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Forex Halal

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Is Forex trading allowed in Islam?


Halal Forex yes or no? One-quarter of the world’s population is Muslim. Given the development of online trading in the financial markets, the question of where intraday trading and online Forex trading fits in with Islamic law is asked frequently by Forex traders. Although the question cannot be answered in a definite manner, Islamic authorities agree that currency trading under certain conditions is halal (i.e., permissible according to Islamic law).

The Islamic religion has clear rules and regulations in financial matters. Islamic financing under Sharia law or Islamic law is different from traditional financing used throughout the world. According to Islamic economic principles, the following conventional financial practices are prohibited:

  • Interest is referred to as riba
  • Extreme risk is known as gharar
  • Gambling and speculation

Generally risky foreign exchange trading, when practised per Islamic financial principles, is referred to as Islamic foreign exchange trading.

It gets complicated when we examine what these “certain conditions” for trading Forex are, but let’s look at the question from another angle.

Please note that Engine Forex is in no way a religious authority on the subject of Islamic Forex or day trading. Our article is designed to offer some guidance on the subject of Islamic trading accounts. We recommend that you consult with a religious authority that can evaluate your individual situation on whether your trading activities can be considered Halal or not.


Is Forex trading Halal or Haram Fatwa?


Usury, which is defined today as "the practice of making unethical or immoral monetary loans that unfairly enrich the lender", is completely prohibited of course. This further implies that any deal or contract that involves an element of interest (riba) is not allowed according to Islamic law.
So how can Forex Halal be defined?

The Islamic Forex Accounts make it easier for Muslims to engage in foreign exchange trading without breaking the laws of religion. Islamic Forex trading accounts are more commonly referred to as swap-free trading accounts in the Forex market. This allows traders to trade any currency pair and hold overnight without deduction of fees or reward.

To comply with Sharia law, Halal trading accounts allow traders to hold open positions for long periods that do not incur any interest. With Islamic Forex trading accounts, profits or losses depend entirely on the movement of the currencies and the markets in general.

This fact is of great importance in foreign exchange trading and the concept of rollover fees. Rollover fees are interest payments that Forex traders have to pay when they keep a position open overnight. They are also called swaps and cover the fees that banks charge for transactions that are kept open overnight. Islamic Forex accounts are therefore free of swap fees.

Today, many modern Forex brokers offer at least some suitable trading account options that are typically called “Islamic accounts”, "Swap-free accounts" or “Muslim accounts”. As said before, they commonly operate without standard interest payments and overnight fees. Instead, commissions are charged on these Forex accounts, which makes foreign exchange trading problematic when it comes to Islamic law. However, the traditional spot Forex trading offered by Forex brokers, with no overnight interest payments or charges is widely accepted by the Islamic community.

Do I have to be Muslim to open a swap-free trading account?

You do not have to be Muslim to open an Islamic Forex account, but such accounts also have certain disadvantages. They can include a higher spread or hidden fees, but also a limit on how long a position can be kept open.

A client who opens Swap-free Forex account and abuses it by executing carry trades is likely to have his account closed by the Forex broker. Carry trades means that a trader simultaneously opens an Islamic Forex account and a traditional account and uses these two accounts to balance each other out. The result is that the trader earns the difference, which in this case is the interest income.

Islamic Law, the stock market and currency market, Fx Halal explained


As per Islamic lawForex trading can only be permissible or halal if the transaction or currency exchange is performed hand to hand. The Prophet Mohammed thought of exchanges of different types of commodities that would be made between two parties, recognising that this was a natural and just aspect of commerce. When the stock markets and currency markets were operated face to face, there was no concern when it came to Sharia law. However, nowadays and with telephones, computers and the development of online trading, this “hand to hand” transaction is not as literal anymore.

The difference between Islamic and Classic Forex accounts

Islam forbids interest gain in Western understanding, as well as usury and gambling. Nevertheless, it is, of course, possible in the Islamic legal system to conclude transactions with remuneration for borrowed money. For example, home financing could not be carried out in any other way. However, other constructions than our Western interest system are used for this purpose.

