Why Trading with Islamic Forex Account is Important for the Muslims
By Muslim Sharia law, forex trading is prohibited due to the connection with paying and receiving interest. Still, some liberal Muslims trade forex with a regular forex account. On the other hand, practicing Muslims go for the Islamic forex account, which runs according to the Sharia laws.
Islamic accounts follow all the religious guidelines to offer Islamic forex trading, which establish that you don’t need to deal with any kind of interest. Besides, you can get some benefits too while obeying the Sharia.
How important is the Islamic forex account? We will get to know this throughout this article, along with the details of Islamic forex.
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Basic of an Islamic Forex Account
An Islamic Forex account is basically an alternative trading account for Muslims with compliance with the regular account’s features. It is also called a swap free account.
Although Islamic forex brokers try to offer the same stuff as the regular account, it is different.
As per Sharia law, Muslims are not allowed to do any transaction that has a connection with interest fees, which explains that Muslims cannot take any interest advantages or provide any advantages. Due to these problems, most of the Muslims refrained from forex trading. And, with that thought, brokers started offering Islamic forex account.
Although it is not new, many brokers are recently coming out as swap free broker to provide the trading opportunity to Muslim traders.
Islamic forex traders will enjoy the regular account’s feature with some extra support. Some of the features are-
- As soon as orders are placed, the transaction is completed right away without any delay.
- Transaction cost should be paid immediately.
- Currency transfer between the accounts is done in no time.
However, you will not get to see any promotion for Islamic forex as brokers earn a minimum profit from Islamic forex trading. However, they don’t discourse either; if anyone wants to open one, brokers warmly invite them.
Islamic Financial Law Terms
Islamic trading follows sharia law, so you better know the Islamic financial terms beforehand to ease your forex trading.
Riba is another word for interest in Arabic. However, lending money with high interest also falls under the riba.
Riba is simply making money using money. However, this kind of activity is forbidden in Islam. So, involving with any kind of interest activities is totally haram.
Selling something without a physical presence is strictly prohibited in Islam, which is considered a risk, and it is called Gahrar. Moreover, gambling also falls under Gharar as well as the short position. So, these activities are haram. To avoid the Gharar rules, you have to sell a long position, such as overnight trading. Besides, uncertain agreements are also forbidden.
The Mudharabah Arrangement
When a partnership or arrangement occurs between two parts, it is called the Mudharabah arrangement. Usually, the two parts involve the investor and the person who manages that investment.
As per the Sharia law, the Mudharabah arrangement can operate as restricted and unrestricted. In the restricted arrangement, a person or the manager gets authorization from the investor to administer the investments. On the other hand, for the unrestricted arrangement, there are no such limitations.
Musharakah arrangement is a partnership type agreement when two parties share their profit and loss from trading. However, it does not violate the Riba rule.
However, the share of profit and loss depends on the invested capital as well as the signed agreement.
Islamic Sharia laws prohibit some trading arrangements which are haram in Islamic eyes.
Interest on Margin Deposits
It is usually an interest that occurs when a trader makes the cash deposit to a forex broker. However, only larger traders can take this benefit, and it has huge risks too. So, it goes against the riba rule, which was eventually prohibited in Islam.
Rollover fees are the interest changes that occur for holding a position overnight, which falls under Islamic prohibition. However, it is prohibited, therefore halal forex brokers offer a fixed commission for each trade instead of charging any interest.
Each currency has different rollover fees, and the fixed commission should be varied too.
Usually, loans contain interest charges, which is not allowed in Islam as per the Riba. Additionally, any signed commitment with repaying assurance that consist of interest is also prohibited.
Margin in forex trading means taking the loan from the broker in terms of interest fees and it is absolutely against the Sharia. However, some swap free account may offer margins without interest.
Short sales include borrowing an asset for a short time and sell it for profit. It goes against the Gharar as the seller doesn’t win the real asset and sells them quickly.
It is a selling agreement that’s the price is set up today and sells on a future date. However, it is against the Gharar principle; therefore, a swap free account may come in handy.
So, if you want to follow Islamic trading rules, halal forex brokers can take care of your prohibitions.
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Commissions in Islamic Forex Trading
Usually, a regular forex trading account earns the broker’s fee from interest. Islamic forex trading doesn’t get the opportunity to make money from interest or swaps. Instead, they earn from the commission.
So, the halal forex brokers impose commission to earn money from trading because interest is prohibited. The commission includes administrative fees, trading commissions, and margin commission. Although these are not interest fees, costs may change like the interest fees sometimes.
But the commission rates depend on the policy of the swap free forex broker. So, it is necessary to check out the forex broker reviews to find the best Islamic forex broker with a flexible commission structure.
How to Select the Best Islamic Forex Broker?
The demand for swap free forex accounts is increasing continuously as more Muslim traders are investing in forex. As a result, new traders may find it difficult to select the best Islamic forex broker. But we have found out some criteria that will help you the best swap free forex broker.
- Check the regulation status of that swap free broker first. Make sure the broker has acquired the membership from a proper regulatory body.
- Usually the swap period depends on the broker. For example, some swap free broker set the restriction on holding a position. Many Islamic forex brokers may allow the traders to hold the position for 30 days in the Islamic forex account, while some may offer a few days. Thirty days one is suitable for the long-term trading strategy. So, choose your strategy first, then select the broker according to the short-term or long-term strategy.
- Understanding the offered terms and conditions are important as the different brokers may offer different terms and conditions.
- Get to know the broker’s minimum deposit, leverage, spreads, etc.
- Check out if the broker offers all the benefits as the regular trading account holder gets.
- Finally, know the instruments you can trade, offered forex trading platforms, education platforms, customer support, and language support.
Islamic Account Opening Process
When you are ready to sign up for an account, you may go to the desired swap free broker’s website. However, you may need to provide the relevant documents to prove yourself as a Muslim. That’s how you will get the benefits of an Islamic forex account.
You will have to keep in mind that only Muslims are allowed to have a swap free account.
Instruments you can Trade with Swap Free Account
Islamic accounts offer almost all the instruments like the regular account except for the forbidden ones. For example, if a company sells pork, its stocks will not be available to trade in your account as pork is haram in Islam.
Importance of Islamic Forex Account
Islamic account follows the Sharia guideline, so it will not break your beliefs. Besides, there are no swap fees for longtime positions. As a result, it will not go against the Gharar. Moreover, the Mudarabah agreement allows both parties to share the profit and loss, so it strictly goes with Islamic financial laws.
Drawbacks of Islamic Account
Although the Islamic forex account doesn’t charge any interest, it charges a huge commission for holding the currency overnight. The amount of commission varies on swap free forex brokers.
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An Islamic Forex account is a blessing for the practicing Muslims. Apart from the high commission charges, it is all good for the Muslim traders. But Muslim traders are not forced to have a swap free account; it depends on the traders whether they want to have an Islamic account or not.
As the Islamic accounts strictly follow the Sharia laws, therefore, you don’t need to worry about interest. But it is essential to choose the best forex broker.