What is an Islamic Forex account? How to trade according to Islamic finance
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While trading in Islam is often considered to be haram, it is still possible to trade. The key is to find an Islamic Forex account, which offers swap-free trading for traders of Muslim faith.
This article will focus on the principles of Islamic finance and solutions for halal Islamic trading.
Keep in mind that this site is not a religious authority on Islamic trading. If you want to be sure that your trading activities are halal, you can consult a religious authority that can take into account your personal situation.
What is an Islamic Forex account?
An Islamic Forex account is a halal trading account that is offered to clients who respect the Quran and wish to invest in the Islamic stock market following the principles of Islamic finance.
Also known as swap-free accounts, Islamic trading accounts differ in several ways from regular Forex accounts. As Sharia law prohibits the accumulation of interest, traders with Islamic accounts do not pay or receive interest rates. In addition, transactions in accounts based on Islamic finance must be carried out without delay, so currencies must be transferred from one account to another immediately, and transaction costs must also be paid at the same time.
Although halal investment in Forex is not a recent financial innovation, there are few swap-free brokers that offer Islamic accounts like Admiral Markets.
Often this type of trading account is not promoted by brokers, since sometimes they are less profitable for them and the number of clients that request them is quite limited. However, Admiral Markets offers its Muslim clients the opportunity to open an Islamic trading account.
The principles of Halal Forex Trading
Islamic finance has four basic principles:
- Prohibition of payment and receipt of any interest rate (Riba)
- Immediate exchanges in the context of trading operations
- Prohibition of gambling
- Distribution of risks and benefits
These four principles do not always fit into the Western banking and trading tradition, and to respect the principles of Islamic finance, specific trading accounts have been created, commonly referred to as "Islamic accounts."
These accounts are offered to clients who wish to do halal Forex trading without having to separate their investment activity from their religious principles.
In general, these accounts are quite similar to traditional trading accounts, only some specific elements have been adapted to meet the fundamental principles of Islamic finance.
How to open an Islamic Forex account?
To open an Islamic Forex account, Muslim customers must register and open an Trade.MT5 account, and provide the necessary documents to open a halal trading account.
You can see the full process for opening a trading account in this video:
As soon as you receive confirmation that your Islamic Forex account is open, you can make your first deposit, through the payment method you prefer, and start trading on the Halal Exchange. Opening an Islamic trading account is now easier than ever.
You can request a withdrawal of your earnings or funds at any time through your online account.
If you wish you can practice first with a demo account of Islamic trading without risk. You will have access to real market conditions but with virtual funds. In addition, they are free!
Commissions on Islamic Trading Accounts
One of the peculiarities of Islamic trading is that it does not generate any swap interest, as in the case of all other traditional trading accounts. The swap is an interest paid or received by the trader when he leaves an open position overnight, which makes currency trading haram.
However, Islamic currency trading accounts eliminates these interests to allow Muslims to trade in the halal stock exchange. But then, what commissions do traders pay?
All Muslim customers who use an Islamic trading account pay the margin, commissions and administrative fees, which are not the interests of Riba Haram.
Is Forex trading halal or haram?
With a quarter of the Muslim world and the development of online trading, the issue of the stock market in Islam is increasingly raised. This section will examine many points of view and sources to answer the question of whether trading is halal or haram.
It will analyse in depth the Forex market and the actions in particular, and will try to offer advice on how to remain halal and see what instruments can be traded following Sharia law.
So, in the case of Forex, stocks, futures, commodities and currencies, is investing in the stock market halal or haram?
This is a question that often arises among Muslim investors who want to invest in financial markets. In fact, Islam allows the search for the improvement of your situation, especially financial, but doubts persist about the stock market in Islam.
By definition, Forex trading can be considered halal and not contrary to the fundamental principles of Islamic finance. Forex trading is increasingly accessible and the potential for quick profits is attracting more and more traders every day. At first glance, it seems like a halal investment opportunity, because it's simply about buying and selling money. However, there are some things that need to be examined.
If you buy the Euro against the Dollar and sell later, when the Euro has appreciated against the Dollar, it is a halal transaction. But in reality, several problems persist that the Islamic trade account is trying to solve.
Islamic Finance: Forex Riba
On the side of the ban on paying or receiving interest where things are getting a bit more difficult. As a standard practice, when an investor holds open positions after the close of the trading session, the broker charges a swap commission, which corresponds to an interest rate.
This interest rate is linked to the fact that the broker grants you an indirect loan through leverage. And like any loan, it is normal for it to be profitable for the creditor, which in this case turns out to be the broker.
That is why a standard trading account is haram, since its operation includes interest payments, but the Islamic trading account is halal, eliminating the payment of these swap interests.
