Forex is the most liquid market in the world, with opportunities to make money daily or with longer-term trades. It is also one of the few markets that operates 24 hours a day, 5 days a week. Forex is open to nearly anyone who wants to try it.
Not all styles of Forex accounts are compatible with Islamic financial principles. In this article, I explore how Forex works, what types of accounts are available, and how Shariah principles fit with Forex trading.
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The Central Principles of Islamic Trading
The Shariah has coded principles for how commerce should function, covering the definition of money, how individuals should treat finance, and the role of commercial transactions in society. The most central principles include:
Money is a medium of exchange, not an asset
This founding Shariah financial principle is the most significant feature separating Islamic finance from non-Islamic models. When money is a medium of exchange, any financial transaction must be underpinned by an exchange of goods or services.
Islam prohibits payments of interest (“Riba”)
Once money is deemed a medium of exchange and not an intrinsic asset, it automatically prohibits a charge on money itself, which is the definition of interest. Interest payments lack an underlying exchange of goods or services to make them Halal or permissible.
Prohibition of excessive risk (Gharar)
Excessive risk (Gharar) is prohibited. Commercial transactions should have clear relationships between parties and transparency concerning risks, rewards, and information. The Islamic concept of “Gharar” encompasses a broad range of commercial risks, including:
- When the claim of ownership of an asset is unclear or suspicious.
- When the existence or characteristics of goods or services are unclear.
- A lack of transparency between parties, a lack of information on the contract, or where a transaction based on misunderstandings leads to the concealment of the consequences of a transaction.
- Excessive uncertainty for the type of transaction, e.g., 100% risk of capital loss for a potential 10% gain.
Proportional sharing of risks and profits
Parties should share risks and profits proportionately. Those who risk less should share a smaller portion of the rewards than those who risk more in the transaction. There should not be situations where one party can risk little but can claim most of the rewards or vice versa.
Prohibition of pure gambling (Maysir)
Pure gambling (Maysir) and exchanging money without clear commercial reasons or outcomes based on chance are prohibited.
Commercial transactions should benefit society
Underlying goods and services should be societally beneficial rather than the transactions carried out solely for personal enrichment.
Prohibition of supporting Haram activities
Commercial activities should not support forbidden or Haram activities. For example, the production and distribution of alcohol or pork products or the running of a casino is forbidden, given that consuming alcohol or pork, and gambling are Haram.
Forex Swaps and How Do They Relate to Islamic Trading Accounts?
For traditional (non-Islamic) Forex accounts, brokers typically have a swap fee for open positions. Here is a quick guide on how Forex swaps work:
- When I enter a Forex trade, I either pay or receive a daily swap fee for the trade.
- I receive interest on the long currency in the Forex pair and pay interest on the short currency. The swap fee is the difference between the two interest rates. If the long currency’s interest rate is greater than the short currency’s interest rate, I receive a swap fee. If it is the other way around, I pay a swap fee.
- The broker calculates swap fees for each Forex pair, but they generally base the calculations on each country’s central bank interest rate.
- Brokers only implement a swap fee for trades held open at a specific time each day. For intraday trades that are not open at that time, there is no swap fee.
- Forex swap is also known as rollover or carry because the currency has “rolled over” from one day to the next, or I have “carried” the trade from one day to the next.
Halal Aspects of Forex Trading
Spot trading is halal
Spot trading is a halal trading method. Forex is conducted on a “spot” basis, meaning the current price and date for the transaction rather than a future price and settlement date in the case of a futures contract.
Standardized and regulated contracts
Forex contracts are standardized, properly regulated in most jurisdictions, and have transparent pricing and trading execution. These are critical conditions for halal trading under the Shariah concept of Gharah.
Risk control through liquidity
Forex is liquid, which allows risk control. Even though Forex trading is leveraged, which increases risk, it is also the most liquid market in the world. I can enter and exit positions instantly with little slippage, have stop-losses and trade small lot sizes to limit the risk to my account. Avoiding excessive risk is a core principle of Islamic finance.
Societal benefit
Forex trading is societally beneficial because it adds liquidity to the system. Economies require the easy exchange of currencies to conduct trade, and Forex trade facilitates liquidity in global economies.
Legitimacy of currencies Trading
Forex trading is legitimate because currencies are sovereign-backed legal tender that change in value. This makes Forex trading different from gambling without purpose.
Haram Aspects of Forex Trading
Interest involvement
Forex trading can involve interest. This is true for non-Islamic Forex accounts with interest-based swap payments on trades held open for more than one day.
