Few social-cultural systems have impacted our society more than religion. The belief in a higher power has shaped the world through rituals, sermons and other practices but also through defining the fundamental guidelines of social behavior within the communities.
For religions like Islam, those guidelines include extensive references to finance, creating the concept of Islamic finance. Offering foreign exchange (forex) services to Muslim customers has to be in accordance with their beliefs through special Islamic accounts.
This article will cover the basics of Islamic forex accounts — how they work and what makes them different from ordinary ones.
Fundamentals of Halal Forex Trading
Islam is an old religion with complex guidelines, many of which offer in-depth principles for financial business.
Although some of them sound outdated by modern standards, their principles still apply. For example, a trade has to be immediately exchanged. This concept works through over-the-counter (OTC) trading. No interest is involved in any form, credited or debited. Halal forex trading has to be swap-free — without an interest fee for an overnight position.
Finally, forex trading has an advantage over other markets in terms of short-selling. Islam prohibits short selling — borrowing an asset while betting on its price decline. But currencies trade as a pair so selling a currency doesn’t have to involve borrowing any asset or interest element.
Is Forex Trading Halal or Haram?
Forex trading can be both halal or haram. It depends on the individual’s attitude toward it. According to Islamic law, something is considered forbidden or “haram” based on the guidelines of the Holy Quran.
The forex-related prohibited activities include charging interest and gambling. While these forex accounts operate without charging interest, the gambling factor is partially up to the traders themselves.
Is their strategy sound? Are they operating with a specific purpose or randomly?
Islam doesn’t prohibit conducting regular business, which involves taking on risk, yet by removing the leverage factor, an Islamic forex broker removes the gambling element — making the trading halal.
Understanding How Islamic Forex Accounts Function
Islamic forex accounts have few key differences from regular account types. Here are four things to keep in mind when trading through an Islamic forex account.
Commissions
Islamic accounts are swap-free, meaning they don’t pay or earn swaps or interest on any trades. Instead, most brokers opt for a flat financing charge rate, also known as a commission, that depends on the currency pair. While popular pairs such as USD/JPY might have a low commission, exotic ones like EUR/ZAR might be 10 times more expensive.
Eliminating Interest
Earning or charging interest or riba is one of the critical haram concepts in Islamic finance. In forex trading, interest is charged or accrued for trades that roll over into the next day. Islamic forex accounts don’t offer this, preventing some strategies based on that concept.
For example, borrowing the lower interest rate currency to fund a purchase of a higher interest rate currency is known as a carry. Yet, Muslim traders should not pursue it, nor should it work on Islamic forex accounts.
Limited Currency Pairs
Using an Islamic forex account might limit access to some exotic currency pairs. This is mainly because of the forex broker’s expenses associated with the significant interest rate differentials. Exotic currency pairs involve emerging markets that often have high-interest rates, such as Turkey or Thailand, and forex brokers cannot process those trades under halal guidelines.
This limitation doesn’t impact most traders who prefer to stick with the most popular currencies: the U.S. dollar (USD), the Euro (EUR), the Japanese yen (JPY), the British pound (GBP), the Canadian dollar (CAD), the Swiss franc (CHF), the Australian dollar (AUD) and the New Zealand dollar (NZD).
Wider Spreads
By offering leveraged trading through borrowed funds, brokers make a sizeable portion of their income by charging swap interest. Because charging interest is not allowed in Islamic finance, they have to find some other compensation to make it up by setting a wider spread.
This spread seldom makes a difference for long-term traders, but it makes short-term trading (scalping) much harder. Traders who execute tens of daily trades might have to adjust their approach as fees and spreads quickly add up, eating into the profits.
An Islamic Forex Account is designed to comply with Islamic finance principles, specifically the prohibition of riba (interest). Forex trading involves overnight positions that incur interest (swap fees), which is considered non-compliant with Sharia law. To avoid this, Islamic forex accounts offer swap-free trading. Here's how you can open one:
Steps to Open an Islamic Forex Account
Follow these steps, you can ensure that your forex trading remains in line with Islamic principles.
- Research Brokers Offering Islamic Accounts: Not all brokers offer Islamic accounts, so the first step is to find brokers that provide Islamic account options. Ensure the broker is regulated and has a good reputation.
- Verify Sharia Compliance: Check the broker's terms and conditions for Islamic accounts to ensure they fully comply with Sharia law. Some brokers charge alternative fees to compensate for the lack of swap fees, so review these costs.
- Register for an Account: Sign up on the broker's platform as you would for any other forex account. You will usually need to provide personal identification and fulfill KYC (Know Your Customer) requirements.
- Request an Islamic (Swap-Free) Account: Most brokers will offer the option to open an Islamic account directly during registration. In some cases, you may need to request the account separately after opening a standard one. This can usually be done by contacting customer support and submitting a request.
- Confirm Account Features: Ensure that the account is indeed swap-free. Some brokers may allow swap-free trading for a limited period before reverting to a regular account if you don't actively trade.
- Fund Your Account: Deposit funds into your Islamic forex account using a method that suits you. Many brokers offer various funding options, including wire transfers, credit/debit cards, and e-wallets.
- Start Trading: Once your account is approved and funded, you can begin trading. Make sure you understand the broker’s policies on spreads, commissions, and other fees.
Things to Consider:
- Fees and Spreads: Although Islamic accounts avoid interest, some brokers may charge higher spreads or other types of fees, so compare different brokers.
- Account Conditions: Some brokers impose conditions, such as trading within specific limits or maintaining a minimum balance, for their Islamic accounts.
- Sharia Advisory Boards: Brokers offering Islamic accounts may have a Sharia advisory board that certifies compliance with Islamic finance rules. This can provide peace of mind regarding the account's adherence to Islamic principles.
Religious Compliance Comes With Restrictions
Religion is essential to many people’s lives. Its influence stretches far beyond the spiritual element and sometimes deep into established business practices. Currency exchange is a fundamental part of international business, and the only way it works is through currency trading.
By collaborating with Islamic scholars, forex brokers found a way to offer their services in a halal way. While it limits access to some markets or prevents pursuing specific strategies, it is a small price to access one of the largest markets in the world.
Frequently Asked Questions
Can anyone open an Islamic account?
Islamic accounts aren’t tied explicitly to customers of the Muslim faith but to everyone who wants to trade without an overnight swap rate.
Is it haram to trade forex?
There is a lot of uncertainty among Islamic scholars about the nature of forex trading. Most scholars agree that trading forex is halal under three conditions. The trading has to be over-the-counter (OTC) and immediately, implying that pending orders are haram.
The trade also has to execute without money borrowed with interest and cannot incur interest itself. An Islamic account doesn’t have an overnight swap fee. Finally, a halal trade cannot be short as it involves borrowing an asset you don’t own, which is against Islamic law.
Is working in forex halal?
Islam recognizes currency exchange as a necessity. Working in forex while following religious guidelines — not charging interest, encouraging gambling behavior or using borrowed funds — should be halal.