Islamic Forex Brokers
The popularity of online forex trading has swept over the globe in recent years, as more and more brokerages were launched, and existing ones were adapted to the new regulatory requirements and to the needs expressed by various markets.
Indeed, the GCC (Gulf Cooperation Council) countries were touched by the online Forex fever too, and as more and more brokers offer Shari’a-compliant, Islamic Trading Accounts, more and more traders from this geographic/cultural area are drawn into the online trading vert.
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How exactly does an Islamic Trading Account work though and what requirements does it have to fulfill to be considered truly Shari’a-compliant?
Most brokerages offering Islamic Trading Accounts only state that these are swap-free accounts. Is that enough to make Forex trading halal though? Most Islamic scholars agree that under certain conditions (as long as there is no blatant riba involved) Forex trading can indeed be considered halal. There is quite a bit of debate concerning the exact conditions that need to be fulfilled in this regard though.
To understand the nature of the debate, one needs to consider the three basic prohibitions of Islamic Finance.
– the first one is about riba (interest).
– the second one concerns gharar (or excessive risk)
– and the third one is about gambling/speculation in general.
The riba problem is what most brokerages are focused on, as it seems to be the tenet most strictly enforced by those who determine whether or not a trading account is indeed Shari’a-compliant.
In Islamic Law, making money from money by way of the interest is strictly prohibited. Such profit is considered unjust, the equivalent of the unlawful taking of one’s property, and conducive to negative growth in terms of resulting social wealth.
Under Islamic Law, financial activity needs to benefit humanity first and utmost. Riba is obviously inconsistent with this view.
The only acceptable form of the loan is the “good loan”, which is always interest-free. Shari’a does not argue that there is no benefit in riba. It does however hold that its dangers far outweigh its benefits.
In a spot currency transaction, there is no interest involved. According to Shari’a, the exchanging of various currencies, for equal value and according to a fair exchange rate, is indeed permissible. When one payment is delayed in the above equation, problems surface.
The swap-free nature of Islamic Trading allows traders to carry their positions overnight, without being charged a fee for it. With positions kept open indefinitely, spot currency trade is effectively emulated, as the outcome of such a trade only hinges on the currency rate movement within that period of time.
Traders from GCC countries (Saudi Arabia, Oman, Kuwait, Qatar, Bahrain and the UAE) should always look for the SSB seal on the website of their broker, to make 100% certain they are indeed trading in a Shari’a-compliant environment. The SSB is the Shari’a Supervisory Board, a religious authority, which reviews the products and services offered by various brokerages and decides whether they make the compliance-cut or not.
Obviously though, as already stated above, Shari’a compliance goes way above and beyond the riba. Also, brokerages often resort to increased spreads and added commissions to make up for the shortfall resulting from their riba-compliance policies.
With brokers offering massive leverage (often in the neighborhood of 1:500), gharar is a major problem as well. Indeed, trading with such leverage can be viewed as the very definition of excessive risk.
In this regard, brokerages have to walk a tightrope, in an effort to have the gharar they work with categorized as gharar yasir (light gharar) which is tolerated by Islamic Law.
Theoretically, an SSB seal should present sufficient guarantees in this regard as well.
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