first open a demo account to Get clarity on the swap fee and how it works. This will give you a good idea regarding the charges you wouldn’t have to pay when you start trading. The account opening process will differ based on the broker you choose. So, make sure to opt for a broker who provides a hassle-free and quick method for opening a swap-free account.
Before concluding, I want to say that the perception of Islam on forex trading cannot be generalised as scholars and believers may have different opinions on the same topic. However, opening a swap-free or Islamic trading account would be a great option for Muslim traders who want to get some market exposure and venture into halal forex trading without the fear that they might go against the financial ethics and principles set by their religion or faith.