Followers of the Islamic faith make up a large proportion of FOREX traders in the world today. It is important for them to trade in a manner that is compliant with the doctrines of their faith. Therefore, the question must be asked – is FOREX trading halal? Asked another way, is FOREX trading compliant with the teachings of the Holy Quran?
In this article, we will discuss the most important elements of Islamic trading, while answering the key question about whether FOREX trading is halal or not. It is vital to note that while we offer you commonly accepted interpretations of Sharia finance, we do not claim to be the ultimate authority on these matters. If you are still unsure, please seek advice from religious scholars.
Is FOREX Trading Halal?
The question of whether FOREX trading is halal (acceptable) or haram (unacceptable) within Sharia law generates much debate, which is why it is a good idea to state the commonly accepted positions. Within the teachings of Islam, you are allowed to pursue activities that lead to the enhancement and improvement of your personal financial situation. This means that seeking to augment your financial standing through FOREX trading is acceptable. Therefore, FOREX trading is halal.
Keep in mind that even though Islamic traders do not get to pay interest, they will still be charged the trading fees, margin and commissions related to trading with a FOREX broker. Also, to make up for not billing you swap fees, brokers will normally inflate the spreads between currency pairs, which compensates them for lost swap-fee income, but means Islamic spreads will never be as tight as regular spreads. We will explain the significance of interest payments in the next section.
As to the legality of FOREX trading in Islamic countries, you will find that trading FOREX is legal in all MENA countries. You simply need to ensure that you deal with brokers who are regulated by the local authorities. When you start trading with a Sharia-compliant account, consult your broker on the rules around trading in the country of your residence.
The Basics of Islamic Trading- What Makes FOREX Trading Halal?
There are some important structures to comply with when trading according to Islamic principles, but one cardinal rule stands above others— it is not allowed for an Islamic trader to earn or pay interest. Brokers charge regular traders an interest facility for keeping unclosed positions open overnight. For example, with day trading, many traders maintain open positions for short periods of time, often a few hours or less. However, some traders must keep their positions open for longer than 24 hours. In this case, it is accepted practice for traders to pay interest to the broker for this facility, otherwise known as a rollover fee or swap fee. In Sharia finance, this customary practice is prohibited. We will discuss swap fees in more detail later in the article.
Interest payments for keeping overnight positions open are normal for regular traders, but for followers of the Islamic faith, they are simply not allowed. This is where Islamic brokers come to the fore, as they have developed accounts that comply with the requirements of halal Islamic trading, while staying away from and advising their clients to stay away from what is haram.
There are more regulations that need to be abided by to remain compliant with Sharia finance. We will discuss these in more detail in later sections. However, it is vital to remember that receiving or paying interest is a touchstone matter to navigate when an Islamic trader starts their career.
If FOREX trading is halal, are there any restrictions to note? Yes, there are. Many brokers do not permit Islamic traders to buy selected exotic currencies, such as the Argentine peso. The reason for this is because certain exotic currencies are used in countries that often have high interest rates. It is, therefore, haram for traders to be associated with these currencies. This list changes all the time, so you are advised to check with your broker. Sharia-compliant traders, who are on the ball, will usually volunteer this information to you, so you don’t have to go looking for it.
Another restriction is that Contract for Difference (CFD) trading is not allowed in Islamic trading. Remember that you are not buying a product or the underlying asset of a type of instrument. With CFD trading, you are trying to predict how the price will change in the future so that you can benefit from making the right prediction. This is not acceptable according to Sharia finance as you are not taking an equal share in the risk of the transaction, a fundamental item to consider before entering any investment transaction as an Islamic trader.
Two important assets that you cannot trade as an Islamic trader are bonds and treasury bills. This is because bonds are issued based on a fixed-interest rate, the proceeds of which will be paid at the end of the life of the bond. This is against Islamic finance law. By the same token, futures contracts are in contravention of Sharia law as the exchange of goods happens on a date in the future, breaking the hand-to-hand principle.
How To Start Sharia-Compliant FOREX Trading
So, what do Islamic traders have to consider when they start trading? Here are the four main Islamic trading principles to remember:
● You cannot pay or receive interest.
● The risks and benefits of a transaction must be shared equally among all parties.
● Transactions must be completed as fast as possible.
● Gambling is not allowed.