In any case, interest rarely plays a role in Islamic trading accounts, because these accounts rarely earn interest. However, for Islamic CFD accounts, the swap commissions for overnight trading are omitted. CFDs usually are overnight traded as a call position with a negative interest rate for the customer and as a put position with a positive interest rate.

In Islamic accounts, brokers close positions at night - often early in the morning between four and five o'clock - and reopen them immediately to suspend the swap.

Rollover fees are not charged either. If the broker pays interest on the balances on the trading accounts, which happens in rare cases, then this interest is not charged for Islamic accounts.

Islamic accounts in forex trading are important because Islamic jurisdiction (Faqih) provides for the exchange of money from one hand to the other on the spot. Since this is no longer appropriate in the age of online banking, Islamic accounts are subject to rules such as:

  • delay-free trading
  • Registration of currencies in the accounts of both trading partners
  • no interest on trading
  • immediate payment of any commissions.

Commissions further refer to spreads. Brokers also act under Islamic law if they strictly avoid account management fees for Islamic accounts. We need to take a close look at this: With classic accounts, there is certainly the possibility of additional services subject to a charge in an actively managed account.

The original Islamic jurisdiction forbids Muslims to accept a return service for a granted credit. Islamic Forex accounts are therefore structured as No Riba Forex accounts (Forex without interest). The actual interest would be overnight swaps and rollover fees.

Controversial or concealed is the fact that a CFD that is subject to margin calls must be based on the fact that the broker initially grants the trader a loan for trading. However, in practice, there are very few brokers with margin calls. Therefore, trading on this point conforms with Islam from the outset.

Pros and Cons of Islamic trading accounts

The advantage of Islamic accounts is that they are compliant with the Islamic legal system, and therefore, no Muslim has to fear to violate Islamic law in trading. The differences to classic trading accounts are significant because overnight swaps and rollover fees are common practice.

But there are also some disadvantages:

In the case of overnight positions with short CFDs, traders lose the interest gain (although they are not subject to the interest payment for long CFDs either). Further, brokers sometimes demand higher spreads due to the elimination of swap and rollover fees. Trading could become more expensive. There may be limits on keeping a position open - up to and including day trading with CFDs only.

Examples of Islamic Forex brokers  

Many top online Forex market brokers offer at least one Islamic account option. For example, IC Markets (Check our review), one of the leading online Forex brokers, has enabled all their account types (except their ECN option) to support swap-free trading and free funds insurance. All accounts allow access to 35 currency pairs, 4 metals, 3 CFDs and 4 cryptocurrencies. Popular trading platforms such as MT4 and 5 are accessible.

Another top player in the online Forex industry offering a swap-free, Islamic account option is IFGM. This Australia based Forex and CFD broker offers leverage up to 500:1, variable, ultra-low spreads and an overall excellent trading environment.

Conclusion


In Forex and CFDs trading, financial products can be utilised with additional leverage. Traders can leverage the value of their position up to a specific factor which is set by the broker. However, this also means that the majority of positions are leveraged. This means further, that technically, the trader takes out a loan with the broker. Intraday trading does not incur any fees. However, if positions remain open longer than 24 hours, the credit interest rate - also called SWAP - has to be paid.

For Muslim traders who follow Sharia law, however, this is not permitted due to the interest prohibition. To solve this problem, brokers offer Muslim traders a service called "Islamic Account", "Swap-free Account" or "Muslim Account". This account typically provides the same possibilities, trading conditions and options as a standard trading account, but there are no swap fees, overnight charges or interest charges. Instead, to remain profitable, Forex brokers charge increased commissions on spot Forex trades.

Whilst there’s argument that this is just a disguised interest component, many scholars are content with this new method of facilitating trades and consider spot Forex trades to be halal.

Muslim traders should, therefore, thoroughly check all conditions of these unique trading accounts before getting started with a broker.

We hope that our article and comparison table can help you find the right Forex and CFD broker for your individual needs.