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by Nathan Smith on December 1, 2020

The ins and outs of an Islamic trading account – what’s the difference?

There are many types of forex trading accounts, but in this article, we will be discussing the Islamic Forex trading account. And how different it is from the other trading accounts. What is an Islamic trading account? And how does it operate? The reason why this account is called an Islamic trading account is, first, because it is different from the regular trading account, and second, it is guided by Islamic law. The characteristics of this account are that, unlike the regular Forex trading account, this one operates without any additional fees or interest. According to Sharia Law, Muslims are not allowed to receive or give any kind of interest or get involved in any such activities. It is for this reason that the Islamic Forex account was established.

On the regular forex accounts, there are many different fees and interests that traders give and receive. An example of such fees is the rollover fee, which is made when a trader carries a position over to the next trading day. There is no such fee with an Islamic Forex account.

Swap-Free Forex Account

As the word implies, a swap-free account basically means an account without swaps. An Islamic account is a swap-free account. A big part of Forex trading involves several fee payments, which are considered as interest. It is for this same reason that they are called interest-free.

Why are interest dealings prohibited in Sharia Laws?

According to the Sharia Laws, receiving and giving interest of any form is strictly forbidden for all Muslims. The main reason for this prohibition is because of their religion and beliefs, which states that Muslims should give and not expect anything in return that they should only give for the sake of giving. Since this is how the typical forex trading accounts work, a platform was created for the Muslims to trade while maintaining their religious beliefs.

What are the various rules set up by the Islamic Scholars regarding Forex Trading?

All types of Forex trading, as well as stock, and all the types of online trading are supposed to comply with the norms of Forex trading. Some of these markets still have ongoing Forex trading compliance disputes. The Islamic Forex accounts are not left out as they also have a dispute going on as they try to mitigate religious norms and complying with Forex trading norms at the same time. However, scholars in the Islamic communities have created some rules that Muslim traders can abide by, and if they strictly follow these rules, they are allowed to trade on the financial market.

Every FX broker has the responsibility towards its clients to feature an Islamic trading account for their customers regardless of their size. A perfect example would be Axiory, a mid-sized FX brokerage, which despite not having direct access to the Islamic markets, still features Islamic accounts due to the diversity of its existing customers, from approved locations.

Who May Open An Islamic Account?

Anybody can open an Islamic account. The reason why this is so is that nobody does verification of a trader’s religious beliefs before they set up a Forex trading account. All an individual needs to do before setting up an Islamic account is to send a request through a broker’s customer support department, or the broker can open the account automatically. However, the choice between the two options depends on the broker.

How Does The Rollover Fee Come About?

As all traders already know, at the end of the day, the foreign exchange market closes. At times before the market closes, traders might have open positions which they expect to yield some returns, and for these traders to avoid losses on any positions, they are allowed to carry it over to the next day for a rollover fee. This payment is interest made for carrying trade over to a new trading day. The difference between interest rates is calculated to get the rollover fee. For instance, 1.75 (AUS) – 0.5% (GBP) = 1.25%. This will further be divided by 365 days to get the interest that a trader is supposed to pay. It is also worth noting that swaps can either be negative or positive.

What is Riba With Regards to the Islamic Forex Trading Account?

Riba is Arabic, and it means “interest” in English. The Sharia Laws forbid riba: They state that ardent should give without expecting anything in return, like interest. That is why Islamic Forex accounts do not operate with interest. The main reason why it is considered a swap-free account, is, in other words, an interest-free account or a riba-free account.

What is Musharaka?

Mushrabic is an Arabic word for joint venture or partnership, established for the execution of a particular kind of business with the intention of making profits, where the profits and losses are shared according to a specified ratio among the partners.

Hiba

Hiba is an Arabic word for gifts or loans given. This is the means through which Islamic Forex brokers manage the accounts of their clients (traders). What they do is, all the profits made from trading by their devoted clients will be donated to charity, which allows the traders to continue trading in the Forex market. Also, some of these Islamic brokers offer their clients a forex welcome bonus online. These bonuses often encourage new traders to start trading or help some traders practice trading with them, and some experienced traders use such bonuses to learn more about a broker before choosing to work with them.

What is the shortcoming of an Islamic Account?

Trading swap-free sounds so great, but what’s more is, there are disadvantages to having an Islamic account. The reason for this is because the minimum deposit amount is very high, and leverage is low.

What Advantages does An Islamic Forex Account have?

Not everyone can trade with an Islamic Forex account because not everyone shares the same religious beliefs, and also because a majority of people trading forex do it for the profits. Thus this sort of account is not a good fit for them. However, for traders who make rollover trades most of the time, this is an excellent option for you because Islamic accounts allow traders to carry positions into a new trading day without any rollover fees.

Are Islamic Forex Accounts Against Islamic Laws?

Islamic scholars have received the Islamic Forex trading account idea with mixed feelings. While some of them support the idea and say that it does not go against Islamic Laws, others are of the opinion that it goes against Islamic laws because interest is still being made, although the majority of traders donate these proceeds to charities. This is the reason why Islamic scholars came together to establish certain ground rules for ardent Muslims to follow, which can permit them to trade on the forex markets following Islamic laws. According to the rules:

  • The currency of a particular trade must be transferred by the traders to both parties, and in the end, it should be completed in one currency.
  • It also stated that trades should be made without delay in currency spot markets.
  • Further, participants must pay in full the amount of money for the trade, not in parts.
  • All trades must be swap-free or interest- free.

By Nathan Smith

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