Understanding the Islamic Forex Account and its Structure
Technically forex trading is prohibited unless they use an Islamic forex account. It is because the regular trading account incurs interest which is haram or forbidden. Due to the Islamic belief, most Muslims refrain themselves from forex trading until swap free account or halal forex brokers were started. Nevertheless, Islamic forex brokers offer services to Muslim traders only. Find out our best swap free forex broker list created by our expert team.
Usually, Islamic forex trading involves all types of religious guidelines. However, all the brokers may not offer the same rules or conditions. Therefore, you must find out the best forex broker. But, before that, you should have a proper understanding of Islamic forex.
This article will enlighten you about Islamic forex trading and accounts. Without further ado, let's begin with the basics of Islamic accounts.
Understanding the Islamic Forex Account
It is usually known as a swap free account. In other words, it is a halal trading account that follows Islamic Shariah laws. You can know from the name that; this account is dissimilar from a regular trading account.
However, the Shariah law is very strict, which forbids any financial transaction involving interest or any kind of illegal stuff. However, forex trading doesn't have anything illegal in it, the interest. Therefore, as a Muslim, if you take benefits from interest, you will be a sinner. So, for the practicing Muslim, trading with a regular forex account is haram. However, it does not indicate that you cannot trade through the regular account.
So, keeping the Muslims in mind, many brokers looked for an alternative and came out with a solution that doesn't have any relation with interest. However, the alternative is not a recent invention. Few brokers used to offer swap free accounts. But, with the increasing involvement of the Muslims, almost all the brokers nowadays offer Islamic forex accounts.
Although the regular brokers offer the Islamic forex, they provide full support to use the Islamic account effectively. However, the brokers do not publicize the Islamic forex account as these accounts are less profitable. But any Muslim can ask for swap free account, and brokers can offer according to their requirements.
Islamic Financial Law Basics
Islamic laws may seem complicated if you don't understand them properly. Therefore, you may not be able to find the right Islamic forex account without knowing the laws. We have compiled all the relevant Islamic financial laws.
The Arabic term Riba means interest that has been charged on a transaction. Further, lending money for interest is also known as Riba. In simple words, Riba means making money from money, and this is prohibited in Islam. Therefore, paying interest or earning money through interest is haram.
It represents the risk. Precisely selling an item or stuff that is not available physically is forbidden. So, the practicing Muslim cannot participate in any sort of gambling as well as a short position in trading. Hence, the trader should take a long position, which should be an overnight position. Apart from this, any agreement for future trading is also not allowed in Islam.
The Mudharabah Arrangement
It is basically a partnership between two parties, such as the investors and the fund manager. However, the Mudharabah agreement usually happens unrestricted and restricted. In the case of a restricted agreement, the fund's manager or administrator owns the authority to manage the fund. But there is no such thing available for the unrestricted find.
It is an allowed partnership model from the shariah law. Musharakah basically means 'to share.' It is a kind of agreement on which two parties will certainly get the benefits. It is the perfect way to allocate the earning without breaking the Riba rule.
Moreover, the partners don't just sign for the profits; they will also share the loss too. However, it depends on the fund invested by a trader or the investor. Overall, the profit or loss is shared as per the previous agreement.
Prohibitions by Islam
There are many prohibitions in Islam regarding the financial transaction, and traders are not allowed to do any of these. But, swap free broker can work with the prohibitions on Islamic forex trading.
- Margin deposit's interest: It signifies the incurred interest that comes out from the deposit. However, the margin deposit's interest is bidden by sharia law.
- Overnight rollovers: As per the Shariah rule, a Muslim trader cannot work with a forex account that charges or receive points from holding a position overnight. Normally any position that stays open after 5 PM is known as overnight rollover.
- Loans: A Muslim trader cannot take loans that have an interest in it as this kind of activity breaks the Riba rule. Further, a signed agreement with replaying assurance is also prohibited.
- Short Sales: Islamic law also forbids short sales. Therefore, no one can borrow an asset for a short span of time and then sell it to earn some quick profit. But, short sales are not applicable for forex trading. It mainly works with stock trading.
- Forward sales: It is such an agreement that involves buying or selling something at a future date whose price is agreed today. Sharia law doesn't allow this. But, trading with a swap free forex broker will definitely help the trader to avoid this.
- Margin Trading: Trading on a margin trading signifies the borrowing money in terms of interest from the broker. However, this is banned by the shariah for the Muslims. Therefore, a swap free account will come in handy.
Commissions in Islamic Trading Account
Usually, regular forex reading platforms' earning sources are fees and commission. Since Islamic forex brokers do not charge interest, how do they earn money? So, it might be a mystery how does halal forex brokers get their fees!
The answer is they charge a commission, which is their source to earn money. Islamic forex brokers charge administrative fees as well as certain commissions on different trading. And these kinds of commissions and fees are different from the interest rate. Nevertheless, different brokers may charge differently, and you may check different forex broker reviews on the site to know the best Islamic forex broker and their commission rates.
Choosing the Best Islamic Forex Broker
As the demand increases, many forex brokers started offering swap free account. Therefore, many lucrative offerings confuse traders about the best Islamic forex broker. However, if you can stick to some requirements, you can easily find the best broker.
In the beginning, check out the regulation and regulatory status of your intended broker to ensure your funds are safe and secure with that broker.
Some swap free broker restrictions on swap time, while some brokers may offer unlimited time. For instance, Islamic forex account may offer different timing for holding a position. But, most of the time, they allow keeping a position for more than 30 days. This is actually more time for the long term position holder. Therefore, choose a broker as per your requirement and strategy.
Further, understanding the terms and conditions is also necessary. So, you will need to find a broker depending on their spread, leverage, minimum deposit, and more.
Normally, swap free broker offer Islamic forex trading, and this kind of account gets the same benefits as the regular forex account. So, you will need to know the regular forex broker's offering and then compare it with the Islamic forex account to see the compliance.
Moreover, you also need to check the pairs, asset classes, customer support, trading platforms, languages, and more. But, if you are a newbie trader, you can check out the top 100 forex brokers and easily find the desired one.
Opening Process of an Islamic Trading Account
Once you select a swap free forex broker, you can go for the account opening process. However, the process is similar to the regular forex broker. You will need to supply some personal info and documents to the broker to get your account approved.
Assets you can Trade via Islamic Account
Islamic accounts don't put any restrictions on trading. Therefore, a trader can trade anything that doesn't go against religious or shariah beliefs. For instance, you should not trade shares of a company that is related to alcohol or other haram stuff.
Benefits of Trading with Islamic Forex Account
- As a Muslim, your belief will not get hurt.
- Anyone can take a long term position without any interest fees and charges.
- Mudarabah type accounts are beneficial for both parties.
An Islamic forex account is the best option for Muslim traders. But Muslim traders don't need to trade through an Islamic account or the swap free account. Muslims can trade via regular accounts too. But trading with Islamic accounts keeps no doubt about haram trading. So, try to find the best forex broker that offers Islamic trading.
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