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Muslim traders around the world always wonder if they can start trading or not, whether Forex trading is halal or haram, and what the Islamic rules have to say about all this.
Due to religious concerns, some brokers offer Islamic trading accounts for investors who follow the Islamic faith. However, there are different religious opinions about the legitimacy of these accounts.
Financial trading using an online broker involves several tools that might benefit traders and a few of these are not allowed according to Sharia law. Some opinions say that even Islamic accounts might not be sufficient to for trading in a halal way.
To understand what Islamic accounts have to offer, we have summed it up here so that those who are interested might have a clear picture of what these accounts do differently. In the following guide, you can find out what are the religious limitations for traders, and how to trade Forex in a halal way.
Firstly, let us examine the meaning of halal and haram trading. Halal means anything that is permissible and allowed by Sharia law. When a trade is halal, it means that it is compliant with Sharia law.
On the other hand, haram means that the act is forbidden. When a trade or behavior is haram, it means that it is not in line with the beliefs of Islam and therefore, is unacceptable.
Since Islam sets forth rules for different aspects of life, it defines which forms of trade are acceptable. According to these laws, income that is received without the exchange of a service, a job, or an effort, is considered haram.
Thus, the concept of interest rates is haram. A trader shall not receive or pay any interest according to Islamic regulations. In addition, there are rules that prohibit gambling, or any activity that metaphorically translates into gambling.
The reason that many consider trading, and Forex trading specifically, to be haram, is that there are fees paid or interests received without any trading activity. Thus, gaining without any effort.
One of the major concerns here is the rollover swap and interest resulting from it. When a trader opens a position in the currency market and leaves the account running overnight, there is a swap or a rollover interest that is paid either to the broker or the trader.
Depending on the currency pair that is being traded, the difference between the interest rates of the pair’s national banks is calculated and paid - whoever holds a positive interest rate difference receives the swap interest payment.
This kind of payment is haram and not allowed by Islamic regulations, and Muslim traders should not indulge in any trading that pays them additional income from a non-trading activity.
In addition to that, the usage of leverage is also not allowed, because the leverage typically entails borrowing money from the broker, and paying that money back with interest.
It depends on what the broker is offering. Most brokers nowadays offer CFD trading. This does not imply the physical acquisition of an asset or security and is entirely based on speculations of price movement (you can read more in our CFDs vs Stocks differences article).
Islamic regulations perceive this type of speculation as a derivative of gambling, which is strictly forbidden in any shape or form.
As we mentioned previously, trading directly in the currency market can be seen as halal, as it is very similar to exchanging currencies at a currency exchange. However, when looking at trading accounts, a Muslim trader needs to be careful that rollover swap interests are not being charged. Along with this, any account that offers leverage trading should be avoided.
By now, we have identified what makes trading haram. Next, we need to look at how a Muslim investor might be able to trade Forex, while still complying with the rules and regulations of Islam.
Muslim traders need to always avoid keeping their trading account running after the end of the trading session, otherwise, they are bound to pay or receive a swap interest.
Also, Muslim traders need to open market positions using their own capital, because under Islamic regulations they can not trade using leverage as this to is connected with interest payments.
Any other activity that carries some kind of interest rate, either paid to the broker or the trader, should be avoided. Things such as shorting, borrowing, and exchange options, are to be avoided because such payments are considered to be “riba”, which is not allowed in Islam.
In addition to that, since CFD trading is not allowed, a Muslim trader needs to find a broker that allows direct access to the market. This enables a trader to buy and sell currencies directly from the market and not through speculative instruments such as CFDs.
Financial trading for Muslim investors seems to be quite delicate, and traders need to be very careful of the options that are offered by the broker.
Alternatively, a trader can open an Islamic trading account. Recently, many brokers have started offering these accounts which take the Islamic rules into consideration and make sure that traders do not get involved in any trading activity that is considered haram.
Recently, the best financial trading brokers are all adding the Islamic account type to their list of accounts. This comes in a response to the increasing demands for trading by different traders from different backgrounds.
The Islamic trading account operates a bit differently than the usual trading accounts that a broker may have on their website. There are some limitations that are associated with the Islamic trading account. These boundaries have been put in place to help Muslim traders access the market without having to worry about accidentally partaking in certain haram activities.
