How To Open And Manage A Forex Islamic Account?

The forex market is a versatile and dynamic place that has become an attractive trading spot for millions of people worldwide. With the establishment of numerous online trading platforms, accessing and trading in the global currency market has become easier than ever. However, Muslim individuals often find it hard to fit in with the rest of the traders as certain aspects of forex trading go against their religious beliefs and principles. Hence, forex brokers came up with the idea of adding a special account type named an Islamic trading account, where Muslims can freely engage in forex trading without breaking their religious ethics and morals.

But beginners stepping into the forex world may need guidance to start with forex Islamic accounts. In this article, you will learn A to Z details about Islamic forex accounts and the steps involved in opening and managing this type of account.

What is an Islamic Forex Account?

As the name suggests, an Islamic forex account targets traders who believe in Islamic rules and principles. This account type is specially designed to cater to the needs of Muslim traders by providing slightly different trading conditions that fully align with their religious beliefs. Islamic forex accounts are also known as swap-free or interest-free accounts as they fully eliminate the swap rate or interest element (riba) that is involved in forex trading.

The trading experience in an Islamic forex account is not much different from that of a regular trading account except for the absence of swap rates or interest charges. Basically, the swap rate is a type of interest that the trader pays or earns for holding overnight trade positions. The application of swap rates is a peculiar feature of the currency market as the trading instruments here are international currency pairs which consist of 2 different currencies with two different interest rates set by Central Banks.

This interest rate difference in the currencies of a pair results in a swap or rollover fee, which is typically applied at night by your broker. In the forex market, there is also a strategy named carry trading, where you just carry forward your trades and hold on to trade positions for an extended duration to earn profits from the swap that you earn from the broker. Whether you earn from swap rates or it becomes an expense depends on the type of position opened (long or short) and the currency pair chosen for trading.

Now, Muslim traders cannot follow such strategies and cannot engage in any transaction involving interest of any kind, as the act of paying or receiving interest is strictly prohibited in Islam. It is seen as a means of exploitation per Islamic finance rules and must be forbidden in all situations. Since swap rates are also a form of interest, Muslim traders can’t open overnight trade positions as swaps will be automatically applied to such trades.

But when they trade on an Islamic account, they can freely open overnight positions and also hold them for however long they want without worrying about swap rates. Beginners who are confused about the swap fee and its value in their own currency can take the help of trading tools. In addition to the absence of swap charges, the Islamic forex account also incorporates all the principles of Halal forex trading, making it an ideal account type for religious traders.

The Principles of Halal Forex Trading

Halal forex trading is actually a term used to describe the process of forex trading that confirms the standards, rules and principles of Islamic finance. In Quran, Shariah law is the foundation for these beliefs and ethics that distinguishes permissible (Halal) and forbidden (Haram) activities for Muslims. Such rules are applied to all fields of life, including food consumption, way of living and financial matters. So, the principles of Halal forex trading ensure that a Muslim forex trader is not breaking any of these religious rules while engaging in the trading process.

Now, let’s have a look at the 4 main principles of Halal forex trading.

1. 1. 1. 1. No Gambling – To engage in Halal forex trading, you must avoid following martingale strategies or relying on mindless speculation, as these trading approaches fall under the category of gambling, which contains high risk. As per Shariah law, uncertainty in financial transactions must be avoided at all costs.
            Hence, Muslim traders have to work hard to minimise their risk while trading. Because of this, many forex brokers don’t allow trading with highly volatile instruments or currency pairs on Islamic accounts as it goes against the concept of halal trading.
         2. Swap-free – The key principle of Halal forex trading is the absence of swap rates or interest charges, which is ensured by giving the Islamic forex account a swap-free status. As we mentioned earlier, the broker will charge a flat rate to compensate for the loss of rollover fee, but this is permissible as it is not a form of interest.
         3. Spot Transactions – The next important principle of Halal forex trading is that the trades or transactions must be carried out immediately without any delay. It means that a Muslim trader must not engage in trading with forex futures as it is a form of price speculation without an actual delivery taking place, which is forbidden as per Shariah law.
         4. Fair Sharing of Risks & Rewards – Islamic finance also encourages fair sharing of risks and rewards, which states that the parties involved must share their risks and rewards equally. This means the profits and losses should be distributed equally, so no party should make easy money while someone else has to bear excess losses. This principle promotes fairness and ethics in the context of forex trading.

   How to Open an Islamic Forex Account?

   The process of opening an Islamic forex account is very easy once you find a suitable broker offering halal trading conditions. Thankfully, the forex market has several top Islamic forex brokers providing swap-free accounts to Muslim traders. You just need to find the best platform or broker for Halal forex trading by checking their trading conditions. Make sure they offer Sharia-compliant accounts and proceed with the signup process.

   The account opening process is not much different from the regular trading accounts, but you will be asked to confirm your identity as a Muslim, which may require submitting additional documents. Most brokers are strict about offering this type of account to Muslims only, and some even put geographical restrictions based on the Muslim population in various countries. So, you need to ensure your broker also provides Islamic forex trading accounts in your region.

   Islamic Trading Account Commissions

   All types of costs except swap rates applied to a normal trading account are also applicable to an Islamic trading account. The swap rates or rollover fee will not be applied to any overnight trade positions, but they will have to pay a predetermined admin fee. This admin fee is the cost of keeping this position open without the application of a swap. This also makes up for a broker’s loss from avoiding interest rate application in these trades.

   Usually, there will not be much difference in spreads and regular commissions associated with trades in an Islamic trading account. But you need to confirm the same with your broker before account opening as some brokers may add a markup on spreads or charge extra commission on swap-free accounts.

   Trading on Islamic Accounts in MetaTrader

   The most popular and widely used trading platform among forex traders is still the MetaTrader softwares. The classic MT4 is the first choice of many beginners taking baby steps into the forex world, while modern and advanced traders are switching to the advanced successor, MT5. Islamic traders can also explore the sophisticated software by signing up with an Islamic forex broker who provides MT4 and MT5 as platforms for Halal trading.

   This way, you will get to trade on MT5 with a swap-free account while taking advantage of the powerful features and tools available on the platform. MT5 is especially suitable for Muslim traders who want to trade multiple asset classes apart from forex for diversification.

   Conclusion

   To sum it up, the launch of Forex Islamic accounts has opened up a lot of opportunities for Muslim traders, which remained untapped for a long time due to religious rules and restrictions. Islamic trading accounts can be your gateway to access the forex market in the best possible manner without deviating from your faith or ethics as a Muslim. You get to trade the volatile currency market with the very same competitive edge that a regular trader gets but in a Halal way.

    

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