Forex Trading: Islamic Trading Accounts

Forex Trading: Islamic Trading Accounts

In the world of forex trading, ethical considerations are not the only set of considerations that influence trading decisions and practices. To a certain extent, religious considerations can influence trading decisions as well. For Muslim traders, certain types of financial activities are prohibited and non-compliant with Sharia Law. As such, specific financial accounts and trading accounts have to be developed for Muslim traders to participate in trading, and they are known as Islamic trading accounts. In this blog post, we will be discussing more about this unique account, and what we should pay attention to.

What is an Islamic Trading Account?

An Islamic trading account is structured to align with the principles of Islamic finances. While all traders can apply for an Islamic account, the Islamic trading accounts were developed specifically to be aligned to Islamic principles, so that Islamic traders are not going against the religion when engaging in financial activities. These principles include the prohibition of interest (Riba), excessive uncertainty (Gharar) and gambling (Maysir). As such, there are three distinctive features of the Islamic trading account, namely:

• Zero Swap or Interest Charges

As Islamic principles prohibit interest, Islamic trading accounts do not have overnight swap nor rollover interest charges. In conventional trading accounts, traders pay or receive interest for holding positions overnight, but this is absent in Islamic trading accounts, and thus they are not affected when trades are held for long term. As such, an Islamic trading account would be an account that does not charge overnight swap nor rollover interest charges.

• Ethical Trading Practices

It is to no surprise that Islamic trading accounts would ensure that the environment is conducive for ethical trading practices, so that people can follow and comply to Sharia law. They do this by both avoiding high leverage forex trading, and ensuring that non halal stocks are excluded. For example, Islamic trading accounts may not offer leverages of 1:100 if they deem this leverage as too high and thus involving excessive speculations. Additionally, they will proactively exclude non Halal commodities or stocks whilst trading (industries that deal with pork, gambling and alcohol). These are some of the ethical trading practices that the Islamic trading accounts will enforce so that the activity of trading is compliant with Sharia law.

• Transparency and Fairness

Comparative to other brokers, Brokers that deal in Islamic trading accounts must ensure that all terms and conditions are clear and that no hidden charges or deceitful practices are involved. This is to not run against the sin of excessive uncertainty (Gharar). For example, brokers may advertise their accounts as swap free, only for users to find out that there are hidden administrative fees or higher spreads that the users have to bear. In Islamic accounts all of these information has to be clear and accurate.

What are some challenges and considerations before applying for an Islamic trading account?

• Limited Broker Options

Due to the exclusivity of Islamic trading accounts, many brokers do not offer it. This means that it is harder to find an Islamic broker with good rates. You may be limited by language, especially when trying to navigate and search for better brokers that offer better terms and conditions when it comes to Islamic trading accounts.

• Verification of Compliance

At the same time, it will be challenging for users to ensure that the accounts offered are actually legitimate Islamic trading accounts. The absence or presence of a sentence could result in very different meanings, thus making it challenging for users to verify that the accounts are compliant to Sharia law. It is recommended for new users to look for certifications and endorsements from recognized Islamic scholars, or consult a senior that has been in the field for a longer period of time.

Despite the challenges that Islamic traders face, Islamic accounts provide a way for Islamic traders to participate in the financial market without being in conflict with their religious principles. Rules and regulations are already in place so that Islamic traders do not find themselves in a situation where they break the rules of their religion. However, Islamic traders still have to do their due diligence and ensure that their accounts are compliant with Sharia Law.