Forex Trading In Islam - Understanding What Is Permitted & Prohibited
- Written by Business Daily Media
The lucrative nature of the forex market, with countless opportunities to trade, is attracting a lot of interest from people around the world. This includes individuals as well as institutions with diverse backgrounds and distinct trading goals. When it comes to retail traders, the online forex trading community has all types of people who have their own ideologies and beliefs but are united by a common goal: making profits from favourable fluctuations in currency prices. However, those who believe in Islam are often reluctant to take part in forex trading despite their interest, as religious beliefs bind them.
In this article, we will shed some light on the perspective of Islamic finance on forex trading and discuss what is permitted and prohibited for a Muslim forex trader.
The Morality of Forex Trading as Per Islamic Finance
Islamic finance is the guideline that a believer has to follow to maintain religious morality and ethics in financial transactions. Since forex trading is also an activity involving money, the principles of Islamic finance must be considered. Islamic finance strictly prohibits any type of transaction or deal that involves payment of interest to another party or earning interest from someone else. Interest is seen as a form of financial exploitation in Islam, and thus, even the smallest amount of interest can make an activity Haram or forbidden for Muslims.
In forex trading, the interest element takes the form of swap rates applied on overnight trade positions. But the launch of swap-free accounts, popularly known as Islamic accounts, has fixed this issue. This type of account completely removes the interest component from trades by replacing it with a predetermined fee, which is the cost of keeping that position running without swap charges. So, Muslims who open an Islamic account for trading can easily extend the duration of their trades without violating the rules about the avoidance of Riba or Usury (interest) in Islamic finance.
Another rule established by Islamic finance is completing all deals and transactions immediately and not delaying anything in the future. A vast majority of forex trading is done in the spot market, and Muslim traders can also engage in spot trading to abide by this principle. Islamic finance is also against gambling and promotes fair sharing of profits and losses. Hence, someone who carries out their trades based on logical calculations and analysis will not be doing anything forbidden as the uncertainty will be minimised by risk management.
Brokers offering Islamic accounts pay special attention to all Islamic finance principles and make special provisions and adjustments to the trading conditions to make this account fully compatible with Halal trading. In short, forex trading is permissible for a Muslim as long as the trader refrains from the forbidden practices. The best way to do this is to sign up for an Islamic trading account specially designed for Muslims keen to participate in Halal forex trading.
How to Set Up a Swap-free Account?
The first thing that you need to do to set up a swap-free trading account is to find a forex broker providing this type of account. There are quite a few top forex brokers offering Islamic forex accounts, and you just need to make sure they are Shariah-compliant and choose the best one based on the trading conditions offered. You can try their swap-free account on a demo, which can be easily opened on the MT4 or MT5 trading platform. For better trading features, you can opt for MT5. You also need to check the tools and features of their platform and its functionality for a hassle-free trading experience. You can do that by opening a demo account first and a real account later once you are satisfied with the demo account.
The account opening process is pretty simple and quick with most Halal forex brokers, but they will ask you to verify your identity as a Muslim since it is common to keep this account type exclusively reserved for Muslim traders. Once you complete the online verification process, you will be able to trade right away, with adherence to the principles of Islamic finance. As we mentioned earlier, there will not be any swap or rollover fees attached to your overnight trade positions, but your broker will charge an admin fee based on the duration of trade and the currency pair chosen.
Another thing to keep in mind while opening an Islamic account is that the broker may put restrictions on the available trading instruments, as trading with highly volatile currency pairs goes against the rule of limiting the risk or uncertainty in transactions. Also, the swap rates on some exotic pairs tend to be very high, which makes it hard for a broker to make them available without swap fees. Hence, traders using an Islamic account can only trade with the pairs that qualify for Halal trading.
Is Shorting Permissible for a Muslim Trader?
Shorting is a type of trade where the trader expects the price of the currency pair to drop and, hence, sells the base currency in a pair to make a profit from the higher price at the moment. When a trader places a buy order, they anticipate a price rise for the chosen currency pair, referred to as going long in forex terms. There is nothing forbidden about entering a short trade position for a Muslim trader as long as it complies with the rules of Halal forex trading. Hence, shorting a currency pair is allowed and possible for a Muslim trader engaged in Halal trading.
Is CFD Trading Allowed as Per Islamic Finance?
Most forex brokers also offer other asset classes for CFD trading, and those who open Islamic trading accounts can also trade with other instruments offered by the broker. But many have this doubt regarding CFD trading as it involves interest elements in typical situations. CFDs can be any trading instrument based on Derivative contracts, which gets its value from the underlying asset, but the application of interest can make it Haram for Muslim traders.
However, most brokers will be offering CFDs for Halal trading by removing the riba, which goes against the principles of Islamic finance. Thus, the forbidden aspect is removed for those who operate on an Islamic account, and hence, they can freely trade CFDs without any issues. Another thing that comes with CFD trading is leverage. and Shariah-compliant accounts often limit leverage availability, and you will have to trade with your own money to follow the rules of Islamic finance.
Wrap Up
After considering all the key principles of Islamic finance and the special trading conditions provided by Islamic trading accounts, one can reach the conclusion that forex trading is not fully forbidden in Islam and the concept of Halal trading is a revolutionary approach on its own. Believers of Islam can also participate in the forex market by using Shariah-compliant, swap-free accounts and advising with an experienced scholar or Islamic finance expert would be ideal for framing your trading strategy per the rules of Islamic finance. Choosing a transparent and trusted Islamic forex broker can make the Halal trading process easier for a trader.