If you are thinking that traditional banking in the Western sense does not easily support these principles, then you are correct. Many traditional financial ventures involve interest, some take days and months to conclude, and many contain elements of imbalanced risk. This confirms the need for Islamic trading, a type of trading that complies with the rules of Sharia Law as it relates to finance.
You might be asking yourself how does one choose a broker that supports all these rules? Selecting an Islamic broker is not that different from choosing a normal broker. In both cases you still need a broker that is well-established, has the right levels of liquidity, and has worked hard to give you a good selection of features. Only after you have vetted these elements can you concentrate on what sets different Islamic brokers apart. As we have seen, Islamic trading has many similarities with normal trading, but also some major differences.
What Is an Islamic FOREX Account?
To be on the right side of Sharia finance laws, brokers must offer products that do not give traders the opportunity to enrich themselves from interest. An Islamic FOREX account pays close attention to the requirements of Islamic faith and the stipulations of the Quran. Brokers must ensure that none of the features of any account they offer disagree with the teachings of Islam.
As we have said, rollover fees cannot be charged if an account is to be considered halal. Islamic accounts are often called swap-free accounts. These accounts differ from normal accounts in several important ways. Before we proceed, let us further understand why it is necessary to structure Islamic FOREX accounts in this way. In Islam, the concept of “hand-to-hand" trading refers to the bygone practice of completing transactions face to face, in one sitting, so that interest does not become necessary.
However, with the changes in the way business is done, resulting in electronic transactions happening across vast distances and across different markets, Islamic experts have said that hand-to-hand trading is no longer possible, but must be supplanted by a new trading equivalent that operates the same way as completing a transaction in the same session. Clearly, this poses challenges in the context of an overnight interest charge.
Islamic compliant transactions in the FOREX world must be conducted rapidly, so currencies can be transferred without hold ups. All costs and fees must be paid immediately, in a manner that closely mirrors hand-to-hand trading. However, it is not always a good idea for Islamic traders to close their positions so quickly, as they will sometimes need to keep their positions open overnight to maximize their profit-making odds.
To allow this, brokers do not charge rollover fees, but instead offer a swap-free account option. This exemption makes all the difference because without it, Muslim traders would not be able to take part in the FOREX trading world.
This is one of the key terms you will encounter in Islamic FOREX trading. Whenever you leave your position open for more than 24 hours, you are required to pay interest for this facility as it costs brokers money to keep your positions open. This interest is called a swap fee or rollover fee. As we have mentioned, the need to pay interest arises from the fact that the broker is effectively giving you a loan.
However, as interest payments are haram according to Sharia finance laws, Islamic investors would be in a difficult situation if they wanted to actively trade FOREX. This is from where the concept of the swap-free account comes.
Some brokers have gone the extra mile by providing access to additional instruments in Sharia-compliant ways. Besides FOREX, Islamic traders can invest in shares and commodities. In the realm of share trading, be aware that, as per the rules of Islamic trading, you are allowed to invest in shares in a company if the company does not produce alcohol or offer gambling services, both of which are against Sharia Law.
Advantages and Disadvantages of Islamic Trading
One of the main advantages of Islamic accounts, halal forex trading accounts, is that they give market access to Islamic traders who would otherwise not have been able to take part in this thriving global marketplace. Being able to partake in the global FOREX trading movement comfortably in the knowledge that your religious beliefs are being honored is an important factor to many people. The next big advantage is that there are no swap fees on Islamic accounts. This way, you can open long-term positions while not violating the hand-to-hand principle.
As far as the disadvantages go, when traders short positions, they receive positive interest payments whenever they get into profitable territory. Islamic traders do not have the benefit of earning interest from shorting strategies. In saying that, it is not a loss to Islamic traders in the sense that they are notallowed to earn this interest, but it helps for savvy traders of any religion to know the opportunity cost they give up by trading according to their beliefs. Another disadvantage is that when broker interest fees are removed, many brokers either make up for this through high administrative fees or by increasing the spreads on FOREX pairs.
The Bottom Line
The number of Islamic traders is rising all the time. This has driven growth in the base of Islamic brokers from which to choose. From what we have discussed in this article, there are a few key items to consider when entering the FOREX trading realm if you are to trade in compliance with Sharia finance laws. Traders are advised to check that their broker can handle the unique requirements of Islamic trading.
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