What Is An Islamic Account in Forex?

When you keep positions open overnight, your broker will automatically carry them over into the following day and charges a “rollover fee” on your account. However, there is a kind of account that has no such swap charges, that is, Islamic Account. In this article, we will focus what is Islamic account Forex trading and how this relates to the foundations of Islamic finance, and give you a list of brokers providing Islamic Account for you trading needs.

What Is Islamic Finance

Traditionally in Islam, trading is believed to be haram, although it’s not as black and white as that.  The primary principle in the Islamic trading process regulation is to avoid any harmful activities, mainly investments interest, along to restrict high-risk transactions which prohibit margin and derivatives trading.

Islamic finance has four basic principles:

-Prohibition of payment and receipt of any interest rate (Riba)

-Immediate exchanges in the context of trading operations

-Prohibition of gambling

-Distribution of risks and benefits

Islamic Prohibitions:

Overnight rollovers: Sharia law prohibits trading accounts from incurring or receiving rollover swap points on positions that remain open at the New York close of 5 p.m. EST.

Interest on margin deposits: Sharia law prohibits the accrual of interest on the funds deposited in a trading account.

Loans: Money transferred by a bank or financial institution as a loan to a customer with interest terms is prohibited because it involves Riba. Signed commitments and pledges to repay loans also fall into this prohibited category.

Margin trading: Trading stocks on margin involve paying interest (that would amount to Riba) for borrowing money from a broker to buy or sell equities, so that would also be against Sharia law. In contrast, trading forex just requires a margin deposit with no interest charged when you make a transaction on margin.

Short sales: Engaging in a short sale by borrowing and subsequently selling an asset for profit is forbidden. This is mostly an issue with stock trades, not forex trades.

Forward sales: Sharia prohibits agreements to buy or sell at a future date on a price agreed upon today. This would prevent you from entering into forward contracts or trading futures contracts.

Due to the nature of Forex trading, where a certain level of risk must be taken in order to generate a successful trade, traditional online Forex trading is completely forbidden.

What Is Islamic Account

An Islamic Forex account is a halal trading account that is offered to clients who respect the Quran and wish to invest in the Islamic stock market following the principles of Islamic finance. These types of accounts are designed to be compliant to the Islamic teachings and consequently, they differ from regular accounts in several respects.

Islamic account is a regular account for Forex trading, but without fees in the form of interests. This type of account is commonly referred to as a ‘swap-free account’ – meaning there is no interest.

Although there aren’t as many Islamic brokers as traditional brokers, there is more appearing year on year. It’s worth noting that whilst not all broker companies offer specific ‘Islamic accounts’, many will offer a standard account – but customized to your needs and in keeping with Sharia law.

Pros and Cons of Islamic Trading Accounts

The main difference between Islamic accounts and basic accounts is that there are no swap commissions. This can be a very important advantage, since you can open long-term positions without running the risk of reducing your profits due to swap commissions. The second great advantage is that the trader will be able to open positions in currency pairs in which swaps costs are generally very high (especially in exotic pairs).

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. In addition, to remain profitable after the elimination of interest, the non-swap broker will charge a fixed administrative fee, as banks do in Islamic finance.

Best Forex Islamic Accounts 2021

1. FXTM

2. FP Markets

3. AvaTrade

4. OctaFX

5. BDSwiss

Conclusion

Islamic Account is ideal for anyone who would like to eliminate swaps from their trading strategy. The swap-free account is also perfect for traders from religious backgrounds (especially Muslim).

It’s important to remember that not all broker platforms advertise Islamic trading accounts. Some are called ‘swap-free’ accounts, or ‘halal’ accounts. If you can’t see any of the aforementioned but are interested in that broker, then send them an email and they might customise a standard account to meet your swap-free needs.