Religion is the most influential framework in our society that provides us with a guiding light for the right moral conduct. It has an indelible mark on each aspect of life and has shaped the world through principles, sermons and practices. It has also touched the finance sector and has given rise to the unique concept of Islamic Finance. Islamic forex trading is also a subset of Islamic finance. Therefore, if you are a Muslim trader who wants to enter the forex trading market, you must know about Islamic forex accounts created to cater to the unique needs of Islamic traders.
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What is an Islamic Forex Account?
Islam has some very intricate rules when it comes to forex trading. Prophet Muhammad (peace be upon him) has laid down some guidelines that contour the forex trading business. One such important principle is a hand-to-hand exchange, which in forex trading, has been put into practice through over-the-counter trading, but there are some other rules as well, such as interest-free trading, equal sharing of risk etc., which have to be fulfilled for forex trading to be halal for forex traders. Forex brokers have started offering Islamic forex trading accounts to solve this issue. There are special types of accounts that are particularly created for Muslim traders. These forex accounts operate without swap costs, and other factors like not taking excessive risk or gambling are largely upto a particular trader. This means that Muslims can partake in forex trading as long as they are trading cautiously and using an Islamic account that doesn’t charge rollover fees.
What is a Conventional Forex Account?
While Islamic accounts are offered to traders who practise Islam and follow Sharia law, a conventional forex account is a regular trading account widely available for every retail trader. Since other religions don’t impose strict regulations on interest-based trading, traders using a conventional or standard account have to pay swap fees for keeping the positions overnight. Those who practise day trading don’t have to swap fees as they don’t roll over their position to the next trading day. However, traders who implement medium or short-term strategies that involve holding on the positions for more than a day are charged swap fees which are calculated based on the interest rate differential. Except that, traders are given access to the same features in Islamic accounts; they can trade on the same trading platforms, be it the classic MT4 or the advanced MT5 trading platform. Moreover, they access all the forex trading tools, including indicators, trading calculators, currency converters and more.
Factors That Differentiate Islamic From Conventional Forex Accounts
Though there aren’t many differences between Islamic and Conventional trading accounts, the ones there are, are really significant, so you should definitely be aware of them before starting out.
- Commissions: Islamic trading is only deemed permissible when it strictly forbids interest-based trading. As such, halal forex brokers don’t charge interests or swaps on overnight trades. Instead, they charge a flat financing or commission fee. Brokers have different rules regarding financing fees. Some brokers don’t charge it, while others do so if a trader keeps the position open for more than 3 or 5 days. For instance, if a broker charges a financing fee after three days, this means you will not be charged any fees on the first three days and have to pay it if you keep it open the fourth night, and it will be deducted every other night thereafter as long as you don’t exit the position. The financing fee mostly varies based on the pair you are trading. This is why it’s crucial to check the fee for the pair you are planning to trade so that you can have a correct idea of your fees. On the flip side, conventional forex trading accounts accrue swap costs.
- Wider Spreads: Swap fees are one of the most significant costs the broker makes and contribute to a large chunk of their total income. However, charging interest is forbidden in Islamic finance. To offset this loss, traders need to find a viable solution that favours traders’ religious beliefs as well as doesn’t hamper their earnings. This is why Islamic forex brokers resort to implementing wide spreads. Conventional accounts, on the other hand, have narrow spreads as the broker also charges commissions and swap fees from traders using a regular account.
- Limited Currency Pairs: Many forex brokers limit Islamic traders to major and minor pairs only. Considering the higher interest rate on exotic currencies, it definitely makes sense because swap rates on these currencies are quite higher, which is hard for traders to offset through spread widening. Therefore, most brokers don’t allow traders to trade exotic pairs on Islamic accounts. However, on a standard trading account, there’s no restriction as such, and traders can trade any currency of their liking.
Who Can Trade in an Islamic Forex Account?
Islamic trading accounts are made to allow Muslim traders to trade forex. This is why most traders only allow Islamic traders to use these accounts. To prove their identity, brokers may require traders to provide a document that proves their religion. This is mostly a part of the registration process. However, the terms and conditions vary from broker to broker. Some even allow non-muslims to use Islamic trading accounts. Therefore, checking the broker’s website thoroughly before proceeding is best. Apart from that, there are no restrictions as to who can trade in an Islamic forex account and who can not, but generally, Islamic forex accounts are not considered beneficial for scalpers or day traders because of wider spreads. Moreover, whether you are planning to use an Islamic account or a conventional account, you should be well-versed in the fundamentals of trading and practise on a demo account before risking real money. If you don’t have confidence in your skills or knowledge, it’s better to give yourself some more time and to improve your knowledge.
Conclusion
To conclude, the influence of religion extends far beyond the spiritual aspect of life. In fact, it is rooted in all the elements, be it business, finance or anything. In order to comply with religion and its tenants, it becomes necessary for a trader to accept some restrictions that come along with it. However, by collaborating with an Islamic forex broker, traders can easily follow their religious beliefs and pursue their interests in forex trading.
