How to Choose an Islamic Forex Broker
It is not that well understood why certain Forex brokers are acceptable to Muslims and others are not. The reason is actually very simple. Islamic law prohibits any form of usury, meaning any financial transaction where one either pays or receives interest. If you keep a Forex trade open past a certain time, which is usually 5pm New York time, you will either receive or be charged a small amount of interest on your open trade, which is based upon the differential in the current respective market interest rates that make up the currency pair that has been traded. This is unacceptable under Islamic law.
As the number and wealth of the global Islamic community has increased over recent decades, there has been a growing response within the financial services industry worldwide to provide more financial products and services that are compliant with Islamic law. For example, many European and American banks now offer Islamic bank accounts, Islamic mortgages etc. Creative and fairly straightforward solutions are offered to avoid the actual payment or charging of interest.
Forex brokers are no different to the rest of the industry, and there are many Forex brokers that offer Sharia-compliant accounts which are free of overnight interest payments or charges. Even if you are only a day trader, you should still open an Islamic Forex account if you want to be compliant with Sharia, in case you leave a trade position open by mistake and so accidentally break Sharia law.
What is the Price You Pay?
As you can guess, in Islamic Forex accounts, brokers will want to find a way make up the income that they would have otherwise made on the overnight charges, which are always tilted in favor of the broker. This is usually done by charging either an extra flat fee every month, or by charging slightly higher spreads. The spread is the difference between the buy and sell prices that are quoted a broker at any time for the same currency pair, and effectively represents a commission you pay to your broker.
The only extra thing you need to do in choosing a Sharia-compliant Forex broker is look at the broker’s overnight rates and compare them to what they are asking in return. It is not always easy to find a broker’s overnight rates so you might have to email them a list of currency pairs and ask them to reply to you with the current overnight rates that they are charging, for they can change slightly on a daily basis. When you have the numbers, compare the amount that you would avoid paying in a typical month with the additional fee or spreads they propose to charge you. If you see that you would be worse off, then you should be able to find a better offer somewhere else.
There are actually a few Forex brokers that ask for no extra charge at all for Sharia-compliant, interest-free Forex accounts. If you can find them, examine their spreads carefully and see whether they are competitive. If so, they are offering you a great deal, as one of the easiest ways to make money in Forex is to be able to leave winning positions open for a long time, and you will not have to pay any overnight charges to do that.
As with all Forex brokers, you also need to check that your account deposit will be safe and is covered sufficiently by a government-backed deposit insurance scheme. You also need to worry about whether they will provide you with good, fast trade execution, and a reliable server that does not go down when the market becomes very active. The safety of your deposit needs to be your primary concern, but you have to be able to trade effectively too. When you find a broker that can offer all this, you are all set with a real chance to profit in the Forex market.