In fact, in Islam, it is allowed to borrow money from someone to invest for profit and then repay this interest-free loan to the creditor.
To remain profitable, the broker instead charges fees and commissions, which some may consider a disguised interest, but many researchers approve this method to facilitate trading. Therefore, an Islamic trading account without swaps crosses the riba barrier.
Islamic Finance: Hand-in-Hand Halal Trading
With the interest item discarded, the next question refers to the exchange itself. Trading in Islam is allowed as long as it is done "hand in hand."
In the past, most transactions would have been completed face to face, but with the evolution of electronic commerce, what is meant by "hand in hand"?
Many argue that the agreement is between the broker and the trader, which would be permissible under the definition of two different parties, and therefore halal.
Investigators went further in saying that the actual exchange must take place during the same "session", when the contract is concluded.
Therefore, transactions must be executed immediately, which is usually the case with Forex traders, where orders are executed in a few seconds or even less.
This eliminates, for example, binary options from the halal trading framework, where the exchange of goods differs, which is haram.
Islamic Finance: Trading Games of Chance
In Islam, gambling is prohibited, but can Forex trading be considered a haram game of chance?
Trading consists of buying and selling assets, with the objective of earning money through the increase or decrease of the asset's price. A trader must attempt to predict this based on their analysis.
Therefore, trading is not a game of chance, but an investment based on market analysis, which is not haram.
To properly analyse the market you need to learn many concepts and strategies, which is why we offer you our free trading webinars:
Islamic Finance: Risk and Reward in Halal Trading
One of the biggest concerns about trading is the element of shared risk. An element that is regulated by principles such as Bai al inah (sale and repurchase), Bai salam, Mudarabah (profit sharing), Bai muajjjal (credit sale), Bai bithaman ajil (sale with deferred payment), Murabaha and Musawamah.
When you invest, you are investing in an asset. If this asset increases in value, you get a profit. On the other hand, if the asset loses value, you incur a loss. As a result, you share the benefits and risks of conducting business well. From this point of view, trading and Islam are, therefore, fully compatible.
Can shares be purchased according to Islamic Finance?
It is generally accepted that the purchase of shares is not haram. That is because you simply buy a percentage in a company. However, you must ensure that the company in question does not act against Sharia law.
Companies such as Pernod Ricard (alcohol) and Française des Jeux (gambling), for example, would not be halal.
Companies that operate from an Islamic perspective can be divided into two categories:
- Activities resulting from halal practices: Sea transport, manufacturing, clothing, medical equipment, real estate, furniture, supplies, etc. They are generally free of haram practices or transactions.
- Activities based on haram practices - Any company that operates with alcohol, gambling, riba banks, etc. It is not halal. In these circumstances, stock exchanges are haram.
If there is a mix of activities, most researchers agree that if the company sells only a fraction of the non-halal goods and services, you could still invest in the shares. It is suggested that you simply donate the percentage of profits generated by the non-halal section of the company.
So if 10% of the company's profits come from alcohol, you would give 10% of your profits to a charity.
What can I trade with an Islamic account?
With a broker like Admiral Markets, you have access to the main markets: Forex, CFDs on indices, CFDs on stocks, CFDs on raw materials and cash stocks, as well as rarer markets such as CFDs on cryptocurrencies, CFDs on bonds and ETFs (funds traded on the stock exchange).
A Muslim investor who wishes to follow the precepts of the Sharia law to participate in Islamic trading has the right to wonder which assets he may or may not invest in. All the financial markets mentioned are halal, except two: bonds and futures.
Bonds are treasury bills. At the time of issuance, a fixed interest rate is fixed during the life of the bond. Although the value of the bond may vary and fluctuate according to the supply and demand of the market, the return on investment calculated as a percentage of the original value of the bond is fixed and does not vary.
Therefore, bonds can be considered haram because they are based on an interest rate, even if when you invest through CFDs you do not receive interest, it is the value of the interest rate that is at the root of the spread. Therefore, investing in this asset would be like taking advantage of an interest rate.
Futures contracts are also considered haram due to the deferred nature of the exchange of goods, after the "signing" of the purchase or sale agreement. It is not immediate.
Although there are no Islamic cryptocurrencies as such, that is, cryptocurrencies dedicated to Islamic finance, they work exactly the same as traditional Forex currency pairs. They are quoted against the dollar or another currency, so their fluctuations depend solely on changes in supply and demand.
They are not based at any time on interest rates, directly or indirectly, which makes it possible to consider halal cryptocurrencies in the context of Islamic finance.
Raw materials are also halal, since the good is metals or agricultural products.
