Things you should know about Islamic Forex Account
For the practicing Muslims, trading forex is haram, in other words, forbidden, as it consists of charges and payments, which is against Islamic faith and beliefs. However, it doesn’t mean that Muslims don’t have the right to forex trading. That is why numerous forex brokers offer Islamic forex account or swap free account for the Muslim traders only.
Islamic forex brokers keep all the religious guidelines in their mind before offering you Islamic forex trading. Although, not all the swap free brokers offer the same conditions and may differ considerably. But, the basic idea of Islamic trading remains the same.
So, it would be best if you know all the basic terms of Islamic trading, which will ultimately help you choose the best Islamic forex broker.
Let’s start with the very basics.
What is an Islamic Forex Account?
Islamic forex account, also widely known as swap free account, is a halal forex trading account, which is created by following the Islamic Sharia laws. However, this type of account is different from the regular forex account in many ways.
Usually, the Sharia laws strictly forbid any kind of transaction that includes the interest in it. So, taking the benefits from interest or paying interest is prohibited in Islam. And, the forex trading model is based on interest.
Keeping all these interest related problems in mind, brokers offer an account type that doesn’t have any connection with interest fees. However, the halal trading process is not a recent invention. There have been few brokers that offer swap free trading. But, nowadays almost all the best forex brokers offer Islamic accounts as the Muslims are getting interested in forex trading.
However, traders will get all kinds of support from halal forex brokers along with the regular account’s features. For example, the transaction should be completed right away while the currencies are transferred immediately from one account to another, and transaction costs are paid right away.
Usually, brokers don’t promote Islamic forex account as it is less profitable. However, If any Muslim clients want to open swap free account, brokers then let them open the account.
Key Elements of Islamic Financial Law
To understand Islamic forex trading properly, you should be aware of some terms as you may see them while doing any transaction based on Sharia laws.
It’s an Arabic word that means the charged interest. Besides, it also refers to lending money with a high-interest rate. In other words, riba is making money from money, which is forbidden in Islam. So, making money from interest or even paying interest charges are haram (forbidden).
Gharar means risk; more accurately, selling something that is not present physically is haram in Islamic Sharia law. So, whoever follows the Islamic Sharia law cannot gamble and take any short trading position (a long position is needed, which signifies the overnight trading position). In addition to that, any tentative agreements or chances are also prohibited in Sharia.
The Mudharabah Arrangement
The term Mudharabah arrangement signifies the partnership or arrangement between two parts, such as the financial role of a person and the role of managing a fund. Whoever has the financial role will invest while the other part will control the fund.
However, according to the Sharia, the Mudharabah arrangement can be restricted and unrestricted. For the restricted arrangement, the investor provides the authority to a manager or a person to administer the funds. However, the fund’s management has no constraints for the unrestricted arrangements.
Musharakah is a type of partnership according to the Sharia law, which means ‘to share.’ As per this agreement, both parties of the partnership will get the benefits from a trader. Through this way, the partners can earn without violating the Riba rule.
However, the partners will share the losses too; it will depend on the invested capital and the agreement. On the other hand, the earned profit will also be shared according to the agreement contract.
Following prohibitions are imposed by the Islamic laws. Therefore, traders cannot perform any of those. However, swap free broker can cover you all the prohibitions while they offer Islamic forex trading.
- Overnight rollovers: According to the Sharia laws, you should not get a forex account that incurs or receive swap points from an overnight position. Usually, any position that remains open after 5 pm is considered an overnight rollover.
- Margin deposit’s interest: The incurred interest from the deposited fund in a trading account is prohibited by Sharia law.
- Loans: getting loans with interest charges is prohibited as it breaks the Riba law. Besides, the signed commitments that want the assurance to repay the loan with interest is also prohibited.
- Short sales: Any kind of short sales is prohibited, which means borrow an asset and then sell it for profit. However, this occurs with the stock trade, but not with the forex trades.
- Forward sales: It is an agreement to buy or sell something at a future date whose price is agreed upon today. This is not allowed in Sharia. Therefore, a swap free forex broker is needed to avoid this.
- Margin Trading: Trading forex on a margin requires paying interest to borrow money from the broker, which is against the Sharia. So, you need a swap free account with a margin deposit that doesn’t charge any interest.
Islamic Trading Account’s Commission Structure
Regular forex trading platforms earn money from interest and other charges. But, you may ask about Islamic forex broker’s commission structure and how they make money since there are no swap charges.
As you already know, to keep the forex trading halal, Islamic forex account neither offer benefits from interest nor charge any interest.
The question is, how does halal forex brokers make money from the trader. They make money from commission. As a commission, a forex trader needs to pay administrative fees, commission on trading, and margin, which are different from the interest.
That’s how the best Islamic forex broker makes money. However, these charges depend on the brokers, and you should check out forex broker reviews to find out the top Islamic forex brokers that don’t have a tricky commission structure.
Criteria to Choose the Best Islamic Forex Broker
Nowadays hundreds of forex brokers are offering swap free account, which makes it difficult to choose the best Islamic forex broker. However, if you follow some criteria, selecting the right broker becomes easier.
Firstly, you will have to look for the regulations and always choose the regulated broker as regulation will provide a fair operation policy to keep your funds safe.
Many swap free forex broker tend to set time restrictions for the swap period. But, few brokers offer unlimited time for keeping up a position. For example, some Islamic forex account may allow up to 30 days to hold a position, which is good enough for a long-term strategist. So, you should select a broker according to your trading strategy.
Next, you should check specific terms and conditions offered by the brokers as this can vary among the brokers. While checking the conditions, make sure you also know the minimum deposit amount, spreads, leverage, and more.
Usually, Islamic forex trading offered by the swap free forex broker includes the same elements like the regular forex trading. So, you should check them out and see if they comply with both account types.
Additionally, other considerations are asset types, currency pairs, trading platforms, customer supports, educational support, and language.
If you are not well experienced in the trading world, you may search for the top 10 forex brokers.
How to Open an Islamic Trading Account?
Once you are totally done with selecting the best swap free broker, you can proceed to open the account. Although the account opening process is the same for all brokers, you will need to provide some documents proving you are Muslim. Otherwise, your application for an Islamic forex account will not be accepted.
Who can Open Islamic Forex Account?
As the Islamic forex account follows the Sharia laws, only Muslims can open an Islamic account. However, it is not mandatory for Muslims to open Islamic accounts; they may open regular accounts too.
What Can you Trade with an Islamic Account?
You can trade anything with an Islamic account that doesn’t break the Sharia or religious belief. For example, you will not be allowed to trade a company’s share that manufactures alcohol as it is haram in Islam. So, you can trade all the instruments that conform the religious belief.
Advantages of Islamic Forex Account
- It works with the Sharia compliant, so trading will not go against the Islamic beliefs.
- There are no swap fees, which means traders can go for the long-term position without paying any interest.
- Mudarabah Agreement gives advantages to both parties as profit and loss will be shared by both.
Disadvantages of Islamic Forex Account
We have found only one potential disadvantage, which is, paying a lot as a commission to hold a position overnight. However, it is not obvious but depends on the broker’s policy.
If you strongly follow Islam and its laws, the Islamic forex account is the best choice for you to initiate forex trading. However, you are not bound to trade with an Islamic account or swap free account through halal forex brokers. You are open to choose the regular accounts too. But the Islamic account will provide you the service with the compliance of the Shariah laws. So, you don’t need to worry about haram forex trading.
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