Forex trading is popular across the globe, attracting traders from many different countries, cultures, ethnic backgrounds and religious affiliations. In order to cater to a wide range of clients, brokers must take into account different belief systems, cultural practices and laws.
Some religious laws impact almost every area of life, including finance and investing. This is certainly the case when it comes to catering to Islamic forex traders. The Islamic faith is one of the most common religions in the world, so it is hardly surprising that some brokers go out of their way to create trading conditions that are acceptable to Islamic traders.
When it comes to investing, Sharia law, while not expressly prohibiting forex trading, includes various rules that can potentially impact the way that investments are made. This places restrictions on trading foreign currencies, and means that Islamic traders will need to find a broker that caters to their specific needs.
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Terms relevant to Islamic trading
Islamic finance has a few basic principles:
- The payment of interest is forbidden
- Trading exchanges must be immediate
- Borrowing to profit from an asset you do not own is forbidden
- Gambling of any kind is forbidden
- Risks and benefits must be distributed between all parties in a financial transaction
These principles can be incompatible with the way that Western banking, trading and investing are carried out, but it is possible to get around this by creating Islamic accounts with specific trading conditions. For example, these accounts cannot be interest bearing, and both profits and losses must be shared between the parties involved in any financial transaction.
The situation is further complicated by the fact that, like any law, Sharia law must be interpreted, and as with almost any religious principle, the laws were created long before forex trading. Therefore, there may potentially be some disagreement between scholars as to what is halal and what is not when it comes to forex trading.
How do Islamic accounts differ from regular accounts?
Many forex brokers have gone to the trouble of creating Islamic accounts that, as far as possible, comply with the principles of Sharia law, and abide by the spirit of the restrictions placed on Islamic investors. These accounts generally carry the same features as traditional trading accounts at the same broker, with just a few specific elements adapted to meet the principles of Islamic finance that apply to forex trading.
Islamic accounts do not generate any swap interest, for example, which is interest paid or received in forex trading when a position is held open overnight. Other fees, such as commissions, margin and administrative fees, are charged on Islamic accounts, but none of these are calculated as interest, therefore complying with an important principle of Sharia law.
Other features commonly built into Islamic accounts include:
- Immediate buying and selling of currencies without delay
- Currencies are transferred directly to and from the buyers’ and sellers’ accounts
- The cost of the trade is paid without delay
- There is no interest on trades
- There is no leverage offered, or leverage is offered interest-free
How do I open an Islamic account?
Once you have found a broker that offers Islamic accounts (see above for our current recommendations), the first thing to do is to look at the terms of the account to make sure that you are satisfied with them. You will want to be generally happy that the account meets your needs and requirements, and does everything you require it to, in order to do the type of trading you want to do. When you are happy with the broker, and the account offered, you can go ahead and open an account. This is usually a quick and easy process, which can be done entirely online.
Islamic trading summary
It is possible for Islamic investors to trade forex successfully while complying with Sharia law, but there are certainly a few issues to be aware of. Most Islamic traders will find that opening an Islamic account with a reputable broker is the best way to get started with forex trading, while feeling confident that the way that the account is designed ensures that they are staying compliant with Sharia law.
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