Muslim trading accounts are also known as “swap-free” accounts. This is one of the major concerns for those wishing to trade according to Islamic rules. These accounts do not receive or pay any rollover interest, and a trader may keep the account active overnight for free.
Besides that, the use of leverage is limited. In some cases is completely deactivated, since leverage is considered as borrowing funds for benefit. However, some brokers still offer limited leverage where the broker only receives their share from the gain, without any interest being charged or paid.
In addition to these, CFD trading is not allowed. This means that Islamic accounts will have fewer financial instruments available, as Muslim traders can only trade with the physical asset, and not with speculative instruments.
Given the huge pool of online brokers, it can become a hustle for a Muslim trader to locate a reliable broker that offers an Islamic account that is worth their while. Avatrade is a reliable broker that has been around for more than a decade and is considered one of the largest trading brokers in the world.
Avatrade offers Islamic trading accounts, and to get started all you need to do is follow these steps:
It might be to the advantage of the trader using an Islamic Forex trading account, as they don't have any interest rates that need to be paid for rollovers. This will have little impact on scalpers, or day traders because they do not require keeping their accounts running overnight.
However, traders who use position trading, swing trading, or end-of-day trading strategies will benefit greatly as they can keep their accounts running overnight without being charged for it.
It might seem that this would have a negative impact on brokers, as they still need to pay interest fees to central banks for keeping positions open after trading hours. Not to worry, brokers compensate for this through the spread. Financial instrumentals for Islamic accounts usually have wider spread ranges in order to compensate the brokers for the loss of interest payments that are forgone in Islamic accounts.
Also, there are fewer currency pairs available on these types of accounts. You will most likely discover the major currencies such as USD, EUR, GBP, JPY, CHF, CAD, AUD, and ZAR.
These pairs usually have a tight spread range so the broker can accommodate additional costs. Exotic currency pairs have a wider spread range, which makes it impractical for the broker to increase the cost over them by adding additional fees to the spread.
Besides Forex trading, other financial instruments are also affected by the limitations imposed on Islamic accounts. Commodity trading and the thriving cryptocurrency market, like Bitcoin, are treated differently.
Commodity trading such as gold and silver is permitted under the Islamic account. However, there are some differences in the way they operate. Since CFDs are not allowed, a trader has direct access to buying and selling commodities without CFDs playing any part.
This means that these commodities are backed by gold from the broker’s side. If a trader wants to sell any of these commodities, the broker has to sell some of the gold they acquire in order to pay the trader.
Therefore, the bid and ask prices on these commodities might differ from the usual accounts, they might be a bit pricy and might require more time to process an order.
The cryptocurrency market is generally very controversial. The virtual currencies that are traded in this market fluctuate heavily, and the market movement is very speculative.
It gets even more controversial when observing it in light of Islamic rules. Islamic rules deny any trade that imitates gambling, and since this market works on speculations and expectations of price movements, it functions similarly to gambling which is strictly prohibited.
Therefore, most brokers do not include cryptocurrency trading in Muslim trading accounts, because it is considered haram trading.
It is a type of account that is offered to traders who follow the Islamic faith. These accounts are known as swap-free because users do not receive or pay any swap interest. Swap interest is considered borrowing money for extra benefits, which is called “riba” and is strictly forbidden.
There are some elements that a Muslim trader needs to eliminate in order to practice halal trading. These include things such as using a swap-free account, not using CFDs, not using leverage, and directly dealing in different financial markets without borrowed capital. Thus, a Muslim trader needs to find a financial broker that offers an Islamic account, which incorporates everything required to start halal Forex trading.
In most cases, no. There are two reasons for this prohibition. The first is that brokers usually charge additional interest rates over the leverage that is given to the trader, which is considered borrowing for a benefit, and it is haram. The other reason is that leverage can have exaggerated financial damages if a trade goes unsuccessful. It hurts the financial well-being of households and economies, which makes using it not advised. It can also lead to a situation where a trader becomes indebted to the broker and will have to pay back the money they lost with interest.
Forex trading itself is not haram, there are some features related to Forex trading that are considered haram practices in Islam. Rollover swaps, for instance, are a major concern for Muslim traders. With a rollover swap, a trader may receive or pay an interest rate for keeping their trading position open overnight, which is not allowed under Sharia law.