Lack of Physical goods exchange
Forex trading does not involve an underlying exchange of goods and services. Islamic finance stipulates that money is a medium of exchange, and Halal transactions involve an exchange of goods and services.
Pure speculation
Pure speculation is haram. Some Islamic scholars argue that Forex trading is pure speculation, which is Haram by itself, and its societal benefits are limited.
Are Any Forex Trading Strategies Haram?
In particular, Islamic experts universally consider Forex “Carry trading” strategies Haram. In non-Islamic Forex accounts, the broker pays or receives a swap fee on Forex positions held past the rollover time each day. The swap fee is the interest rate on the long currency minus the interest rate on the short currency.
The carry trading strategy is to enter Forex positions with high interest rates on the long currency relative to the short currency, i.e. to enter trades solely to collect swap fees. Since these fees are interest-based and paying or receiving interest or Riba is Haram under Shariah rules, Islamic scholars consider carry-trading strategies Haram.
Is Forex Legal in Muslim Countries?
Many Muslim-majority countries permit Forex trading. Here are some examples:
- Indonesia Forex trading is allowed, with regulations to align with Sharia principles.
- Pakistan Forex trading is allowed and regulated by the Securities and Exchange Commission of Pakistan (SECP).
- Saudi Arabia Forex trading is legal and regulated by the Capital Market Authority (CMA), which has rules to ensure compliance with Shariah principles.
- United Arab Emirates (UAE) Forex trading is allowed and regulated in the UAE.
- Qatar Forex trading is legal and regulated by the Qatar Financial Markets Authority (QFMA), which has rules to ensure compliance with Shariah principles.
- Kuwait Forex trading is allowed and regulated by the Kuwait Capital Markets Authority.
- Turkey Forex trading is legal and regulated by the Capital Markets Board of Turkey.
- Malaysia Forex trading is legal and regulated by the Securities Commission Malaysia, which provides guidelines for complying with Islamic finance principles.
How Do Islamic Forex Accounts Work?
Islamic Forex accounts remove swap fees to ensure compliance with Shariah rules. The best Islamic Forex brokers replace swap fees with alternative charges:
A fixed fee: The broker charges clients a fixed fee for open positions at rollover time. Whether the underlying Forex pair has a positive or negative swap, the fee is always the same and always paid by the client. A fixed fee such as this is Halal because it is not interest-based and is a charge for the broker’s services.
A swap-free period: The broker will not charge swap fees for a limited timeframe: For example, the broker will not implement a swap fee for a set number of trading days for open positions.
Wider spreads: The broker will have wider spreads for swap-free accounts.
How to Apply for an Islamic Account
- Ensure you choose a broker that meets your requirements, e.g., available markets, leverage, regulation, minimum account size, etc.
- Complete the account opening procedure. This is usually entirely online and requires you to confirm identifying details such as name and date of birth.
- Submit identifying documents: most brokers, as part of their regulations, must receive documents from customers proving their identity, e.g., government ID or driver’s license, and proof of address, such as a recent utility bill.
- Download their trading platform.
- Deposit money into the account. Brokers typically accept debit or credit card payments, as well as wire transfers.
Islamic Trading Accounts Pros and Cons
Pros
- They do not charge interest, making them Shariah compliant.
- Plenty of brokers offer Islamic trading accounts, making it easy to find one that meets your needs, in terms of leverage, trading platforms, and speed of order filling.
- Islamic trading accounts in most countries are properly regulated to ensure the safety of client funds, such as using segregated accounts.
Cons
- The charges in place of swap fees can be expensive in Islamic accounts.
- Not all Islamic trading accounts offer access to a full range of markets of Forex pairs.
- Not all brokers with Islamic trading accounts offer all types of execution, such as Direct Market Access or ECN accounts.
How Do CFDs Align with Sharia Law?
Contracts for Difference (CFDs) are generally not Shariah-compliant for two reasons:
- CFDs do not have physical ownership of the underlying asset, making them closer to pure speculation or gambling, which is Haram.
- CFD accounts generally have swap fees, which are haram because the fees are interest-based.
If Shariah compliance is essential for you, many Islamic scholars recommend not trading CFDs.
Conclusion
Forex offers one of the most dynamic and easily accessible financial markets for trading. Depending on the trading account, it may or may not comply with Shariah rules. The key obstacle to Shariah compliance is swap fees on trades held overnight. However, many brokers offer swap-fee accounts designed to be Shariah-compliant, often replacing the swap fee with a fixed charge that’s not interest-based. Many Muslim countries have approved Forex trading in their jurisdictions.
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- What is an Islamic Trading Account & How Does it Work?
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