Forex Islamic Account – What is that? How it works? Most of the Muslim Forex traders have these questions in mind. It is widely believed that some of the aspects of Forex Trading does not go well with the Islamic Shariah. That’s why when Forex brokers started to expand their business in Muslim countries, they had to prepare Forex Islamic Account to make Forex trading 100% halal according to Islamic Shariah.
But, still we can see there is confusion among the traders about Forex Islamic Account. People don’t really know what makes it Islamic and how it is different from other account. I myself is a Forex Trader from a Muslim Country. That’s why I had a query on Islamic account. In this article, I am going to discuss everything that a Forex Trader must know before going for an Islamic Account.
Forex Islamic Account
There are many Forex brokers and binary options today offer the option to open an Islamic account. To understand how these accounts work, you must first understand the principles of the Sharia (Islamic law) and how it is applied consistently to banking and finance.
How Shariah Law works?
Sharia laws prohibit the acceptance of specific interest or fees for loans of money (known as riba or usury), if the payment is fixed or floating.
As of 2009, there were more than 300 banks and 250 investment funds around the world who met with Islamic principles. From 2014, financial institutions that comply with Shariah represented approximately 1% of total assets in the world, totaling about $ 2 billion in funds. Not all Muslims follow Sharia laws. According to the accounting firm Ernst & Young, Islamic banking represents only a fraction of bank assets of Muslims, but has been growing at an annual rate of 17.6% between 2009 and 2013, faster than the banking assets in its set and is projected to grow by an average of 19.7% annually through 2018.
Unlike conventional banking, Islam merely prohibits lending money at interest, so specific Islamic rules have been created in transactions in order to prevent this from happening. The basic principle of Islamic banking is based on risk sharing, which is a component of trade, rather than the transfer of risk seen in conventional banking. As such, Islamic banking employs concepts such as profit sharing, custody, cost plus and leasing.
How Forex Islamic Account Works?
Under normal market conditions, trading in commodities and currencies are executed on the spot market for 24 hours. At 5:00 pm New York time, all open positions will be renovated in the next 24 hours and daily interest will be added to the accounts of the company every 24 hours. The brokerage firm then can either pay the interest or charge the customer’s account to cover what is considered rates of rollover . For traders who hold positions overnight rollovers can have a significant impact on the profitability of an account.
In an Islamic account things are different. Since there should be no interest (Riba) of any kind for the duration of the contract of Islamic account, any open transaction at the end of the trading day automatically passes the rollover poses a problem for those who follow Islamic law, because that these trading are considered usury. Therefore, conventional rollovers are simply not allowed.
Over the years, the Islamic rules have been adjusted slightly to allow Muslims to participate in currency markets without violating Sharia law. Most brokers now offer accounts No-Swap that can be used under certain conditions in order to allow traders to either trade much as their money is permitted or take a loan from the broker on the condition that the entity does not receive any usurious interest on the loan. In most cases, no interest or commission is charged for lasting the trades for more than 24 hours and zero interest is charged in the rollover. So actually no interest or swap is paid or charged.
Forex Islamic Account: How Revenues come?
So how do you choose a good broker in terms of Islamic accounts?
Broker revenues come directly from the spreads, which is the difference between Ask and Bid prices in a currency pair. Many brokers that offer accounts ‘No-Swaps’ they increase spreads of these accounts or apply a additional commission or fee so that at the end of the day, it is like paying interest on night positions, but often at a higher rate. So brokers are charging a bit more in spread rather paying or charging Swaps or interest.
Other brokers offer Forex Islamic account without fee or charge and maintain the same spread of that swap accounts.
There are also brokers that offer additional benefits for Non-swap accounts as Hibah. Hibah are gifts or donations given voluntarily; therefore, the broker allows its Muslim customers donate a portion of their profits as charity.
The Bottom line
With the expansion of the Muslim community in the trading arena, brokerage firms are doing their best to accommodate Islamic accounts. Not all brokers have jumped on the race at the moment, but if they want to remain competitive in the market, they have to add this feature to their offers.