WHAT ARE ISLAMIC FOREX TRADING ACCOUNTS
Islamic Forex accounts, or Swap-free accounts, are an optional trading account type which allows Forex traders to keep in compliance with the principles of Sharia law. According to the Islamic law, or the Sharia law, interest paid on all loans of money is prohibited. Under Sharia law, this is also called Riba, or usury. Islamic Forex accounts don’t earn overnight interest on positions placed on the Forex market and thus keep all trades Sharia complaint.
FOREX BROKERS OFFERING ISLAMIC SWAP-FREE ACCOUNTS
There are a variety of brokers that offer Islamic accounts tailored for Muslim traders. There are usually no limitations on this account type – this means you can trade Forex, commodities, CFDs contracts and every financial instrument that complies with the Islamic financial regulations.
An important note: With some forex brokers, you will need to open a real trading account which can then be converted into an Islamic account. Very few brokers have a registration page specifically for Islamic accounts. If you are in doubt do not make any deposits before discussing with your account manager. That said, here is a list of brokers that we recommend for Islamic accounts.
THE DIFFERENCE BETWEEN ISLAMIC FOREX ACCOUNTS AND REGULAR FOREX ACCOUNTS
In the Forex market, any position hold overnight generates a rollover which can either be earned or charged depending on the currency you are trading and the direction of the market. Rollover interest is a form of interest that can be credited or debited from your trading account, and thus it is prohibited by Islamic financial regulations. In the financial world, this rollover is also known as the swap rate. So, Islamic Forex accounts are swap-free accounts where no overnight interest is credited or debited.
The Islamic Forex accounts have two underlying attributes:
- Free swap rates.
- No interests rate (aka no Riba).
Other than the above, Islamic Forex accounts usually have the same trading terms and conditions as a regular Forex account. However, some most Forex brokers change the commercial terms of trading with them and might limit the trader from trading cryptocurrencies. Some Forex brokers will widen their spreads on Islamic accounts in order to compensate for the missed revenue that would have otherwise have been generated by collecting interest. Another practice, but is far rarer, is that some Forex brokers charge an up-front commission on trades instead of widening the spreads.
ISLAMIC FINANCIAL REGULATORY BODIES
The main financial regulatory bodies in the Islamic world are the following:
- Islamic Financial Services Board – IFSB.
- Accounting and Auditing Organization for Islamic and Financial Institutions – AAOIFI.
- International Islamic Financial Market – ISFM.
- Liquidity Management Center – LMC.
Forex brokers that are registered in Muslim majority countries often have to comply with many local regulations and are required to follow the Sharia law, whereas Western Forex brokers have much more flexibility when it comes to the interest charged to their clients. This is why only some of the brokers offer this account type.
Islamic Forex, or Swap-free, accounts are an optional account type that is often selected after signing up with a broker. They are intended for use by traders of the Islamic faith which prohibits earning income generated solely by interest. A majority of Forex brokers can accommodate followers of the Islamic faith by offering them swap-free trading accounts that are compliant with Sharia law.