Traditional Forex trading can pose problems for religion-abiding Muslims because it often involves overnight interest. Your Forex broker could charge interest if you borrow to open a position. And if you keep your position open overnight, you could stand to receive or pay interest depending on the prevailing interest rates.
It is possible to trade currencies without incurring interest: 1) invest no more than you can afford and 2) remember to close any open positions by 5pm New York time. However, this is likely to reduce how much you can afford to invest and may not be an option if 5pm New York time (10 pm UTC/GMT) is in the middle of your night time.
Benefits of an Islamic broker
Instead, you could open an account with a Sharia-compliant broker Forex broker to enjoy interest-free leverage and avoid interest on rollovers.
Islamic Forex brokers will provide interest-free leverage. In other words, you can borrow entirely free of charge.
No rollover interest.
With an Islamic Forex account, your open positions will be closed by 5pm New York time to avoid rollover interest. You can them re-open them immediately after that. Some brokers will open them on your behalf free of charge.
Are there any disadvantages?
If you’re a non-Muslim thinking of opening an Islamic account simply to avoid interest, think again. Most brokers will ask that you provide evidence of your faith if you request a Sharia compliant account. They could close your account altogether if they have grounds to believe you are trying to game the system.
Interest-free doesn’t necessarily mean you’ll be at an advantage, as some brokers will look for alternative sources of revenue if they cannot charge interest. This is why Islamic accounts can have marginally wider spreads than conventional accounts. Other brokers may require higher minimum deposits.
However, this isn’t always the case. FBS Forex offers Forex and commodity trading accounts in Islamic format to all clients of Muslim faith. In addition, you can keep your open positions overnight for up to 14 days at no additional cost. Others, such as HotForex EU tend to apply a carry charge after 7 days.
How to open an Islamic account
Our comparison table shows popular Forex brokers with Islamic accounts.
Some brokers such as FBS Forex or HotForex have dedicated Islamic accounts, in which case signing up is straight forward.