Islamic accounts in MetaTrader
The MetaTrader trading platform is the most-used platform in the world. It is also the most popular trading platform among Forex brokers and online CFDs. So, what could be more normal than questioning whether it meets the criteria of Islamic finance?
The MetaTrader trading platform can be considered halal, simply because it is only a trading platform. In fact, this platform is just a tool, an interface that allows you to open your orders in the market.
Regardless of the nature of the trading account you use, be it a standard account, a pro account or an Islamic account, your orders will be executed in the same way. Only your broker can define the trading conditions with which you are going to invest, the platform does not alter or modify them in any way.
In addition, only the trading account you choose will have an impact on your trading conditions and can become a halal or haram trader. Hence the importance of choosing an Islamic trading account with your broker so you don't have to pay interest rates.
You can learn more about how MetaTrader works or about general trading concepts with our free online courses:
How to do Halal Trading with Islamic Forex Accounts?
Therefore, Halal Islam Trading is possible for Muslim traders with Admiral Markets' Islamic trading account. Let's now look at some trading strategies to use in your broker's account without swap.
Day Trading in Islamic Accounts
Day Trading is one of the three types of trading, along with scalping and swing trading that we will analyse. This type of strategy consists in opening positions that will be closed during the sessions, that is, before the markets close at the end of the day.
The interest of this type of operations during the same session is the fact that the open positions are not kept at night, the payment of swap commissions is avoided and, therefore, the interest rates, even if you are not operating in an Islamic trading account without a swap.
But in this case, what is the advantage of having an Islamic account?
Sometimes a trader opens a position in the morning, with the intention of closing it at the end of the day, but at the end of the session the position is making a profit and the trader anticipates that the movement should continue.
In this case, it may be prudent for him not to close his position and maintain it for a greater benefit. If the trader has an Islamic account, he can take full advantage of this opportunity, but if the trader has a standard account, he will have to give up this potential gain to respect the principles of Islamic finance and not pay interest rates.
Trading in a non-Islamic account also exposes the Islamic trader to the risk of forgetting and falling into a haram trading activity.
Scalping in Islamic Accounts
Like intraday trading, scalping is a trading style. This implies the opening of positions, by the trader, that are destined to close quickly, in a few minutes or even a few seconds.
The goal of a scalper (a term that refers to a trader who practices scalping) is to open many small positions by earning only a few points in each of them.
The advantage of scalping is that, as with intraday trading, as positions are closed quickly there is no interest rate payment, since the position will close after a few seconds or minutes. Therefore, an Islamic scalper can easily use a standard account and is not limited to the use of an Islamic trading account.
On the other hand, as with intraday trading, if the scalper wishes to maintain a position for a longer period of time, and this position is destined to become a long-term position to accumulate more attractive potential benefits, he will have to use an Islamic account, otherwise you will have to cut your position to avoid paying interest.
Although this is more difficult to occur scalping than in intraday trading.
Swing Trading in Islamic Accounts
Swing trading consists of opening positions for several days or even weeks. Therefore, a swing trader that respects the principles of Islamic finance must work with an Islamic account, no matter what, if you want to avoid paying interest.
Swing trading is considered the least risky of the three short-term investment approaches, but a swap-free trading account is essential for an Islamic trader.
Advantages of Islamic Accounts
The main difference between Islamic accounts and basic accounts is that there are no swap commissions. This can be a very important advantage, since you can open long-term positions without running the risk of reducing your profits due to swap commissions.
The second great advantage is that the trader will be able to open positions in currency pairs in which swaps costs are generally very high (especially in exotic pairs).
Disadvantages of Islamic Accounts
The absence of the swap can also be detrimental to the halal forex trader, since it will not be able to benefit from the positive interest payments that are often paid to short positions, along with the benefits of carry trading strategies.
Often, to remain profitable after the elimination of interest, the non-swap broker will charge a fixed administrative fee, as banks do in Islamic finance.
Open an Islamic trading account
It is clear that halal trading will depend partly on your actions and partly on the broker you choose. Whatever your Islamic investment online, whether in stocks or Forex, Admiral Markets offers you an Islamic Halal Trading Account.
Once you have tested the conditions of the broker and practiced in a demo account you can open an Islamic account to start trading.
Other items that may interest you:
- Forex trading for beginners: ultimate guide
- What is CFD trading? CFDs for beginners
- An introduction to Forex technical analysis
About Admiral Markets
Admiral Markets is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world's most popular trading platforms: MetaTrader 4 and MetaTrader 5.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer or request for any transaction in financial instruments. Keep in mind that such business analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decision, you should seek the advice of independent financial advisors to ensure that you understand the risks.