The question regarding the legality of forex trading in Islam has been one of the most controversial in the online financial trading space. Interestingly, this question has not been answered conclusively as various Islamic scholars have different views on the subject.
The development of online trading in the financial sector over the past two decades has created a new horizon for retail traders from all parts of the world. With a quarter of the world’s population being Muslim, it is only expected that more Muslim traders will join the online trading scene.
In Islam, charging interest, known as Riba, is forbidden and considered a major sin in the eyes of God. This is why many online forex and CFD brokers have designed and offer an Islamic forex account, tailored to address the needs of Muslim traders.
Is Online Forex Trading Halal or Haram?
The Islamic Sharia Law guides Muslims. The Sharia law has been around for centuries and is designed to be the ultimate pathway for Muslims. A Muslim will follow the principles of Sharia in virtually all aspects of their life, from social issues to economic matters.
When it comes to banking and investment, Sharia law strictly forbids lending money and charging interest. Instead, investment in the Muslim community is directed by the concept of risk-sharing. Some of these principles include sale and buy-back agreements, profit sharing, credit sales, deferred payment sales, and more.
When Sharia law is applied to online forex and financial markets trading, interest (Riba) earned or charged for an overnight trading position is prohibited (Haram). In the spot financial trading scene, trades are executed 24 hours a day. Once it is 5:00 pm New York time, the open market positions are rolled over to the next daily cycle. The daily interest from these trades is then added to the account of the broker. It does not matter if the broker debits or credits the accounts of their clients with interest, the fact that interest is payable or earned during an online trading transaction makes it haram to Muslim traders. Situations like this force Muslim traders go against the teachings of their religion.
Islamic Trading Accounts
To solve this issue and to enable Muslim traders to trade financial assets without going against their religion, Islamic trading accounts or Swap-Free accounts were created. The Islamic forex trading account eliminates interest or Riba in every form during trading.
For instance, rather than roll over an open market position leading to overnight interest, open positions in Islamic forex accounts are closed once the market ends by 5:00 pm New York time. They are then reopened immediately after closing them, hence avoiding interest that would accrue in the fresh daily cycle.
For forex trading to be considered halal in Islam, the trader needs to follow these basic principles:
- Should not pay or receive interest (Riba);
- Should not gamble;
- The risks and benefits should be distributed;
- And there should be an immediate exchange when it comes to trading operations.
Conditions for Islamic Accounts
Before a broker can claim to offer trading accounts that are in line with Sharia law, their Islamic forex accounts should offer certain conditions:
- Execute orders immediately – This addresses the rule of prompt hand to hand exchanges between two parties.
- Settle transactional costs immediately – This ensures that interest will not be incurred.
- Zero-interest on trades – Any interest charged or earned will deem the contract invalid and not halal.
- Offer access to fully tailored Islamic forex accounts
Creating a Halal Forex Account
There is little question regarding the permissibility of currency exchange in Islam, as long as there is no Riba involved. Also, the exchanger needs to have a valid reason to take part in a probable profit event based upon market analysis that does not rely upon gambling of any kind. This is where brokers who offer Islamic trading accounts come into play.
Several brokers now offer Islamic forex trading accounts for Muslims and those that wish to trade without interest. Take the time to review different brokers and check that they are regulated and offer other important services and features such as an intuitive trading platform, educational resources, secure banking as well as professional customer support.
Final Words
Online trading has been a controversial subject in the Islamic financial world, with various scholars having varying views about its stance in Sharia Law. However, the advent of Islamic forex trading accounts or Swap-Free accounts has made it easier for Muslim traders to join the financial markets. These accounts allow them to trade currencies and other financial assets without any interest. The elimination of Riba ensures that online trading is halal for Muslim traders and as a result, they are able to take advantage of the many lucrative trading opportunities in the financial markets.