Faith, Values & Forex Trading: What Are Islamic Forex Accounts?
The forex market is always ahead of other financial markets regarding turnover and trading volume. Hence, it overtakes other trading markets in terms of profitability, too. The high number of trading opportunities you get in the global currency market, along with the easy access and convenience, made it a key attraction for traders worldwide. The forex trading community also includes Muslims, the second-largest religious group after Christians, as over 2 billion people worldwide follow and adhere to Islamic morals and beliefs. But they often have difficulty getting into currency trading as it contradicts the faith and values they live by as Muslims.
In this article, we will be discussing the topic of forex trading in connection with Islamic faith and values and will also understand the purpose of Islamic forex accounts and how they allow you to trade forex while remaining faithful to your religion.
‘Riba’ in Islam and Swap in Forex
The Arabic word ‘Riba’, which means “to increase” or “to exceed,” describes unfair exchanges or fees charged for borrowing something. It is also called ‘Usury’, which means high interest rates. Riba or Usury can be defined as interest charges in simple words, and it is seen as financial exploitation as per ‘Shariah law’ in Islam. Engaging in any financial transaction that involves paying or receiving interest in any form is strictly prohibited in Islam, and it is referred to as ‘Haram’ as per the rules and principles of Islamic finance. Hence, Muslims must refrain from participating in any interest-based transaction.
Applying a swap in forex is also a form of interest or ‘Riba’ since the trading instruments are international currency pairs, which involve 2 currencies with different interest rates, and brokers will apply this as the cost of keeping a trade open for more than a day. Hence, all overnight trade positions will be subject to swaps, either charged to the trader, resulting in a debit or the amount being deducted from the trading account balance or earned by the trader as the same gets credited to the account.
The swap, being a debit or credit, will depend on the type of position opened and the chosen currency pair because it is based on the difference between the interest rates of the currencies in that pair. In any case, Muslim traders who strictly follow the principles of Islamic finance won’t be able to keep their trades open for more than a day due to the incidence of swaps in forex trading. The swap will always be applied to a regular trading account unless you close the positions by the end of the day, stopping you from following strategies like swing trading or positional trading.
However, many forex brokers wanted to make trading easier for their Muslim clients, and they introduced a specified account type called Swap-free accounts or Islamic accounts to make this possible.
The Fundamentals of Swap-Free Accounts
Just as the name suggests, swap-free accounts are simply swap-free, and you won’t be charged or credited with a swap while engaging in overnight trading in this type of account. The interest element will be eliminated and replaced by a predetermined admin fee, which is just the cost of keeping the trade running for an extended duration. Some brokers don’t even apply this admin fee unless you keep the trade open for a duration of 3 days or more. Positions that are closed before 3 days won’t be subjected to this deduction. This may depend on the broker you choose to open a swap-free account and their pricing. If all this sounds confusing to you, then you should try trading on a demo account to find out how swap works. Once you get a hang of the process, you can open the live Islamic trading account.
The rest of the trading conditions on a swap-free account will be more or less similar to those offered on a regular Forex account, but this can also change depending on the broker you choose and their policy. Apart from being swap-free, Islamic accounts that are Shariah-compliant will be designed to incorporate all fundamental principles of Islamic finance, allowing Muslim clients to engage in Halal forex trading with ease. You will get the same tools and features that a regular trading account user gets without significant changes in the overall trading experience.
Benefits of Using Swap-free Accounts
- Halal Trading Conditions – The primary benefit of using a swap-free account for trading is the ability to get market exposure with halal trading conditions. You won’t be at the risk of breaking any rules or principles that you live by as a Muslim. In addition to eliminating swaps, the Shariah-compliant account will also promote ethics, fairness, and transparency in trading by only providing spot trading and limiting the availability of specific trading instruments. For example, trading with forex futures and exotic pairs won’t be possible on an Islamic account as the first one involves speculation, and the 2nd one comes with added risk, which goes against the practices in Islamic Finance.
- Suitable for Implementing Long-term Strategies – Muslims trading on a regular account won’t be able to follow any long-term strategies or trading styles with a longer time frame because holding trades for a longer duration will result in swap charges. But this issue can be solved by opening a swap-free trading account where trades kept open for a longer duration won’t be subject to swap or rollover fees. Hence, this account type suits medium-term and long-term trading strategies like swing and position trading.
- Equal Opportunities – Trading on a swap-free account also gives you a fair chance in trading by providing equal opportunities. Many Muslims may avoid forex trading as a whole or only engage in day trading due to the swap charges that make the trading process Haram for them. However, with the launch of Islamic accounts, Muslim traders can trade forex freely without being concerned about deviating from their faith. This also promoted ethical trading, which enables healthy competition among traders by reducing the incidents of unfair practices and speculation.
Things to Consider While Choosing a Swap-free Account
- Consider Your Options – The number of forex brokers who offer swap-free accounts is still less, but you need to consider all the available options before choosing the best broker for Halal trading. It would help if you did some background checks about the broker to ensure they are reliable and preferably go for a regulated broker to stay safer. There are quite a few top-regulated brokers who are offering Islamic accounts, but the criteria for being eligible for a swap-free account will be different based on their policies. So, make sure the one you choose suits your requirements in the best possible way.
- Platform Functionality – Another thing you need to consider while choosing your swap-free account is the functionality of the trading platform that the broker is offering. Make sure the platform provided by your preferred broker is good enough to support your trading strategy, and also consider aspects like the speed of execution and trading experience you get on the platform. The classic MetaTrader 4 platform and the advanced MetaTrader 5 platform are the two most popular choices in the Forex community. I suggest you take some time to find the best platform for Halal trading before opening an account.
- Cost-Effectiveness – The last thing that I want you to consider while choosing a swap-free account is cost-effectiveness since different brokers will have further charges, and the trading cost should be considered while selecting a suitable broker. This way, you can maximize your profit potential by calculating all the trading costs on an Islamic account. The spreads, commission, and admin fee charged to compensate for the swap loss should be reasonable and fair to align with Halal trading principles.
Is It a Good Idea to Use Swap-Free Accounts?
A swap-free account is a good idea if you are a Muslim interested in forex trading. This account type ensures adherence to Sharia law in the best way possible without putting a lot of restrictions on the trading process. The trading conditions offered on an Islamic account ensure you are not deprived of the trading opportunities your counterparts get while using a regular trading account. You won’t have to let go of the long-term trading opportunities and can go for them without worrying about swap charges.
Moreover, swap-free accounts also have a higher purpose as they allow you to explore the lucrative forex market without losing touch with your spiritual side as a follower of Islam. It is about making profits in trading, being ethical, and holding onto your religious values.